Page 1*
How Corporate Social Performance
Is Institutionalised Within
the Governance Structure
Frank J. de Graaf
Cor A. J. Herkströter The Dutch Corporate Governance
Model
ABSTRACT. Since Ackerman in
Corporate social
responsiveness, the modern dilemma
(1973), pleaded for the institutionalisation of corporate social
performance (CSP)
in business processes, researchers
have focused on the role
of strategy in CSP. This article
demonstrates that CSP is institutionalised within the
governance structure. We will
attempt to make this clear by means
of a description of the
Dutch system of corporate
governance. Under certain circumstances Dutch companies are
already bound to
CSP due to prevailing legislation. A
governance per-
spective shows that CSP is
institutionalised within a company’s governance structure.
‘‘Processes of respon-
siveness’’, since long regarded as a
starting point of CSP-
analysis, appear to be decision-
making processes. Within these processes the expectations of
the stakeholders can be
institutionalised, trust can be built and
interests can be
incorporated. This makes CSP
context-dependent. However, it is possible to analyse
companies by com-
paring the companies’ individual
governance structures.
The article concludes that CSP-analysis
can fruitfully extend into analysing in the role of
the stakeholders in the
influence-pathways that are
incorporated within the
governance structure.
KEY WORDS: corporate governance, corporate social
performance, stakeholder influence
Introduction
There is a growing interest in the
relationship
between corporate governance and the social
performance of a company. Literature
focuses
specifically on the composition of the
board (Coffey
and Wang, 1998; Luoma and Goodstein, 1999),
emphasises the practical implications
of certain
theoretical assumptions (Leader,
1999) or studies the
institutional embeddedness of companies (Heath and
Norman, 2004). This study analyses
the influence of
pathways that stakeholders and
companies use to
balance specific interests and thereby shape the social
performance of a company. It
demonstrates the
influence-pathways that can be – and
sometimes
have been – constructed by a company and stake-
holders to institutionalise certain
social responsibili-
ties. These insights are produced in a
description of
the institutionalisation of corporate social perfor-
mance (CSP) in the Dutch system.
In the literature, CSP is defined as ‘‘a
business
configuration of principles of social
responsibility, processes of social responsiveness,
and policies, pro-
grammes, and observable outcomes
as they relate to
the firm’s societal
relationships’’ (Wood, 1991, p. 693). A researcher or manager who
theoretically or
practically wishes to implement CSP,
therefore, faces
challenges if attempting to create
effective links be- tween these concepts. In corporate
processes, the
principles of the company,
stakeholders and the
corporate policies meet. Ethical values
are shaped within the interaction with
stakeholders and trans-
formed to policies, where the
outcomes of certain
policies influence ethical values and
stakeholder expectations again. This article
proposes that in such
a conceptual model the governance
structure will
play a major role.
Dr. Frank Jan de Graaf is researcher at the University of
Amsterdam Business School and
Adviser Responsible
Investment at PGGM Investments.
Cor A. J. Herkstroter is holding the
chair International Man- agement at the University of
Amsterdam Business School.
With gratitude to Aime Heene, Nikolay
Dentchev, Matthew
Haigh, Harm Jan de Kluiver, Jonatan
Pinkse, Bas Steins Bisschop and two anonymous
reviewers.
Journal of Business Ethics (2007)
74:177–189
Ó Springer 2007
DOI 10.1007/s10551-006-9229-8 ------------------------------
*Page 2*
Readers of Ackerman’s article How
companies
respond to social demands (1973)
will recognise the theoretical building blocks which by
now have
become standard elements in the
theoretical discus-
sions on CSP, but which also have
become widely accepted in business administration.
Ackerman
(1973) asserts that a company’s CSP is
not limited to
good intentions of the management.
CSP must be institutionalised within the business
processes and
anchored within society.
In a later publication, Bauer and
Ackerman (1976)
enunciates that ‘‘responsiveness’’, 1
or, a company’s
willingness to accommodate social
developments,
would be an appropriate start of
analysis. The social responsibility of a company is
constituted in the
interaction between the company and
the stake-
holders. From this observation Bauer
and Ackerman (1976) conclude that one should not
so much refer
to corporate social responsibility – the
social responsi-
bility of a company – as to corporate
social responsive- ness, or, the willingness to bear the
responsibility for
certain prevailing expectations in
society.
The notion introduced by Bauer and
Ackerman (1976) did notmeet with
widespreadacceptance. Yet,
a ‘‘company’s responsiveness to
social developments’’
has been regarded as the starting
point of CSP-analysis since (e.g. Carrol, 1979; Margolis and
Walsh, 2003;
Wartick and Cochran, 1985; Wood,
1991).
Wartick and Cochran (1985)
elaborate upon the notion’s process-related character.
According to
them, a company’s responsiveness to
its environment
is not a static aspect. Instead, the
argue, CSP relates to a continuous interaction between
stakeholders –
interested parties on whom a
company’s future
existence is (co-)dependent – and the
company itself. It relates to ‘‘processes of
responsiveness’’ in which
the company has an own identity. Yet,
it cannot
determine what is important without
the stakeholder inputs.
The process approach of Wartick and
Cochran
(1985) is detailed by Wood (1991).
Not only is the
interaction between a company and its environment
important. While an interaction
between norms and
values of a company, as is formulated
in the princi-
ples of corporate social responsibility, and the policy
resulting from these norms and
values, is also sig-
nificant. Wartick and Cochran (1985)
still hold to a
responsibility with a standardised formulation that is
the same for all companies. Wood
(1991) asserts that
corporate social responsibility is
established by means
of interaction. At a certain moment, a company will
define what it sees as its own
responsibility. At times
it might be formulated explicitly. Yet,
quite often it
consists of the patterns of expectation which stake-
holders have towards one another
and towards the
company. These expectations, which
may be traced
back to norms and values, develop within the
‘‘processes of responsiveness’’,
eventually leading to
social policies, social programmes and
social impacts
(Swanson, 1995, 1999). Berman and Rowley (2000), having
completed a
literature review, regretfully observe
that CSP-
analysis has not advanced much
beyond a clarifica- tion of the concept. Some research
was been done,
but had been hampered by the
researcher’s objective
in wanting to prove that CSP was an
important development. Therefore, together
with other
researchers, Berman and Rowley
(2000) plea for
more descriptive and inductive
research (see also Griffin, 2000; Margolis and Walsh,
2003). Further
development of the theory has to stay
as close to
business practice as possible. With
this objective, we follow the pragmatist’s approach,
advocated by
Margolis and Walsh (2003, p. 283). In
pleading for a
reorienting perspective on the theory
of the firm, descriptive research strategies are
necessary again,
because 30 years of CSP-research has
not managed
to overcome critical flaws.
By building on CSP theory, the article demon-
strates that the governance structure
of a company
can play an important role in the
interaction be-
tween a company and stakeholders, the ‘‘processes of
responsiveness’’. Since Ackerman
(1973) researchers’
attention has been mainly focused on
company
strategy (Wood, 1991). Below, it is argued that the
stakeholders may structurally
exercise control over a
company by their position towards
the company’s
management as it is defined in the governance
structure. In this paper we attempt to
mirror business
practice as accurately as possible by
describing the
role of the institutional environment in which
companies’ operation. Analysis of the
governance
structure makes it possible for the
researcher, con-
sultant and manager to understand the processes that
embody CSP, so that the concept can
successfully be
made operational. This furthermore
develops in-
sights on how stakeholders can be represented in the
networks in which a company
operates (Leader,
178
Frank J. de Graaf and Cor A. J.
Herkströter ------------------------------
*Page 3*
1999) and also how stakeholder-
learning-dialogues
are shaped in existing governance
systems. By making this statement, the paper
focuses
strongly on the position of the
employees in Dutch
corporations and by the formal
regulation that give them a position in the governance
structure. How-
ever, if – besides shareholders – one
group of
stakeholders can have a formal
position, others could acquire a comparable position. For
example, within
cooperatives stakeholders unite to
fulfil a specific
economic need. Clients, for example
within coop- erative banks, or suppliers, often in
the agricultural
sector, thereby have a critical role in
the governance
structure also.
CSP and corporate governance Analysis of corporate governance
yields important
insights to researchers and managers
involved in
CSP. The general assumption is that
the interaction between the stakeholders and a
corporation forms
the starting point for CSP-analysis
(Bauer and
Ackerman, 1976; Berman and
Rowley, 2000; Swanson, 1995, 1999). In order to
implement CSP a
company has to have a good insight
in its environ-
ment. In order to reach this insight,
Wood (1991) defines three policy instruments:
stakeholder man-
agement, issue management and
environment anal-
ysis. She uses these tools to create a
functional description of the ‘‘processes of
responsiveness’’.
Management mainly determines the
responsiveness
of a company to social developments.
Corporate governance literature reveals yet an-
other perspective aside from these
three policy
instruments. Luoma and Goodstein
(1999, p. 554)
argue that, if we assume that company’s attention to
the social interests of stakeholders is
regarded as
important and legitimate, it may also
be assumed that
this is institutionalisedin social structures,especially in
corporate governance. For
researchers of CSP it is
important to analyse the relationship
between the
position of stakeholders within the company man-
agement and the processes and
performance of a
company (p. 561). Slowly, empirical
research, which
studies this relationship, is published. However, the
results are not (Coffey and Wang,
1998; Hillman
et al., 2001) unambiguous. Some
further theoretical
development on this matter seems to be of great value.
By means of their position in the
governance
structure, stakeholders structurally
influence com-
pany policy. The governance structure is the sum
total of all formal procedures and
processes in which
decisions are made (Nooteboom,
1999; Williamson,
2000). Responsibilities are institutionalised in the
corporate governance structure. If,
for example, a
company has to submit decisions to a
works council
then this may influence the decisions. This concept
will be elaborated below.
The governance structure is the result
of the
company’s characteristics, its identity
and of the demands imposed on the company
by the stake-
holders and by the law and
regulations as imposed by
the authorities. The governance
system may be defined as the legal framework within
which the
relationship between stakeholders
and a company
may be constituted
2 (Weimer and Pape, 1999;
Whitley, 1999). This legal framework,
largely
determines which structural influence
stakeholders
do exercise on company policy within the gover-
nance system. The governance
system, itself how-
ever, is also determined by the
influence stakeholder
groups have (had) on society. The opinions on governance systems
differ per
theory and per national context.
Authors such as
Freeman and Reed (1993), Kochan
and Rubinstein (2000) and Davis et al. (1997) argue
for a steward-
ship or stakeholder model for
corporate governance.
In this theoretical conception it is
stated that the company must not only be
accountable to the
shareholders as is the rule in the
Anglo-Saxon
nations. A company is a type of
stakeholders’ asso- ciation.
The stakeholder perspective of a
company sup-
plements the agency theory, which is
so prevalent in
business economics and management science. The
agency conception is based on the
conflict of
interests between the shareholder
(principal) and the
manager (agent). Critics of the agency theory pro-
pose that too much emphasis is
placed on the
conflict of interest between rationally
operating ac-
tors, which is between the managers and the owners
of a company, the shareholders.
Insights concerning the role of a
company’s
governance structure may contribute
to research and policy making in the field of CSP. The
interaction
between a company and its
stakeholders is largely
institutionalised in the governance
structure. Corporate Social Performance
179
------------------------------
*Page 4*
Therefore, the company structure
must fulfil a role within academic CSP-analysis and in
the policy
making of governments and
companies. The shape
of this structure in a certain national
context mainly determines how and when
stakeholders influence a
company’s policy. With the choice of
this perspec-
tive, we make a fundamental choice
regarding the form of CSP-analysis. It is not an
additional policy
area for companies. The corporate
social responsi-
bility is being institutionalised within
the corporate governance structure. Researchers
are mainly inter-
ested in the question how companies
accommodate
developments going beyond the
imposed limited economic, legal and technical
demands.
CSP and the national governance
system
As some of the authors with this view,
Kochan and Rubinstein (2000) refer to the
governance system as
it exists in continental Europe and
Japan in their plea
for the stakeholder perspective of a
company. These systems are network-oriented
(Moerland, 1995;
Nooteboom, 1999; Weimer and Pape,
1999). The
collaboration amongst the various
stakeholders is essential. According to researchers
such as Freeman
and Reed (1993), it is the lack of
collaboration in the
governance systems in Anglo-Saxon
nations which lead to the search for alternatives. The
American and
Anglo-Saxon system may be
categorised as market-
oriented with its emphasis on the
financial market and, primarily, on the shareholder
seeking a return
on his investment (see Table I). In a
company, the
expectations of the stakeholders are
largely institu- tionalised within the governance
structure.
In the governance structures in the
United States
and even more in the United
Kingdom, expectations of the financial markets (market-
oriented) are more
prominent. Much attention is given to
the share-
holders’ position, both regarding
their involvement as wellasregardingthesupplyofinformation.Thewider
social interest must mainly be
protected by (govern-
mental) regulations. In this
constellation, company
and stakeholders enter into short- term relationships
that are broken as soon as one of
either party is given a
more interesting offer. Due to the
stakeholders’ focus
on their own interest, the governance system in the
United States is based on laws and
regulations more
than it is in Europe (Nooteboom,
1999). Suitable
recent illustrations of this phenomenon are the
TABLE I
The characteristics of governance
systems
Governance system
Market-based Network-based
General characteristics
Market orientation
Internal orientation
Short-term relations
Long-term relations Competition
Cooperation
Governance structure
Capitalist form, focus on the
financial markets, the shareholders
Collective form, focus on a group of stakeholders
Forms of corporate control
Exit-based, when
dissatisfied, stakeholders leave
Voice-based, when dissatisfied,
stakeholders complain in the network
Governance mechanism
Contract
Trust
Governance evaluation
Third parties Networks
Theory
Agency theory
Stewardship theory/normative
stakeholder theory
Research orientation Agency problems between the
management and shareholders
Balancing stakeholder interests
Countries
United States and Great Britain
Continental Europe and Japan Stakeholder
influence strategies
Emphasis on indirect
influence-strategies
Emphasis on direct influence-
strategies Characteristics of stakeholder
influence-pathways
Regulation
Consultation
180
Frank J. de Graaf and Cor A. J. Herkströter
------------------------------
