Comments to Prakash Sethi “Self-regulation as a way to implement CSR at a global level”

1. Comments to Prakash Sethi“Self-regulation as a way to implement CSR at a global level” Alessandro Vercelli Department of Economic Policy, Finance and Development University of Siena

2. keeping in mind:Prakash Sethi, 2003, Setting Global Standards, Wiley, Hoboken, N.J. Basic questions: -Which is the best way to enforce CSR standards? -Should we rely on CSR self-regulation or institutional regulation? regulation by law -Which is the optimal relationship between { ? self-regulation by corporations

3. Attitude towards CSR self-regulation

4. CSR self-regulation has shaky economic foundations • Perfect competition model: distribution of income regulation necessary { structurally unstable → oligopolist practices max utility ≠ max happiness B) Real markets ≠ perfect competition market: incompleteness externalities further sources of market failures { and so on transaction costs bounded rationality

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

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

7. Global markets Further problems: ↑ asymmetry of information Different local regulations { between different stakeholders ↑ asymmetry of power harmonization of local regulation We need { transnational authorities to enforce in the meantime this enlarges the scope of CSR self-regulation

8. CSR INITIATIVES AND STAKEHOLDERS FEEDBACK ETHICAL CODE SMS CERTIFICATION REPORTING BOARD MANAGEMENTSTAKEHOLDERS Green arrow: implementation & information flow Red arrow: behavioral and dialectic influence Black arrow: influence through shareholders meetings Blue arrow: strategic and managerial influence

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

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

11. Synergy non substitution between regulation and self regulation - CSR self-regulation is not devoid of an enforcement mechanisms provided that there is an active participation of the stakeholders - the legal system guarantees at best only a minimal standard → synergy between legal regulation and CSR self-regulation: -progressive awareness of stakeholders virtuous circle between { -effectiveness of legal norms -upgrading of ethical standards

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

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