DOI: [10.9774/GLEAF.4700.2015.se.

00006]

A Decentred Stakeholder Network Path

to Creating Mutual Value
Is Walmart Showing the Way?

Jerry Calton
University of Hawaii-Hilo, USA

This paper draws upon recent insights into the emergence of issue-focused stake-
holder networks which engage in a co-creative process of creating mutual value. It
OO Stakeholder
network applies these insights to evaluate former CEO Lee Scott’s “21st Century Leadership”
governance effort to impose an ethical supply chain control system in China. The paper concludes
OO Walmart in that further institutional development (especially in relating to the decentred process
China
of co-creative learning to advance network governance mechanisms and a supportive
OO Transformational
leadership at
culture for multi-sector collaboration) is needed to realize the potential of 21st century
Walmart transformational leadership at Walmart and elsewhere.

Jerry M. Calton is Professor of Management in the College of Business & u College of Business & Economics,
Economics at the University of Hawaii at Hilo. He earned his PhD in business University of Hawaii-Hilo, Hilo,
administration from the University of Washington in 1986. He earned an HI 96720, USA
earlier doctorate in history from UDub in 1970. His teaching interests include
business ethics/society, international management, social entrepreneurship, and ! tk
managing for sustainable systems outcomes. He has published in journals,
such as Business & Society, Business Ethics Quarterly, Journal of Business Ethics,
International Journal of E-Collaboration, and the Journal of Corporate Citizenship.
A recent publication, Building Partnerships to Create Social and Economic Value at
the Base of the Global Development Pyramid, co-authored with Patricia Werhane,
Laura Hartman, and David Bevan, appeared in JBE in 2013. Jerry is also a past
president of the International Association for Business & Society (IABS).

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 a decentred stakeholder network path to creating mutual value

O
n 24 October 2005, CEO Lee Scott made a widely noted “21st Cen-
tury Leadership” speech to Walmart’s extensive global stakeholder
network. This event was trumpeted by the world’s largest big box
retailer as a “defining day in the history of Walmart”. After years
of struggling to cope with an unfolding crisis of legitimacy posed by a growing
army of disgruntled stakeholders unprepared to embrace the negative side-
effects of Walmart’s obsessive drive for low cost supremacy (skimpy wages and
benefits for associates, relentless cost pressure on suppliers, a massive carbon
footprint and other environmental problems generated within its global supply
chain), CEO Scott arrived at an epiphany of green consciousness: “Environmen-
tal loss threatens our health and the health of the natural systems we depend
on”. He went on to proclaim that “being a good steward of the environment
and in our communities and being an efficient and profitable business are not
mutually exclusive. In fact, they are one and the same”. In effect, Scott was say-
ing that a single bottom line focus on profit maximization was complementary
with a more nuanced and complex “triple bottom line” effort to improve finan-
cial, social, and environmental performance simultaneously. Scott recognized
that his 21st century leadership goals were “both ambitious and aspirational”.
Indeed, he confessed that he was “not sure how to achieve them, at least not
yet” (Schell, 2011, p. 86).
This paper will draw upon recent insights into the emergence of issue-
focused stakeholder networks (Roloff, 2008; Frooman, 2010) and paradoxical
challenges in the co-creative process for constructing mutual value within
stakeholder networks (Calton et al., 2013; Kurucz et al., 2013; Sachs & Ruhli,
2011; Svendsen & Laberge, 2005). It will evaluate the progress in implementing
Lee Scott’s transformational agenda, particularly in Walmart’s Chinese supply
chain, and suggest that further learning (especially relating to the decentred
process of co-creative learning) is needed to realize the paradoxical potential of
21st century transformational leadership.

Emergence of issue-focused stakeholder networks

Roloff (2008) reinforces the argument of Calton & Payne (2003) that “wicked” or
“messy” problems (complex, systemic, multifaceted issues riddled by paradoxi-
cal tensions and contested meanings) are better addressed within a decentred
multi-stakeholder learning network. Roloff points to the rise of issue-focused
stakeholder networks as complementary to the traditional firm-centred stake-
holder model. This paper will ask whether Walmart’s ambivalent aspirational
response to stakeholder challenges reflects a paradoxical tension, perhaps
even a cultural and conceptual incompatibility, between the older firm-centred
stakeholder model (which retains some key assumptions of the neoclassical eco-
nomic theory of the firm) and the more recent decentred stakeholder network
phenomenon. See also Hahn et al. (2014) on the cognitive challenge of coping
with paradoxical tensions in the sustainability framework.

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Drawing upon Roloff (2008, p. 245), this paper identifies the following fea-
tures of the firm-centred stakeholder model, as represented in Freeman’s (1984)
classic treatise on stakeholder management:
tt The purpose of stakeholder management is to enhance and protect the
welfare of the focal firm by extracting value from its value chain and mini-
mizing the costs and risks inherent in stakeholder relationships
tt Freeman’s widely accepted stakeholder definition draws attention to indi-
viduals or groups that can affect (direct or primary stakeholders) or are
affected by (secondary or indirect stakeholders) the activities of the firm.
These stakes are represented in stakeholder maps as bilateral links that
flow in hub and spoke fashion toward the focal firm for adjudication and
prioritization
tt The method of operation is that firm managers seek to control separate
bilateral stakeholder relationships, while prioritizing the welfare of domi-
nant primary stakeholders, particularly shareholders
tt The means of communication is via monologic (one-way) messaging to
shape strategic meanings that privilege the firm’s perspective and interests
(e.g. press releases, issues or reputation management, branding initiatives,
executive memos to subordinates, etc.)
tt The learning orientation is toward a unilateral, top-down resource audit
and environmental scan (SWOT analysis) process in which top managers
transform information into strategic “meaning” which is then passed on
to subordinates for action
tt The justification for action is an assertion of pragmatic legitimacy, as defined
in Suchman’s (1995) application of neo-institutional theory, to be discussed
below
These features of the firm-centred stakeholder model can be contrasted
with the emerging issue-focused stakeholder network, which calls attention to the
increasing social and political activism of indirect or secondary stakeholders:
tt The purpose of an issue-focused stakeholder network is to draw together
parties who must reconcile different perspectives on a shared messy prob-
lem or issue so that mutual value can be jointly created (co-created) and
the benefits of shared learning processes can be distributed fairly. Mutual
value can reflect discrete benefits garnered from network interactions
for different stakeholders as well as a common public good constructed
within a cooperative learning or problem-solving process. Messy prob-
lems could range from the need to cope with global warming or global
poverty, to a failing public education system or concerns about food safety
or insecurity
tt The stakeholder definition identifies all individuals or groups (including
the firm or firms) embedded in a network of interdependent relationships
grounded in different stakes driven into a shared issue or problem domain

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tt The method of operation within an issue-focused stakeholder network is via

a deliberative interactive process of discovery to find common ground as a
basis for creating and distributing mutual value within a shared problem
domain
tt The means of communication is via an interactive multi-stakeholder learn-
ing dialogue (Calton & Payne, 2003) that enables a community conversation
on how to best cope with a shared problem or issue. See also Kurucz et al.
(2013) for useful insights on how the firm’s managers can learn how to work
collaboratively within this networked, issue-focused context
tt The learning orientation is social construction of emergent meanings and
shared insights via a co-creative process of learning dialogue. Such co-
creative insights emerge from an incremental, collaborative action-learning
process for generating mutual value (Sachs & Ruhli, 2011; Svendsen &
Laberge, 2005; Waddell, 2006). See O’Connell et al. (2005) on the role of
stakeholder activism in promoting institutional learning
tt The justification for collaborative action is the construction and reinforce-
ment of moral legitimacy, as defined by Suchman (1995) and discussed
further below. Moral legitimacy is reflected in the emergence of trust within
network relationships (Calton & Lad, 1995; Jones & George, 1998)

The unfolding crisis of corporate legitimacy

Palazzo & Scherer (2006) and Roloff (2008) point to the growing managerial
problem of maintaining corporate legitimacy, as reflected in society’s percep-
tion of the validity of the firm’s licence to operate. The public perception of
business legitimacy is fragmenting, with a growing number of critics charging
that both environmental problems and social inequities, such as increasing
income inequality, are attributable at least in part to prevailing business values
and practices. The neoclassical economic theory of the firm stipulates that
business managers’ primary responsibility is to enhance the residual economic
value of the firm to benefit the ownership interest, while minimizing costs and
risks posed by other external contractors involved in the value creation proc-
ess (Cyert & March, 1992). Even the firm-centred stakeholder model retains
some of these assumptions. Thus, Sachs & Ruhli (2011) note that the hub and
spoke pattern of control-oriented bilateral managerial interactions with differ-
ent stakeholders tends to create a divide and rule regime within which “most
corporations concentrated on one or a very few stakeholders who were directly
related to the firm’s value-creation process” (p. 2). The widely cited Mitchell
et al. (1997) model for determining stakeholder “salience” to business decision-
makers tends to overweight the attribute of stakeholder power and underweight
legitimacy (defined primarily in moral terms) in determining how the focal
firm should prioritize stakeholder claims. Thus a powerful stakeholder with

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an urgent claim, but weak legitimacy, would take priority over a legitimate but
weak claim by a “dependent” stakeholder, such as a young sweatshop worker
or a farmer downstream from a polluting Walmart supplier in China. Such
dependent stakeholders typically gain power in relation to the focal firm only
after their cause has been taken up by an issue-focused stakeholder network
which forces the firm to take the claim seriously. In a recent assessment of the
current state of stakeholder theory, Freeman et al. (2010) conclude that both
the neoclassical economic theory of the firm and the firm-centred stakeholder
model offer different versions of a narrative that “presumes that by focusing
on the interests and rights of their dominant group, all other stakeholders will
benefit” (Quoted in Sachs & Ruhli, 2011, p. 2). The proliferation of stakeholder
protests against Walmart’s business values and practices (and declining share
prices) leading up to CEO Lee Scott’s dramatic 21st Century Leadership procla-
mation in 2005 illustrates the limitations and risks of a strategic mindset that
privileges pragmatic over moral claims to legitimacy.
Palazzo & Scherer (2006) argue that corporate managers are being forced to
consider ways to buttress their firm’s moral legitimacy because they are now
operating in a more diverse and contested stakeholder environment which is
increasingly sceptical of corporate claims of pragmatic and cognitive legiti-
macy. This argument is framed by Suchman’s (1995) classic categorization of
three different forms of legitimacy. Pragmatic legitimacy arises from unilateral
“inside-out” managerial efforts to convince stakeholders that they derive value
from ongoing bilateral exchange relationships with the firm. Cognitive legiti-
macy is based on an “outside-in” stakeholder buy in of a prevailing ideology,
world view, or meta-narrative. It is assumed that “isomorphic pressure” from
leading exponents of the prevailing world view will promote convergence by
both firms and stakeholders toward cognitive consensus. The current orthodoxy
of free market capitalism argues that all stakeholders will benefit in the long
run from the expansion of global capitalism, unfettered by excessive regula-
tion and redistributive or progressive tax regimes. Stakeholders are urged to
embrace the “invisible hand” of free market transactions which will assure the
emergence of a spontaneous order within which a “rising tide will lift all boats”.
However, there is growing evidence of the breakdown of cognitive consensus as
to the legitimacy of business values and practices. This is reflected in the rise
of stakeholder activism stirred up by widespread concerns about the negative
social and environmental impacts of corporate activities within the globaliza-
tion process (Frooman, 2010; O’Connell et al., 2005; Stiglitz, 2013). Triggering
these concerns are the advance of outsourcing and attendant job losses as well
as declining or stagnant wages for the middle and working class in developed
countries, growing income inequality everywhere the globalization process
advances, sweatshop exploitation of workers within global supply chains, and
rampant pollution at developing country production sites. In response to the
rapid advance of stakeholder activism, particularly among the secondary or indi-
rect stakeholders “affected by” global business practices, corporate managers
are being forced to join or forge alliances with issue-focused multi-stakeholder
networks. Among these are the Fair Labor Association (FLA), Global Reporting

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Initiative (GRI), the Global Compact, and a rapidly expanding coterie of other
“global action networks” or GANs (Waddell, 2011; Waddock, 2006).
Roloff (2008) and Frooman (2010), as well as Scherer & Palazzo (2007) argue
that corporate participation in issue-focused multi-stakeholder networks is a
complementary extension of firm-centred management practices and assump-
tions. They frame it as a pragmatic response to a special contingency of cogni-
tive dissonance and environmental turbulence encountered by stakeholders
disturbed by the indirect consequences of corporate business practices and
value frameworks. This paper, drawing attention to Walmart’s efforts to impose
ethical supply chain management controls upon its Chinese suppliers, will
highlight the paradoxical tensions between the value assumptions and prac-
tices of firm-centred stakeholder management and issue-focused stakeholder
networks. When corporate managers are drawn into a decentred issue-focused
stakeholder network, they must learn how to think, speak, and act as a participant
in a web of multi-lateral relationships which arise out of a joint effort at mutual value
creation. The third form of moral legitimacy accruing to a corporate citizen can-
not be imposed unilaterally. It must arise organically from a co-creative proc-
ess of discovery within a multi-stakeholder learning dialogue (Calton & Payne,
2003). Sachs & Ruhli (2011) build on this insight to argue that the governance
of stakeholder networks requires a new management paradigm grounded in
normative rules of engagement, such as the requirement of inclusiveness and
respect for the values and opinions of all participants in the network deliberative
process (see also Calton, 2006). Inclusiveness and respect for the values and
contributions of all network participants within a more democratic institutional
context are structural preconditions for a network governance process that must
generate and sustain trust-based relationships. Trust, the willingness of one party
to place something of value at risk in the hands of another party in order to
reap a potential return lies at the heart of the process for creating mutual value
within stakeholder networks (Calton & Lad, 1995; Jones & George, 1998). Roloff
defines moral legitimacy as resulting from a “conscious moral judgment [by
stakeholders] that is based on giving and considering [normative] reasons to
justify corporate strategies and practices” (2008, p. 244). Within issue-focused
networks, normative rules tend to be process-oriented and emergent because,
in a contested pluralist problem domain, value convergence arises from an
aspiration to be realized incrementally via an iterative learning process, rather
than from a shared cognitive realm established prior to agreement (Kurucz
et al., 2013).
The process of mutual value creation is necessarily decentred and pluralist
since each participant in an issue-focused network aspires to gain a particular
valued good from the co-creative process. The jumble of different, competing
values within each issue-focused network cannot be sorted out and reconciled
unless there is a concomitant search for common ground which can serve as the
basis for working together to address a shared problem. Thus, the process for
creating mutual value contains an amalgam of aspirational private and public
goods held in dynamic suspension as network participants seek to work out

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their differences while constructing a shared public good. The call for corpora-
tions to live up to “triple bottom line” performance standards reflects an effort
to make sense of the jumble of stakeholder aspirations within the co-creative
learning process for creating mutual value. Sachs & Ruhli (2011) portray the
decentred process for creating mutual value as an amalgam of old and new
management assumptions within an emerging new paradigm. This paradigm
retains elements of firm-centred pragmatism as well as issue-focused efforts
to build a normative basis for generating moral legitimacy within stakeholder
networks. Whether Walmart executives fully grasp the appropriate role for cor-
porate participants in managing the paradoxical tensions within this emerging
networked reality is doubtful.
Robert Simons (1995) offers a useful perspective on the relevance of different
levers of management control when a corporate transformation effort is under-
taken—as was the case with Walmart in 2005 and thereafter. Simons contrasts
diagnostic and interactive systems of corporate control. Diagnostic control
systems are appropriate when the competitive environment is relatively stable
and predictable and the corporate strategic plan is roughly aligned with market
threats and opportunities. Under such circumstances, diagnostic control sys-
tems measure how well managers’ actions contribute to the implementation of
the strategic plan and encourage incremental adjustments to improve planned
performance, defined primarily in terms of profitability or productivity gains.
However, when the corporate vessel enters turbulent, contested, unpredictable
waters, the captain and crew must learn how to engage with stakeholders within
a shared problem domain to learn how to learn together. This is where interac-
tive control systems must come into play. An interactive control system does
not so much impose as enable negotiation of an emergent order out of a pattern of
exploratory interaction between representatives of the firm and its activist stake-
holders. Out of this learning process of multi-stakeholder dialogue, new belief
systems or boundary definitions may emerge to guide the transformational
effort. This discovery process may generate new business opportunities, as
well as forms of cooperative endeavour and a broadened definition of corporate
performance. Measures of social and environmental accountability may also
emerge that define new standards of corporate citizenship (Waddock, 2006).
This process of institutional innovation is shaping a new form of network gov-
ernance that complements and may eventually replace conventional top-down
notions of corporate governance of the focal firm.

Lessons from Walmart’s top-down transformational

effort in China
On 22 October 2008, CEO Lee Scott convened a China Sustainability Summit
in Beijing to roll out Walmart’s tough new social and environmental standards
for its 60,000 Chinese suppliers. Scott declared:

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Meeting social and environmental standards is not optional… If a factory does not meet
those requirements, they will be expected to put forth a plan to fix any problems.
If they do not improve, they will be banned from making products for Walmart
(Schell, 2011, p. 88-89; emphasis added).

Walmart’s unilateral imposition of mandatory controls to achieve ethical com-

pliance within its global supply chain suggests the retention of the top-down
diagnostic control assumptions and methods of firm-centred stakeholder
management.
A new study of Walmart’s supplier relations in China (Chan, ed. 2011) argues
that the big box retailer’s seemingly tough ethical control system is riddled with
evasion, duplicity, and corruption. The authors of this study blame Walmart for
inviting evasion by refusing to recognize or grapple with the paradoxical tension
generated by unrelenting pressure to cut costs within the global supply chain
while insisting on improved social and environmental performance from its
suppliers. One Chinese supplier compared doing business with Walmart to
engaging in battle:
If you want to win, you have to know the enemy very well… Walmart’s number-one
rule is low price; that you have to satisfy. I don’t think its requirements on labor
rights are very important. Of course, you have to trick Walmart to make higher
profits (Xue, 2011, p. 42).

Xue concluded that CSR consultants (and ultimately Walmart shareholders),

rather than workers or environmental stakeholders were the primary benefici-
aries of this ethical supply chain control effort. Xue characterized Walmart and
other big box/supplier dealings with dependent stakeholders in China as a “cat
and mouse game” (2011, p. 46). Chinese CSR consultants offer compliance
evasion tactics such as:
tt Multiple books that massage performance data to mislead tax collectors and
ethical compliance officers
tt Parallel plants that offer ethics inspectors a model plant that complies with
code standards, while other plants violate child labour, limits on involuntary
overtime, and minimum wage standards
tt Advance warnings of inspector visits
tt Coaching of employees on what they should say during inspections, upon
threat of job loss if the supplier’s contract is not renewed
tt Shifting of work to cheaper, uninspected sub-contractor plants

Conclusion

Forcing Chinese suppliers to absorb the additional costs of compliance, while

Walmart insists on reaping the benefits of continued cost savings is not an
exercise in mutual value creation within an issue-focused stakeholder network. By

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insisting in his 21st Century Leadership speech that improving social, environ-
mental, and financial performance goals are “one and the same thing” (Schell,
2011, p. 86), Lee Scott conflated a firm-centred unitary standard of financial per-
formance with a pluralist triple bottom line construct which requires a decentred
process of mutual value creation. If corporations such as Walmart conclude that
they must enhance their moral legitimacy by joining decentred, issue-focused
stakeholder networks, they must be prepared to abide by the process-oriented
rules of stakeholder engagement. That is, they must be capable of entering into
an open-ended, interactive process of discovery via multi-stakeholder dialogue
to build and sustain trust within the network. At a minimum, Walmart would
have to open its ethical supply chain compliance system to outside oversight
by issue-based stakeholder networks that provide independent oversight and
certification of compliance with social and environmental standards, providing
feedback on how the process can be improved. The process of mutual value
creation assumes that all stakeholders will reap benefits from value chain
activities and that such benefits will be distributed fairly (Sachs & Ruhli, 2011;
Kurucz et al., 2013). If Walmart managers hope to buttress their company’s
claim to moral legitimacy, they must earn the trust and engaged participation of
­Walmart’s issue-focused stakeholders in the process of network governance. Lee
Scott and his successors at Walmart’s helm are not there yet. They must learn
how to blend their firm-centred pragmatism with the normative requirements
of transformational management within stakeholder networks.

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