THE MAKING OF MEANINGS

THE MAKING OF MEANINGS: THE ROLE OF INSTITUTIONS AND ACTORS IN THE CO-CONSTRUCTION OF FIELD LEVEL

INTERPRETATIONS AND MEANING SYSTEMS

A dissertation submitted for the degree of

DOCTEUR EN SCIENCES DE GESTION DE L’ECOLE DOCTORALE

« ECONOMIE, MANAGEMENT, MATHEMATIQUES DE CERGY » ED 405

FROM ESSEC BUSINESS SCHOOL

Presented and defended publicly on September 12, 2011 by

Afshin MEHRPOUYA

Jury

Marie-Laure Djelic Supervisor Professor, ESSEC Business School (Cergy, France)

Nicolas Mottis Supervisor Professor, ESSEC Business School (Cergy, France)

Michael Power Referee Professor, London School of Economics and Political Sciences (London, UK)

Sigrid Quack Referee Head of Research Group, Max Planck Institute for the Study of Societies

(Cologne, Germany)

Carlos Ramirez Examiner Associate Professor, HEC (Paris, France)

Philippe Zarlowski Chair Associate Professor, ESCP (Paris, France)

This Page is Intentionally Left Blank

Thèse présentée pour l'obtention du

PHILOSOPHIÆ DOCTOR (PH.D.) IN BUSINESS ADMINISTRATION

ESSEC BUSINESS SCHOOL

et

DOCTEUR EN SCIENCES DE GESTION

DE L’ECOLE DOCTORALE

« ECONOMIE, MANAGEMENT, MATHEMATIQUES DE CERGY »

ED 405

ESSEC BUSINESS SCHOOL

Soutenue publiquement le 12 septembre 2011 par

Afshin MEHRPOUYA

Titre de la thèse

LA CONSTRUCTION DU SENS – LE ROLE DES INSTITUTIONS ET DES ACTEURS SOCIAUX DANS LA CONSTRUCTION CONJOINTE DES

SYSTEMES INTERPRETATIFS ET SEMANTIQUES

Jury

Marie-Laure Djelic Directrice de thèse Professeur à l'ESSEC (Cergy, France)

Nicolas Mottis Directeur de thèse Professeur à l'ESSEC (Cergy, France)

Michael Power Rapporteur Professeur à la London School of Economics and Political Sciences (Londres, Grand Bretagne)

Sigrid Quack Rapporteur Directrice de la recherche à l'Institut Max-Planck de recherche sociale (Cologne, Allemagne)

Carlos Ramirez Examinateur Professeur associé, HEC (Paris, France)

Philippe Zarlowski Président Professeur associé, ESCP (Paris, France)

This Page is Intentionally Left Blank

PhD Dissertation – Afshin Mehrpouya – ESSEC Business School 5

Abstract

This dissertation explores the interaction between structure and agency in the context of multi-level

institutionalization. Institutions interplay in complex ways across the field, national and transnational

levels. Those complex dynamics condition both the interpretations and convictions that actors produce

and the ways they mobilize meanings in order to “enact” their interpretations and convictions under

competing demands. These dynamics are explored in-depth through two empirical studies. The first

looks at the role national institutions play in the transnational regulation of sovereign wealth funds.

The second examines the role of actors and institutions in evolution of frames used for socially

responsible investments.Both the empirical studies utilize qualitative research methods drawing upon

multiple sources of data including participant observation, interviews and a wide range of documentary

evidence and secondary material. These studies yielded three research papers, two of which are

empirical and the third one is conceptual. The two empirical papers named respectively “Sovereign

wealth funds, the IMF and transparency” and “From God to markets” attempt to answer theoretical

questions around the role of institutions at multiple levels of transnational, national and field, and

actors in constitution of interpretations and meanings. In addition, these papers mobilize and contribute

to other theoretical frameworks including transparency, interpretive accounting, transnational

governance, social movements and soft laws. The third paper named “social responsibility and karma

of market”, provides a conceptual framework for all the mechanisms claimed to translate the social

behavior of firms to financial performance. It then sets out the firm attributes and institutional factors

at multiple levels that mediate this link. Overall, this dissertation attempts to provide a better

understanding of how competing institutions at different levels condition the actors’ behavior and how

actors selectively mobilize and edit the institutional frames and meanings.

Keywords: meanings, institutions, interpretations, transparency, social movements, interpretive accounting,

transnational governance, corporate social responsibility



Résumé

La présente thèse étudie l'interaction entre structure et agence dans le contexte d'une

institutionnalisation sur plusieurs niveaux. Les institutions interagissent de manière complexe sur le

terrain et aux niveaux national et transnational. Cette dynamique complexe conditionne tant les

interprétations et les convictions générées par les acteurs que leur mobilisation du sens pour mettre en

pratique interprétations et convictions en pratique dans le cas d'exigences multiples. Les deux études

empiriques l'étudient de manière détaillée.La première porte sur le rôle joué par les institutions

nationales dans la réglementation transnationale des fonds souverains ; la seconde, sur le rôle des

acteurs et des institutions dans l'évolution des cadres d'interprétation appliqués aux investissements

socialement responsables. Ces deux études se basent sur des méthodes de recherche qualitative qui

s'appuient sur différentes sources de données, dont l'observation de participants, des entretiens plus de

nombreuses sources documentaires et sources secondaires. Ces études ont donné lieu à trois articles de

recherche, deux empiriques et un conceptuel. Les deux articles empiriques, Fonds souverains, fonds

monétaire international et transparence et Du dieu aux marchés, répondent à des questions théoriques

sur le rôle des acteurs et des institutions aux différents niveaux du champ, la société et l’espace

transnational dans la constitution interprétative et sémantique. Ces deux articles font référence à

d'autres cadres théoriques et les enrichissent en retour, notamment dans les domaines de la

transparence, de l'étude interprétative de la comptabilité, de la gouvernance transnationale, des

mouvements sociaux et du droit mou. Le troisième article, La responsabilité sociale des entreprises et

le « karma du marché », propose un cadre conceptuel pour les mécanismes supposés traduire le

comportement social des entreprises en performances financières. Cela introduit différentes

caractéristiques relatives à l'entreprise ainsi que des facteurs institutionnels impactant ce lien. La thèse

dans son ensemble éclaire la façon dont des institutions en compétition conditionnent le comportement

des acteurs et comment ces derniers se mobilisent de manière sélective des cadres et apports

sémantiques des institutions.

Mots-clés : sens, institutionnalisme, transparence, mouvements sociaux, étude interprétative de la comptabilité,

gouvernance transnationale



TABLE OF CONTENTS

LIST OF FIGURES ...................................................................................................................... 14

LIST OF TABLES ........................................................................................................................ 15

LIST OF ABBREVIATIONS ....................................................................................................... 16

ACKNOWLEDGEMENT ............................................................................................................ 17

REMERCIEMENTS ..................................................................................................................... 20

1 INTRODUCTION ............................................................................................................... 23

1.1 Présentation Générale ........................................................................................................ 24

1.2 Overview ............................................................................................................................ 26

1.3 Theoretical Background ..................................................................................................... 32

1.3.1 Meanings and Organizations ...................................................................................... 35

1.3.2 Multiple Layers of Institutions and the Transnational Space ..................................... 39

1.4 Epistemological Standpoint and Methodological Approach ............................................. 44

1.4.1 Epistemological Standpoint ........................................................................................ 44

1.4.2 Methodological Approach .......................................................................................... 48

1.5 Overview of the Three Research Papers ............................................................................ 55

1.5.1 Sovereign Wealth Funds, the IMF and Transparency ................................................ 57

1.5.2 From God to Markets ................................................................................................. 60

1.5.3 Corporate Social Responsibility and Market “Karma” .............................................. 63

2 SOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY ...................... 67

2.1 Résumé ............................................................................................................................... 68

2.2 Abstract .............................................................................................................................. 69


2.3 Introduction ........................................................................................................................ 70

2.4 Theoretical Background and Methods ............................................................................... 73

2.4.1 Theoretical Discussion ............................................................................................... 73

2.4.2 Methods ...................................................................................................................... 91

2.5 Sovereign Wealth Funds and Soft Laws for Transparency ............................................... 97

2.5.1 What are Sovereign Wealth Funds? ........................................................................... 97

2.5.2 The Transnational Negotiations................................................................................ 105

2.5.3 Negotiation Process .................................................................................................. 111

2.6 Cultural Interpretations of Transparency ......................................................................... 120

2.6.1 Information as a Public Right (Democratic Information Logics) ............................. 123

2.6.2 Information as a Market Instrument (Market Information Logics) .......................... 124

2.6.3 Information as Power (Centralized-Power Information Logics) .............................. 125

2.7 Conclusion ....................................................................................................................... 130

2.8 References ........................................................................................................................ 134

2.9 Appendix .......................................................................................................................... 142

2.9.1 Appendix I – Exploratory study of SWFs ................................................................ 142

2.9.2 Appendix II – Analysis of Transnational Codes for Transparency .......................... 144

2.9.3 Appendix III - SWF Preliminary Interview .............................................................. 147

2.9.4 Appendix IV – List of IWG Meeting Participants ................................................... 150

2.9.5 Appendix V - IWG-SWF - Generally Accepted Principles and Practices ............... 156

3 FROM GOD TO MARKETS .......................................................................................... 163

3.1 Résumé ............................................................................................................................. 164

3.2 Abstract ............................................................................................................................ 165


3.3 Introduction ...................................................................................................................... 166

3.4 Theoretical Background ................................................................................................... 168

3.5 Methods............................................................................................................................ 173

3.6 The Ever-changing “Face” of Socially Responsible Investment ..................................... 177

3.6.1 Early Days of SRI ..................................................................................................... 179

3.6.2 The Era of Shareholder Capitalism and the Financialization of SRI ....................... 182

3.6.3 The Emergence of the SRI Outperformance Frame ................................................. 188

3.6.4 The Emergence of the Co-opting Financial SRI Frame ........................................... 193

3.6.5 Transnational Space as a Key Mediator for the International Adoption of SRI ....... 200

3.6.6 The Contemporary State of SRI Frames across the World ...................................... 203

3.7 Discussion ........................................................................................................................ 204

3.7.1 Mainstreaming and Meanings .................................................................................. 204

3.7.2 “Institutionally Humbled” Actors and Meanings ..................................................... 215

3.8 Conclusion ....................................................................................................................... 216

3.9 References ........................................................................................................................ 219

3.10 Appendix .......................................................................................................................... 225

3.10.1 Appendix I. List of Interviewees .............................................................................. 225

3.10.2 Appendix II. Examples of Social Responsible Frames of Public Pension Funds .... 227

3.10.3 Appendix III. Analysis of US SIF Reports from 1995 to 2000 ................................ 231

4 SOCIAL RESPONSIBILITYAND MARKET KARMA .............................................. 235

4.1 Résumé ............................................................................................................................. 236

4.2 Abstract ............................................................................................................................ 237

4.3 Introduction ...................................................................................................................... 238


4.4 Markets and Social Responsibility................................................................................... 241

4.4.1 Firms as Purely Economic Entities Accountable to Shareholders ........................... 242

4.4.2 Firms as Socially Embedded Entities Accountable to All Stakeholders .................. 242

4.4.3 Reconciling the Economic and the Social ................................................................ 244

4.5 Translation of Social to Financial .................................................................................... 247

4.5.1 Image Effects ............................................................................................................ 251

4.5.2 Direct Effects of Social Externalities on Stakeholder Performance ......................... 260

4.5.3 Explicit Stakeholder Claims ..................................................................................... 263

4.6 Discussion and Concluding Remarks .............................................................................. 269

4.6.1 Concluding Remarks ................................................................................................ 274

4.7 References ........................................................................................................................ 277

5 DISCUSSION AND CONCLUSION .............................................................................. 285

5.1 The Two Empirical Studies - Differences and Complementarities ................................. 286

5.1.1 Level of Analysis ...................................................................................................... 286

5.1.2 The Institutionally Humbled Actor, Meanings and Interpretations .......................... 287

5.1.3 Transnational Space and Meanings .......................................................................... 289

5.2 Contributions.................................................................................................................... 291

5.2.1 Contributions to Theory............................................................................................ 291

5.2.2 Contributions to Practice .......................................................................................... 296

5.3 Limitations of the Research ............................................................................................. 299

5.3.1 Number of Interviews ............................................................................................... 300

5.3.2 Sampling Issues ........................................................................................................ 301

5.3.3 Insufficient Study of Unofficial “Behind the Scene” Political Processes ................ 301


5.3.4 Insufficient Granularity in the Analysis of Information Types ................................ 302

5.3.5 Inattention to the Role of Networks ......................................................................... 302

5.3.6 A Static Model of the Social-Financial Performance Link ...................................... 303

5.4 Future Research Directions .............................................................................................. 303

5.4.1 Performativity ........................................................................................................... 303

5.4.2 Interpretive Studies of Accounting ........................................................................... 304

5.4.3 Unintended Consequences of Institutional Work ..................................................... 305

5.4.4 Types of Transparency Demands ............................................................................. 306

5.4.5 Empirical Studies of Failings of the Social-Financial Performance Link ................ 306

6 REFERENCES .................................................................................................................. 309

7 RESUME SUBSTANTIEL EN FRANCAIS .................................................................. 317

7.1 Présentation des trois articles ........................................................................................... 319

7.1.1 Fonds souverains, fonds monétaire international et transparence ............................ 319

7.1.2 Du dieu aux marchés ................................................................................................ 320

7.1.3 La responsabilité sociale des entreprises et le « karma du marché » ....................... 320

7.2 Contributions.................................................................................................................... 321

7.2.1 Contributions à la théorie ......................................................................................... 321

7.2.2 Contributions à la pratique ...................................................................................... 323

7.3 Limites de la thèse et pistes pour l’avenir ........................................................................ 324


LIST OF FIGURES

Figure 2-1 Citations of “Transparency” in the top five global newspapers and magazines - 1983 to 2009 .............. 75

Figure 2-2 Overview of the normative bases for transparency demands in the transnational codes .......................... 78

Figure 2-3 Global adoption of Freedom of Information Act 1966 - 2009 ................................................................... 84

Figure 2-4 The three ideal types for attitude to transparency logics and the three SWFs ........................................ 126

Figure 3-1 Trends in the size of assets under SRI management in the US ................................................................ 178

Figure 3-2 SRI and the increased density of the field ................................................................................................ 184

Figure 3-3 Examples of socially responsible frames adopted by the largest pension funds ...................................... 203

Figure 4-1 Mechanisms linking social and financial performance of firms .............................................................. 250

Figure 4-2 Process and assumptions for the symbolic/image effects ........................................................................ 252

Figure 4-3 Process and assumptions for the direct effects ........................................................................................ 261

Figure 4-4 Process and assumptions for the explicit stakeholder claims .................................................................. 265

Figure 4-5 Summary of the failings of the link between social and financial performance ...................................... 268


LIST OF TABLES

Table 1-1 Overview of the three papers included in the dissertation .......................................................................... 55

Table 2-1 Overview of sampling approach for sovereign wealth funds ...................................................................... 94

Table 2-2 List of interviewees ...................................................................................................................................... 95

Table 2-3 Summary of country attributes .................................................................................................................. 104

Table 2-4 Summary of SWF attributes ....................................................................................................................... 104

Table 2-5 Ideal types for attitude to transparency logics .......................................................................................... 126

Table 2-6 The three ideal typical organizations and transnational information demands ........................................ 129

Table 3-1 Breakdown of interviewees - Full list of interviewees provided in Appendix I.......................................... 176

Table 3-2 Major historical milestones in the evolution of SRI .................................................................................. 192

Table 3-3 Overview of the different ways investors frame and justify SRI ................................................................ 199

Table 3-4 The emergence of national and international SRI organizations .............................................................. 202

Table 3-5 Analysis of SRI statements of public pension funds ................................................................................... 203

Table 3-6 Field level changes as social movements become mainstream ................................................................. 214

Table 4-1 List of key institutional variables mediating the social-financial performance link .................................. 270


LIST OF ABBREVIATIONS

CSR Corporate Social Responsibility

ESG Environmental, Social and Governance

FMI Fonds Monétaire International

FOIA Freedom of Information Act

GAPP Generally Accepted Principles and Practices

IFRS International Financial Reporting Standards

IMF International Monetary Fund

ISR Investissement Socialement Responsible

NGO Non-Governmental Organization

RSE Responsabilité Sociale des Entreprises

SRI Socially Responsible Investments

SWF Sovereign Wealth Fund

UNEP FI United Nations Envrionmental Program - Finance Initiative

UNPRI UN Principles of Responsible Investments


ACKNOWLEDGEMENT

The past four years have been some of most inspiring and challenging years of my life. There

were many points along this path rich with learning and sense of achievement and moments

when I felt lost or overwhelmed. I would like to acknowledge the help, support and guidance of

several people, which enabled me to transcend this path.

First and foremost, my gratitude goes to my thesis advisors, Marie-Laure Djelic and

Nicolas Mottis. They have been resourceful, generous, patient and supportive throughout these

four years. What I learnt from them will continue to guide me in my future academic life.

I would also like to thank the dean of ESSEC’s PhD program, Raymond Allan Thietart,

who has been a constant source of precious guidance and support. I aspire to his wisdom and

vision.

To find my way in the intellectual maze of accounting and organization studies, I have

relied on the support and knowledge of many other scholars. I would especially like to thank

Michael Power for having me at the London School of Economics - Center for Analysis of Risk

and Regulation, and for his valuable intellectual input and support. My stay at the LSE was one

of the very rich and intellectually stimulating periods of my studies. I would like to thank Carlos

Ramirez, Sigrid Quack and Philippe Zarlowski for generously reviewing my work and for

agreeing to be on my dissertation committee. In addition, I would like to thank professors Jim

Hawley, Frank den Hond, Damon Golsorkhi, Marie-Leandre Gomez, Philippe Lorino, Celine

Louche, Rita Samiolo, Sarah Soule, Charlene Zietsma and Gilles van Wijk for their reviews, help

and guidance.


Several individuals generously helped me obtain access to the two empirical fields I

studied and to understand their complex politics and dynamics. I would especially like thank

Perrine Dutronc of MSCI Group. She has been a great source of help, support and insight, which

has been essential to my study of socially responsible investments (SRI). I am grateful to

Matthew Kiernan, the visionary founder of Innovest Strategic Value Advisors who played a

central role in my professional exposure to SRI and continues to be an important source of

knowledge and support. I would also like to thank James Gifford of United Nations Principles of

Responsible Investments for his time and support.

I am indebted to Kathrin Gordon of the Organization for Economic Cooperation and

Development. Her generous help and guidance were instrumental to my understanding of

International Monetary Fund’s negotiations process for soft regulation of the sovereign wealth

funds and to obtaining my interviews with the sovereign wealth funds.

I would also like to thank all my interviewees. I hope my work will prove to merit their

time and openness.

Several colleagues have given me their friendship and shared with me their valuable time

and thoughts. Among those, I would especially like to mention Diane-Laure Arjaliès de la

Lande, Adrien Boberly, Max Chauvin, Imran Chowdhury, Melih Kavukcu, Julien Malaurent and

Mahmood Shafiee Zargar. Knowing them has been one of the highlights of the past four years.

I am grateful to the Tehran University of Medical Sciences of Iran and York University –

Schulich School Business of Canada, both of which provided me with the educational basis for

my studies at ESSEC. Moreover, I am thankful to ESSEC, which has provided me with a

stimulating intellectual environment and material support during my doctoral studies, and to

France, which has received me warmly, and continues to fascinate me with its cultural and


intellectual offering. I hope that through my work and future contributions to the academic

society and community at large, I will be able to give back part of what I have received.

I would also like to thank Lina Prevost of the ESSEC PhD program. She has been a

compassionate, open and creative source of support and assistance throughout the past years.

I am thankful to Michelle Fawcett for her excellent editing work, Axelle Dallot for her

outstanding work with translations and all the other individuals and organizations who have

made this work possible through their help and support.

I would like to acknowledge the contribution of European Sustainable Investment Forum

- FIR, which under the best research proposal grant in 2010 provided me with financing for part

of my dissertation research.

Finally, I would like to thank my family and especially my parents who have been the

sole source of unconditional and selfless love and support throughout my life. I aspire to them as

models for compassion and openness.


REMERCIEMENTS Ces quatre dernières années ont été parmi les plus riches et les plus stimulantes. Ce fut, en effet,

une période extrêmement instructive et épanouissante, même si parfois, je me suis senti perdu

voir submergé. Je tiens donc à remercier ceux qui m'ont aidé à dépasser ces difficultés par leur

soutien et conseils.

Je souhaite avant tout exprimer toute ma reconnaissance à mes directeurs de thèse, Marie-

Laure Djelic et Nicolas Mottis, qui se sont montrés particulièrement perspicaces, généreux et

patients et ont été d'un grand soutien au cours de ces quatre années. Leurs enseignements

continueront à me guider dans mon parcours académique à venir.

J'aimerais également remercier le doyen du programme doctoral de l'ESSEC, Raymond

Allan Thietart, qui a toujours été présent pour m'orienter et me soutenir. Je ne peux qu'aspirer à

sa sagacité et à sa vision.

Je n'aurais pas pu me retrouver dans le labyrinthe intellectuel de la théorie des

organisations et de la comptabilité sans l'appui et l'expertise d'un grand nombre d'autres

spécialistes. Je tiens en particulier à remercier Michael Power de m'avoir reçu au Center for

Analysis of Risk and Regulation de la London School of Economics, ainsi que pour ses apports

conceptuels et son aide. Mon séjour à la LSE fut l'une des périodes les plus stimulantes

intellectuellement de mes études. Merci également à Carlos Ramirez, Sigrid Quack et Philippe

Zarlowski d'avoir pris le temps de réviser ma thèse et accepté de faire partie de mon jury. Je

remercie aussi les professeurs Jim Hawley, Frank den Hond, Damon Golsorkhi, Marie-Léandre

Gomez, Philippe Lorino, Céline Louche, Rita Samiolo, Charlene Zietsma et Gilles van Wijk

pour leurs révisions, leur soutien et leurs conseils.


J'ai été aidé par plusieurs personnes pour accéder aux deux domaines empiriques de mon

étude et pour en comprendre les dynamiques et politiques complexes. J'aimerais remercier en

particulier Perrine Dutronc de MSCI Group, qui m'a été d'une aide précieuse, et dont la

perspicacité a été cruciale pour mon étude des ISR. Je tiens également à exprimer ma gratitude à

Matthew Kiernan, le visionnaire fondateur d’Innovest Strategic Value Advisors, qui a joué un

rôle majeur dans ma découverte professionnelle des ISR. Je suis reconnaissant envers James

Gifford des Principes pour l’investissement responsable des Nations Unies pour le temps et

l'appui qu'il a bien voulu m'accorder.

Je suis également redevable envers Kathrin Gordon de l'Organisation de Coopération et

de Développement Économiques. C'est grâce à son soutien et aux orientations qu'elle m'a donné

que j'ai pu comprendre le processus de négociation relatif aux fonds souverain du FMI et obtenir

des entretiens avec des représentants de fonds souverains.

Enfin, je souhaite remercier ces derniers pour les entretiens qu'ils m'ont accordés. J'espère

que mon travail justifiera le temps qu'ils m'ont consacré et l'ouverture dont ils ont fait preuve.

Plusieurs collègues m'ont également accordé leur amitié et ont pris le temps de partager

avec moi leurs réflexions. Parmi ces collègues, je souhaite citer spécifiquement Diane-Laure

Arjaliès de la Lande, Adrien Boberly, Max Chauvin, Imran Chowdhury, Melih Kevekcu, Julien

Malaurent and Mahmood Shafiee Zargar. Faire leur connaissance a été l'un des temps forts de

ces quatre années.

J'aimerais en outre remercier l'université des sciences médicales de Téhéran et la

Schulich School of Business de l'Université de York au Canada de m'avoir bien préparé pour

mes études à l'ESSEC. Je suis de plus reconnaissant envers l’ESSEC pour l’environnement

intellectuellement stimulant et le soutien matériel qu’elle m’a apporté pendant mes études


doctorales, et envers la France, où j'ai été accueilli chaleureusement. Je reste fasciné par tout ce

qu’elle a à offrir sur les plans culturel et intellectuel. J’espère avoir l’occasion de rendre un peu

de ce qui m’a été donné par mon travail et la contribution que j’apporterai au milieu académique

et à la communauté en général.

Merci enfin à Lina Prevost, du programme doctoral de l’ESSEC, pour sa gentillesse et sa

créativité, à Michelle Fawcett pour son extraordinaire travail de révision, à Axelle Dallot pour les

traductions et à toutes les autres personnes et organisations sans l’aide desquelles ce travail

n’aurait pas vu le jour.

J'aimerais remercier le Forum pour l'Investissement Responsable, qui a financé une partie

de mes recherches de thèse dans le cadre de la bourse 2010 pour les meilleures propositions de

recherche.

Enfin, je tiens à remercier ma famille, mes parents en particulier, qui ont été l'unique

source d'amour et de soutien totalement inconditionnels et désintéressés que j'aie connue. Ils sont

pour moi un modèle de compassion et d'ouverture.


CHAPTER 1

INTRODUCTION

Institutions, Actors and Meanings in Organizations

CHAPTER 1INTRODUCTION Présentation Générale


1.1 Présentation Générale Cette thèse étudie l'interaction entre structure et agence dans le contexte d'une

institutionnalisation sur plusieurs niveaux. Les institutions interagissent de manière complexe sur

le champ et aux niveaux national et transnational. Cette dynamique complexe conditionne tant

les interprétations et les convictions générées par les acteurs que leur mobilisation du sens pour

mettre en pratique les interprétations et convictions dans le cas d'exigences multiples.

La présente thèse s'appuie sur deux études empiriques originales.

I- Une première étude faisant suite au processus transnational de réglementation des

fonds souverains de novembre 2007 à octobre 2008

II- Une seconde étude portant sur l'évolution sémantique dans le domaine de

l'investissement socialement responsable (ISR) des années 1960 à nos jours (2011)

La présente thèse se base sur ces études empiriques pour proposer trois articles de recherche qui

répondent au même éventail de questions. Ces articles sont intitulés:

I- Fonds souverains, fonds monétaire international et transparence : différents acteurs,

différents sens ?

II- Du dieu aux marchés: le rôle des acteurs et des institutions dans la

reconceptualisation des investissements socialement responsables

CHAPTER 1INTRODUCTION Présentation Générale


III- La responsabilité sociale des entreprises et le « karma du marché » : à quel point le

lien entre performances sociales et financières est-il solide et durable ?

La présente thèse se base sur des méthodes de recherche qualitative s’articulant une combinaison

d'observation des participants, d'entretiens semi-structurés et de sources documentaires. J’ai de

plus exercé pendant quatre ans les fonctions d'analyste de notation environnementale et sociale

en Amérique du Nord et en Europe. Ma carrière m'avait auparavant amené à travailler en

collaboration étroite avec plusieurs fonds souverains.

CHAPTER 1INTRODUCTION Overview


1.2 Overview

This dissertation explores the interaction between structure and agency in the context of multi-

level institutionalization. Institutions interplay in complex ways across different levels – field,

national and transnational. Those complex dynamics condition both the interpretations and

convictions that actors produce and the ways they mobilize meanings in order to “enact” their

interpretations and convictions under competing demands.

This dissertation builds upon two different, original, empirical studies.

− A first empirical study following the transnational process of regulation for Sovereign

Wealth Funds over the period November 2007 to October 2008

− A second empirical study exploring the evolution of the meanings in the Socially

Responsible Investment (SRI) field from the 1960s to the present day (2011)

Based on these two different empirical studies, this dissertation proposes three research papers

that address the same range of theoretical questions. The titles of the papers are:

1. Sovereign Wealth Funds, the International Monetary Fund and Transparency: Is

everybody talking about the same thing?

2. From God to Markets: The role of actors and institutions in the reframing of Socially

Responsible Investments

3. Corporate Social Responsibility and Market “Karma”: A framework for analysis of

the link between social and financial performance of the firms and its failings



This dissertation uses qualitative research methods and combines participant observation, semi-

structured interviews and documentary evidence as its data sources. Moreover, the author

worked for four years as an environmental and social rating analyst in responsible investments,

both in North America and in Europe. The author has also worked closely with several sovereign

wealth funds as part of his previous professional activities.

Three papers

1 - Sovereign Wealth Funds, the International Monetary Fund and Transparency: Is everybody

talking about the same thing?

This paper proposes an analysis of a process of transnational institution building aimed at

improving the transparency and governance of sovereign wealth funds. The International

Monetary Fund was the facilitator of this process. This paper explores different interpretations of

transparency around the negotiation table and shows how those interpretations were strongly

shaped by organizational constraints and national institutional frames. This multi-vocality had an

impact on the process of transnational institution building and its outcome.

2- From God to Markets: The role of actors and institutions in the reframing of Socially

Responsible Investments



This paper follows a consequential transformation of framing and language in the field of

socially responsible investments (SRI). As mainstream financial actors started to adopt SRI, a

loose network of boundary actors mobilized meanings and a language that could accommodate

the institutional demands of mainstream financial organizations. This adaptation of meanings

was sometimes in conflict with their own personal convictions.

3- Corporate Social Responsibility and Market “Karma”: A framework for analysis of the link

between social and financial performance of the firms and its failings

The third paper is a conceptual paper that highlights the contextual and institutional factors that

mediate the link between the social responsibility of firms and their financial performance. This

paper provides a conceptual model for different types of impact that social performance can have

on the financial performance of firms. The paper then introduces firm attributes and ideational

and structural institutional scenarios at field, society and transnational levels where the

conceptual model fails. In such scenarios, not only does social responsibility fail to yield

financial benefits, it can also come at a cost for the firm.

Contributions

This dissertation proposes to make several contributions both to theoretical debates and to

practice.



Theoretical Contributions

Both empirical studies undertaken as part of this thesis evoke multi-level institutionalization and

explore the ways in which competing institutional logics at different levels mediate the

production of interpretations and the constitution of meanings. A focus on multi-level

institutionalization, particularly with due attention to the transnational level, is still too rare and

in-depth empirical explorations, in particular, are lacking (Djelic and Sahlin-Andersson 2006

p.18-19).

The study on sovereign wealth funds provides an interpretative account (Kakkuri-

Knuuttila, Lukka et al. 2008) of the transnational negotiation process around the transparency

and governance of sovereign wealth funds. The social dimension of transnational regulation,

particularly as it relates to audit, accountability and transparency pressures, still remains

underexplored (Hopwood 2009). The non-Western focus of this study, in addition, provides a

rare occasion to expose the impact of different institutional and cultural traditions on actors’

interpretations of audit and transparency pressures. In general, the literature has tended to neglect

these non-Western contexts and traditions.

The study on the field of socially responsible investment contributes to the literature that

attempts to cross-fertilize studies of social movements and organizational institutionalism

(Schneiberg and Lounsbury 2008). This study shows how embedded social movement actors are

transnational and cross-societal enablers of meaning change at the field level. Studies of meaning

systems as carriers of institutions are underrepresented in institutionalism.

The third paper, “Social Responsibility and Market Karma”, proposes a contribution to

existing literature on the link between the social and financial performance of firms. The model



introduced in this paper integrating all processes linking social and financial performance of

firms can enrich the ongoing effort to understand the financial implications of social

responsibility. This paper brings attention to the key ideational and structural institutional

variables at transnational, national and field levels as well as firm attributes mediating this link

that have been largely neglected in the literature so far (Margolis, Elfenbein et al. 2007), and

exposes the unreliability and conditionality of this link.

Contributions to Practice

This dissertation also contributes to practice in the areas of transparency and accountability

regulation and socially responsible investment.

The paper focusing on sovereign wealth funds, the IMF and transparency lays out ideal

types for cultural attitudes to transparency, which can be helpful for regulators engaging in

national and transnational transparency standards and norm setting. Attention to cultural attitudes

to transparency pressures can help decrease the chances of conflict and increase the adoption of

and compliance with such codes and standards.

By laying out the failings of the link between firms’ social and financial performance,

this dissertation describes scenarios where non-market mechanisms would be needed to ensure

the socially responsible behavior of firms. This can assist managers, investor and regulators

regarding how they approach the environmental and social externalities of the firms.



This introductory chapter presents the theoretical background of this dissertation, the

epistemological standpoint and methodological choices, and then provides a more detailed

summary of the three papers. Subsequently, the full text of the three papers is presented as

individual chapters. The final chapter of this dissertation provides an in-depth discussion of the

contributions of the three papers and suggests areas for future research.

CHAPTER 1INTRODUCTION Theoretical Background


1.3 Theoretical Background

We live in a complex web of competing and contrasting cognitive and normative frames that

limit our choices and give stickiness and stability to our individual and collective actions.

Attention to this web reminds us that the atomized, context free, rational, efficient and heroic

agent who acts based on “facts” is a myth. Study of the social, cultural and historical context, and

how it interrelates with the personal and collective human will, has been a key preoccupation

within social sciences, and is particularly characteristic of institutionalism.

In the late 19th and early 20th century, German historicism emphasized the role of the

national state as carrier of a unique national identity and Geist. This unique Geist, in turn,

reflected upon the nation’s social and economic system (Myles 1956; Djelic 2010). This

perspective was consistent with and influenced by Hegel’s historical determinism. In their

attempt to account for context, German historicists primarily focused on the historical path

dependency of human (national) societies as reflected in the unique and particular forms of

national economic and political organizations. German historicism did not believe in the

existence of universal economic laws and models. Ultimately, German historicism lost the

Methodenstreit and Austrian economic model builders would come to dominate the development

of economics as a modern science (Fourcade-Gourinchas 2001). Nevertheless, this school has

remained alive through a complex process of filiation and its spirit remains vivid in some

variants of contemporary institutionalism (Djelic 2010).

Late German historicists, such as Max Weber and Werner Sombart (Koslowski 1997),

played an important role in the evolution of this thought. Max Weber was influenced by the

German historicism movement, but was wary of its structural determinism (Djelic 2010). Weber



brought attention to structure in the form of history, rules and bureaucracies while adopting

methodological individualism and keen attention to the individual and to the role of social

interactions.

Embeddedness and embedded actors were thus the centerpiece of the work of Weber and

later “old institutionalists”, such as Polanyi and Selznick (Lounsbury and Ventresca 2003; Djelic

2010). While decreasing their emphasis on history and historical contingencies, “old

institutionalists” in sociology paid increasing attention to the cultural and soft dimensions of

institutions and structures at the community level, rather than focusing on the nation as the unit

of analysis. This is manifested in Selznick’s definition of institutionalization as “the infusion of

values beyond and into the technical tasks at hand” (Selznick, Nonet et al. 1969:17). In addition,

old institutionalists such as Polanyi studied institutional change and the role of conflict and

power in defining institutional dynamics (Perrow 1986 ch.2). These trends further distanced

them from the historicists’ structural determinism.

In parallel, founders of institutional economics, such as Veblen (1909) and Commons

(1934; introduction), built upon the historicist tradition but acknowledged the mutual

conditioning of individuals and structures rather than attributing dominancy only to institutional

structures. Veblen states:

“The growth and mutations of the institutional fabrics are the outcome of the conduct of

the individual members of the group – since it is out of the experience of individuals and

through the habituation of the individuals that the institutions arise, and it is in this same

experience that these institutions act to direct and define the aims and end of conduct.”

(Veblen 1919 p. 37).



Interestingly, in the late 20th century, “New Institutionalism” took a long time to

rediscover its roots and to refocus its attention on institutional change, meanings, culture, power

and conflict.

“New Institutionalism” or “Neo-institutionalism” emerged in the 1970s as a reaction to

the dominance of theories of rational, atomized action in economics as well as in other social

sciences. As a consequence, earlier works in neo-institutionalism primarily emphasized the role

of structure, stability, resilience and isomorphism and mostly left unstudied the role of embedded

or soft agency (Meyer 1996; Djelic and Sahlin-Andersson 2006) in influencing institutions. Early

studies looked at regulatory, cognitive and normative frames (Scott 2008) as key drivers for

isomorphism backed by coercive, normative and mimetic forces (DiMaggio and Powell 1983).

The quest for legitimacy and the ceremonial and ritualistic adoption of practices highlighted in

this literature fundamentally departed from the rationalistic assumptions of mainstream

economics about individuals and organizations (Meyer and Rowan 1977).

Since then, neo-institutionalism has expanded like wildfire not only in sociology but also

in political science and economics. This has generated a vast body of conceptual and empirical

work, which has helped demystify how competing sets of values, norms and rules shape and are

shaped by individual and collective human behavior. However, scholarship within the tradition

of neo-institutionalism is still striving to address several theoretical dilemmas, such as finding

the right balance between agency and structures (Beckert 1999; Lawrence and Suddaby 2006;

Djelic 2010), institutions as drivers for isomorphism vs. competing institutions driving diversity

and change (Lounsbury 2008) and institutions as structures vs. institutions as ideations (Djelic

and Quack 2003 p.18).



This dissertation attempts to address the gaps in two important dimensions of

institutionalism. First, there is a need to pay more attention to the creation, maintenance and

transformation of meanings and meaning systems as important pillars of institutionalization

(Czarniawska 2004; Zilber 2008). Second, there is also a need for more studies of

institutionalization that will focus across multiple levels of institutions and take special notice of

the fast expanding role of the transnational space (Djelic and Quack 2003 p.31; Djelic and

Sahlin-Andersson 2006 p.18-19). These two gaps are explored in more detail below.

1.3.1 Meanings and Organizations

Interpretations, meanings and meaning systems have been a center piece of social studies,

whether they are referred to as subjective interpretive schemes (Giddens 1984 p.29-30),

significations (Hall 2009), webs of significance (Geertz 1985), frames (Goffman 1974), habitus

(Bourdieu 1990) or sense making (Weick 1995). All these scholars study the interpretive and

communicative dimensions of human social behavior, be it through linguistic or material modes

of meaning constitution.

Giddens (1984) emphasizes how individuals who have access to the same “stock of

knowledge” choose their own “interpretive scheme” and how those individuals then construct

and constitute significations, frames or meanings. He emphasizes how interpretations and

meanings do not exist in isolation. They are collectively “enacted” and they are embedded in

time and space and in particular social contexts (Boland 1993).



While meaning constitution is socially and historically embedded, the constituted

meaning is also the fundamental inter-subjective carrier of institutions, i.e. values, norms and

rules (Czarniawska-Joerges and Sevón 1996). Consequently, meaning is the unit of analysis

where enacted subjectivity and institutions intermingle. The study of meaning constitution is

where the secret to the questions about the respective roles of agency and institutions in the co-

construction of the institutional field lies (Meyer and Jepperson 2000).

Despite the emphasis on the importance of culture and meanings in fundamental works of

neo-institutionalism (Weick and Binkhorst 1977; DiMaggio and Powell 1983), most of the recent

empirical works in this paradigm, especially in the US, have focused on the analyses of

structures and/or on the diffusion of practices and norms. Such empirical studies primarily

attempt to show the impact of institutions on organizations through finding traces of change

mediated by institutions (Suddaby, Elsbach et al. 2007; Djelic 2010). By focusing on the

“visible,” the “quantifiable,” the “factual” and the “objective”, such research has mostly

neglected the contents of the institutions and of the institutionalization process that is culture and

meanings (Mohr 2005; Djelic and Quack 2008). This positivist flavor is in stark contrast to the

constructivist roots of institutionalism. The study of meanings and culture requires micro-level,

qualitative, process-focused empirical research, which contrasts with the dominant structure-

focused, statistical, macro studies of institutions and organizations (Clot, Lorino et al.; Zilber

2008:164-165).

Over the past two decades, neo-institutionalism scholars have paid increasing attention to

meaning systems and the travel of ideas (Djelic 1998; Sahlin and Wedlin 2008; Zilber 2008).



“Scandinavian Institutionalism” has been one of the outstanding contributors to the

understanding of dynamics of meanings through the traveling and translation of ideas in and

across organizations (Boxenbaum and Strandgaard Pedersen 2009). Based on the foundational

work of Gabriel Tarde (1962) and Bruno Latour (1987), this community of scholars has focused

on the circulation, translation and editing of ideas instead of“diffusion” - a metaphor borrowed

from physics, assuming meanings can travel like molecules without undergoing change (Sahlin

and Wedlin 2008). These scholars have studied closely how ideas are translated by soft

“carriers” and “translators” and how edited, repackaged and hybridized (Djelic and Sahlin-

Andersson 2006:16-17) ideas and meanings can result in institutional change in the field

(Brunsson and Sahlin-Andersson 2000). Czarniawska and Joerges (1996) highlight that ideas

become popular not because of their content but because of who supports them and how they are

“packaged, formulated and timed”.

In the study of meanings as the “carriers of institutions” into organizations, in a departure

from the mainstream and mostly positivistic accounting studies, interpretive studies of

accounting and audit have been another important and emerging contributor (Ahrens 2008).

Accounts are rich in meaning and are important instruments and objects of legitimation (Power

2003), central to the process of reality construction in organizations (Morgan 1988). Accounts

generate “facts” that create an illusion of rationality and visibility (Burchell, Clubb et al. 1980).

Technical rationale for using accounting is frequently overshadowed by its meaning content and

its rationalizing and reifying use (Ansari 1987). Plans, budgetary processes, control systems and

accounting are artifacts through which societal expectations are expressed (Czarniawska-Joerges

and Sevón 1996). Studies linking accounting to a cultural context analyze which symbols,

language and values are represented in a particular account. In addition, interpretive accounting



scholars have been preoccupied with how different meanings of accountability among actors

sharing the same stock of knowledge result in the variability in budgeting and accounting

practices (Dent 1991; Modell 2001). Such studies have developed an elaborate methodological

approach. This approach is based on constructing “narratives” (Czarniawska 2004) – providing

dense description of the context and the subjective interpretations of actors and then attempting

to draw explanations from the cases which “connect the dots” and help understand the “natural”

course of events (the etic dimension of the interpretive research) (Boland 1993; Kakkuri-

Knuuttila, Lukka et al. 2008). As Geertz (1985:19) points out, interpretive studies consist of

“tracing the curve of social discourse and fixing it into an inspectable form”.

What is special about accounting and audit is that they deal with artifacts of legitimation

and as a result studies of institutions and meanings in accounting tend to focus on practices and

micro-processes of institutional change and meaning systems (Dambrin, Lambert et al. 2007).

This is the type of research that has been mostly lacking in recent neo-institutionalist accounts of

organizations (Zilber 2008; Djelic 2010).

Drawing from these bodies of literature on the role of meanings in organizations, this

dissertation attempts to address the gaps in our understanding of the creation, maintenance and

transformation of meanings and meaning systems as important pillars of institutionalization

(Czarniawska 2004; Zilber 2008).

The paper, “SWFs, the IMF and Transparency”, draws upon institutionalism and

interpretive accounting research. This study applies the interpretive accounting methodological

approach to a transnational case of transparency and governance regulation. It provides an

analysis of how national institutions and organizational cultures condition actors’ interpretations

of transparency and how the differences in interpretations, in turn, influence the transnational



institution building process. Studies of the institutional conditioning of interpretations in a non-

Western context are still too rare.

The study of the socially responsible investment field provides an account of how the

distributed agency (Garud and Karnøe 2005; Quack 2007) of social movement actors plays an

important mediating role in the constitution and transformation of field level meanings. This

study primarily focuses on how the actors in the boundary of the SRI movement and mainstream

investors repackage SRI to adapt to the institutional setting of incumbent actors. This study helps

conceptualize the types of meaning constitution and transformation that take place as social

movements succeed and move on to become mainstream. This is aligned with a wider effort to

cross-fertilize the theoretical insights of social movement literature, on the one hand, and

organizational institutionalism, on the other (Lounsbury 2005; Schneiberg and Lounsbury 2008).

1.3.2 Multiple Layers of Institutions and the Transnational Space

One key attribute of contemporary Western capitalism is the increased density of organizing and

organizations (Ahrne and Brunsson 2006 p.74-94). Compared to only a few decades ago,

organizations today have to deal with a much denser web of organizations at different levels, not

only for their legitimacy but also for their technical and material needs (Brunsson and Jacobsson

2000). This density is revealed both in the multiplicity of organizational types and in the

superimposed layers of organizations and meta-organizations (Ahrne and Brunsson 2005).

Furthermore, for different types of organizations, there are fast emerging and expanding national

and transnational institutions, norms, rules and verification processes (Power 1999). With the

increased internationalization of economic and material flows, the transnational space,



especially, has emerged and expanded significantly. This space comprises a multitude of non-

state actors crossing national boundaries and institutionalizing and maintaining global “rules of

the game” (Djelic and Quack 2003). This has resulted in an explosion of international

organizations, standard setting and soft laws. The decentralization of regulation, legalization and

verification from states to a vast array of coalitions of states and non-state actors has resulted in

what scholars have called regulatory explosion (Levi-Faur 2005; Djelic 2009), the emergence of

regulatory capitalism (Braithwaite 2008), and the global Audit Society (Power 1999).

In political sciences, studies of globalizations have followed the two distinct paths of neo-

liberal studies and critical or Marxist studies. Neo-liberal studies of globalization depict

globalization as a rational process of internationalization of economic flows and political models

and consider it, on the whole, as a positive progressive development associated with

modernization (Drori 2008). In contrast, critical and Marxist studies of globalization perceive it

as a process of domination and exploitation of the broad south by the Western hegemon. The

common trait of these two paradigms is that they are based on the premise of the rationality of

actors and autonomous and rational nation states.

In contrast, institutionalist accounts of globalization have brought attention to the cultural

dimension of globalization and to the ritualistic dimensions of practice diffusion and adoption.

Studies of transnationalization in institutionalism have followed two distinct paths.

On the one hand, the scholars labeled by Djelic as East Coast/European institutionalists

(Djelic 2010) have emphasized the historical path dependency of national business systems, their

diversity and national identities (Hall and Soskice 2001; Morgan, Whitley et al. 2006). This

literature, sometimes referred to as the “varieties of capitalism” or the “national business

systems” paradigm assigns a Geist-like importance to the nation and state as the primary level of



analysis and as the defining and structuring base of national business systems. To such scholars,

transnational space can only cause temporary and inconsequential change in national business

systems (Crouch 2005).

On the other hand, West Coast institutionalism (Djelic 2010) has emphasized the role of

predominantly Western world society norms (Meyer, Boli et al. 1997) as drivers for

isomorphism between different nations, with a consequent gradual global move towards

rationalization. These scholars have showed us how dominant world society norms and cultures

have made economic systems from widely different countries with different historical, cultural

and social backgrounds look increasingly identical (Ramirez and Meyer 1980; Drori and Meyer

2006; Hafner-Burton, Tsutsui et al. 2008). To world society scholars, the nation state is not an

isolated island; rather, it is embedded in world society and is affected by the dominant norms and

“myths” present at that level. By exposing the ceremonial dimension of national policy making,

under the world society influence, these scholars succeed in explaining the “soft decoupling”

(Weick 1976; March and Olson 1976) between nation state policies and practices. In a realist and

rationalistic account of globalization, such decoupling is simply labeled as “policy failure”

(Drori 2008). World Society literature brought the global or transnational level of analysis, as

well as a focus on global governance through “culture”, to studies of globalization.

Recently a third approach has emerged. This approach to the study of transnationalization

emphasizes both trickle up and trickle down trajectories linking the national and the transnational

– and moving us beyond the hesitation between static national path dependencies and simple

global isomorphism (Djelic and Quack 2006; Djelic and Quack 2007). This approach has

generated studies that explore both how transnational institutions influence national structures,

meanings systems and practices and how national differences are represented and involved in the



process of transnational institution building. This emerging literature highlights that

institutionalism should go beyond national path dependency and isomorphism. Given the

transnational and national exchanges and co-construction of institutions, we should instead be

studying the concomitant “national path transformation and the transnational path creation”

(Djelic and Quack 2007).

For this type of research to become possible, institutions and how they condition actors’

behavior, and how they in turn are conditioned by it, should be studied at and across multiple

levels. It is only by examining the dynamics of the transnational, national and field level

institutions and their interplay with “soft” actors that we can hope for an understanding of the

complex and increasingly dense and multi-layered organizing characteristic of our economic,

social and political lives (Djelic and Sahlin-Andersson 2006; Quack 2007). However, with few

exceptions (Kleiner 2003; Quack 2007), such multi-level studies of institutions remain scarce. As

Djelic and Quack (2008:301) point out, “institutional processes that extend beyond the

organizational and sectoral fields or run through vertically layered institutional orders have been

largely neglected”.

Both empirical studies included in this dissertation provide an analysis of

institutionalization at and across multiple levels. The studies explore how those multi-level

institutional frames shape in complex ways the interpretations the actors construct, the meanings

they constitute, and their strategies of influence. In the study of the transnational regulation of

sovereign wealth funds, the primary focus is on how national institutions and organizational

cultures influence the interpretation of the concept of transparency and disclosure that is

provided at the transnational level. This paper “combines a study of the activities and interests of

carriers with an account of their institutional embeddedness (which can have multiple and



conflicting sources) … with a transnational scope” (Djelic and Quack 2008 p.306). Most

institutional accounts of transnational regulation so far have been Western-focused. Multi-layer

institutional analysis involving non-Western countries is another contribution of this work. The

rise of emerging economies and their increasing representation in transnational governance

makes such research highly relevant and essential.

In the study of socially responsible investment, a historical account of the movement

shows how the SRI field has changed in the process of mainstreaming, and how types and layers

of organizations involved in the field have evolved. This study particularly emphasizes how the

transnational organizations for SRI emerged and how they started to play a central role in norm

setting and the global circulation and adoption of financial SRI frames. This study shows how

social movement actors can influence institutions at different levels, and in return, how the

institutional dynamics of each level influence the language and tactics of the social movement

actors.

“Social Responsibility and Market Karma” introduces multiple layers of ideational and

structural institutions as mediators in the link between social and financial performance of firms.

Most studies of this link have been decontextualized, under-socialized and inattentive to the role

of institutions and context.

The following section provides an overview of the epistemological underpinnings and

methodological choices of this dissertation before presenting the studies themselves.

CHAPTER 1INTRODUCTION Epistemological Standpoint and Methodological Approach


1.4 Epistemological Standpoint and Methodological Approach

The two empirical studies undertaken for this dissertation are based on constructivist and

interpretive epistemologies, and both use qualitative research methods. This dissertation utilizes

qualitative research methods because they focus attention on the social processes of the

construction of “reality” and are more consistent with constructivist and interpretive perspectives

(Zilber 2008).

1.4.1 Epistemological Standpoint

As other interpretive works, this dissertation considers organizations and their environments as

inter-subjective and inter-dependent cultural spaces (Morgan 1986). In contrast to the

rationalistic, objective and positivist viewpoints on organizations, this dissertation focuses on

interpretive processes of reality construction (Garfinkel 1967, Weick 1979) and inter-subjective

experiences and the symbolic and ideational aspects of organizations (Zietsma and Lawrence

2010). In this approach, the organizations and individuals are embedded in culture and their

behavior is conditioned and structured by culture (Scott 1995).

1.4.1.1 Theory Development

In conducting the empirical studies, I followed the existing methods for interpretive studies

(Boland 1993; Kakkuri-Knuuttila, Lukka et al. 2008; Lukka and Modell 2010). Both studies

provide a narrative reflecting the subjective interpretations of the actors involved in each case

(Kakkuri-Knuuttila, Lukka et al. 2008). Each study then attempts to explain the patterns that



emerged and the relationships between different events, institutions and actors (Kakkuri-

Knuuttila, Lukka et al. 2008). This is the point that these studies depart from a pure interpretive

and subjective frame of study and instead the researcher attempts to provide his/her own

interpretation of the empirical events under study. Several scholars have highlighted the need for

combining emic and etic (Pike 1967) in interpretive studies, and have pointed out that obsession

with subjectivity in interpretive research results in pure descriptions which do not help explain

other cases and “if not” scenarios (Boland 1989). This is the attempt at Verstehen (Weber

1997:93) through which the researcher interprets actors’ subjective states of mind and

“unclarified situations” and events are transformed through the process of inquiry to “warranted

assertability” (Dewey 1925).

In the process of inquiry, I attempted to approach my empirical fields without a fully

formulated research question and as I collected and analyzed empirical data, my theoretical

questions evolved. I then adapted my continuing data collection and analysis to the changing

research questions. This is consistent with the constant comparative method where theorization

and the data are in constant interplay (Suddaby 2006). In other words, in this approach, new

theory is developed by paying careful attention to the contrast between “the realities (what is

actually going on) of substantive areas” (Glaser & Strauss, 1967: 239) and the author’s

interpretations of those realities. From this perspective, data collection and analysis are guided

by the ongoing interpretation of data and emerging conceptual categories. Put differently, this

approach unifies data collection, analysis and theorizing processes and avoids the common

dualism between inquiry and theorization as manifest in inductive and deductive approaches to

inquiry.



In theory development, instead of assuming the possibility of an objective scientific

reality, I focused on “can be” and “would be” scenarios, bearing in mind that the researcher’s

findings are the result of his/her sense-making and subjective interpretation of empirical events

and phenomena. This is why in the studies included in this dissertation I attempt to suggest ideal

types of behavior, which have no reality claims. Rather, by providing schematic and pure cases,

ideal types can help future inquiries by providing frameworks and clues as to how meanings and

actions are constructed (Weber 1904). As Weber (1946:88) puts it, “an ideal type is formed by

the one-sided accentuation of one or more points of view” according to which “concrete

individual phenomena … are arranged into a unified analytical construct” - in its purely fictional

nature, it is a methodological “utopia [that] cannot be found empirically anywhere in reality.”

1.4.1.2 Reflexivity in Social Inquiry

One of the key challenges of social inquiries is that the researcher’s convictions, cultural

background and social and historical context can influence his/her interpretations of the events at

hand. This has been a preoccupation of many social scientists.

Weber has dealt with this issue by suggesting that the researcher should attempt to

separate his/her political beliefs and stance from his/her scientific findings and should make

his/her normative stances explicit. In other words, Weber’s approach is based on his belief in the

dualism between fact and value, and empirical and normative knowledge (Weber 1949). He

believes that the social researcher “could adhere to the principle of objectivity once normative

perspective had been laid out” (Weber 1949:section I:2).



Bourdieu, however, goes beyond this dualism. Bourdieu (1993) highlights that the role of

the researcher is to use scientific competence to produce a critical knowledge independently of

any ideology and interest. Bourdieu insists on the importance of a reflexive sociology in which

sociologists must at all times conduct their research with conscious attention to the effects of

their own position, their own set of internalized structures, and how these are likely to distort

their objectivity. Through this constant monitoring, the social researcher can make explicit

his/her values and institutional background and can hence attempt to decrease the related biases

at each and every step.

I was involved as a practitioner in both empirical fields under study. As a result, my

personal values and normative stances could introduce bias in my data collection, analysis and

theoretical development.

In the attempt to decrease such biases, Weber’s writings on objectivity in social sciences

and Bourdieu’s work on the reflexivity and autonomy of the social researcher were key

references. To achieve this, in the interviews, I explained clearly to my interviewees my

background and professional role in the field. In addition, throughout the analysis of data, I was

constantly aware of the codes that I chose, the quotes that I cited and the conclusions that I drew

to see whether and how they might be influenced by my personal beliefs and background.

Finally, when I finished writing a first draft of the narrative for each of the empirical cases, I

asked two professionals from the field to read and confirm the validity of my narrative. Through

this exercise, I attempted to root out potential influences of my subjective biases on construction

of the narrative.



1.4.2 Methodological Approach

Both empirical studies that I have undertaken use qualitative research methods. Sources of data

included a mix of interviews, participatory observation and documentary evidence such as

websites, press releases, annual reports, databases and other sources specific to each study.

1.4.2.1 Empirical Fields

The two empirical fields under study comprise a study of the micro-processes of SWF

negotiations over a period of 11 months and a study of the macro processes of the emergence of

the mainstream SRI field and the role of actors in changing field level meanings over a period of

50 years.

1. Sovereign Wealth Funds, the IMF and Transparency: The first empirical

study covers the negotiation process facilitated by the IMF for developing

transparency soft laws for SWFs. This covers 11 months from the submission of a

proposal at the IMF for developing the code in November 2007, to the negotiation

process and finalization of the code in October 2008. Based on the sampling

method described below, the behavior of the SWFs of Kuwait, Norway and

Singapore are studied during the negotiation process to see whether their varying

national and organizational institutions influenced their behavior and concerns

regarding transparency. In addition, the original proposal and the final code were

studied to understand the impact of differences in actors’ interpretations on the

code’s content.



2. From God to Markets:This paper focuses on the global socially responsible

investment movement from 1960s to the present day (2011) and focuses on the

role of boundary actors and institutions at multiple levels in reframing of the

movement during this period.

1.4.2.2 Sampling

The two empirical studies utilize two different sampling methods. This section details how the

sampling was carried out.

1. Sovereign Wealth Funds:For the study of SWFs, the sample selection aimed at

maximizing the variability of selected SWFs regarding the type of national

government and the level of connectedness to international markets. These two

variables were used for sampling based on the finding that democratic and market

based rationales were used by the IMF to demand transparency from the SWFs.

Variability was maximized to facilitate the study of the impact of political

structure and connectedness to international markets on the behavior of SWFs in

the negotiation process. Based on this sampling method, the SWFs of Norway,

Singapore and Kuwait were chosen. More information can be found in the

respective research article.

2. Socially Responsible Investments: Two variables were used to choose the

interviewees for the analysis of the evolution of SRI frames. The first criterion

used was that they should have had a significant role in the global diffusion of



SRI and second, that their careers should cover a significant portion of the past

forty years. After the first interviews with the former CEO of Innovest and the

founder of US Sustainable Investment Forum, both of whom are cited as two of

the most influential people in the growth of SRI, the following interviewees were

chosen based on the snowball sampling method (Browne 2005). At the end of

each interview, each interviewee was asked to mention the top five individuals

and institutions involved in the global diffusion and growth of SRI. Following 21

interviews, a list of 29 individuals (including the individuals already interviewed)

has been compiled. This exercise was continued up to the point of saturation,

which means the point at which no new names were mentioned by the new

interviewees. I chose this method to ensure that all the mediators involved in the

framing of SRI at the global and national level were interviewed. This can help

achieve a cross-sectional understanding of the dynamics of the social movement,

and avoid generalizations based on the viewpoint of a specific cluster of actors.

This sampling method has been used by other social movement scholars to

achieve a cross-section of the social movement members (Heirich 1977; Opp

1988).

1.4.2.3 Data Collection

Qualitative data used for the two empirical studies were of diverse sources including interviews,

participant observation, websites, reports, press releases and videos.



1- Interviews: All the interviews for the two studies were semi-structured. Interviews were

carried out either in person or over the phone and lasted for an average of 60 minutes for

the SRI study and 45 minutes for the SWF study. For the study of SRI, interviews were

continued to the point of saturation using the snowball sampling method (refer to the

above section for more details). For the SWFs, the number of interviews was constrained

by the limited number of total negotiators present during the GAPP negotiations and by

the political sensitivity of the negotiations. Twenty-one interviews were carried out for

the study on SRI and nine interviews for the study on SWFs. Both of the empirical

papers, presented in Chapters II and III of this dissertation, provide the full list of their

interviewees in an appendix. With three exceptions, all the interviews were recorded and

transcribed. The three exceptions (two in the study of SWFs and one in the SRI study)

were due to confidentiality concerns of the two SWF interviewees and low recording

quality of one SRI interview. In these cases, detailed notes taken during the interviews

were used for analysis.

2- Participant observations: The author worked as a research analyst in the largest global

SRI research firm (Innovest) for four years, from June 2006 to June 2010. As part of his

professional activity, the author rated large international companies on their

environmental and social policies and performance. These four years coincided with the

buy-out of the small firm, Innovest, by a large mainstream financial organization

(RiskMetrics – a JP Morgan offshoot). The author has also participated in 11 SRI

conferences including both value-driven and mainstream actors from 2006 to 2009. In

addition, the author has worked with several of the SWFs, including the Australian,



Canadian, Norwegian, Libyan, Chinese and Singapore SWFs as part of his previous

professional activities from December 2008 to October 2009. This work included

discussions with sovereign wealth funds concerning their disclosure and compliance with

the IMF GAPP and a ranking of SWFs on their GAPP compliance.

This participant observation in both the empirical fields under study has enriched

the current study with a first-hand account of day-to-day practice.

3- Textual material: Both studies use a wide range of reports, press release and contents

from websites. For the study on SWFs, a major source was the documents released by the

IMF before, during and after the negotiations process. In addition, SWF websites, several

third party reports and press releases were analyzed as part of this study. The governance

dataset of RiskMetrics Group (Now MSCI Group) on SWFs was another important

source. This dataset included 47 indicators of governance and disclosure for the ten

largest SWFs.

For the study on SRI, a wide range of articles, websites and SRI organizations’

annual reports were analyzed to structure a narrative of the SRI social movement over the

past 50 years. The UN Principles of Responsible Investment’s database of signatories

was another key source of data for this study, which was used to achieve a better

understanding of the type, size and global spread of organizations in the SRI field. In

addition, the Institutional Shareholder Services (now MSCI Group) datasets on

environmental, social and governance shareholder resolutions in the US were used to

analyze the evolution of shareholder activism and type of organizations involved during

the past ten years. Both studies utilized secondary sources of data including academic

papers on the history of SRI and SWFs.



4- Audio and video material: Audio and video material was used, especially for the study

of SRI. Most of the SRI interviewees were well-known figures, who had carried out

multiple public interviews over the past decades. Where such material was available, it

was used to address the retrospective bias related to the time elapsed between the SRI

movement’s key events and the time of this study.

1.4.2.4 Data Analysis

Both empirical studies use coding, word counting and other data reduction methods to analyze

the qualitative data. I started data reduction and analysis in parallel to the data collection to

ensure that emerging theoretical questions were reflected in subsequent interviews. For the SRI

study, the audio and video material was selectively transcribed and coded. Both the studies

applied a preliminary coding (Miles and Huberman 1994) based on the variables in the research

questions and, as the research questions were refined, the codes were refined too. More

information about the codes used for each study is included under the Methods section of each

paper.

1.4.2.5 Verification of Data Sources

In both the studies, multiple sources of qualitative data were used to triangulate the data sources

(Guion 2002)and where the findings were inconsistent, additional research was carried out to

understand the underlying reasons for inconsistencies. For example, most of the interviewees for

the SRI study, mentioned that the hybridization frame for SRI emerged in the early 2000s. I



verified this by analyzing the annual reports of the US Sustainable Investment Forum. This

analysis confirmed the statement of the interviewees and showed that framing SRI as risk and

opportunity and part of the regular investment management process first appeared in their 2005

annual report. Another example was my analysis of the shareholder resolutions database and the

organizations that filed the shareholder resolutions to confirm my interviewees’ statement that

mainstream investors avoid more radical types of shareholder activism instruments.

In addition, following the development of the narrative for both the studies, two experts

from the field who were not among the interviewees, (a policy maker and a consultant for the

SWFs paper and an academic and a senior research analyst for the SRI paper) were asked to

review the narrative and point out any potential inconsistencies or biases.

The following section provides an overview of the three papers included in this

dissertation.

CHAPTER 1INTRODUCTION Overview of the Three Research Papers


1.5 Overview of the Three Research Papers

The two empirical studies and the related analysis of literature yielded four papers, of which

three are included as part of this thesis. This section provides an overview of the three papers.

Table 1-1 Overview of the three papers included in the dissertation

Paper Method Theoretical question Empirical

field Data Theories

1- Sovereign Wealth Funds, the International Monetary Fund and Transparency: Is everybody talking about the same thing?

Qua

litat

ive

How do national institutions at different levels affect the interpretations of actors on transparency and disclosure demands? How do differing interpretations on transparency and disclosure affect transnational institutions building?

IMF regulatory negotiations process for SWFs from November 2007 to October 2008

− Nine semi-structured interviews − Participant observation over 18 months − IMF proposals and press releases and the final soft law SWF Websites and press releases − RiskMetrics SWFs dataset − Secondary literature on SWFs

− Transparency and Accountability − Institutional analysis − Transnational governance and World Society

2- From God to Markets; A study of the role of actors and institutions in reframing socially responsible investment

Qua

litat

ive

What are the changes in field level institutions, language and framing as a social movement succeeds and moves to the mainstream? What role do boundary actors play in the adjustment of a movement’s logics and framing as the movement succeeds and moves to the mainstream?

Socially responsible investments movement – from the 1960s to present

− Twenty-one semi-structured interviews Participant observation over four years Annual reports − Press releases, Websites − Signatories database of UN PRI − Shareholder resolutions database of ISS − Secondary literature on SRI

− Institutional analysis − Meaning-making − Social Movements



3- Corporate social responsibility and market “karma”; A framework for the analysis of the link between social and financial performance of the firms and its failings

Con

cept

ual

What contextual variables mediate the link between firms’ social and financial performance? In what scenarios is the social/financial performance link dysfunctional?

- − Institutional theory − Stakeholder theory − Corporate social responsibility

Of these three papers, two are empirical (1, 2) and the third (3) is conceptual and provides

part of the theoretical foundations needed for the study on socially responsible investment (2).

The following section provides an overview of the three papers. Full papers are included

in the following chapters (Chapters 2,3 and 4) of the dissertation.



1.5.1 Sovereign Wealth Funds, the IMF and Transparency

Is everybody talking about the same thing?

This paper presents the first of the two empirical studies undertaken as part of this dissertation.

Data collection and analysis for this study took place from June 2008 to July 2010. The first draft

was presented in February 2009 and since then; different versions have been presented at

European Group for Organization Studies (EGOS), Critical Perspectives on Accounting and

Academy of Management (forthcoming) conferences.

1.5.1.1 Overview

This paper provides a framework for analyzing how actor’s interpretations on transparency

pressures is shaped by national institutions at multiple levels and how these different

interpretations impact transnational regulation of transparency and disclosure.

The paper begins with an analysis of the literature on social dimensions of transparency,

transnational governance and soft laws. The paper provides a discussion of the differences

between institutional dynamics of market and democracy based transparency pressures.

Following the description of methods, the paper then provides a comparative analysis of

the national institutions of Kuwait, Norwegian and Singapore SWFs and the perspectives of their

representatives on transparency and disclosure. This is followed by a detailed description of the

IMF-led negotiations process for improving the governance and transparency of SWFs, with a

special focus on the behavior of the three SWFs under study. The paper finally discusses the

code itself, how it evolved during the negotiation process and how institutional and interpretive

differences of SWF actors affected it. The period under study is from the submission of the



proposal for the development of the soft laws for SWFs in November 2007 up until the release of

the code in October 2008.

1.5.1.2 Theoretical Questions

This paper explores the following theoretical questions:

I- How do national institutions at different levels affect the interpretations of actors

on transparency and disclosure demands?

II- How do differing interpretations on transparency and disclosure affect

transnational institutions building?

1.5.1.3 Theoretical Background

This paper draws upon the literature on transparency, audit and accountability (Tsoukas 1997;

Power 1999; Hood and Heald 2006; Roberts 2009). It utilizes world society (Meyer, Boli et al.

1997) and transnational governance (Djelic and Quack 2003; Djelic and Sahlin-Andersson 2006)

literature to study the role of transparency in the transnational space and the process of institution

building for the SWFs. The study’s epistemology and methods are structured using a

combination of multi-layer institutional analysis (Djelic and Sahlin-Andersson 2006, Quack

2007) and interpretive accounting frameworks (Boland 1993; Ahrens 2008).



1.5.1.4 Theoretical Development

Through a multi-layer analysis of the institutions affecting the three SWFs under study, and

based on a detailed description of the negotiations process, the study provides three ideal types

for actors’ institutionally conditioned interpretations of transparency and disclosure pressures.

These ideal types are: information interpreted as power, information interpreted as the market‘s

need and information interpreted as the public’s right. The paper then provides a framework

describing the different types of conflict that emerge when using democracy or market-based

framing for transnational transparency demands from organizations with different mixes of the

three ideal types.

1.5.1.5 Contributions

This paper proposes contributions to the literature on transparency, transnational governance and

interpretive accounting. Analysis of the role of national institutions at multiple levels on

transnational institution building and introducing an interpretive approach to the transparency

pressures in a non-Western context are two of the contributions of this paper. In addition, the

paper proposes contributions to practice in regulation of transparency, accounting and audit.



1.5.2 From God to Markets

The role of actors and institutions in the reframing of Socially Responsible

Investment

This empirical study of the SRI movement represents the second of the empirical studies

undertaken as part of the dissertation. Data collection and analysis began in November 2009 and

ended in May 2011. The first draft of this paper was presented in February 2010 and since then;

different versions have been presented at Organization Studies workshop on social movements,

EGOS and Academy of Management conferences.

1.5.2.1 Overview

This paper studies the role of SRI social movement actors in the evolution of the movement’s

logics and language in response to institutional changes at multiple levels, as SRI succeeded and

moved to the mainstream. The paper first provides an institutional narrative of the SRI

movement from the 1960s to the present. It then differentiates the frames that emerged in the SRI

movement during this period. Finally, the paper analyzes the boundary actors’ motives in

reframing the SRI movement and the challenges they faced in surmounting the conflicts between

their convictions and the institutional demands of the incumbents’ field.





1. What are the changes in field level institutions, language and framing as social

movements succeed and move to the mainstream?

2. What role do boundary actors play in the adjustment of a movement’s logics and

framing as the movement succeeds and moves to the mainstream?

1.5.2.3 Theoretical Background

This paper uses multi-layer institutional analysis (Djelic and Sahlin-Andersson 2006 p.18-19,

Quack 2007), social movements (Zald and McCarthy 1994; Den Hond and De Bakker 2007) and

collective action framing (Benford and Snow 2000) frameworks. Through combining

institutional analysis and social movement frameworks, the paper attempts to strike a balance

between the attention to structure and agency in providing a multi-layer longitudinal analysis of

meanings in a social movement as it succeeds.


The paper sets out seven structural changes in the SRI field as the social movement succeeded. It

then provides three ideal types for the type of framing change and meaning-making work that the

reformist social movement actors engaged in as the social movement succeeded and moved to

the mainstream. These ideal types are: the hybridization of logics with the mainstream, the shift

from negative to positive motivations for societal change and the increased use of participatory

language for societal change. This study shows how actors adjust their language at different

times and spaces and how they justify the compromises that sometimes conflict with their

convictions.




This study contributes to the academic literature on institutionalism and social movements. The

papers’ analysis of institutions at multiple levels, the cross-fertilization between social

movements and institutionalism literature and the conceptualization of meaning- making

strategies of actors in successful social movements are some of the contributions of this paper.

The paper equally proposes in equal measures contributions to the practice in social responsible

investments and also the regulation of firms’ social behavior.



1.5.3 Corporate Social Responsibility and Market “Karma”

A framework for analysis of the link between social and financial

performance of the firms and its failings

This conceptual paper focuses on the mechanisms linking firms’ social responsibility and

financial performance. The first draft of this paper was presented in November 2009 and since

then, different versions have been presented at the UN Principles of Responsible Investments and

Academy of Management conferences. Since February 2011, Imran Chowdhury of ESSEC

Business School, has contributed to the development of this paper as a co-author.

1.5.3.1 Overview

The paper starts by providing a review of the theories of a firm’s social responsibility. It then

discusses the academic literature that attempts to link the firm’s social responsibility and

financial performance. The paper then develops a conceptual framework integrating all the

mechanisms mentioned in the literature for the social-financial performance link. The following

section studies the institutional factors at transnational, national and field levels, and firm

attributes that mediate the social-financial performance link. The paper concludes with an

analysis of how acknowledging the conditionality of this link can influence the social

responsibility research agenda.





1. What are the contextual variables that mediate the social-financial performance

link?

2. In what institutional and contextual scenarios does the social-financial

performance link become dysfunctional?


This paper provides an institutionally-embedded analysis of the link between social and financial

performance of firms. Through a literature review, this paper brings all the mechanisms linking

the firm’s financial performance and social responsibility under the same conceptual framework.

The three mechanisms for the translation of social responsibility to financial performance

developed in this paper are symbolic/image effects, direct effects and explicit stakeholder claims

on the firm. The paper then provides a multi-later analysis of the ideational and structural

institutions mediating the translation of social performance to financial performance. The paper

analyzes institutional and contextual scenarios where each of the three mechanisms fails and

where social responsibility might come at a cost to the firm.


This paper attempts to brings society and institutions back into the analysis of the link between

social and financial performance of firms and to emphasize the social embeddedness of this link

as any other market based exchange. It provides a comprehensive conceptual framework that

brings in all the social-financial performance linkage mechanisms described in the literature. The

paper’s detailed analysis of the contextual and institutional variables that mediate each



mechanism and scenarios when they fail provide insights for empirical studies attempting to

prove the link. The paper also contributes to practices in responsible investments and regulation

of environmental and social impact of firms.

CHAPTER 0 Overview of the Three Research Papers


The following three chapters provide the full text of the three research papers. A

discussion of the contributions of the dissertation,the limitations and future research directions

follows in the final chapter.

PhD Dissertation – Afshin Mehrpouya – ESSEC Business School, UCP67

CHAPTER 2

SOVEREIGN WEALTH FUNDS,

THE IMF AND TRANSPARENCY

Are They All Talking About the Same Thing?

Presented at

Critical Perspective on Accounting, Florida, US, 2011

Academy of Management Conference, San Antonio, US 2011 (forthcoming)

European Group for Organization Studies (EGOS) Conference, Lisbon, Portugal 2010

European Group for Organization Studies (EGOS) Conference, Barcelona, Spain, 2009

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Résumé


2.1 Résumé

Ces trente dernières années, la transparence s'est établie comme norme internationale

dominante de notre société (Meyer, Boli et al, 1997). Cette étude montre tout d'abord que

les appels à la transparence dans l'espace international se basent sur deux normes

différentes : d'une part, « les besoins d'information des acteurs du marché » et d'autre part

« le droit démocratique à l'information du public ».

Cette étude s'appuie sur cette conclusion pour analyser le processus de développement du

droit mou (soft law) relatif à la transparence et à la gouvernance des fonds souverains,

processus initié par le Fonds monétaire international en 2008. Cela présente une analyse

comparative des fonds souverains de Norvège, du Koweït et de Singapour pour mettre en

lumière l'influence sur les négociations et leur résultat des différences nationales de

perception de la transparence, aux niveaux individuels et institutionnels, ainsi que de leur

décalage avec l'approche du FMI.

En ce qui concerne les appels à la transparence, cette recherche dégage trois types-

idéaux, à savoir: l'information perçue comme source de pouvoir, un droit public, et un

besoin du marché. Par ailleurs, cette étude montre que les préoccupations des fonds

souverains concernant les appels à la transparence et à la publication d'information

diffèrent selon leur profil spécifique combinant les différents types-idéaux. Ces

préoccupations influencent tant le processus de développement que le contenu final du

droit mou.

Mots-clés: fonds souverains, transparence, approches institutionnelles, droit mou,

publication, commensuration, transnational

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Abstract


2.2 Abstract

Over the past three decades, transparency has been established as a dominant world

society norm (Meyer, Boli, et al 1997). This study first establishes that transparency

demands in the transnational space rely on two different normative bases of “information

needs of market actors” and “democratic information rights of the public”.

Based on this finding, this study provides an analysis of the soft law development process

for transparency and the governance of Sovereign Wealth Funds (SWF), organized by the

International Monetary Fund (IMF) in 2008. Through a multi-layer institutional analysis

of the sovereign wealth funds of Kuwait, Norway and Singapore, and their behavior

during the negotiations, this paper shows how the national institutions condition actors’

interpretations of transparency demands. It then shows how differences between

interpretations of transparency demands of different SWFs and the IMF affected the soft

law development process for disclosure and its outcome.

With regard to interpretations of transparency demands, this study develops three ideal

types: information perceived as power, information perceived as a public right and

information perceived as a market need.

Keywords:Sovereign Wealth Funds, transparency, institutionalism, soft laws, disclosure,

interpretive accounting, translational

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Introduction


2.3 Introduction

On October 8th 2008, following four months of negotiations organized and facilitated by the

International Monetary Fund (IMF), a voluntary code was released, primarily to improve the

“transparency” and governance of Sovereign Wealth Funds (SWF). The code demanded

transparency from SWFs – mostly from the Middle East and Asia – principally on the grounds of

facilitating the international movement of capital and improving accountability. This is the study

of how that code came to be and how national differences affected the process of its development

and content.

In the space of three decades, transparency has emerged as a dominant world society

norm (Meyer, Boli et al. 1997:29-35) in global political and economic discourse. In response to

the indiscriminate push for transparency in the economics, political sciences and management

literature, a critical body of literature has recently emerged that questions the unintended ethical,

social, political and technical consequences of transparency (Tsoukas 1997; Power 1999; Power

2004; Bessire 2005; Roberts 2009). However, in this literature, national institutions and how they

moderate receptiveness to, and consequences of transparency have not received much attention.

One key goal of this paper is to explore this particular dimension and to show how transparency

is interpreted and reacted to differently by actors from different national institutional and

political contexts (Scott 2001).

This study analyzes the effects of organizational and national institutions on the

interpretations of transparency and information disclosure within three different Sovereign

Wealth Funds from Norway, Kuwait and Singapore. The theoretical perspective combines world

society literature (Meyer, Boli et al. 1997) and multi-level institutional analysis (Djelic and



Quack 2008), The paper then provides a study of how these differences affected the IMF’s soft

law development process and outcome for improving the transparency and governance of the

SWFs.

Leading accounting scholars have highlighted the need for a better understanding of the

institutional dynamics of transnational regulation for transparency, audit and accounting. For

example, Hopwood recently emphasized that “one additional area that I have always thought of

as needing further investigation is that of the politics and institutional contexts of accounting

regulation, particularly at the supra-national and international levels” (Hopwood 2009). This

paper responds to this gap. In addition, this paper responds to calls for more studies of

institutions at multiple levels and how they influence and are influenced by processes of

transnational governance (Djelic and Sahlin-Andersson 2006).

Transparency is a concept deeply embedded in Western enlightenment and liberal norms.

During the past few decades, demand for transparency has become an integral part of liberal and

neoliberal discourse under the general “modernization” (Ramirez and Meyer 1980) frame, both

for governments and non-state organizations.

Economic (markets) and political (democracy) liberalism and individualism have been

the two fundamental normative bases for the global push for liberal reforms (Thomas and Meyer

1984). As the study of existing transnational transparency codes demonstrates (see Appendix II),

these two forces also form the normative bases used for demanding information and

transparency. In other words, “needs of markets” for information and the “democratic public

right” to information and accountability are the two fundamental rationales used by international

organizations to demand transparency.



International organizations, such as the IMF and the World Bank, have been at the heart

of the global push for transparency and have devised a wide set of soft laws, rankings and audits

to push for more transparency, especially in the peripheral countries.

An interesting, recent example of transnational institution building and soft law

development for transparency is the process of soft law development for improving transparency

and governance of sovereign wealth funds under the supervision of the IMF. Sovereign wealth

funds are investment organizations mostly from Asia and the Middle East, which manage the

excess capital of their national governments. This is another instance where an inter-

governmental organization with mostly Western norms and values attempts to diffuse a uniform

“dominant” norm (Djelic and Quack 2003:324-5) among actors from differing national

regulatory, normative and cognitive contexts (Scott 2001).

This paper provides a comparative analysis of the SWFs of Singapore, Norway and

Kuwait. The analysis includes a comparison of high order institutional logics of the three

countries, the structure of the different SWFs, their relationship with their national governments

and the information practices of each SWF in the past. A study of the negotiation process

facilitated by the IMF, which culminated in the Santiago Principles (also referred to as the

Generally Accepted Principles and Practices or GAPP) in October 2008, follows. The final

section of the paper introduces three ideal types for the attitude of organizations to transparency

pressures and audit.

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Theoretical Background and Methods


2.4 Theoretical Background and Methods

2.4.1 Theoretical Discussion

In this paper, transparency is defined as a norm for information disclosure whereby information

is made accessible to all interested parties, and the withholding of information is the exception

rather than the rule. Transparency is a metaphor for being able to see through with no barriers

(Bessire 2005). In this paper transparency is differentiated from “targeted disclosure” where

information is tailored and disclosed to specific stakeholders but is not made available publicly

(Hood and Heald 2006).

2.4.1.1 The Transparency Culture

The “information rights of citizens” is a topic that emerged during the enlightenment in the

Western world with the development of individualism and the self-directed man (Meyer 1990).

Rousseau considers transparency free from power, ambiguity and discrimination as a key

prerequisite of pure democracy (Starobinski, Goldhammer et al. 1988). Rousseau considered

opaqueness, evil and transparency a lost state of nature (Hood and Heald 2006:7) and

recommended that “public servants should work in the eyes of public”. According to Kant

(Taylor 2010), “publicity” (which is a term used as an equivalent to transparency in earlier texts)

provides a “test for justice” in political and intellectual matters and requires all participants to

submit to “the judgment of sound common reason”. Jeremy Bentham (1838) – one of the most

ardent supporters of transparency as a mode of control – believed that “the more strictly we are

watched, the better we behave”. The push for “transparency and rule” based governance was a



move against the tradition of “oath and judgment” as cornerstones of public office (Hood and

Heald 2006:8-10).

Transparency continues to be cited as a fundamental tool for democratic governance,

participation and accountability especially in mainstream, rationalistic political sciences

literature (Grant and Keohane 2005; Fung, Graham et al. 2007).

This legacy of states’ transparency has been extended and reinforced by the more recent

focus on disclosure and transparency in the economic sphere representing the economic face of

Western liberalism and individualism. In mainstream economics (Akerlof 1970; Healy and

Palepu 2001), accounting (Bushman, Piotroski et al. 2004) and managerial literature

(Lowenstein 1996; Maher and Andersson 2002) transparency is cited as a key instrument for

addressing a range of economic issues such as risk evaluation, agency costs and “information

asymmetry”.

The following graph illustrates the recent explosive increase in citations of the word

transparency in major international media outlets.



Figure 2-1Citations of the term “Transparency” in the top five global newspapers and magazines - 1983 to 2009

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Source: Factiva - publications covered: The Financial Times, The New York Times, The Economist (United

Kingdom), International Herald Tribune, The Wall Street Journal, The Washington Post

It is important to remember that transparency and “openness” demands underlie important

concepts of accountability, commensuration, remote decision-making and audit. Transparency

requires generating information and the externalization of accounts of self by individuals and

organizations. As a key process of legitimation, the accounts can then be subjected to verification

and audit (Power 1999). Transparency also facilitates the commensuration (Espeland and

Stevens 2003) of different entities based on standardized and “comparable information” for the

purpose of remote and decontextualized decision making (Porter 1995). Consequently studying

transparency is fundamental to understanding the societal influences of accounting, audit and

management control systems.



In response to the indiscriminate push for transparency as a dominant norm in the

mainstream academic literature and Western economic and political public discourse, a plethora

of critical literature has emerged. In an interdisciplinary effort, scholars have questioned the

moral, social, political and technical issues underlying transparency and the “information

society”. Roberts (2009) argues that forcing individuals and organizations to generate

information and to build external “accounts” of themselves for comparison with an ideal and

“best practice” as the dominant mechanism for accountability results in a flawed effort to achieve

the external ideal. This effort is driven by the quest for legitimacy, recognition, and guilt. This

endeavor is based on an externalized and decontextualized account of the self and an ideal or

“best practice” which is detached from the realities of the local context. In the “Tyranny of

Light”, Tsoukas argues that the abundance of standardized information about a phenomenon

hides the real complexity and richness of the phenomenon, which means that more information

results in less understanding (Tsoukas 1997). Some scholars have questioned the ethical

dimensions of the demand for transparency and have highlighted the “ethical gaps” in forcing the

creation of external accounts and decontextualized ideals on the individuals, groups and

organizations (Messner 2009). Furthermore, several scholars have decried the demise of trust and

the spiral of distrust in the information society (Tsoukas 1997; Power 2007). This obsession with

information as the primary mode of control has resulted in the explosion of disclosure and audits,

creating what Power (1999) calls the “audit society”.

2.4.1.2 Transparency and World Society

The history of transparency in the transnational space goes back to the First World War and the

first doctrine of Woodrow Wilson’s Fourteen Points, released in 1919 (Hood and Heald 2006:11-



12). This doctrine set out the goal to achieve “open covenants of peace openly arrived at with no

secret international agreements in the future” (consistent with Kant’s argument in “Towards

Perpetual Peace” for the openness of public treaties)(Hood and Heald 2006:11-12). As the

transnational space expanded after the Second World War, transparency has been a fundamental

principle in all important treaties such as GATT (Article 3) and the EU transparency directive

(Hood and Heald 2006:11-12). An analysis of some of the most important transnational soft laws

for transparency is provided in Appendix II. All these international transparency codes demand

transparency based on the democratization and market-based rationales. The figure below

provides details of transparency’s normative underpinnings in transnational codes listed in

Appendix II.



Figure 2-2Overview of the normative bases for transparency demands in the transnational codes

Source: transnational transparency codes included in Appendix II.

The following section provides an analysis of these two logics as the bases for demanding more

transparency in the transnational space.

2.4.1.3 Marketization and Transparency

The rapid global shift from hierarchies to markets (Djelic 2006) and collaboration to competition

(Djelic and Quack 2005) has resulted in the expansion of markets in all aspects of social life –

governments (New Public Management), regulatory space (Soft Laws), justice (alternative

dispute resolution), social security (private insurance) and intra-firm markets (transfer pricing),

etc. (Djelic 2006). In the transnational space, organizations such as the World Bank and the IMF

have been important mediators in the circulation and adoption of market logics (Djelic 2003).



Marketization comes with its inherent information demands. Markets demand

information disclosure on the premise of its use for controlling agency relationships. This type of

information demand has been well-documented in the literature examining the embeddedness of

agency (Granovetter 1985) and its role has been emphasized in the “decontextualized”

contractual relationships where the principal and agent operate in separate social spaces (Shapiro

1987). In addition, other market actors demand information for calculating the exchange value of

market commodities and to make transaction decisions.

The underlying assumption of the international organizations prescribing economic

transparency is the superiority of Western liberal economics models (Djelic 1998), based on the

principles of macroeconomic stabilization, deregulation and liberalization of foreign trade and

capital flows (Simmons and Elkins 2004), as a globally applicable model, and contractual and

information-based economic organization as the superior global mode of market/economic

organization.

It is important to point out that contractual and information-based economic organization

is not the only available alternative for economic organization. Several studies describe

alternative forms of principal protection and economic organization. For example, Geertz

provides a solid description of how economic organization in Middle Eastern markets is based on

dense, trust-based networks between market actors, and exclusion-based sanctions for breach of

trust, rather than on Western contractual and information based models (Geertz 1956).

Forces at play in this diffusion and translation process are a combination of coercive

(IMF’s conditional credit, for instance), mimetic and normative instruments (rankings of

business friendliness, for example) and socialization mediators, such as Western business

education, transnational networks (Marcussen 2006) and epistemic communities (Haas 1992).



All these mechanisms are reinforced by the level of connectedness of the state to international

capital markets and the social space. For example, countries highly dependent on Foreign Direct

Investment or debt are more inclined to abide by international capital market demands (Morgan,

Whitley et al. 2006), and countries dependent on conditional loans from the IMF are more

inclined to follow its recommended practices.

One example of the marketization-based transparency initiatives introduced by

international organizations is the IMF’s Fiscal Transparency initiative, which sets guidelines for

government fiscal transparency supported by normative instruments, such as transparency ratings

for states. On its website (IMF, 2007) it states that:

“…inadequate clarity on government policy had undermined market confidence…”

And recommends that:

“Transparency in government intentions, based on higher quality data published

timely, should be further advanced to provide market players with predictability.”

In addition, the IMF introduced a voluntary Code of Good Practice on Transparency in Monetary

and Financial Policies in 1998 for its member countries. The World Bank has also released a

range of white papers emphasizing the role of transparency in facilitating trade (WorldBank

2007). One such World Bank whitepaper states that:

“Improving transparency of trade policy is a critical aspect of any structural reform

agenda. This is particularly true with regard to trade expansion and integration, as the



principle of transparency can be applied to a wide range of policies affecting border

and ‘behind-the-border’ procedures.”

Whenever the confidence in economic agents has been tarnished by the exposure of corruption

and fraud, there have been regulatory and public calls to replace the lost trust by greater

transparency and information disclosure. Examples include the introduction of the Securities

Exchange Act of 1934 following the Great Depression (Benston 1973), SEC regulations

following the Enron, Nortel and other scandals in the late 1990s (Seligman 2002), and the

current call for increased “transparency” in hedge funds and proprietary trading, etc. following

the credit crisis. As will be discussed later, the same phenomenon can be observed in Asia

further to the Asian economic crisis - for instance, countries such as Singapore improved their

public and private sector economic disclosure following the crisis to regain international market

trust (Mohd Ghazali and Weetman 2006).

Unlike “‘democratic” information demands’ which are based on “‘public disclosure” and

transparency, market-based information demands are mostly targeted at the principal (or

potential principals). Principal can be narrowly defined along the economic contractual lines or

more widely interpreted based on the organization’s “stakeholders”.

It should be pointed out that democratic and market-based forces are said, both in

democratization and political economy literatures, to cross fertilize (Nelson, Kochanowicz et al.

1994; Maravall 1997). In particular, demands of markets have been cited to result in more

openness and information disclosure and to oppose traditional power hierarchies by replacing

them with supply and demands based “merits”.



2.4.1.4 Democratization and Transparency

The diffusion of the democratic model as a dominant world society norm has been widely

studied. Many such studies have focused on the critical international organizations – the IMF and

World Bank, in particular – in this diffusion process (Gleditsch and Ward 2006; Torfason and

Ingram 2010). The push for democratization has resulted in a rapid increase in the adoption of

this model by states. With the exception of periods such as post-Second World War, when many

dictatorships emerged, this increase has been consistent over the past two hundred years

(Torfason and Ingram 2010).

In the democratic (be it direct or representative) governance systems, the public is

entitled to information about different branches of state institutions as a prerequisite for effective

participation, as a driver for increased accountability (McKelvey and Ordeshook 1986) and as a

constitutional right between the public and the government based on the social contract (Wright

1967). These reasons are worded in most Western countries’ Freedom of Information Acts

(FOIA). In the US, at the time of legalization of the FOIA in 1966, President Lyndon Johnson

affirmed that “democracy works best when people have all the information that the security of

the Nation permits. No one should be able to pull the curtains of secrecy around the decisions

which can be revealed without injury to the public interest.” (Johnson 1966)

The relationship between democratic governance systems and the right of the subjects to

information has been examined through a study of the emergence of the FOIA at the national

level in all Western democracies (Bennett 1991). Sweden was the first country to adopt its

Freedom of Information Act in 1766, and all Western democracies did likewise to provide the

public open access to government information during the second half of the 20th century (US



1966, Norway 1970 etc.). During the past two decades, several non-Western governments have

adopted Freedom of Information acts, many of which continue to be regarded as highly opaque

by organizations such as Transparency International. As shown in the figure below, in 1966 very

few countries had Freedom of Information legislation. However, in 2009, with the exception of

the Middle East and Sub-Saharan Africa, most countries in the world have adopted such

legislation, regardless of the type of government. The swift adoption of Freedom of Information

legislation by mostly opaque peripheral nations is consistent with the findings of Hafner-Burton

et al (2008) that nations with the worst human rights records are more likely to adopt UN human

rights charter to improve their legitimacy in the international community.



Figure 2-3 Global adoption ofFreedom of Information Act 1966 - 2009

Nations with a Freedom of Information Act in 1966 (dark shading)

Nations with a Freedom of Information Act in 2009 (dark shading)

Source: opengovernmentrecords.net

Other recent transnational codes for transparency based on the democratic and public

accountability logic include: MeTA (Medicines Transparency Alliance) and the Extractive

Industries Transparency Initiative. Furthermore, international organizations such as the IMF, the

Organization for Economic Cooperation and Development (OECD), the World Bank

(WorldBank 2007) and the United Nations Development Program (UNDP 2010) have all



emphasized the role of transparency in democratic governance and in improving accountability

and informed public engagement and participation.

In an interesting example of using a democracy and accountability-based argument, the

IMF states:

“The IMF also encourages its member countries to be as open as possible about their

economic policies. Greater openness encourages public discussion of economic

policy, enhances the accountability of policymakers, and facilitates the functioning

of financial markets.” (IMF Accountability Website)

This quote is an interesting example of the IMF’s assumption that public dialogue and

deliberation are accepted principles in all societies. In a similar vein, the World Bank’s website

states:

“The World Bank recognizes the fundamental importance of transparency and

accountability in the development process. Accordingly, the Bank’s disclosure policy

would give public access to all information in its possession, subject only to a limited set

of exceptions.” (WorldBank 2007)

Several socialization processes and normative instruments are at work behind the diffusion and

translation of democratic information demands and defending people’s information rights.

Examples of normative instruments behind such demands are international ratings of different



states’ “transparency” levels by organizations such as Transparency International. Western

education and Western public media (Randall 1993) are examples of key mediators underlying

the diffusion of democratization-based information demands.

The underlying assumption behind the global diffusion of democratic information rights

is the superiority of democratic social contracts compared to other types of state/public

relationships, and additionally, the global applicability of information-based accountability

mechanisms between the public and the state.

At the time of writing, Wikileaks and its publicizing of internal documents mostly from

Western governments (O'Loughlin, Witmer et al. 2010) has reignited the debate about the

boundaries for the transparency of governments.

2.4.1.5 Transparency and National Institutions – the Missing Discussion

One key area that has been missing in studies of transparency is the role of national institutions

and culture in individuals’ and organizations’ interpretations of and attitudes towards

information disclosure and transparency. Most existing conceptualizations of transparency

continue to assume that transparency and how it is perceived are “culture neutral”. For example

Heald (2006:29-35) offers several classifications of transparency such as outward, inward,

upward and downwards transparency, and transparency as openness vs. transparency as

surveillance. What is missing in such classifications is the interpretive and institutional

dimension. Could it be that the same demand for transparency would be interpreted in quite

different ways in different institutional contexts?



By comparing different national institutional logics and their meditating role towards

transparency demands, this paper attempts to expose this new dimension of the “transparency

culture” in the complex institutional context of the transnational space. This is a space where

national norms, cognitive frames and interests collide and compete with each other and

transnational organizations’ norms and demands.

Studies of world society norms show how dominant norms such as transparency are

adopted by national entities in their quest for legitimacy. In their seminal paper, Meyer et al

(1997) highlight that there are competing world society normative frames and models, such as

diversity vs. standardization, equality vs. liberty, welfare state vs. small government and

individualism vs. solidarity and collectivism. Such competing frames are used by different actors

to achieve legitimacy and to mobilize political and material resources. Several scholars have

captured how the diffusion of world society norms through mediators such as international non-

governmental organizations and inter-governmental organizations results in the adoption of

dominant norms in diverse national contexts. Examples include democracy (Torfason and

Ingram 2010), national educational systems (Ramirez and Meyer 1980), adopting human rights

codes (Hafner-Burton, Tsutsui et al. 2008), government downsizing (Lee and Strang 2006) and

central bank independence (Polillo and Guillén 2005). While in many of these cases there are

potent counterframes to the dominant normative frames, in the case of transparency, there are no

potent counter world society frames. Recently, national security has been increasingly used to

counter the transparency frame for governments, and “trade secret” is used as a counterframe to

the “market transparency” frame. However, such counter frames are not backed by national and

transnational movements and organizations in the way that transparency is. It is difficult, for



example, to envision an organization that would be named “Secrecy International”. In addition,

these frames are exceptions, rather than alternatives to transparency.

While world society normative frames condition transnational and local actors and push

states towards isomorphism through various socialization processes (trickle-down trajectory),

national institutional logics are also represented in the transnational space through several

mediators, such as national educational systems, media and the national representatives in the

transnational organizations (trickle-up trajectory) (Djelic and Quack 2003). Consequently,

transnational organizations emerge as institutional fields (Friedland and Alford 1991), where

multiple national and world society frames and institutional logics (Thornton and Ocasio 1999)

compete and condition the actors and result in heterogeneity and constant evolution and change

(Lounsbury 2008). For research to go beyond national path dependency on one hand and World

Society isomorphism on the other, Djelic and Quack (2007), suggest studying the transnational

and national trickle-up and trickle-down trajectories and the process of co-construction of

transnational institutions. This is what they describe as the study of “national path transformation

and transnational path creation”

For this type of research to become possible, institutions and how they condition and are

conditioned by actors should be studied at multiple levels. It is only by studying the dynamics of

the transnational, national, field level institutions, the organizational culture and the “soft” actors

that we can achieve an understanding of the complex and increasingly dense, multi-layer

organizations of our economic and political lives(Djelic and Sahlin-Andersson 2006; Quack

2007). However, with few exceptions (Kleiner 2003; Quack 2007), such multi-layer studies of

institutions remain scarce. As Djelic and Quack (2008:301) point out, “institutional processes



that extend beyond the organizational and sectoral fields or run through vertically layered

institutional orders have been largely neglected”.

This study responds to this call by focusing on how national and organizational

institutions influence the interpretation of the concept of transparency and disclosure. This paper

“combines a study of activities and interest of carriers with an account of their institutional

embeddedness (which can have multiple and conflicting sources) … with a transnational scope”

(Djelic and Quack 2008 p.306).

The case covered by this study focuses on soft law development as a dominant type of

transnational institution building. Soft laws are codes and rules which are not backed by

traditional coercive and sanctioning instruments of national governments (Mörth 2004). This

case of soft law development for the SWFs is part of a broader trend for soft regulation as a new

technology of governmentality (Higgins and Hallström 2007). During the past few decades, the

internationalization of social spaces, capital flows and industry supply chains have resulted in a

rapid expansion of the scale and scope of the creation of soft laws, voluntary principles and

international standards as a tool for governing and organizing in the transnational space. Such

laws have been devised through interaction between national and transnational actors such as

governments, non-governmental organizations, professional organizations and firms (Ahrne,

Brunsson et al. 2007).

The fast expansion of soft regulation both in the national, and especially, in the

transnational space has been called the “golden era of regulation” or a “transnational regulatory

explosion”. This era of “regulatory capitalism” (Braithwaite 2008) has been described as a move

away from national state monopolies on legalization and a shift from statism to pluralism (Hirst



and Birkbeck 1997). Such laws, developed through transnational processes of negotiation and

legalization, are very different from their national “hard” counterparts (Abbott, Keohane et al.

2000; Mörth 2004). In the absence of the sanctioning powers of national governments, such laws

are diffused, translated and adopted based on a wide range of normative, mimicking or coercive

(DiMaggio and Powell 1983) soft mechanisms.

During the past three decades, social studies of standards and standard setting (Brunsson

and Jacobsson 2000; Higgins and Hallström 2007) have followed a separate path from soft laws

(W. Abbott and Snidal 2000; Djelic and Quack 2003; Mörth 2004). However this trend is

changing. Historically, standards were considered “value free” norms for technologies and

technical processes only (such as most ISO standards), while soft laws were perceived as

normative principles and practices of social behavior. However, the line between the two is

increasingly blurred. This is because both soft laws and standards are technologies for norm

setting and for the stabilization of institutional fields (Levi-Faur 2005). Both are subject to rituals

of audits and verification (Power 1999) and the structures for development bodies, institutional

dynamics of norm development and performativity (MacKenzie 2004) of both follow similar

socialization paths. Examples such as the International Standardization Organization developing

social responsibility standards, further highlights the blurring of this line (Hallström 2008). The

code under study, GAPP, is another proof of this blurring line because since it includes a mix of

standards and specifications for accounting disclosure on investment returns and portfolio, and

principles for governance and disclosure.

In a rich example of an institutional study of norm setting, Hallstrom (2004) studied the

negotiations process leading to the International Financial Accounting Standards. By

interviewing negotiators, she attempted to understand the role that different epistemic



communities and professional bodies played in influencing the standard setting processes and

how actors were influenced by the “several hats” that they carried and their institutional

“baggage”. Such institutional accounts of norm setting (Botzem and Quack 2005; Quack 2007;

Botzem and Quack 2009; Laux and Leuz 2009) show that the development of soft laws and

standards is not ruled by rationality, but and it is a rich process of muddling through (Quack

2007), embedded in power, conflicts and, competing and conflicting institutional logics.

What is missing in such studies is attention to how cultures and national institutions

condition the interpretations and stances of transnational actors. While some scholars hint at such

differences and that norm setting is a “multi-level game” (Mattli 2003), none has attempted to

conceptualize such differences through the analysis of national institutions at multiple levels,

especially where non-Western nations are involved. Due to the increasingly multilateral world,

institutional accounts of norm setting processes involving non-Western actors are much needed.

This paper also attempts to address these important gaps in soft law and standard setting

literatures.

2.4.2 Methods

Interpretive accounting methods (Dent 1991; Boland 1993; Kakkuri-Knuuttila, Lukka et al.

2008) have been used as one of the key methodological references for this study. Interpretive

studies of accounting and audit explore how actors’ socially-embedded interpretations of

accounting and control affect their practices (Sinclair 1995) and how accounting and control

processes can work to influence actors’ interpretations as instruments for diffusion of logics of

rationality and efficiency (Ansari 1987). Most of these studies have been intra-organizational. In



this study, considering that the focus is on how institutions condition individuals’ interpretations

of transparency and disclosure, interpretive accounting methods were found suitable. However,

in this case, interpretive accounting methods have been applied to a transnational case.

Interpretive studies of accounting are centered around structuring a narrative based on the

subjective interpretations of actors (Czarniawska-Joerges and Sevón 1996; Lukka and Modell

2010). The researcher then attempts to “make sense” of the narrative and explain the relationship

between events (Lukka and Modell 2010). This is the point where the actor moves from etic to

emic, from focusing on subjects and their interpretations to treating social events as objects and

structuring the researcher’s interpretation of events (Boland 1989). Interpretive accounting

methods rely on participant observation (Lukka and Modell 2010) and ethnographic approaches

as the central method for understanding the field and structuring their narratives. In addition,

they rely on wide ranging documentary and archival evidence to supplement their primary data.

For the study of SWFs, the direct study of the field during the negotiations was

unfortunately not possible. To achieve an understanding of the different interpretations of the

negotiators of the IMF’s transparency demands, the author interviewed nine participants present

during the negotiations. In addition, this study utilizes a wide range of qualitative

material,including documentary evidence such as IMF discussion papers, SWF websites and

annual reports and several third party reports. The dataset of RiskMetrics Group (Now MSCI

Group) on SWFs was a key source for achieving a better understanding of the disclosure

practices of the SWFs. This dataset includes an analysis of the 10 largest SWFs across 47

indicators on their governance and disclosure.

The author has worked with SWFs of Australia, Lybia, Norway, Singapore and China as

part of his previous professional activities. This work included several teleconferences over a



period of two years with executives and directors of these SWFs covering their disclosure and

governance. This participant observation has significantly enriched the analysis undertaken in

this paper.

Sovereign wealth funds were chosen because of the high level of variability in their

approach to transparency and information disclosure. They were also selected because of the

diverse high-order institutional logics of their host countries in relation to power structure and

the level of integration in global markets (a mix of Western, Middle Eastern and Asian

countries).

In the IMF soft laws for SWFs, both market-based and public accountability and

democratic arguments are used as the basis for the need for more transparent SWFs.

Consequently, for the inter-case choice of sample (Miles and Huberman 1994), Norway, Kuwait

and Singapore were chosen because they appeared to represent maximum variability (Perrow

1967) on type and level of exposure to international markets and type of national governments.

Furthermore, all these funds actively participated in the negotiation process. The exploratory

study (provided in Appendix I) used for sampling was based on the type of national government

and the level of structural integration of the SWF in the national government, as well as the

amount of Foreign Direct Investment in the country and the activity of foreign banks - used as

proxies of the level of integration of a country in international investment markets (Polillo and

Guillén 2005; Morgan, Whitley et al. 2006). Details in this area for the three sovereign wealth

funds under study are provided later in this paper.



Table 2-1Overview of sampling approach for sovereign wealth funds (underlying data provided in Appendix II)

Internal openness

Based on type of government and disclosure to local public

High Low

External openness

International market integration - Based on FDI and foreign bank presence

High IMF

expectations Singapore

Low Norway Kuwait

To study the soft law development process, interviews were conducted with nine

participants in the negotiations. The official total number of participants was 84, of which –

based on interviewees’ statements – around twenty were actively engaged in the negotiations.

This included six interviews with representatives of the SWFs (two from Norway, one

from Singapore, one from Libya, one from New Zealand and one from Canada/Alberta), two

representatives from the IMF, and the OECD representative present at the negotiations. The

choice of interviewees was based on the key criterion of participation in the negotiations. In

addition, an attempt was made to interview the representatives of the three SWFs under study.

Consequently, the Temasek and Norway Government Pension Fund Global representatives were

interviewed, although the Kuwait representatives declined.



Table 2-2 List of interviewees

Organization Position held Role in the GAPP negotiations

The OECD Senior Economist Observer

Temasek (Singapore) Director of Global Strategy Active participant

Norwegian Ministry of Finance Director General in the Ministry of Finance Asset Management

Department

Active participation and in charge of one of the editing committees

Norwegian Ministry of Finance Investment Director Active participant

New Zealand Superannuation fund Chief Executive Active participant

Ministry of Finance - Canada Assistant Deputy Active participant

Ministry of Finance - Libya Senior Director Active participant

International Monetary Fund Senior Economist Active participant - present in the

first two sessions

International Monetary Fund Senior Director Active participant

The number of interviews was constrained by the highly sensitive nature of the negotiations and

confidentiality concerns of the negotiators. However, considering that all the interviewees were

asked to provide their account of the same negotiations process, while interpretations varied,

after thesixth interview, the interviewees’ accounts of the proceedings and behavior of other

actors started to saturate and few new examples of behavior or quotes from the negotiations

emerged. All the interviews were semi-structured (the guiding questionnaire is provided in

Appendix III). The interviews had an average duration of around 45 minutes. The questionnaire



was validated through carrying out mock interviews with two different individuals informed

about the sovereign wealth funds (Miles and Huberman 1994), and was constantly adapted to

reflect the changes in the theoretical development, as the data was collected and analyzed. The

interviews covered the reasons for the funds’ participation in the negotiations, interviewees’

accounts of the negotiations and the type of conflicts that emerged over time, the role played by

different SWFs and the way the code evolved during the negotiations.

To analyze the impact of the negotiation process on the content of the soft law, the

original IMF proposal and the final code were analyzed and compared. In addition, a range of

documents related to the negotiations were studied (full list provided in “Primary Sources” under

References).

To better understand the role of high order and organizational logics on the “embedded”

actors engaged in the soft law negotiation, a comparative analysis (Perrow 1967) of the national

and organizational contexts of three SWFs was carried out. This comparative analysis is mostly

based on secondary sources of information, such as SWF websites, news and national

government websites of the three countries under study.

The qualitative material was coded as collected, based on the emerging codes of conflict,

transparency perception, motivation for participation, changes in the soft law, trust and

information disclosure habits codes (Miles and Huberman 1994). The theoretical question and

codes were modified and refined, as data collection progressed and interviews were carried out.

The ideal types were developed and theorized as data was collected and analyzed in accordance

with the constant comparative method (Suddaby 2006).

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Sovereign Wealth Funds and Soft Laws for Transparency


2.5 Sovereign Wealth Funds and Soft Laws for Transparency

2.5.1 What are Sovereign Wealth Funds?

A sovereign wealth fund is an investment management organization that manages the excess

capital of the government, against which the government has no direct liability (unlike public

pension funds). They come in various sizes and structures and vary in their investment targets.

SWFs are in the unique structural position in which they face state logics (given their

relationship to the government) and market logics (considering their international investment

management role). Governments assuming an international investor role is not a new

phenomenon. State-owned enterprises and state-owned banks investing in capital markets have

been prevalent in the West for the past few centuries (Toninelli 2000) and investment bodies

owned by resource-rich Middle Eastern states have existed for several decades. The Kuwait

Investment Authority has been investing the oil revenues of Kuwait in the global capital markets

since 1953. In the following decades, to better manage their foreign exchange, similar

institutions also emerged in other commodity rich countries such as Abu Dhabi (1976), Qatar

(2000), Norway (1992) and Libya (2007) (RiskMetrics 2009).

Interestingly, the term “sovereign wealth fund” was first coined as recently as 2005 in an

article titled “Who Holds the Wealth of the Nations?” (Rozanov 2005). Prior to this, there was no

common point of reference and identity attributed to the various types of state-owned investment

organizations. The emergence of this category at the transnational level and the associated

definition and construction of a common identity has resulted in the increasing exposure of the

SWFs to common institutional pressures.



The high oil prices post-2003 and the fast growing trade imbalances between Asia and

the West in the same period resulted in a considerable growth in the size of SWFs. Their total

size in the 1990s amounted to less than 1% of the global equity markets while in early 2010 their

estimated total size of around USD 3.3 trillion made up around 8% (RiskMetrics 2009).

This rapid growth resulted in the emergence of significant East to West flows of capital

and buy-outs of Western firms by SWFs. The lack of liquidity in Western markets during the

credit crisis further contributed to this process and SWFs such as Qatar Investment Authority,

Abu Dhabi Investment Authority and Temasek, in highly visible transactions bought stakes in

Western financial institutions, including Merrill Lynch, Citigroup, Barclays and UBS (Monitor-

Group 2009).

This was the first time that there were large capital flows from the East to the West,

contrary to historical trends. This resulted in increased public opinion and media focus on SWFs.

During this period, the dominant public concerns in the West about SWFs centered around the

possibility of political objectives underlying their investments (US-Senate 2008).

The following section provides an analysis of the national business systems and

government structures of the three SWFs under study. The paper then focuses on the IMF

transnational negotiation process for development of SWF soft laws – the “Santiago Principles”

or Generally Accepted Principles and Practices (GAPP).

2.5.1.1 Norway

The Norwegian government is a classic European social democracy. In the Freedom of

Information Act of Norway introduced in 1970, information about government operations is



perceived as a democratic right, underlying participation and accountability. The national

ombudsman supervises the execution of the Freedom of Information Act.

Foreign Direct Investments have been used as a proxy of a country’s integration in the

global markets and the impact of the transnational codes and norms on the national institutions

(Polillo, Guillen 2005, Morgan, Whitley et al. 2006). Norway is the recipient of relatively low

amounts of FDI (less than 1% of GDP). This is one of the lowest in the developed world and

following exponential growth of oil revenues from the 1980s onwards especially, most capital

flows from Norway are outbound. The Government Pension Fund Global (GPFG) is a

continuation of the former Petroleum Fund that was first established in 1990. The fund is under

the responsibility of the Ministry of Finance of Norway, and the latter outsources in turn the

operational management of the fund to Norges Bank which acts as the Norwegian central bank

(NorgesBank 2010).

GPFG has had the highest level of disclosure among the SWFs during its lifetime

(RiskMetrics 2009). Its current level of disclosure surpasses GAPP requirements in many areas.

The fund states that it is owned by the people of Norway, and based on the Freedom of

Information Act, they have the right to have access to its information (Regjeringen 2008). The

fund representative stated:

“We cannot politically survive in Norway without being open and transparent… For

us, transparency has no specific audience and it is about being open, in absolute

terms.”



2.5.1.2 Kuwait

In the case of Kuwait, the hereditary nature of state power (descendants of the Sabah family) and

the central role of the Emir in the legislative, judiciary and executive branches of the

government, all point towards a highly centralized power structure. The Kuwait Emir has

suspended the elected National Assembly three times for extended periods since the

independence of Kuwait in 1961 (Javedanfar 2008). Kuwait has no Freedom of Information Act,

no detailed disclosure of budget and no detailed information about government operations.

Kuwait’s Ministry of Information is in charge of censoring and controlling flows of information

targeting the Kuwaiti public. This also includes books and films, etc.

Kuwait has very low levels of inbound FDI (less than 0.2% of GDP) (FDI.NET 2010)

and given its significant oil and oil-related revenues, which comprise about 95% of the country’s

GDP, its economy is relatively independent of global capital markets. This case is also

strengthened by the limitation of the activity of foreign banks in Kuwait – foreign banks have

been permitted to have one branch in Kuwait since 2004 only. Consequently, the Kuwait

government is not heavily affected by international market logics and the information demands

of international capital markets.

The Kuwait Investment Authority (KIA), an integral part of the government, was founded

in 1953 to manage the country’s fast expanding foreign reserves due to oil exports. Its board of

directors comprises several ministers, and its CEO is a US-educated member of an elite Kuwaiti

family who has formerly held several positions in the National Bank of Kuwait (the Kuwaiti

central bank) (Kuwait-Petroleum-Corp 2009).



On its website, KIA mentions (based on Law No. 47 of 1982) that the fund should not

make any information public and any annual reporting should be to the National Assembly, only.

The fund does not make public any information available about its operations, portfolio or

returns. KIA manages around USD 240 billion worth of Kuwait’s foreign reserves (RiskMetrics

2009). When, for the purposes of this study, officials were contacted in the London office of

KIA, their representative stated: “KIA is owned by the government and consequently it cannot

participate in any such information inquiries.”

2.5.1.3 Singapore

Despite having an election process, Singapore has been ruled by the same political party

(People’s Action Party) and members of the Lee family since its independence. The government

does not have a Freedom of Information Act and has been regularly accused of controlling

information flows through media control and censorship, especially information of a political

nature. For a while, for example, the government limited the circulation of the journal,The

Economist, due to its criticism of the ruling party (Rodan 2002). However, the remarkable

difference with the case of Kuwait is that, as other non-commodity export driven economies,

Singapore is highly dependent on foreign capital which amounts to over 17% of its GDP

(FDI.net 2010). This is 30 times more than Norway or 55 times more than Kuwait. Following the

Asian economic crisis especially, it has been well documented that the quest for reestablishing

trust in the economy and competition for foreign capital with other Asian countries has resulted

in significantly higher levels of disclosure, both at the government level and in the private sector

(Rodan 2002).



Singapore has two state-owned investment organizations. One, the Government

Investment Corporation, is in charge of managing part of the country’s foreign reserves. The

other, Temasek is the sovereign wealth fund covered by this study. Temasek was founded in

1974 to manage state-owned companies as part of the privatization process. However, through

floating the ownership of such companies in the stock market and via direct transfers of capital

from the national government, Temasek currently operates as an investment management fund

with a capital base of around USD 134 billion (RiskMetrics 2009).

As of March 2008, 66% of Temasek’s employees were not Singapore nationals. The

directors and most of the executive managers of Temasek have an international business

background and are independent from the government. However, since 2004, the wife of the

current Prime Minister has occupied the position of CEO, and before that, the fund was run by

the Senior Minister, Lee Kuan Yew. Temasek reports directly to the President and is registered

as a special type of corporate entity exempt from public disclosure (RiskMetrics 2009).

Up until the early 2000s, the fund was mostly governed by senior government officials

and reported only to the Ministry of Finance and a parliamentary budgetary committee. In 2001,

Senior Minister Lee Kuan Yew, who at the time was the chair of Temasek stated: “We are a

special investment fund. The ultimate shareholders are the electorate. It is not in the people’s

interest, in the nation’s interest, to detail our assets and their yearly returns.” Since this date, as

part of the country’s strategy to rebuild international trust in its economy, the country has

undertaken several initiatives to improve the overall level of economic disclosure of state-owned

and private entities registered in Singapore. Since 2004, the disclosure behavior of Temasek has

changed significantly. The fund has started to publish annual reports and some portfolio and

governance information (Singapore-Window 2004). This is consistent with Espeland’s claim



(Espeland and Stevens 2003) that information-based controls increase when trust between the

actors decreases. However, in areas such as disclosure of portfolio data, returns and exercise of

ownership rights, it still lags significantly behind funds such as the Norwegian Government

Pension Fund. The key attributes of the governments and SWFs under study with regards to

political structure and level of exposure to the global market logics and disclosure are

summarized in the below tables.

The following section outlines the negotiation process for achieving Generally Accepted

Principles and Practices (GAPP). It also provides details about how the representatives of the

three SWFs under study behaved during the negotiation process and how the content of GAPP

evolved.



Table 2-3Summary of country attributes

State attributes Market integration

Freedom of Information

Act or equivalent Type of government

Detailed disclosure of

budget and monetary& fiscal policies

Censorship FDI as % of GDP

Foreign banks

Norway Yes (1982) Decentralized -

constitutional democracy Yes No

Less than 1%

21 banks out of a total of 155

Kuwait No Centralized (Family run) No Yes

(moral/religious and political)

Less than 0.2 %

Limited (one branch per bank ) first foreign bank in 2004

Singapore No Centralized (single

party/family) Yes

Yes (mostly political)

17% 93 banks out of total of 105

Table 2-4Summary of SWF attributes

State influence Market influence Disclosure

Structure Operations (Executive

board)

Direction (Board

of directors)

International

offices

Foreign

employees

Annual

reporting

Portfolio

details /

returns

Norwegian Government

Pension Funds Global

Government (integrated in the

Ministry of Finance)

Independent (the Norges bank)

Government (Ministry of

Finance) None 30% Yes Yes

Kuwait Investment

Authority

Government agency

Government background

Government London Unknown No No

Temasek (Singapore)

Corporate (without public disclosure

requirements)

Independent (though CEO is the wife of the

PM)

Independent (with one exception)

Several 66% Yes No



2.5.2 The Transnational Negotiations

In early 2008, in response to public concerns about the intentions of SWFs, several national

governments and international organizations were in the process of developing regulations and

codes to control SWF transactions. At the national level, the US and Germany developed their

own SWF investment scrutiny bodies to respond to public concerns about potential political

motives behind SWF transactions. Such bodies examined all SWF transactions to ensure that

there were no national security risks related to them (FinancialTimes 2007).

At the transnational level, the OECD and the IMF were the dominant players. The OECD

launched a process for regulating the reaction of the recipient countries towards SWF

investments while the IMF created a standing body, the International Working Group on SWFs,

to develop a governance and disclosure code (later named GAPP) for SWFs.

The first trace of the GAPP negotiation process in IMF communiqués dates back to

October 2007. At that time, a document named “Sovereign Wealth Funds—A Work Agenda”

was presented to the board of governors of the IMF to recommend the development of a code for

governance and transparency for SWFs. The document highlighted that:

“Transparency is of interest to very different groups - including the general public,

markets, counterparties, recipient countries, and regulators - but their needs differ…

The case for such a (transparency) focus is two-fold: First, clear governance

structures will help foster accountability and a disciplined and stable investment

policy which reduces fiscal risk and promotes financial stability. Second,

transparency contributes to the efficient allocation of resources by ensuring that



markets and the public have information to identify risks and better assess SWF

behavior.”

In other words, the basic normative underpinning for transparency in the original proposal is

based on market and democratic information rights. In addition, the same document stated:

“Many features of good corporate governance are universally applicable. For

instance, general principles regarding the rights of the shareholder and key

ownership functions, the role of stakeholders, disclosure and transparency, the flow

of information between management and the governing board, and the composition

and responsibilities of the board are all relevant for SWFs.”

This statement also confirms that there is an assumption of global applicability of information-

based transaction management and accountability to stakeholders. Overall, in this 38-page

document, the word “transparency” is repeated 47 times.

In addition, policy discussion papers released by the IMF in 2008, cite the Norwegian

fund whose high level of disclosure is based on a democratic rationale, as a model for other

SWFs (IMF 2008).

The IMF board accepted the afore-mentioned proposal and, as a result, the negotiation

process started in April 2008. Based on the original proposal, a draft for GAPP was created by

the IMF, which was used as the starting point of the negotiations. The negotiation process took

place in three sessions in Washington, Singapore and Santiago over a period of four months,



culminating in the development and release of the Santiago Principles in October 2008. A

drafting session was held in Oslo before the meeting in Singapore focused on finalizing the first

draft of the code.

An interesting aspect of this soft law development process was the decreased coercive

powers of the IMF in comparison to its usual macroeconomic interventions (Polak and Reisen

1991). In most of the cases, the IMF has historically diffused its monetary and macroeconomic

reforms in the target countries through making its financial aids incumbent on the execution of

the reforms. However, in this case, especially given that the regulatory process took place at the

peak of the economic crisis, the capital rich SWFs were not dependent on the usual IMF services.

As a result, in comparison to usual IMF behavior, modes of socialization other than coercion had

to play a more central role. Unlike all other IMF guideline development processes, the IMF

emphasized in this case that the code was developed by and belonged to SWFs and that the IMF

should only play a mediating role and run the secretariat. This hands-off, participatory approach

of the IMF also reflects the particular power dynamics of this negotiation process and the

absence of regular IMF coercive instruments (Mörth 2004).

2.5.2.1 The Negotiators

The negotiators comprised representatives of 22 SWFs and their respective governments,

members from the IMF. The observers included representatives from the Ministries of Finance of

European and OECD countries (for a complete list of participants, please refer to Appendix IV).

The IMF International Working Group on Sovereign Wealth Funds was co-chaired by the

chairman of the Abu Dhabi Investment Authority and an IMF representative (IWG-SWF 2009).



The process was coordinated by a secretariat provided by the IMF and an editorial board in

charge of revising the code, headed by David Murray of the Australian Future Fund. Besides the

IMF staff, the Western countries’ representatives actively represented in the negotiations

included the US Treasury (representing the Alaska Fund) and the Norwegian, New Zealand and

Australian SWFs and representatives from the Ministries of Finance of those countries.

Mr. Bader Mohammad Al-Sa’ad, the general manager of the fund, represented Kuwait in

all three sessions. Mr Al-Sa’ad was elected to be the deputy chair of the forum. Mr Sadr, a

Kuwaiti national, obtained his bachelor degree from Miami University in 1978 and completed

his graduate studies at Kuwait University. Over the past 30 years, he has held general

management and directorship positions at several large Kuwaiti financial institutions, including

the Kuwait Financial Center and the National Bank of Dubai (Kuwait-Petroleum-Corp 2009). A

second western-educated Kuwaiti official accompanied Mr. Al Sa’ad and was active in the

negotiations. Temasek was represented by Hasan Jafri, Director of Strategic Relationships at

Temasek since 2008. Mr Jafri is a graduate of Tufts University in the US who served as a

journalist in the Asian Dow Jones’s office before joining Temasek in 2006. Of the three SWFs

under study, the representative of Temasek is the only one to have had purely private sector work

experience before joining the SWF. Mr. Jafri was one of the three representatives of Temasek.

The other two representatives were from the Ministry of Finance and an executive from GIC -

the other SWF from Singapore.

Norway was represented at the negotiations through two investment directors at the

Ministry of Finance and a director from Norges Bank, the equivalent of a central bank that

manages the operations of the Norwegian SWF. Martin Skancke from the Norwegian Ministry of

Finance studied at the Norwegian Economics and Business Administration School and then at



the London School of Economics. He has worked for the Norwegian Ministry of Finance since

the 1990s. Thomas Ekeli, who also represented the Ministry of Finance, also studied economics

in Norway. He has worked for eight years in the Ministry of Finance and is currently the

Norwegian delegate to the OECD. Previously, he held positions at the IMF, Pareto Securities and

Lehman Brothers. Ola Peter Krohn Gjessing a senior governance analyst for Norges Bank, has

an MBA from a Norwegian business school.

The representatives of the three countries under study all combine a high-level of national

embeddedness and international experience, i.e. they can be described as “rooted

cosmopolitans” (Tarrow 2005).

It should be pointed out that the SWFs and their governments did not influence the

negotiation process only through the actions of their representatives in the three GAPP meetings.

In between meetings, the SWFs and their governments were involved in editing draft GAPP texts

as members of the drafting committee. In addition, all the interviewees confirmed that, during

the meetings, the SWFs were constantly in touch with their senior government officials at home

for key decisions. Based on the background of the negotiators, the level of their “rootedness” in

their respective national logics might be different. However, the multiplicity of mechanisms that

national governments used to influence the process increases the possibility of representation of

national logics in the transnational soft law development process.

2.5.2.2 Motives of Participants

The negotiating parties had decided to participate in the negotiation process for different reasons.

Based on the official statements made by the Middle Eastern and Asian funds and interviewees,



common reasons were “increasing legitimacy in the international investment community”,

“maintaining access to investments in Western capital markets” and “avoiding ad hoc national

regulatory reactions to SWF investments”. In other words, these sovereign wealth funds had

come to believe that a sustained access to resources and investments at the global level would be

dependent on the grounding of a certain kind of legitimacy (Meyer and Rowan 1977).

Concerning the Norwegian fund, the representative of the Ministry of Finance asserted:

“Being part of a club with lax rules could question the legitimacy of the fund

domestically. You have to remember that we are asking the Norwegian public to

trust us in managing their money so we need the Norwegian public to be confident.

Being part of a group with low standards could constitute a risk and jeopardize the

trust placed in us. So for us, risk is about losing local trust in the management of the

fund, and not about losing investment opportunities in other countries.”

This signifies how the legitimacy challenge for certain funds (the Asian and Middle Eastern

funds) was primarily at the international level, while for others (the Norwegian fund) it was

legitimacy in the eyes of the local public that was the key driver for participation. For the IMF,

competition for code development for SWFs, as well as meeting the demands of the recipient

countries appear to have been the two key underlying motives. In early 2008, the Asian

Development Bank, the OECD and several US think thanks were actively exploring the idea of

establishing international standards for SWFs’ disclosure. At the same time, the World Bank

offered technical assistance to SWFs. The European Commission was also developing a set of

voluntary codes of conduct for SWF governance and transparency. In such an environment,



competition seems to have been a major driver for the engagement, as well as the will to urgently

release the code just four months after the process was launched. This is an interesting example

of marketization of regulation and competition in this area - historically under the monopoly of

national governments (Djelic 2006).

Addressing the concerns of the Western recipients of SWF capital (the US, in particular)

was mentioned as another key objective of the IMF. The Western recipient countries’ Ministries

of Finance were present in the negotiations as observers and the US Treasury actively partook in

the negotiations on behalf of the Alaska Oil Fund.

2.5.3 Negotiation Process

All the interviewees present in the negotiation process stated that the IMF played a key role in

the first meeting in Washington from the outset. The IMF staff ran the secretariat and co-chaired

the IWG. During the first meeting, the secretariat had an active and consequential role – setting

the agenda and directing the process.

Based on the above description, the original design of the negotiation process was

Western-dominated, with the IMF and its mostly Western staff leading the secretariat for the

meetings. This is consistent with Djelic and Quack’s (2003:325-325) dominancy of one set of

logics in the building of transnational institutions. However, during the first meeting in

Washington and the second meeting in Singapore, there was mounting dissent, particularly from

Middle Eastern SWFs as a group and other individual SWFs such as the Chinese Investment

Corporation. During the first and second meetings in Singapore, participants expressed great

skepticism about the role played by the IMF. Several funds – the Middle Eastern funds led by the

Abu Dhabi Investment Authority in particular – demanded that the secretariat be run by the SWF



hosting the meeting, rather than by the IMF. Two interviewees stated that the Middle Eastern

representatives considered the process to be a case of “Western powers imposing their norms” on

Eastern nations. One of the negotiators stated that Middle Eastern funds were not prepared to

accept any code that would be too prescriptive. Based on interviewee statements, the control of

the negotiations was mostly transferred to the SWFs themselves during the latter two sessions,

and the role of the IMF secretariat shrunk to bureaucratic functions. The head of one of the

interviewed SWFs stated that:

“The IMF provided the forum for the meeting in Washington. They functioned as the

secretariat for the group, although there was skepticism by some of the participants

who felt that the IMF was too closely associated with the needs of the US and its

particularly prescriptive model. Consequently, there was some tension initially and

along the way, too, whether it was IMF-related or ‘anti-Western’ related.

occasionally, it was unclear. The ADIA (Abu Dhabi Investment Authority),

especially, was skeptical about the IMF secretariat and its members felt that

sovereign wealth funds should get together and work something out – but that they

should be on their own, on their own premises – they believed the IMF should be

given a marginal role, if any at all. The IMF wanted to take the lead at first, although

when SWFs got themselves together and took control of the process, the work

progressed more successfully.”



This clearly underscores the significant power dimension that was present in the first meeting of

the negotiations especially between the Middle Eastern funds/governments and the IMF. Another

SWF representative mentioned:

“I think it (the tone) changed slightly, from being dominant in Washington to finding

a role that was almost more humble - the tone improved over time.”

This signifies that the IMF realized that its historical attitude and coercive power in such

negotiations might not be as effective in this case. One IMF representative stated:

“I completely understand that they were concerned - rightly or wrongly, sometimes

there was the sentiment that the fund was being a bit heavy handed. I guess many of

these people questioned whether they would be cajoled into something, although

they saw over time that that was not the case. The fund has always been very

pragmatic and practical in how it can influence sound economic policy and what we

generally do is decide, on a case-by-case basis, the best way to intervene and

influence processes. Sometimes, this means that we do things by ourselves;

sometimes that we try to influence others. We think it is very natural for us not to be

in the spotlight and to have a secondary role, if we find that this is more efficient.”

As of the second meeting in Singapore, the negotiations seemed to have shifted from

“dominancy” to “negotiated mode” (Djelic and Quack 2003:324-25). In other words, the SWFs



began to take more control of the process and the IMF moved further into the background. From

this point onwards, most of the discussions focused on the code rather than on the broader

political context of the process and the role of the IMF.

The IMF team developed the first draft of the code. A number of experts in various IMF

departments were responsible for different clauses in the code. Following the first meeting in

Washington, the IMF had less control over the code. From this point, three drafting

subcommittees, comprised of SWF representatives, took over the work. A Norwegian, an

Australian and a representative of the government of Singapore, headed the drafting

subcommittees. During the detailed negotiations, a few key contentious points arose, namely

transparency of investment policy and practices (GAPP 18), transparency of policies and

practices in the exercise of ownership rights (GAPP 21) and verification and audit processes for

compliance with the code (GAPP 24). Two types of concerns on transparency clauses appeared

to have emerged for the SWFs. The Middle Eastern funds, including the Kuwait fund, seem to

have been primarily concerned about local public’s access to information, if disclosed. One

negotiator from a Western fund affirmed that:

“I was just describing what I did, that is, how we view the need to provide

information to our people and a representative from a Gulf state said, ‘but I don’t

understand: if we provide that information to the people, they might ask questions’.”

This statement highlights the existence of a second power dimension, in which information

disclosure demands conflict with the national power and information hierarchies, This occurs in



represented countries with centralized power structures and a history of low disclosure to their

local public. The representative of one of the Western SWFs stated:

“I would say most of the concerns were about access of the local public to

information. In our context, the people are fund’s owners, as well, so they need to

know. In some other places, it is not very clear whether they (the people) have any

right to this information … to what extent (local) citizens of the country have a need

to know; well, there were different opinions on that.”

However, the concerns of the Singaporean funds about investment policy disclosure and

practices seem to have been of a different nature. They were primarily concerned about the

impact of those on the business operations of the fund and their returns. The Temasek

representative affirmed:

“We have historically provided all the information demanded by Western regulators, such

as the US Treasury, on an engagement basis. We see no value in public disclosure.

Disclosure should have a known user and reason.”

When asked about transparency on disclosure of returns, one interviewee replied:

“From my understanding, it (the problems of the Singapore funds with transparency

clauses) was from a professional perspective. Up until recently, they would publish



average annual returns over 18, 19 or 20 years, which meant that you didn’t get

public attention on short term losses. When you’re a long term investor, you need to

focus on the long term - disclosing quarterly and annual results is going to make you

nervous and can disrupt investment activities.”

The Singapore representatives rejected certain transparency clauses, which posed risks for their

mode of business operations and returns. These included quarterly disclosure of returns or

disclosure of proxy voting stances of the fund. However, such issues were purely based on

practical business logic. The fund did not wish to disclose quarterly returns because it would

increase the pressure to pursue short-term returns – whereas the fund focuses on long-term

investments.

The Norwegian SWF emphasized that they were present in the negotiations to “share

their experiences” and to be a “good global citizen”, which is important for their government.

The Norwegian SWF affirmed that open access to information is a public right based on the

Freedom of Information Act (Regjeringen 2010). The Norwegian SWF’s representative stated

that fund “owners” meant something different to each SWF representative. For the Norwegian

fund, for instance, “owners” meant the people of Norway. For other funds, it implied the national

government. This is an interesting manifestation of the differences in the social contract between

the state and its public among the countries represented in the negotiations. All the above

statements signify that the Norwegian fund is run primarily with the Norwegian public in mind

as the primary stakeholder.

It should be pointed out that during the three sessions of negotiations, the attitude of

several funds evolved significantly. This was particularly the case with regard to the political



concerns of the Middle Eastern funds, visible during the first meeting. These fears were mainly

assuaged in the following sessions. This might have been the result of a combination of factors.

For instance, during the first sessions, the IMF appeared domineering, while in later sessions

there was a significant shift of control to the SWFs. The funds’ increasing acquaintance during

the negotiations with each other and the mediating role of several participants (the Australian

fund chairman, David Murray, for example) are other important factors that explain the change

in attitudes. Additionally, a number of SWFs had initially expressed concern about the impact of

the disclosure demands on their operations and local politics. However, in later sessions they

began to realize that the development of the code was a key milestone. After its introduction and

the subsequent appeasing of Western stakeholders and removal of political issues and pressure,

they could move on without any actual change in practice. As one of the interviewees asserted:

“They felt that the moment the principles were prepared, published and adhered to,

most of the work was done. That was a key milestone and hopefully the attention to

this would subside over time – the political need would be off the table, if you like.”

During the negotiation process, several technical details of disclosure clauses were dropped and

most of the requirements became broader. In addition, several “public disclosure” requirements

were removed from the codes. Furthermore, GAPP 24 (which covers verification process for

adherence) was relaxed. There was much resistance from a large number of funds to the

verification process (GAPP 24), which introduces auditing as well as the potential for peer

pressure and other types of coercion. One participant stated:



“It was hard to reach an agreement on verification… the early drafts tried to include

it one way or another; you know, something that the IMF could undertake as part of

some consultation or other. One could hire someone else, like an external auditor, to

do it, but it ended up as type of a political document – a voluntary set of principles

that one adheres to. I think that if too much emphasis is put on verification, then the

principles would be generally too weak and not meet the kind of needs that one

would hope for…. The other path would be to get principles that everybody could

sign up to and use as a useful model. Particularly those countries that have not yet set

up their funds; they could use it as a manual, if you like, but without a strict

verification process.”

The final version of GAPP 24 reads: “A process of regular review of the implementation of the

GAPP should be engaged in by or on behalf of the SWF”. This leaves the verification to the

discretion of the SWF and it can be carried out internally.

Following the release of the GAPP on October 13th 2008, the United Arab Emirates

Finance Minister stated on behalf of all Middle Eastern SWFs:

“In view of the voluntary and consensus-based character of the initiative, we are not

convinced of proposals to monitor the implementation of the Principles. We have

previously cautioned against ‘voluntary’ initiatives by the Fund (International

Monetary Fund) from developing into ‘mandatory’ practices, which would detract

from the ownership of these Principles by the SWFs. In addition, given the tight

budgetary constraints that the Fund is operating under and the competing priorities in



light of the ongoing financial turmoil, we would not be in favor of further Fund

involvement beyond this stage.”

This is consistent with Abbot’s proposed soft law content where there is reciprocity between the

level of technical detail and the coercive power integrated in the code (Abbott, Keohane et al.

2000). All the interviewees present at the negotiations emphasized the decrease in technical

requirements, especially the public disclosure aspects of the code and the verification process.

Despite the high level of dissent during the first two sessions in Washington and

Singapore, and the differences in the SWF’s viewpoints on transparency, by the end of the third

meeting a consensus was achieved on a set of 24 principles, released on October 8th 2008. The

final code is provided in Appendix V of this paper. This set of soft laws for SWFs is known as

Generally Accepted Principles and Practices (GAPP) or the Santiago Principles. According to

the interviewees, the urgency for achieving a consensus for both the IMF and the SWFs helped

compromise on certain points and rapidly finalize the code. The IMF had committed to present

the GAPP to the board meeting of the International Monetary and Financial Committee on

October 11th, 2008. For the SWFs, considering that several Western countries (including Italy,

Germany and the US) were in the process of introducing their own regulatory processes for SWF

investment, it was in their best interest to achieve a consensus on a code with minimum delay

(according to interviewee statements). Out of the 24 principles, 16 recommend increased

disclosure of information. Of the remaining eight clauses, seven prescribe governance and

procedural changes at the SWFs, and one is a prohibitive clause about the use of government

information in the SWF’s investment process. The word “transparency” is not mentioned even

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Cultural Interpretations of Transparency


once in the 24 clauses of the code, which is in stark contrast to the original IMF proposal

released in November 2007 in-which the word transparency was used 47 times.

Following the release of the Santiago Principles, the IMF facilitated the formation of a

standing body – the International Forum of Sovereign Wealth Funds – headed by the CEO of the

Australian SWF, David Murray, and co-chaired by the Kuwaiti and Chinese SWFs. The forum

has met several times over the past two years. In addition, interestingly, during 2009 and 2010,

SWFs in Korea, Kuwait and Singapore (Temasek), for instance, started to coordinate their

investments in several cases. The International Forum could possibly emerge as a potent

socialization mechanism – leading in the medium toto long term to the structuration of a

“transnational community” of sovereign wealth funds (Djelic, Quack 2010). As a result and in

the long run, the normative frames and alignment of sensemaking and meanings of this

“community” can induce more consistent disclosure and investment behavior among SWFs. In

the absence of effective coercive instruments, longer- term socialization processes have been

cited as the most important enablers of adoption and translation of soft laws (Djelic and Sahlin-

Andersson 2006) and their intended and unintended impact on practices, i.e. “performitivity”

(MacKenzie, Muniesa et al. 2007).

2.6 Cultural Interpretations of Transparency

A close look at this story shows that there was no hero, and no single rationalistic

“entrepreneurial” actor (Beckert 1999) who shaped the process and its outcome for his/her own

interest. Ultimately, it was the distributed agency (Garud and Karnøe 2005; Quack 2007) of all

actors with different interpretations and agendas who were engaged at different levels, bi-lateral



discussions and deal making and a significant amount of improvisation and muddling through

that led to the final code.

This case is not about the birth of a new transnational norm. Transparency is already well

established and its sense and framing in the transnational space have been institutionalized.

Rather, this case represents an attempt to apply an existing world society norm with Western

origins to new non-Western actors..

The case of SWFs vividly shows how non-Western, historically peripheral transnational

actors, are increasingly vocal and how they carry their national and organizational norms and

values with them in the transnational space. Boundary actors between different layers of

institutions, be it transnational, national or at the field level engage in carrying and translating

meanings. With the growing power of historically peripheral countries world society norms are

bound to be contested, influenced and transformed with more frequency and intensity. In this

case, the transnational code was edited from its point of departure which was based on

democratic and public disclosure where-in Norway was projected as the model for the SWFs, to

a code in-which the word transparency is not mentioned even once (compared to 47 times in the

original IMF proposal). This is a major departure from the isomorphism assumptions of the

world society literature and shows how different kinds of non-Western national institutional

frames increasingly influence the construction of world society frames.

Significant focus has been placed on deconstructing and understanding the social

implications of the “transparency” culture, the information society, information-based

accountability, and the shift from knowledge and trust to information, etc. This case sheds light

on a new dimension of the global “transparency drive” which is how actors from different

national institutional contexts interpret and react to transparency demands. As Quack (2007:645)



highlights, the ambivalence in institutional setting and praxis are accentuated “by the multiplicity

of actors at various levels of inclusion and with different interpretative mindsets”. In such

situations, ideas that the IMF actors seem to perceive as self-evident, such as democratic and

market based transparency, might be perceived differently by different SWF actors. Some SWF

representatives might perceive the same transparency demands as openness and the others as

surveillance. Some SWF representatives might perceive the same transparency demands as

horizontal exchanges with the IMF while the others might perceive it as “vertical” demands

(Hood and Heald 2006) and exercise of power.

Based on the emerging attitudes of the actors under study, three ideal types for

institutionally- embedded interpretations of transparency emerge. The level of exposure to

international markets and the type of governance structure the actors are embedded in seems to

mediate their interpretation of transparency pressures. In a centralized power structure, the actors

who have historically lived in societies where the state holds a monopoly over information seem

to perceive information demands of the IMF differently from countries and organizations where

access to information has been decentralized. Also Additionally, in organizations such as

Temasek, which is run as a private firm dominated by market and financial logics, the material

and “rationalistic” role of information seems to dominate the ideational and symbolic meaning of

information disclosure.

The three ideal types for institutionally-conditioned interpretations of transparency and

information disclosure are described below:



2.6.1 Information as a Public Right (Democratic Information Logics)

This ideal type refers to organizations that have decentralized and participative power structures,

whose dominant information logics are based on the democratic right to information. At the state

level, as discussed, the Freedom of Information Act is the explicit representation of the

constitutional relationship between citizens and the state. In addition, such organizations refer to

their beneficiaries and, in the case of states to their public as the primary owner of information.

Norway’s government and its SWF seem to be a good example of this type of attitude to

information, which can also affect the behavior of the actors representing such organizations.

The type of information disclosure perceived as normatively justified is “public

disclosure” as an enabler for more accountability and informed participation. Compared to

targeted disclosure, public disclosure has a more significant political dimension with regard to

the relationship of states to their public. While in the case of the Norwegian state it is

indispensible for legitimacy and political survival, for those countries with a centralized state,

public disclosure risks disturbing the status quo. In addition, Temasek is concerned about the

business implications of certain types of public disclosure.

The Norwegian SWF is deeply embedded in the state and the Ministry of Finance

outlines its strategies. This contributes to the influence of the state’s institutional logics on the

operations of the Norwegian SWF. National organizations dominated by this ideal type will have

minimum conflict with both marketization-based and democratization-based transnational

information demands. While democratization forces are compatible with the logics of such an

organization, the marketization-based information demands that are usually targeted and not



public are less challenging compared to democratization information demands, in both content

and the audience for the information.

2.6.2 Information as a Market Instrument (Market Information Logics)

This set of logics dominates organizations with high levels of interdependency and exposure to

international capital markets. In organizations engaged in under-socialized transnational

economic transactions, in particular, information replaces other modes of socialization (such as

trust and/or peer pressure) as an important instrument in maintaining stability, assessing

investment risks and valuation. Such information demands usually follow the capital/agency

hierarchy and the capital provider (or potential capital provider) demands information from the

agent. The case of Singapore/Temasek seems most consistent with this ideal type. The stated

lack of belief in the need for public disclosure and the instrumental approach to information

disclosure is consistent with market-based information demand logics. In the case of Singapore,

the high dependency on inbound capital flows and the competition for foreign capital following

the Asian crisis, especially, seems to have resulted in a shift towards more compliance with

international market logics. This is an example where more integration in the transnational

investment space has trickled down towards national business systems and into a more favorable

attitude to information disclosure on the part of the government. As previously mentioned, the

Temasek representative stated that information disclosure was needed to build trust and allay ad

hoc regulatory actions in the market place. However, he also affirmed that information disclosure

should not be public, but targeted and aimed at its specific users. Furthermore, he asserted that

his fund was against any information disclosure that could have negative commercial

implications. This aversion to public disclosure but positive attitude towards targeted information



disclosure is consistent with the information practices of the Singapore state, described earlier in

this paper. The corporate structure of Temasek further accentuates the dominancy of market

logics at Temasek.

2.6.3 Information as Power (Centralized-Power Information Logics)

Power in these organizations is centralized. In these states or organizations, there is a low level

of access to data by the subjects (i.e. low public information rights). The actors exposed to such

institutional logics are predisposed to perceiving information as power and information demands

as a challenge to their power, especially where information demands directly conflict with the

perceived or desired power hierarchy (Foucault and Sheridan 1977).

In the case of the Middle Eastern SWFs, two types of power dynamics emerged. The first

type was “external” and related to the power dynamics between the fund/government and the

IMF/West. As previously mentioned, during the first session of the negotiations, the Middle

Eastern funds, especially, were critical of the role played by the IMF and they considered the

transparency demands as another case of the West imposing its standards on the East. The

second power dynamic was related to the role of information and the power dynamic between

the Middle Eastern SWFs and their local public. During the second and third sessions, when

public disclosure requirements were discussed, the concerns were more about access of the local

public to information rather than that of the international market actors. Organizations dominated

by this type of information logics have difficulty accepting both marketization and

democratization transnational information demands for public disclosure. In such organizations,

given that information is perceived as power, both types of transnational disclosure demands are



considered as political and as forms of domination. The fact that the Kuwait Investment

Authority is a government agency with a board of directors populated by ministers and an

executive management team with government experience, contributes to the influence of the

state’s logics on the SWF’s information disclosure logics.

Table 2-5 Ideal types for attitude to transparency

Ideal types Institutional

setting

Fund closer to

this ideal type

Primary

disclosure

target/type

Example of quotes

1. Information

as a Public Right (Democratic Information Logics)

Decentralized and democratic

governance

Norwegian Government

Pension Fund - Global

Local public – public

disclosure

“We cannot survive politically in Norway without being open and transparent … The fund belongs to the public; we cannot survive politically without being open.”

2. Information

as a Market Instrument (Market Information Logics)

High level of dependence and interaction with capital markets

Temasek - Singapore

Markets – targeted

disclosure

“We have historically provided all the information demanded by western regulators such as the US Treasury on an engagement basis. We see no value in public disclosure. Disclosure should have a ‘known user and a reason.’” “We will disclose information as long as it does not jeopardize our returns.”

3. Information

as Power (Centralized/Power Information Logics)

Centralized power structure and governance

Kuwait Investment Authority

None “For the Middle Eastern funds, it was another case of the West imposing its standards on emerging markets.” “I don't understand. If we provide that information to the people they might ask questions.”

Based on the examination of the national and organizational logics and the behaviors of the

national actors from the three countries under study, the following graph presents the positioning

of each of the three SWFs with reference to the three ideal types.

Figure 2-4 The three ideal types for attitude to transparency logics and the three SWFs



Information as

Power (Centralized

power structures)

Information as a

public rightInformation as a

market need

Norway

SWF

Temasek

(Sg)

Kuwait

SWF

As the above diagram illustrates, no organization falls completely under one single ideal type. As

inherent in the definition of ideal type by Max Weber (Weber 1904:90):

“An ideal type is formed by the one-sided accentuation of one or more points of view,

according to which ‘concrete individual phenomena are arranged into a unified analytical

construct’. In its purely fictional nature, it is a methodological utopia [that] cannot be

found empirically anywhere in reality.”

Although one ideal type dominated each SWF, the ideal type was always combined with other

institutional logics. For example, in the case of Singapore, while market-based concerns were

dominant, the fund representative did mention that public disclosure of fund portfolios and

operations might cause political issues inside the country. This signifies that Temasek’s



information logics were a mix of information as a market need as the dominant logic, combined

with concerns related to the local public’s access to information, i.e. “information as power”.

The mix of the above ideal typical logics that an organization is exposed to has a

significant impact on their information disclosure practices and perspectives. As described in the

transnational soft law development process, the difference between the perspectives of national

actors can result in conflict about certain types of information disclosure demands. A summary

of the conflicts of each of these ideal typical organizations with the transnational marketization

and democratization-based information demands is provided below.

It should be emphasized that an organization’s attitude to information disclosure and

transparency is dynamic and changes over time. Singapore is an interesting example of change of

information attitude following the Asian crisis, to re-establish its legitimacy in global markets,

given its high level of dependence on FDI.



Table 2-6 The three ideal typical organizations and transnational information demands

Marketization

transnational

information demands

Democratization transnational

information demands

Transparency

logic

1. Information

as a Public Right (Democratic Information Logics)

No conflict because democratic logics demand full openness based on the democratic social contract

No conflict because democratic logics demand full openness based on the democratic social contract

2. Information

as a Market Tool (Market Information Logics)

No conflict Conflict with public disclosure demands that might have potential negative business implications Disclosure is instrumental, so most types of public disclosure are not aligned with the organization's logic

3. Information

as Power (Centralized/Power Information Logics)

Conflict - Concerns about dominancy seeking behavior of the regulator Concerns about access of local public to information in case of public disclosure

Conflict - concerns about dominancy seeking behavior of the regulator Public disclosure and information rights go against the power structure and social contract – concerns about access of local public to information in case of public disclosure

What is special in this the case of soft regulation is that the actors had spent little time with each

other prior to the first session of the negotiations in Washington. Consequently, they had little

time to understand other actors’ interpretation schemes or to develop common ground and

common ways for sensemaking (Djelic and Quack 2007) of the transparency demands and

negotiations. As a result, during the first session, ideational differences in interpretation of

meanings dominated the negotiations. In this session, information demands had strong symbolic

meanings for the Middle Eastern funds as a form of domination. In the following sessions, the

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Conclusion


conflicts shifted to more technical and “rational” implications of information disclosure

demands.

In studies of demands for disclosure be it individual, group or organizational accounts,

attention to the institutional background of actors can help scholars make sense of actors’

reactions and interpretations. The mix of institutional and interpretive approaches used in this

study can enrich interpretive studies of accounting, audit and management control. Currently in

such studies, the actors’ interpretations and their relationship with practices play a central role.

By adding an institutional dimension at multiple levels, the interpretation of actors can be better

situated and the cultural influences underlying them can be exposed.

2.7 Conclusion

We live in an “information society” where information is perceived as the tool for controlling

everything. Information is considered apolitical and actionable for remote decision-making and

control. Information is the basis for the comparison and commensuration of different entities in

very different contexts. In such a world, as non-Western countries are increasingly participating

in the transnational dialogue and norm setting, conflicts emerge; conflicts that remind us that the

transparency norm might not be perceived in the same way across different cultural, social and

political boundaries.

As described in this paper, both at the country and organizational level, there are wide

varieties of power structures, types of economic organization and levels of marketization and

financialization. While the democratic information rights and market-based disclosure demands

might be consistent with the values and perspectives of actors from democratic and marketized



organizations, they are in conflict with the logics of organizations with centralized power

structures or organizations that are less integrated into the global capital markets.

Historically, transnational inter-governmental organizations, such as the IMF, had

significant coercive power to assist them with the diffusion and translation of practices at the

national level. As described in this case, the coercive power of such inter-governmental

organizations seems to have been eroded due to the improved capital/political standing of Middle

Eastern and Asian countries against the Western nations. Consequently, as in the case of SWFs,

more participative processes are used for soft law development to maximize the chances of

adoption and compliance.

In the case of the IMF and SWFs, as described, the conflict of logics between the

negotiating parties resulted in the dilution of the technical details of the code and also a

significant decrease in the “public disclosure” demands of those soft laws inconsistent with the

information perspectives and practices of national actors.

One aspect of this impact not studied in this paper is how the conflict of logics can

influence the translation and adoption of such soft laws. Measuring the translation of the soft

laws and their impact on the SWFs’ “action identity” (Brunsson and Adler 1989) is empirically

difficult, and it is still too early in the process of adoption of the Santiago Principles to attempt

such a measurement (the code was finalized in October 2008). However, it can be argued that

disclosure clauses that conflict with national information attitudes will be very difficult for the

SWFs to adopt. This includes the public disclosure clauses of the Santiago Principles, which are

inconsistent with the centralized power structures (such as that of the Kuwait Information

Authority). In such cases, the conflict can result in the decoupling of the political and action

identity of the organizations, and organizational hypocrisy (Brunsson and Adler 1989). Audits



have already been carried out to gauge the level of the SWFs’ compliance with the Santiago

Principles (RiskMetrics 2009). The audits indicate that most of the SWFs have undertaken minor

or no changes in their public disclosure levels following the introduction of the code. In 2008

and 2009, many SWFs, including the Chinese Investment Corporation, the Abu Dhabi

Investment Authority and the Qatar Investment Authority, expanded their communications

departments, hired Western communications managers (PR-Week 2007) and launched

international advisory boards (WSJ 2009). These observations are not definitive. However, they

can be considered indicative of change primarily in the political identity of the SWFs rather than

their action identities (Brunsson and Adler 1989) a result of the introduction of the code.

Adoption of such codes will have intended and unintended consequences in the organizations,

and the “performativity” (MacKenzie, Muniesa et al. 2007) of such transnational codes and

subsequent ratings, audits and measurements is an underexplored area demanding more research.

One limitation of this study is that the analysis has not covered the variations in actors’

perceptions towards different types of information. Demanding disclosure about processes might

elicit diverse reactions compared to disclosure of outcomes (Hood and Heald 2006:30-31). For

example, disclosure of governance structure might face more or fewer challenges compared to

disclosure of investment portfolios, both for symbolic and practical reasons. Further empirical

studies are needed to develop a more granular model, which addresses the different types of

information demanded.

This paper provides a starting point towards a better understanding of the impact of

national logics on the transnational soft law development process. More research is needed to

take into consideration the perspectives of national actors and the role of national high order

logics on the soft laws development process. In the new world of fast-expanding Middle Eastern



and Asian significance and economic clout, where conditionality-type coercive instruments are

increasingly ineffective, there is also a rapidly growing practical need for a greater number of

studies such as this one.

CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY References


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CHAPTER 22BSOVEREIGN WEALTH FUNDS, THE IMF AND TRANSPARENCY Appendix


2.9 Appendix

2.9.1 Appendix I – Exploratory study of SWFs actively involved in the IMF negotiations for sampling

SWF Type of legal

entity

Role of

government

in board

Role of

government in

senior

management

Reporting procedure Audit procedure Foreign

Direct

Investment

% of GDP

Type of

national

government

Abu Dhabi Investment Authority

Government agency

Strong government presence

Limited information - Strong government presence

Reports to the government

No information 4%

Centralized - ruling family

Australian Future Fund

Government agency

Totally independent board

The CEO is the former head of the Central Bank

Annual report and quarterly portfolio updates available online

Internal Audit committee and external Australian National Audit Office

4%

De-centralized constitutional democracy

Chinese Investment Authority

Corporation Strong government presence

All members of the executive committee have/have had government positions.

No information beyond the requirement to be accountable to the State Council

The Internal Audit Department and National Audit Office 10%

Single party system

Singapore Government Investment Corporation

Corporation Mix of government and independent members

Independent Publishes publicly available annual report, as well as quarterly update reports to the Ministry of Finance

Auditor-General of Singapore

17%

Constitutional democracy - PAP the ruling party since the country's independence



Kuwait Investment Authority

Government agency

Mix of government and independent members

Independent The KIA reports directly to the Kuwaiti Council of Ministers on an annual basis. This report is not available to outside parties

State Audit Bureau

0.2%


Libyan Investment Authority

Government agency

Senior board members government officials

No information No information No information

2.1%


Norwegian Government Pension Fund Global

Integrated into the Ministry of Finance

Government appointed members

Independent – Norges Bank operates as Norwegian central bank

Quarterly and annual reports to the Ministry of Finance which are made public through the fund's website

Deloitte AS, as well as internal audits conducted by the Central Bank. Both parties submit audit reports to the supervisory board, then final audit by The Office of the Auditor General

0.8%

Constitutional monarchy – democracy

Qatar Investment Authority

Government agency

Strong government presence

No information available

The QIA does not report publicly on financial information through any official channels.

The State Audit Bureau

2.5


Temasek (Singapore)

Corporation Mainly independent - some have held government positions in the past

Independent Publishes annual report including a financial summary, as well as highlights from the year’s activity

Financial statements are externally audited by an international audit firm

13%

Constitutional democracy - PAP the ruling party since the country's independence



2.9.2 Appendix II – Analysis of Transnational Codes for Transparency

Name of transparency

code

Organization Year Statement of principle Target Rationale

United Nations Transparency in Armaments (UNTIA) – FAS

The United Nations

1991 The United Nations Register of Conventional Arms established by the TIA is widely available so that public pressure can be brought to bear on states which appear to implement irresponsible or destabilizing arms transfers.

Governments Democratic

UN Pearl Initiative United Nations 2005 A private sector-led program aimed at improving corporate governance, accountability and smart CSR practices in business activities across the six countries of the Gulf Cooperation Council (GCC).

Private sector in the GCC

Market-based and democratic

Pacific Plan Regional Accountability Initiatives

United Nations 2005 Governments Democratic

Technology and Transparency Network

The World Bank

Transparency is essential to allow citizens and markets to hold institutions accountable for their policies and performance, to foster trust in government and minimize corruption.

Governments Market based and democratic

Open Budget Initiative OBI - non profit

2006 The aim of the International Budget Partnership (IBP) is to ensure that government budgets are more responsive to the needs of poor and low-income people in society and, accordingly, to make budget systems more transparent and accountable to the public.




Extractive Industries Transparency Initiative Plus Plus

The World Bank

2003 We recognize that a public understanding of government revenues and expenditure over time could help public debate and inform choice of appropriate and realistic options for sustainable development. We underline the importance of transparency by governments and companies in the extractive industries and the need to enhance public financial management and accountability.

Extractive industries

Democratic

CommGAP The World Bank

2006 CommGAP, a global program at the World Bank, promotes the use of communication in governance reform programs and supports the building of democratic public spheres.


Treaty on access to information, the Council of Europe Convention on Access to Official Documents

The European Union

2008 Considering that the exercise of a right to access to official documents: i provides a source of information for the public; ii helps the public to form an opinion on the state of society and on public authorities; iii fosters the integrity, efficiency, effectiveness and accountability of public authorities, so helping affirm their legitimacy;


Code of Good Practices on Transparency in Monetary and Financial Policies

The IMF 1999 The case for transparency of monetary and financial policies is based on two main premises. First, the effectiveness of monetary and financial policies can be strengthened if the goals and instruments of policy are known to the public and if the authorities can make a credible commitment to meeting them. In making available more information about monetary and financial policies, good transparency practices promote the potential efficiency of markets. Second, good governance calls for central banks and financial agencies to be accountable, particularly where the monetary and financial authorities are granted a high degree of autonomy.

Central Banks

Market -based and democratic



Source: Respective websites of the issuing bodies

Code of Good Practices on Fiscal Transparency

The IMF 1997 The Code of Good Practices on Fiscal Transparency (the Code) identifies a set of principles and practices to help ensure that governments are providing a clear picture of the structure and finances of government. Implementation of the Code thus provides assurance to the public that the soundness of fiscal policy can be reliably assessed.


Convention on Access to Information, Public Participation in Decision Making and Access to Justice in Environmental Matters.

United Nations 1998 Recognizing that, in the field of the environment, improved access to information and public participation in decision-making enhance the quality and the implementation of decisions, contribute to public awareness of environmental issues, give the public the opportunity to express its concerns and enable public authorities to take due account of such concerns, Aiming thereby to further the accountability of and transparency in decision-making and to strengthen public support for decisions on the environment, recognizing the desirability of transparency in all branches of government and inviting legislative bodies to implement the principles of this convention in their proceedings, Recognizing also that the public needs to be aware of the procedures for participation in environmental decision-making, have free access to them and know how to use them.



2.9.3 Appendix III - SWF Preliminary Interview

1. What was the role of SWF in the IMF regulatory process? (Influencer, adopter, leader?)

2. How would you assess the process through which the IWG-SWF managed the development

of the code?

a. Governance

b. Participation

c. Venue

d. Etc.

3. Who owned the process? SWFs? IMF? Experts? US Treasury? Did it evolve throughout the

meetings?

4. Do you plan to fully comply with the code? Why?

5. Which clauses in the code were the most difficult to accept? Was it the same for different

SWFs?

a. The information demands?

b. The prescriptions?

c. The inhibitions?

6. Are there operational benefits to implementing the information disclosure clauses of such

codes for the SWFs?

7. What are the operational challenges of implementing the information disclosure clauses of

such codes for the SWFs?

8. How do you think the goals of SWFs from participation in the IWG-SWF process varied

from each other?

9. In what order would you put the following goals?


i. Preventing preemptive ad-hoc regulation by the target nations

ii. Achieving uniformity of practices among SWFs

iii. Leading and influencing the governance and disclosure practices among SWFs

iv. Establishing further trust between SWFs and the other stakeholders

1. Companies

2. Regulators

3. Governments

4. What other factors would you consider as important?

10. What were the key barriers for acceptance of the code by different SWFs?

11. In what order would you put the following potential barriers? How were they different for

different SWFs?

i. Economic costs of operational implementation

ii. Economic costs of information disclosure (loss of competitive investment advantage)

iii. Perception of breach of their sovereignty by the SWF nations

iv. Distrust in the IWG-SWF institution and processes

v. Political cost of disclosure to the local public about returns, portfolio, investment strategy etc.

vi. Political cost of disclosure to the international regulators and investment community about

returns, portfolio, investment strategy etc

vii. What other factors would you consider important?

12. Do you think in different SWF countries, demands for information were matched by

demands from the local public of the SWF nations for more information?


13. How effective do you think such initiatives are in achieving the goals of their originators?

Why?

14. Do you think demand for more “transparency” results in establishing better relationships or

more distrust?


2.9.4 Appendix IV – List of IWG Meeting Participants

IWG Secretariat (International Monetary Fund)

Wouter Bossu

Norma Cayo

Udaibir S. Das (Head of IWG Secretariat)

Antonio Galicia-Escotto

Robert Heath

David J. V. Hofman

Francine Koch

Peter Kunzel

Thomas Laryea

Ross Leckow

Laura Lipscomb

Yan Liu

Yinqiu Lu

Adnan Mazarei

Christian B. Mulder

William Murray

Michael Papaioannou

Iva Petrova

Jukka Pihlman

Jon Shields


Alison Stuart

Amadou Nicolas Racine Sy

Mauricio Villafuerte

Representatives from the IWG Countries, SWFs, and Institutions

Co-Chairs

Hamad Al Hurr Al Suwaidi - Abu Dhabi Finance Department

Jaime Caruana - International Monetary Fund

Member Countries

AUSTRALIA

Ian Beckett - The Treasury

Felicity McNeill- Department of Finance and Deregulation

David Murray (Chair, IWG Drafting Group) - Australian Future Fund

AZERBAIJAN

Ruslan Alakbarov - State Oil Fund of the Republic of Azerbaijan

Azer Mursagulov - Ministry of Finance

KINGDOM OF BAHRAIN

Mohamed Mubarak Al Sulaity - Ministry of Finance

Yousif Abdulla Humood - Ministry of Finance


Talal M. Kazim - Ministry of Finance

BOTSWANA

Linah K. Mohohlo - Bank of Botswana

Oduetse A. Motshidisi - Bank of Botswana

CANADA

Arvind Bhatia - Department of Finance

Wayne Foster - Department of Finance

Rod Matheson - Alberta Finance and Enterprise

CHILE

Amelia Huerta Bertrand - Ministry of Finance

Eric Parrado - Ministry of Finance

Juan Carlos Piantini - Central Bank of Chile

Patricio Sepulveda - Ministry of Finance

CHINA

Wang Jianxi - China Investment Corporation

Wang Shuilin - China Investment Corporation

Zhang Hong - China Investment Corporation

Wu Xueling - China Investment Corporation

Liu Haoling - China Investment Corporation

ISLAMIC REPUBLIC OF IRAN

Abdelali Jbili - International Monetary Fund

Jafar Mojarrad - International Monetary Fund

IRELAND


Eileen Fitzpatrick - National Treasury Management Agency

Dermot Keane - Department of Finance

KOREA

Yi Tae Kim - Ministry of Strategy and Finance

Byunghoon Nam - Ministry of Strategy and Finance

Jeyoon Shin - Ministry of Strategy and Finance

Ik Ho Suh - Korea Investment Corporation

KUWAIT

Bader Mohammad Al-Sa'ad - Kuwait Investment Authority

Mahmoud Ahmed Mahmoud - Kuwait Investment Authority

Nadeya Mohamed - World Bank

LIBYA

Mohamed H. Layas - Libyan Investment Authority

MEXICO

José Gabriel Cuadra García - Banco de México

Alfonso Guerra - International Monetary Fund

Gerardo Rodríguez - Ministry of Finance

Marco Oviedo - Ministry of Finance

NEW ZEALAND

Yuong Ha - International Monetary Fund

Brian McCulloch - New Zealand Treasury

Adrian Orr - New Zealand Superannuation Fund

NORWAY


Thomas Ekeli - Ministry of Finance

Ola Peter Krohn Gjessing - Norges Bank Investment Management

Martin Skancke - Ministry of Finance

QATAR

Ahmed M. Al-Sayed - Qatar Investment Authority

Tariq M. Muslih - Qatar Investment Authority

Kenneth Shen - Qatar Investment Authority

RUSSIA

Peter Kazakevitch - Ministry of Finance

Roman Shiyko - Ministry of Finance

Yulia Snizhkova - Bank of Russia

SINGAPORE

Vivien Chen - Government of Singapore Investment Corporation

Hasan Jafri - Temasek Holdings

Laurence Lien - Ministry of Finance

Siong Guan Lim - Government of Singapore Investment Corporation

Ashok Srinivasan - Temasek Holdings

TIMOR-LESTE

Abraão F. De Vasconselos - Banking and Payments Authority

Emilia Pires - Ministry of Finance

TRINIDAD AND TOBAGO

Allison Lewis - Ministry of Finance

Ewart S. Williams - Central Bank of Trinidad and Tobago


UNITED ARAB EMIRATES

William J. Brown - Abu Dhabi Investment Authority

Euart Glendinning - Abu Dhabi Investment Authority

Saeed R. Al-Hajeri - Abu Dhabi Investment Authority

Robert E.B. Peake - Abu Dhabi Investment Authority

UNITED STATES

Michael J. Burns - Alaska Permanent Fund Corporation

Robert Kaproth - U.S. Department of the Treasury

Permanent Observers to the IWG

Oman: State General Reserve Fund

Saudi Arabia: Saudi Arabian Monetary Agency

Vietnam: State Capital Investment

Corporation

Organization for Economic Cooperation and

Development

World Bank

Recipient Countries (All EU Countries and Japan)


2.9.5 Appendix V - IWG-SWF Mission and Generally Accepted Principles and

Practices (GAPP)

In furtherance of the “Objective and Purpose”, the IWG members either have implemented or

intend to implement the following principles and practices, on a voluntary basis, each of which is

subject to home country laws, regulations, requirements and obligations. This paragraph is an

integral part of the GAPP.

GAPP 1. Principle: The legal framework for the SWF should be sound and support its effective

operation and the achievement of its stated objective(s).

GAPP 1.1 Subprinciple The legal framework for the SWF should ensure the legal

soundness of the SWF and its transactions.

GAPP 1.2 Subprinciple The key features of the SWF's legal basis and structure, as well

as the legal relationship between the SWF and the other state bodies, should be publicly

disclosed.

GAPP 2. Principle: The policy purpose of the SWF should be clearly defined and publicly

disclosed.

GAPP 3. Principle: Where the SWF's activities have significant direct domestic macroeconomic

implications, those activities should be closely coordinated with the domestic fiscal and

monetary authorities, so as to ensure consistency with the overall macroeconomic policies.


GAPP 4. Principle There should be clear and publicly disclosed policies, rules, procedures, or

arrangements in relation to the SWF's general approach to funding, withdrawal, and spending

operations.

GAPP 4.1 Subprinciple The source of SWF funding should be publicly disclosed.

GAPP 4.2 Subprinciple The general approach to withdrawals from the SWF and

spending on behalf of the government should be publicly disclosed.

GAPP 5. Principle: The relevant statistical data pertaining to the SWF should be reported on a

timely basis to the owner, or as otherwise required, for inclusion where appropriate in

macroeconomic data sets.

GAPP 6. Principle: The governance framework for the SWF should be sound and establish a

clear and effective division of roles and responsibilities in order to facilitate accountability and

operational independence in the management of the SWF to pursue its objectives.

GAPP 7. Principle: The owner should set the objectives of the SWF, appoint the members of its

governing body(ies) in accordance with clearly defined procedures, and exercise oversight over

the SWF's operations.

GAPP 8. Principle: The governing body(ies) should act in the best interests of the SWF, and

have a clear mandate and adequate authority and competency to carry out its functions.


GAPP 9. Principle: The operational management of the SWF should implement the SWF’s

strategies in an independent manner and in accordance with clearly defined responsibilities.

GAPP 10. Principle: The accountability framework for the SWF's operations should be clearly

defined in the relevant legislation, charter, other constitutive documents, or management

agreement.

GAPP 11. Principle: n annual report and accompanying financial statements on the SWF’s

operations and performance should be prepared in a timely fashion and in accordance with

recognized international or national accounting standards in a consistent manner.

GAPP 12. Principle: The SWF’s operations and financial statements should be audited annually

in accordance with recognized international or national auditing standards in a consistent

manner.

GAPP 13. Principle: Professional and ethical standards should be clearly defined and made

known to the members of the SWF's governing body(ies), management, and staff.

GAPP 14. Principle: Dealing with third parties for the purpose of the SWF's operational

management should be based on economic and financial grounds, and follow clear rules and

procedures.


GAPP 15. Principle: SWF operations and activities in host countries should be conducted in

compliance with all applicable regulatory and disclosure requirements of the countries in which

they operate.

GAPP 16. Principle: The governance framework and objectives, as well as the manner in which

the SWF’s management is operationally independent from the owner, should be publicly

disclosed.

GAPP 17. Principle: Relevant financial information regarding the SWF should be publicly

disclosed to demonstrate its economic and financial orientation, so as to contribute to stability in

international financial markets and enhance trust in recipient countries.

GAPP 18. Principle: The SWF’s investment policy should be clear and consistent with its

defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing

body(ies), and be based on sound portfolio management principles.

GAPP 18.1 Subprinciple The investment policy should guide the SWF’s financial risk

exposures and the possible use of leverage.

GAPP 18.2 Subprinciple The investment policy should address the extent to which

internal and/or external investment managers are used, the range of their activities and

authority, and the process by which they are selected and their performance monitored.

GAPP 18.3 Subprinciple A description of the investment policy of the SWF should be

publicly disclosed.


GAPP 19. Principle: The SWF’s investment decisions should aim to maximize risk-adjusted

financial returns in a manner consistent with its investment policy, and based on economic and

financial grounds.

GAPP 19.1 Subprinciple If investment decisions are subject to other than economic and

financial considerations, these should be clearly set out in the investment policy and be

publicly disclosed.

GAPP 19.2 Subprinciple The management of an SWF’s assets should be consistent with

what is generally accepted as sound asset management principles.

GAPP 20. Principle: The SWF should not seek or take advantage of privileged information or

inappropriate influence by the broader government in competing with private entities.

GAPP 21. Principle: SWFs view shareholder ownership rights as a fundamental element of their

equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in

a manner that is consistent with its investment policy and protects the financial value of its

investments. The SWF should publicly disclose its general approach to voting securities of listed

entities, including the key factors guiding its exercise of ownership rights.

GAPP 22. Principle: The SWF should have a framework that identifies, assesses, and manages

the risks of its operations.

GAPP 22.1 Subprinciple The risk management framework should include reliable

information and timely reporting systems, which should enable the adequate monitoring

and management of relevant risks within acceptable parameters and levels, control and


incentive mechanisms, codes of conduct, business continuity planning, and an

independent audit function.

GAPP 22.2 Subprinciple The general approach to the SWF’s risk management

framework should be publicly disclosed.

GAPP 23. Principle: The assets and investment performance (absolute and relative to

benchmarks, if any) of the SWF should be measured and reported to the owner according to

clearly defined principles or standards.

GAPP 24. Principle: A process of regular review of the implementation of the GAPP should be

engaged in by or on behalf of the SWF.



CHAPTER 3

FROM GOD TO MARKETS

The Role of Actors and Institutions in the

Reframing of

Socially Responsible Investments

Presented at:

European Group for Organizational Studies Conference – Gothenburg, Sweden 2011

Academy of Management Conference - Paper Development Workshop – Montreal, Canada 2010

Organization Studies Social Movements Workshop – Margaux, France 2010

CHAPTER 33BFROM GOD TO MARKETS

Résumé


Résumé

Du dieu aux marchés: le rôle des acteurs et des institutions dans la


L'adoption et l'intégration de pratiques ont souvent été traitées dans les théories

organisationnelles. Les mouvements sociaux sont une des forces clés derrière la

revendication d'une désinstitutionalisation des pratiques en place suivi d'une

institutionnalisation de nouvelles pratiques. Cette étude s'intéresse à la façon dont les

acteurs des mouvements sociaux entament un processus de conceptualisation pour faire

coïncider à nouveau le cadre originel du mouvement avec les exigences institutionnelles

des organisations en place. De plus, ce travail cherche à éclairer la gestion par les acteurs

des mouvements sociaux des conflits émergents entre leurs valeurs et la nécessité

« pragmatique » d'un cadre conceptuel qui emporte l'adhésion des institutions.

Le mouvement en faveur d'un « investissement socialement responsable » remonte à

quelques siècles. Au cours des dernières décennies, l'investissement socialement

responsable s'est hissé d'une pratique marginale à une pratique courante d'investissement.

Au cours de ce processus d'adoption généralisée, le cadre conceptuel du mouvement a

sensiblement changé pour s'adapter aux pressions institutionnelles qui s'exercent sur les

acteurs classiques du secteur. Pendant l'intégration, on peut citer les types suivants de re-

conceptualisation stratégique : l'hybridation entre l'approche du mouvement et l'approche

courante (financiarisation de l'ISR), le passage des incitations négatives aux incitations

positives, et l'utilisation accrue des cadres et tactiques d'incitation à la participation en

lieu et place de pressions externes.

Mots-clés : investissement socialement responsable, mouvements sociaux,

institutionnalisme organisationnel, capitalisme fiduciaire, conceptualisation

CHAPTER 33BFROM GOD TO MARKETS

Abstract


3.1 Abstract

“Socially responsible investment” has existed since the 18th century in the form of

religious investors avoiding investments in certain “sin” business activities. Over the last

two decades, the socially responsible investment movement has succeeded in moving

from a small niche to the widespread translation and adoption of its practices by the

mainstream investment community across the globe. In the process of this widespread

adoption, the movement’s frames have changed significantly to adapt to the changing

institutional environment of mainstream investors.

This study focuses on how social movement actors have engaged in the (re)construction

of meaning in order to adapt the ideological frame of the original movement with the

institutional demands of incumbent organizations. In addition, this study attempts to

provide a better understanding of how social movement actors cope with the emerging

conflicts between their convictions and the “pragmatic” framing needs of the movement

to appeal to incumbents. This paper introduces three ideal types for reframing during

mainstreaming: the hybridization of logics with the mainstream (financialization of SRI),

the move from negative to positive incentives and the increased use of participatory

frames and tactics.

Keywords: socially responsible investment, meanings, institutions, social movements,

fiduciary capitalism, framing

CHAPTER 33BFROM GOD TO MARKETS Introduction


3.2 Introduction

Mainstreaming involves the diffusion and parallel translation and adaptation of values, norms or

practices from a niche at the margin towards the core of an institutional field. Actors situated at

the boundary between the niche and the core engage in meaning (re)construction to adapt the

meanings and frames extant in the niche to the institutional demands, sometimes competing and

conflicting, of the incumbent institutional field (Lounsbury, Ventresca et al. 2003; Zietsma and

Lawrence 2010).

Meaning-making and framing have recently received increasing attention from

organization scholars as key boundary work (Lounsbury and Pollack 2001; Zilber 2002;

Suddaby, Elsbach et al. 2007; Zilber 2008; Zietsma and Lawrence 2010). However, we lack a

conceptual framework that would allow us to gain a better understanding of how boundary actors

engage in the “institutional work” (Lawrence and Suddaby 2006) associated with the process of

mainstreaming niche practices through meaning-making and framing. This paper attempts to

address this gap.

Social movements play a key role in mediating institutional change at multiple levels and

in circulating and translating marginal values, norms and practices across a field (Zald and

McCarthy 1980; Lounsbury 2005). Building on recent studies which attempt to bridge

contributions in institutional theory and social movements analysis (Davis and Thompson 1994;

Rao, Morrill et al. 2000; Lounsbury 2005; McAdam, Scott et al. 2005; Hargrave and Van de Ven

2006), this study attempts to cross-fertilize between institutional meaning-making (Czarniawska-

Joerges and Sevón 1996; Zilber 2008) and collective action framing (Benford and Snow 2000;

Den Hond and De Bakker 2007) in social movements.

CHAPTER 33BFROM GOD TO MARKETS Introduction


While the institutionalist literature has been mostly preoccupied with the institutional

dimensions of changing meaning systems, the social movement literature has primarily focused

on the role of reformist and radical actors in adjusting social movement frames (Benford and

Snow 2000; Schneiberg and Lounsbury 2008). Consequently, these two research traditions

complement each other to provide a balanced approach, between structure and agency, to the

study of field level changes in meaning systems.

The socially responsible investment (SRI) movement comprises a network of investors,

not-for-profit organizations, investment management firms and independent activists that aim to

increase the level of attention to environmental and social issues in the investment community

(Sparkes and Cowton 2004). Over the past two decades, SRI practices have evolved: they are no

longer used solely by fringe and religious US actors (in particular), but have been adopted by

over 200 institutional investors and more than 600 investment management firms across the

globe. More specifically, this study aims to provide an understanding of how actors edited the

socially responsible investment frames, as the movement moved to the mainstream and became

widely adopted by mainstream investors.

This paper utilizes qualitative research methods based on a diverse set of material,

including interviews, participant observation and documentary evidence such as annual reports,

press releases, websites, archival material and the UN Principles of Responsible Investments

database of signatories.

The following section provides an overview of the literature on meaning making and

framing in the context of institutional change, drawing on both institutionalism and social

movement literature. This is followed by a historical narrative of socially responsible investment

and an account of how and why boundary actors engaged in strategic meaning making to

CHAPTER 33BFROM GOD TO MARKETS Theoretical Background


facilitate the adoption of SRI by mainstream financial actors. Based on the empirical case, the

final section of this paper develops ideal types regarding the meaning-making work undertaken

by boundary actors to facilitate mainstreaming.

3.3 Theoretical Background

Meanings are defined as “those aspects of institutions that are ideational and symbolic” to

distinguish them from the material aspects of institutions (Zilber 2008:152). Meanings are

constituted through language and other symbolic expressions and artifacts (Berger, Luckmann

1966). From early works in institutionalism, “meanings”, “myths” (Meyer and Rowan 1977),

“ideas” (Czarniawska-Joerges and Sevón 1996), “discourse” (Phillips, Lawrence et al. 2004),

“analogies” (Davis, Diekmann et al. 1994), “legitimating accounts” (Creed, Scully et al. 2002)

and “frames” (Goffman 1986) have been cited as key ways in which actors influence and are

influenced by institutions. The mimetic, coercive and normative institutional forces of Dimaggio

and Powell (1983) are built upon “cultural expectation, shared cognitions and beliefs”.

According to Scott (2001), institutions have regulative, normative and cultural/cognitive

dimensions. The latter, he proposes, involves the “creation of shared conceptions that constitute

the nature of social reality and the frames through which meanings are made” (Scott 2003:880).

Meanings are inter-subjective “carriers” of institutions.

Most early empirical works within the institutionalist tradition focused on structure and

the “diffusion” of practices, largely neglecting the “soft” content of institutions, i.e. culture and

meanings (Suddaby, Elsbach et al. 2007; Djelic 2010). Recently, there has been a resurgence of

qualitative studies of institutionalization and deinstitutionalization “processes” (Czarniawska-



Joerges and Sevón 1996; Sahlin and Wedlin 2008; Zilber 2008). Such studies have brought

meaning systems back to center stage, pointing to the central role those meaning systems play in

institutional stabilization as well as disruption. For example, Wicks (2001) demonstrated the

central role played by language and meanings in the emergence of a mindset of “invulnerability”

in a land mine, and the resulting negligence and fatal explosion. Zilber (2002), in her study of a

rape crisis center in Israel, showed how two meaning systems for interpreting the same practices

co-existed among different members. While some members interpreted the work of the center as

a feminist cause, others perceived it as “therapeutic” work. In her study of the hi-tech industry in

Israel, Zilber (2006) showed that different “meanings” of the hi-tech industry are constructed

under the influence of institutions at various levels, be it society or the hi-tech institutional field.

Lawrence and Phillips (2004) illustrated how the emergence of the new institutional field of

whale watching was facilitated by changes in dominant discourses around whales, from the

dangerous “Moby Dick” to the human-friendly “Free Willy.” In their study, they also highlighted

the work of entrepreneurially skilled actors in manipulating public discourse on whales and their

interaction with humans. A number of other studies have attempted to conceptualize the type of

“strategic” meaning-making work (Lawrence and Suddaby 2006) involved in the diffusion of

new practices. An important study in this area is that of jurisdictional changes in accounting

firms (Greenwood, Suddaby and Hinings 2002) illustrating how professional association actors

engaged in “interpreting, representing and translating” relevant issues in a way that justified the

change.

As all these studies highlight, meaning-making work involves manipulating, hybridizing

(Djelic and Sahlin-Andersson 2006) and repackaging (Sahlin and Wedlin 2008) discourses and

tailoring accounts to serve the situated interests of certain actors. In such contexts, different



meaning “communities” facing different institutional logics mobilize and structure different

competing frames and “rhetorical strategies” (Suddaby & Greenwood 2005) to pursue their

goals. This is what Lounsbury and Glynn call “cultural entrepreneurship” and what Greenwood

and Suddaby (2006) label as meaning-making “institutional work”.

The literature on meaning-making has provided profound insights into the dynamics of

meanings and the role of actors in “strategic meaning-making”. So far, there have been very few

studies attempting to understand the types of meaning-making work undertaken to facilitate the

widespread adoption of social movements’ niche practices by incumbent actors (Lounsbury,

Ventresca et al. 2003). This is an important gap that this paper attempts to address. In analyzing

the respective roles of institutions and agents in changing field level meaning systems, this study

examines institutions at multiple levels – from the transnational to the national and the field

level. As Djelic and Sahlin-Andersson (2006) point out, studies that work across multiple level

of institutions and explore the upwards and downwards (sometimes competing) flows across

those different levels are rare (e.g. Kleiner 2003; Quack 2007). More studies of this type are

needed in order to better understand the institutional dynamics of organizations and fields.

Social movements are one of the major drivers of institutional change at multiple levels

of fields, societies and transnational space. Social movements are loose networks of actors and

groups that coalesce to make claims against or for certain practices, constituencies or discourses,

and to create or resist new institutional arrangements (McCarthy, Zald 1977). Social movements

bring together a variety of groups and actors that can be acting in the same direction albeit for

very different reasons and on the basis of quite distinct interests. Compared to traditional studies

in the institutionalist literature, which are mostly focused on one layer of institutions such as the



field or the national level, social movements bring attention to dynamics of institutions

throughout the lifecycle of the movement at multiple levels (Djelic and Sahlin-Andersson 2006).

Socially responsible investment can be characterized as a social movement because it involves a

broad and loose network of actors and organizations that aim to influence the practices of

incumbent investors. All SRI actors agree on the problem, that is, “investors do not pay sufficient

attention to the environmental and social impact of their portfolios” and they seek to change the

way incumbent investors operate (Zald and McCarthy 1994). The cross-organizational

mobilization aspect of SRI, its activist roots, the national and transnational organizations

involved in organizing and “making claims” about SRI and the emergent common definition of

the problem and solution across the entire SRI space qualify SRI as a social movement.

In social movement literature, the concept of “framing” is a close parallel to meaning

making in institutionalism. However, framing focuses primarily on linguistic ideational work

(Benford and Snow 2000), while meaning-making also covers other forms of symbolic

presentations and representations. The rich literature on collective action framing is highly

agency-focused and pays little attention to the institutions that condition the actors’ framing

work (Benford and Snow 2000; Lounsbury, Ventresca et al. 2003). Combining the legacy of

social movements in studying strategic framing with the richness of institutionalism in studying

the effect of structures in conditioning action can bring a deeper understanding of how a loose

network of actors facing competing institutional logics co-construct meanings, as movements

move to the mainstream. The following section provides an overview of the social movements

framing literature and how it relates to meaning making and institutionalism.

For Goffman and Berger (Goffman and Berger 1974), frames are “schemata of

interpretation” that enable individuals “to locate, perceive, identify and label” occurrences within



their life space and the world at large. Movement actors are actively engaged in the production

and maintenance of meaning for constituents, antagonists and bystanders or observers (Benford

and Snow 2000). They are deeply embroiled, along with the instruments of circulation and

translation such as the media and the other social actors, in what has been referred to as “the

politics of signification” (Hall 1982).

At any point in time and space, a social movement is characterized by a master frame,

which defines the common convictions of social movement actors. This can include a description

of the problem (diagnosis) and the proposed solution (prognosis) and the course of action

(Benford and Snow 2000). Depending on the social and organizational context (social movement

organizations, or “SMO”) and the conditioned agency of actors, several derivatives of the

original master frame might emerge. Such frames can coexist at different times or in different

social spaces. They maintain the fundamental logic of the master frame, while adapting the

language and wording of the problem and the solution to the context (Benford and Snow 2000).

The master frame has a major normative component, while the subsequent frames are built as

instruments for mobilization of different actors in different institutional contexts.

There have been several examples where the “strategic revision” of a frame and bridging

(e.g. Gerhards & Rucht 1992) or extension frames (Carrol & Ratner 1996, Davies 1999) have

resulted in the wider mobilization and success of the movement. An example is the gay, lesbian,

bisexual and transsexual (GLBT) rights movement (Austin, Creed et al. 1997) in the US, where

framing GLBT rights as “human rights” resulted in the wider mobilization and legitimacy of the

movement (bridging of the frame). Another example is how in the American Federation of

Labor, “actions of the institutional actors in the market and polity seemed to constrain and

compel the AFL to extend its frames among potential adherents” (Cornfield and Fletcher 1998).

CHAPTER 33BFROM GOD TO MARKETS Methods


As these examples show, there is a close parallel between institutional meaning-making

and social movement framing studies in how they approach the role of meanings in the

structuring of the field. However, in the study of social movements literature, collective action

framing provides not only frameworks for understanding the role of strategic actors in framing

but also frameworks for differentiating various types of actors, whether radical or reformist (Den

Hond and De Bakker 2007), and their different types of institutional work.

Based on a multi-level institutional analysis (Quack 2007; Djelic and Quack 2008), this

study provides an analysis of the frame transformation in the SRI field from the 1960s until the

present. It then examines the framing strategies adopted by boundary actors to appeal to

incumbent actors and to comply with the demands of the targeted institutional setting. This paper

mobilizes the framework introduced by Den Hond and De Bakker (2007) to provide a better

understanding of how the framing strategies of reformist actors differ from those of more radical

ones within the broad context of the SRI social movement.

3.4 Methods

This study utilizes qualitative research methods. It uses a mix of interviews, participant

observation and documentary evidence, such as the annual reports of responsible investment

forums, pension fund websites, press releases and third party reports.

As a first step, two interviews were carried out with two of the longest serving actors in

the SRI field (former CEO of Innovest and one of the founders of US Sustainable Investment

Forum, currently vice president of Walden Asset Management). The material obtained in the

process was combined with the careful study of reports and existing literature to build a narrative



(Czarniawska 2004) of the evolution of the SRI field over the past 50 years. To structure this

narrative, over 30 historical reports and a large number of press releases were examined. Annual

reports of several organizations over the years were also analyzed to determine the evolution of

the dominant frames. Such documents included the annual reports of major global SRI

organizations with wide membership such as the US Social Investments Forum, European Social

Investments Forum and the UN Principles of Responsible Investment. In addition, existing

academic literature on history of responsible investments was used as part of this analysis

(Sparkes and Cowton 2004; Louche and Lydenberg 2006).Two well-informed actors in the SRI

field, who were not among the interviewees, reviewed and validated the historical narrative and

the evolution of the SRI frames.

Participant observation was another key source for the construction of the narrative. The

author worked as a research analyst in the largest global SRI research firm (Innovest) for four

years. As part of his professional activity, the author rated large international companies on their

environmental and social policies and performance. These four years coincided with the buy-out

of Innovest – a small firm – by a large mainstream financial organization (RiskMetrics, formerly

part of JP Morgan). The author also participated in 11 SRI conferences, attended by both value-

driven and mainstream actors, from 2006 to 2009, in North America and in Europe.

The study covers the period from the 1960s to the present. This timeframe was chosen

since SRI prior to the Second World War was consistently religion-based (Louche and

Lydenberg 2006), and it was only during the 1960s that it emerged as a civil rights movement

attempting to change the practices of incumbent investors (Soule 1999).



Following the preparation of the narrative and the differentiation of the different frames

during the period of study, interviews were carried out with actors involved in the SRI

movement. These interviews attempted to capture the intentions of the actors involved in the

emergence of new frames, whether the actors foresaw the consequences of adopting a financial

frame for the movement and the strategies they used in this process. Twenty-one interviews were

conducted, either in person or by telephone. On average, the semi-structured interviews lasted

around 60 minutes. In several cases, as the theoretical development evolved, interviewees were

interviewed a second time to clarify outstanding or emerging issues. With one exception where

low recording quality made full transcription impossible, all interviews were recorded and

transcribed. For that case, detailed notes taken during the teleconference and selective

transcription of the audio were used for analysis.

Two variables were used to select the interviewees for analyzing the evolution of SRI

frames. First, that interviewees play a significant role in the global diffusion of SRI, and second,

that their career span a significant portion of the past forty years. Further to initial two

interviews, the following interviewees were chosen in accordance with the snowball sampling

method (Browne 2005). At the end of each interview, the interviewee was asked to mention the

top five individuals and institutions involved in the global diffusion and growth of SRI. After 21

interviews, a list of 29 individuals (including the individuals already interviewed) has been

compiled. Of the remaining seven individuals, one has passed away and the remaining eight have

not been responsive to interview requests. This method can help achieve a cross-sectional

understanding of the dynamics of the social movement and avoid generalizations based on the

viewpoint of a specific cluster of actors. This sampling method has been used by other social



movement scholars to achieve a cross-section of social movement members (Heirich 1977; Opp

1988).

Table 3-1 Breakdown of interviewees - Full list of interviewees provided in Appendix I

Interviewee group Number of

interviewees

Investment manager 7

Research provider 5

SRI network – Lobby group 3

Academia 2

Institutional investor 2

Not-for-profit organization 2

To address the issue of retrospective bias in the interviews, where possible, videos available from

the interviewees and articles quoting them or written by them were obtained and analyzed. Such

videos were selectively transcribed and coded. One of the major sources of videos was the SRI in

the Rockies Conference website (www.sriintherockies.com).

Coding, word counting and other data reduction methods were used to analyze the

qualitative data. Data reduction and analysis were started in parallel to data collection, in order to

ensure that emergent theoretical questions would be reflected in upcoming and remaining

interviews. A preliminary coding (Miles and Huberman 1994) was applied based on the variables

in the research questions. The preliminary coding comprised belief in social-financial

CHAPTER 33BFROM GOD TO MARKETS The Ever-changing “Face” of Socially Responsible Investment


performance, SRI frames, role of transnational organizations, transatlantic linkages, SRI norms

and codes. As the research questions were refined, the codes were refined, too. In accordance

with the constant comparative method (Suddaby 2006), ideal types (presented in the discussions

section) were developed and theorized, as data were collected and analyzed.

3.5 The Ever-changing “Face” of Socially Responsible Investment

Socially Responsible Investment entails the integration of environmental and social issues in the

investment process1

The UN Principles of Responsible Investment signatories, who have committed to

integrating environmental, social and governance issues in their investment practices, now

include over 200 institutional investors from across the world and more than 600 investment

management firms for a total assets under management of approximately 23 trillion dollars (part

of which they invested based on SRI principles). In early 1990s, the share of assets invested

based on SRI principles out of the total size of equity markets was close to zero in continental

Europe and less than 2% in the US. According to the US Sustainable Investment Forum (US

SIF) and the European Sustainable Investment Forum (EuroSIF), one out of every eight dollars

. Initially a fringe religious movement primarily in the US up until the 1960s,

in just two decades, the movement has succeeded in bringing about significant change in

incumbent investors’ practices and in being widely adopted by mainstream financial actors

across the world.

1Different organizations refer to these practices differently. Some use the terms“environmental”, “social” and “governance” investments, while

others use terms such as “ethical investing”, “impact investing” and “sustainable investing”. This variability in termssuggest differences in the normative underpinnings of SRI from organization to organization. In the course of this paper, the term SRI is used as an umbrella term to refer to all these different flavors of responsible investments.



of assets in the US and one out of every six dollars in Europe are now invested in accordance

with SRI principles.

Figure 3-1 Trends in the size of assets under SRI management in the US

This fast expansion has happened in parallel to a shift in language within the field. In the 2000s,

several international organizations, such as the UN Principle of Responsible Investments (UN

PRI) and the United National Environmental Program - Finance Initiative (UNEP-FI), were

formed. These organizations use financial framing and promise better long-term returns as their

rationale for SRI. In addition, company executives and pension funds pervasively use

“sustainability” language to justify their environmental and social initiatives (Doane 2005).

“Sustainability” and financially-framed social responsibility have emerged as world society

norms (Meyer, Boli et al. 1997). The strength of this norm has been such that several national

and regional organizations recently changed their names to reflect this normative change. For

example, EuroSIF – the European SRI network and lobby organization – changed its name in

2006 from the European Social Investment Forum to the European Sustainable Investment

Forum, and the UK Sustainable Investment Forum – the dominant UK SRI network and lobby



group – did likewise in 2004. Other organizations, including SRI research firms such as KLD in

the US and Jantzi in Canada, went through the same change in the early 2000s.

To provide a better understanding of the institutional setting underlying the changes in

SRI meaning systems and language, the next section provides a historical account of the SRI

field.

3.5.1 Early Days of SRI

In early 18th century in the US, Methodists and (later) the Quakers introduced the idea that when

investing, industries that hurt “ones neighbor” should be avoided. Such industries included

gambling and alcohol, or the “sin stocks” (Asongu 2007). The widespread habit of retail

investment in the US placed the country at the forefront of normative responsible investing. In

Europe, the oldest traces of responsible investment can be found in the UK Methodist church in

the early 1900s, when a fund was established to avoid investing in certain “sin” sectors (Louche

and Lydenberg 2006). Similar funds were set up in other protestant Northern European countries,

such as Sweden and the Netherlands, but later in the 20th century (Louche and Lydenberg 2006).

Jewish and Islamic funds were also important actors in early SRI history. Under Islamic law,

integrating normative values in investments has a long history. Based on Sharia law, the investor

needs to be aware of the activities of the receiver of the capital and those activities should be

consistent with Islamic values (Iqbal 1997). All early religion-based SRI funds were based on

“avoidance” and “negative screening”, rather than on pursuing societal change. In other words,

the moral issue of early SRI entailing the responsibility of firms was structural and not

consequential (Den Hond and De Bakker 2007), meaning that such investors were taking issue



with the existence of sectors such as gambling, alcohol and tobacco, rather than seeking to

change their practices.

The social activism trends of the 1960s and 1970s in the US changed this landscape

significantly. In the 1960s, a widespread social movement emerged in the US using divestments

as an approach to put pressure on the apartheid regime in South Africa (Soule 1999). This was

the first time that SRI was not only about respecting values, but also about pursuing societal

change. Several parallel movements emerged to persuade investors to divest from companies

involved in certain activities, such as the production of chemical and cluster bombs for use in the

Vietnam War, based on societal causes.

The first examples of shareholder activism and proxy wars emerged during these years.

These include the GM Campaign which succeeded in making GM appoint a black member to its

board (Schwartz 1971). Another important aspect of the divestment movements in the 1960s and

1970s was that secular values and movements played a key role in them. The emergence of

international norms on human rights and labor rights facilitated this process. In the 1970s, the

Council on Economic Priorities (CEP) emerged as the first SRI research organization in the US.

CEP’s set of corporate practice standards were based on “social norms” rather than on religious

ones (Lydenberg, Marlin et al. 1993). The norms basis for all post-1970s US SRI research

companies, such as KLD, and responsible investment asset management firms, such as Calvert,

Parnassus and Trillium, were also secular rather than religious (although a significant portion of

their clientele remained religious funds).

The movement for divestments from companies working with the apartheid regime of

South Africa resulted in the creation of national level organizations and networks in the US that

later transformed into today’s SRI organizations. Several pension funds, university funds,



religious funds and not-for-profit organizations were involved in this movement. The ICCR

(Interfaith Center on Corporate Responsibility) – a network of small religious funds which now

plays an important role in coordinating environment, society and governance (ESG) based

investor activism in the US – was originally formed as part of the anti-apartheid investor

movement.

This was the period when several traditionally avoidance-based religious funds also

started to adopt a more activist agenda. While the avoidance of alcohol and gambling remained

limited to religious funds, issues such as apartheid and the war in Vietnam succeeded in

mobilizing a coalition of religious and secular organizations around shared values and interests.

This introduces the issue of collaboration and competition among activist groups (Zald and

McCarthy 1980). As one of the founders of ICCR – a pioneer of the SRI movement with a

religious background – stated:

“I don't think the state of New York is going to ask me what my motivations are if we

decide to join a resolution on political spending – they are going to look at whether we

agree to the issues. Likewise, I am not going to interview a foundation or a trade union

pension fund to understand what their motivations are – so there is a lot of cooperation by

investors in this space.”

As discussed, the anti-apartheid divestment campaign was the trigger for the formation of

investor coalitions and organizations across the US. In the 1970s and 1980s, such organizations –

with the emergence of more research on environmental and social performance of firms – began



to diversify their ethical agenda, moving to labor and environmental issues. The emergence of

“scientific” and quantitative measures of firms’ social responsibility in the 1970s was a key

enabler in the wider adoption of SRI practices. In the 1970s, the first investment funds to

combine negative screens for “sin stocks” and social screens around labor issues emerged. These

were the Pax World Fund and the Dreyfus Third Century Fund (Louche and Lydenberg 2006).

As the apartheid regime came to an end in 1994, divestments stopped further to Nelson

Mandela’s request. As a result, a significant cause for the mobilization of investors disappeared.

At this point, several organizations, such as the Social Investment Forum and the ICCR, tried to

maintain their network and fully refocus investors’ efforts on broader environmental and social

issues. In its first bi-annual SRI trends 1995 report, “After South Africa”, the US Social

Investment Forum affirmed:

“Socially responsible investing in the United States is alive and well in 1995, two years

after the end of the South Africa divestment movement that helped fuel its rise during the

1970s and 1980s. This finding contradicts the ‘common wisdom’ expressed in the media

and elsewhere that the fall of apartheid in September 1993 would lead to the demise of

responsible investing in the US.”

3.5.2 The Era of Shareholder Capitalism and the Financialization of SRI

Over the last two decades, SRI has been radically transformed. In a short period of time, it has

moved from a fragmented, mostly US-based movement to a global field; from value-based

investors to mainstream investors; and from an avoidance-based, value-based logic to a reformist



financial logic. This was the period when organizations at the boundary between value-based and

mainstream investors, especially ESG research firms and SRI networks, started to use

mainstream financial language and norms to appeal to a wider financial audience.

As shown in the following graph, the SRI field became increasingly dense during this

short period and started to involve mainstream investors, mainstream investment managers and a

number of national and transnational organizations.



Figure 3-2 SRI and the increased density of the field

SRI field before the 1980s

Companies

Retail investors

SRI & religious funds

Negative

screening

products Shareholder

advocacy +

divestments

SRI field in the 2000s

Regulations - SRI Lobby groups and networks –

UNPRI – EuroSIF – CERES, national SIFs

Retail investors Fiduciary Investors (Pension funds)

ESG Research

firms

SRI Funds SRI deps of Mainstream asset management

firms and banks

Negative

screening and

best in class

funds

ESG Research services and ratings

Negative

screening and

best in class

fundsInvestors

Intermediaries

Data providers

Companies

Engagement directly or through

intermediaries – individually or through

investor coalitions

Shareholder Advocacy – regular use of

shareholder resolutions

Changes in the SRI field have aligned with broader trends in the US over the past three decades.

Since the 1970s, two major trends have emerged, primarily in US capital markets that were

important precursors for this change: the fast emergence and expansion of pension funds in the

US and the resulting centralization of capital markets and corporate ownership (Hawley and



Williams 1997); and the increased empowerment of shareholders in companies, along with the

move towards “shareholder capitalism”. This brought about significant change in the role of

investors in corporations (Davis and Thompson 1994).

With the change from “pay as you go” (where current workers have to pay for the

pension of current retirees) to funded pension systems (where workers’ pension contributions are

saved for their own retirement in “saving accounts”), a new type of investor – fiduciary

institutional investors – emerged in the Anglo-Saxon world after the Second World War.

Investors of this category (such as pension funds) expanded rapidly from the 1970s onwards and

changed the global investment landscape. Their share of global equity markets has increased to

over 50%, while retail has decreased to 33% post-2000 from over 70% in the 1970s. In the UK –

the country of origin of “fiduciary law” and organizations, a parallel trend can be observed, with

retail investors’ share of capital markets decreasing from over 70% in the 1970s to around 15%

in the late 1990s (Hawley and Williams 2000). Other countries, such as the Netherlands,

Switzerland and Japan, have followed the same pattern. As of 2001, 86% of global pension fund

assets (valued at USD 8.5 trillion) were located in the US and the UK (Chan-Lau 2005).

These investors manage the capital of their beneficiaries under “fiduciary law”. In both

the US and the UK, fiduciary law demands the three principles of independence, care and

prudence (Acg 1978) from the fiduciary. This means that the fiduciary should have only the best

interest of beneficiaries in mind in its functions and should exercise caution and prudence to

ensure the maximization of benefits for beneficiaries.

The fiduciary law interpreted in the narrow economic interests of beneficiaries created a

significant barrier to the inclusion of social criteria in the management of the capital in such

funds in the Anglo-Saxon world (Hawley and Williams 1997). The debate on fiduciary duty in



the US is ongoing, but its narrow interpretations continue to be an important legal and normative

barrier to investors adopting a broader social agenda. As one of the interviewees from a US asset

management firm affirmed:

“… for many investors – religious investors and a good number of foundations, for

example – it can still very explicitly be seen that they have a strong moral, social or

environmental case. As a result, because some of these investors are not bound by

pension fund legal restrictions, they are free to talk about their own mission as a

foundation, or their value as a religious group.”

In contrast, throughout most of Continental Europe, the “pay as you go” pension is still the

dominant system. In countries such as France, where Anglo-Saxon-like pension funds have

emerged (ERAPF, for instance), such pensions and other long-term savings are still mostly

managed by state organizations (Dixon 2008). In other European countries, labor unions and

other civil society groups – depending on their traditional function – play a central role in

managing this type of saving funds. Consequently, large institutional investors (an emerging

category of institutional investors since the late 1990s) in Continental Europe have fewer barriers

to adopting a broader set of economic and social objectives, compared to their Anglo-Saxon

counterparts (for examples of SRI statement of pension funds, see Appendix II).

Another parallel trend in the US has been the shift of power in firms from managers to

shareholders (Davis and Thompson 1994). During this period, proxy voting has rapidly emerged

as a key mechanism for shareholder influence, and shareholders have been entitled to more



information about the firms’ operations and financial performance (Vandekerckhove, Leys et al.

2007). This trend has been another key trend influencing the SRI field, which seeks to influence

firm behavior. This contrasts with European capitalism, where banks continue to play a major

role in providing capital to firms, retail investment remains marginal and firms continue to be

primarily governed by managers. Shareholder activism outside Anglo-Saxon countries remains

rare. In 2011, the first environmental shareholder resolution was mobilized against Total in

France. However, the resolution was later withdrawn and was not voted on. In contrast, over 4

000 environmental, social and governance shareholder resolutions have taken place in the US

over the past 10 years (Institutional Shareholder Services, 2011).

SRI was primarily an American and Anglo-Saxon movement up until the 1990s when

SRI practices started to diffuse widely in Continental Europe and, more recently, in Asia.

Without much historical antecedent in Continental Europe, SRI since the 1990s has seen strong

growth, and the emergence of transnational and national organizations – such as the European

SIF (EuroSIF) and national SIFs – have emerged. In addition, SRI assets under management

have increased from close to zero in the early 1990s to EUR 200 billion in 2002 and to EUR 5

trillion in 2009 (EuroSIF 2010), dominated by large institutional investors. The weakness of

retail investment markets in Continental Europe compared to Anglo-Saxon countries and the

small size and growth of pension funds in Europe have been key factors delaying the

introduction of SRI in Continental Europe (Arjaliès 2009). While SRI in the US has grassroots

origins (bottom up), SRI in Continental Europe has mostly involved translating and adopting the

original American model (Djelic 1998). In the absence of historical retail demand, SRI growth in

countries such as France, Italy and Spain has been a top to bottom diffusion, mediated by

transatlantic linkages in the SRI investment community, political consensus around most



environmental issues in continental Europe and the key role European labor unions play in

governance of investment funds.

Based on the fundamental differences between the structures of investment markets in various

countries, the political opportunities for the growth of SRI in each country have been widely

different. In addition, the mix of frames used by SRI actors has been dissimilar, depending on the

level of acceptability of normative values to mainstream investors.

3.5.3 The Emergence of the SRI Outperformance Frame

In the US, the narrow economic interpretations of the fiduciary duty resulted in attempts by SRI

actors to develop new frames for SRI that were more compatible with the fiduciary constraints of

pension funds. The three major North American SRI research firms and the asset managers

interviewed in North America all stated “targeting pension funds” as the primary reason for their

shift to a financial frame for SRI. Innovest, a SRI research firm primarily targeting institutional

investors, was founded in 1996 with the goal of focusing purely on the financial implications of

environmental and social factors. Other US-based SRI research firms changed their language

from normative to a mix of normative and financial: KLD in 2001, Jantzi Research in 2004, and

so on. As KLD’s former CEO confirmed:

“The shift in language reflected our desire to broaden our client base … we recognized

that we had to develop a broader client base – one that did not deal primarily with retail

investors. So, we began shifting our presentations and our language to bring those people

(pension funds) more into the fold.”



This clearly shows that financial framing by such actors was the result of their interest in selling

SRI products to pension funds. Depending on the type of organization they represented, actors

mixed commercial (selling more SRI products) and value-based (changing company practices

through a wider adoption of environmental and social issues in investment) framing motives. As

the vice president of an SRI investment management firm in the US – and one of the pioneers of

the SRI movement – affirmed:

“A lot of the pension funds that come to us (that have to be prudent fiduciaries and care

for their beneficiaries’ interest) scrutinize us carefully about our financial returns and

investment discipline… if we walk into a pension fund, for example, and make a social-

based or value presentation, we will be treated skeptically.”

This suggests the attempts of social movement actors to achieve “pragmatic legitimacy” among

mainstream investors.

During the same period – when “alpha” returns2

2 “Alpha” is investment return in excess of the compensation for the risk borneas a result of investment managers' performance.

and outperforming the market through

active investment management was relatively fashionable in the mainstream financial

community – companies such as the research firm, Innovest, emerged. Such companies sold

environmental and social research, with the basic claim that SRI funds can outperform the

market and yield “alpha”. This new “outperformance” frame attempted to compete with the

mainstream financial frame. It not only spoke in terms of financial returns, but claimed even

higher financial returns compared to mainstream funds. This frame may have been ideal for



mobilizing investors with a narrow economic focus, such as large American pension funds. It

was during this period that the outperformance promises of SRI even resulted in the emergence

of hedge funds around environmental and social themes that sought to gain short-term profits

from the financial underperformance of irresponsible firms (Schyndel 2005).

During this period – also for the first time – stock picking based on environmental and

social criteria emerged. While SRI was originally based on excluding underperformers, new

best-in class-funds were structured around the top social and environmental performers. These

funds demonstrated a fundamental shift in the attitude of certain SRI actors towards capitalism.

In this new logic, the firm could be a source of social benefit and investors could try to motivate

positive social change through companies. This conflicted with the worldview of a number of

religious funds and activist SRI organizations.

This concretely meant that reformist actors attempting to create symbolic and material

gain incentives for firms conflicted with radical activists, who had structural and fundamental

problems with firms and capitalism. The financial logics for SRI were used by reformist actors

only, while religious and secular radical activist funds remained faithful to the normative basis

for demanding the integration of environmental and social criteria in the investment process.

This is consistent with Den Hond, Bakker’s (2007:908) hypothesis that “in light of the different

ideologies of radical versus reformative activist groups, it is to be expected that only the latter

groups will be inclined to use arguments based on pragmatic legitimacy”.

While the “outperformance” frame had more success in speaking to the mainstream

financial community, it faced an important “resonance” challenge, namely, the difficulty of

establishing “empirical legitimacy” (Benford and Snow 2000). In the early 2000s, investment

research firms such as Innovest and KLD did release several (not very rigorous) studies to



support their outperformance claims. However, these studies mostly focused solely on returns,

rather than on volatility or risk, and were constructed retrospectively or through “back tracking”.

In the same line, over 200 academic papers were published in the 1990s and 2000s to explore the

relationship between the social and financial performance of firms and investment portfolios.

Academic research in this area has remained mostly inconclusive (Stanwick and Stanwick 1998;

Margolis and Walsh 2003; Orlitzky, Schmidt et al. 2003; Haigh and Hazelton 2004; Margolis,

Elfenbein et al. 2007).

One of the senior managers of Innovest – the research company that pioneered the

outperformance SRI rationale – stated:

“When you talk about generating alpha, you have got to be able to demonstrate it. There

was no way that by presenting Innovest research, we could demonstrate that we were

really generating alpha. What we could show was limited to some sectors and only

through back-testing. That was not forward-looking and the results were not replicable

for all sectors.”

The following table provides a highlight of the key milestones leading to the widespread

adoption of SRI by mainstream investors.



Table 3-2 Major historical milestones in the evolution of SRI

Before 1960

SRI exclusively religious, based on negative screening

1960s Emergence of the first case of investor activism around black and women's board representation and then apartheid

1960s Emergence of divestments backed by pacifist, feminist and anti-apartheid social movements

1970s Emergence of the first social and environmental research organization (Council on Economic Priorities)

1970s Launch of first SRI best-in-class fund

1972 First study of the correlation between financial and social performance

1980 Launch of USSIF

1983 Launch of UKSIF

1983 Launch of EIRIS in the UK

1989 Launch of SRI during the Rockies Conference in the US

1990s Fast expansion of positive approach and best-in-class funds

1994 End of Apartheid divestments

1996 Launch of Innovest, based on outperformance logic

1992 First tracking of an SRI fund against indices (KLD)

2000s Regulations for disclosure of SRI strategies for institutional investors in the UK followed by other European countries

2000s All major global investment firms launch SRI departments

2000s Launch of SRI departments in most major banks and asset management firms

2000 Launch of the Global Compact initiative by the United Nations



2000 Launch of the Global Reporting Initiative for ESG reporting standardization of companies

2001 Launch of EuroSIF

2001 Launch of the Triple Bottom Line International Conference

2003 Adoption of an environmental strategy by CalPERS (one of the largest US pension funds

2006 Launch of UN Principles Of Responsible Investments

2006 Largest proxy voting consulting firm (ISS) creates an ESG department

2009 – 2010

Acquisition of Innovest, KLD and Asset4 (ESG research firms) by mainstream financial firms

3.5.4 The Emergence of the Co-opting Financial SRI Frame

Following the empirical legitimacy issues of outperformance frames, from around 2005 onwards

(the first citation of integration in the TBLI Conference and EuroSIF annual reports on SRI in

Europe), a new frame was adopted by the dominant endorsers of SRI. Instead of claiming the

outperformance of SRI funds and recommending stock picking, this new frame declared that

environmental and social risks – as with any other risk and opportunity – should be taken into

consideration in long-term investment management to ensure sustainable “long-term” returns.

The frame does not recommend profiteering from social and environmental investment

management; rather it recommends using such criteria as part of the mainstream investment

process as just another source of long-term portfolio risk. Innovest’s director stated:



“… over time, the pitch around alpha decreased globally at Innovest – even before the

recession. So, over the last couple of years, we have been much more about long-term

risk and opportunities than about generating alpha…”

The major difference between this “integration” frame and the outperformance frame is that

instead of trying to compete with incumbents, it attempts to “extend” the frame to hybridize the

SRI movement with incumbent’s financial logics. This new frame does not recommend

dedicated SRI funds, which seek outperformance. Instead, under this logic, all funds should

consider environmental and social indicators of risk as part of their investment management

process.

The integration frame, while remaining fully instrumental and financial, avoids the

empirical legitimacy issues of the outperformance frame and expands its mobilization targets

from SRI departments of incumbent organizations to mainstream fund management departments.

To confirm the financial framing of SRI over the past two decades, the annual reports of

the US Socially Responsible Investment Forum from 1995 to 2010 were analyzed (details

provided in Appendix III). This organization played a key role in the national level mobilization

and coordination of SRI actors in the US. Its advisory committee and board include all the major

research firms, SRI investment managers and several institutional investors in the US.

In its annual reports, the risk/return or integration frame began to materialize in 2005,

finally emerging as one of the four SRI strategies in the 2010 report. Additionally in these

reports, from 2005 onwards, environmental and social issues were mentioned as another risk

category for mainstream investments. This demonstrates a shift from the outperformance to the

integration/hybridization frame. Interestingly, during economic downturns, the reports play down



the emphasis on the financial dimensions of SRI. Since 2005, many SRI organizations who had

formerly adopted outperformance language have shifted to the risk/return integration frame.

The actors involved in the circulation of SRI played an important role in adjusting the

frame used for SRI to minimize conflicts and maximize mobilization in different settings.

In interviews carried out with the pioneers of the financial frames in both Europe and

North America, an interesting pattern emerged. Twenty five of the 29 individuals studied (of

whom 21 were interviewed) had an environmental or a social educational and professional

background. These individuals later embarked on SRI activities, meaning that they were

positioned at the boundary of normative and financial logics. Most of the interviewees came

from research agencies, international/national SRI organizations (such as UN PRI and

Sustainable Investment Forums) and investment management firms; namely, the three types of

organizations at the center of SRI field, and consequently, at the boundary between value-based

and mainstream SRI.

All the actors interviewed stated that adopting financial language was a “strategic move”

to persuade the mainstream financial community to listen. As the former CEO of an SRI research

firm confirmed:

“We always kept our environmental and social agenda in the backyard – out front,

we used financial language, only.”

This is consistent with the cultural “repackaging” of social services learning in the US

educational system, which resulted in the mainstreaming of service learning as another



curriculum course, rather than a revolutionary approach to education (Lounsbury and Pollack

2001). With regard to the multiplicity of language used by actors, the former head of a

transnational SRI organization mentioned:

“Depending on who I talk to, I adjust the rationale that I use. When I talk to

General Director of Labor in the European Commission, I use the societal

argument, while when I talk to the General Director of Finance; I use the

risk/returns argument for SRI.”

This shows how actors mobilize the meanings circulating in the field depending on the

institutional context they are exposed to. Interestingly, none of the actors using the financial

language and rationale for SRI stated a conviction in the social-financial performance link. The

following quote – from a transnational organization that uses the risk/opportunity integration

argument – clearly demonstrates this lack of belief:

“I am absolutely convinced that pension funds signing into SRI have a normative

agenda, but that they work within a paranoid fiduciary context with a very strong

anti-environmental, anti-progressive political force bearing down upon them from

the right-wing think tanks, the Republicans, and so on. And so, even though they

want to do the right thing (I believe they do exactly what UN PRI is doing), they

use a plausible financial rationale for getting to the same place.”



Overall, this demonstrates that most SRI actors from investment firms, research firms and

pension funds adopted the financial logic as a strategy to overcome the legal and fiduciary

barriers to the adoption of an environmental and social agenda by pension funds. Several

reformist insiders from SRI movements used the financial frame to convince their organizations,

and other organizations, to adopt an environmental and social agenda without a strong personal

belief in the empirical validity of the financial argument.

It should be pointed out that the original religious and value-based SRI organizations

have maintained their value focus and societal change instruments, and co-exist along with the

new fast-expanding “mainstream” translation of SRI. This is consistent with Lounsbury’s (2007)

study of mutual funds, where both competing logics of performance and trusteeship for mutual

funds continued to co-exist.

One major achievement of the integration frame was its success in mobilizing Anglo-

Saxon pension funds with narrow economic fiduciary duties. This was due to the frame’s “long-

term” financial arguments, which were consistent with the long-term economic mandate of such

investors. In the US, CERES – one of the most influential networks of civil society actors,

investors and companies – increasingly started to adopt long-term risk/return integration

language, and in 2003, the first US pension fund, CalPERS, adopted an environmental

investment agenda based on a purely “long-term” financial logic.

Several other US pension funds, such as TIAA-CREFF, CalSTRS and Connecticut

Retirement Plans and Trust Funds, followed in its path. In the UK, the same phenomenon

emerged, with a large number of private and public pension funds adopting an environmental

and social investment agenda, purely based on long-term risk management logic. Currently,

among the 201 asset owners who are PRI signatories, 17 are large American pension funds and



18 are mainstream British pension funds (the other signatories include SRI and mainstream

institutional investors from US, UK and the rest of the world). Most such Anglo-Saxon pension

funds use an integration financial frame and claim consistency of integration-based SRI with

their economic fiduciary duty (see Appendix II for examples of pension fund SRI statements). A

summary of the four rationales and frames that are used for engaging in responsible investment

is provided in the table below. These four frames emerged under the two institutional logics of

values based and financialized SRI. SRI investors use a combination of these frames, depending

on their structure and size, as well as their national regulatory, normative and cognitive context.



Table 3-3 Overview of the different ways investors frame and justify SRI

Frame Typical

investor

Type of investment

products

Sample quote

Value

based - normative

I- Respecting values (feel good SRI)

Religious

Negative screening (Alcohol, Tobacco, etc.)

Catholic Superannuation and Retirement Fund: “Funds will avoid exposure, either directly or indirectly through underlying managers and funds, to companies with material exposure to the production or manufacture of alcohol, armaments, gambling, pornography, tobacco and uranium.”

II- Changing society for better

Religious and non-religious investors with a social/environmental mission (in Europe, several large pension funds also)

Divestment (Sudan, apartheid etc.), shareholder activism and engagement to a lesser extent positive screening (best-in-class funds)

Connecticut Retirement Plans and Trust Funds (CRPTF): “Corporate citizenship encompasses the principle that, in addition to the traditional corporate focus on profits and short-term performance, the business community must be responsible for the “long-term sustainable development of people and communities.”

Financial

III- Outperformance frame - SRI can outperform the markets

Mainstream investment managers and certain research firms such as Innovest

Positive screening (best-in-class funds), thematic funds such as cleantech funds

Innovest: “Environmental alpha has power as a stand-alone factor to determine future stock returns over the testing period.”

IV- Integration frame - Environmental and social issues are long-term investment risks and opportunities that should be taken into consideration as part of the fiduciary duty

Pension funds such as CalPERS, CalSTRS

Integration of environmental and social criteria into the mainstream investment process, shareholder activism / engagement

CalSTRS: “Making money and making investment decisions based on environmental, social and governance criteria may feel like opposing objectives, perhaps because that has been the traditional way of thinking. However, there is a new way to think about wise and profitable, long-term investments, which recognizes a direct link between environmental, social and governance practices and investment performance and risk.”



In addition to the trend of moving to positive screens and the increased use of competing

financial language and logic, there has been a shift in the type of direct influence of investors on

companies. Since the 2000s, the term “shareholder activism” has been used to frame investors’

shareholder resolutions and divestments as a way to change company behavior. However, since

the 1990s, when larger mainstream investors undertook SRI practices, the term “shareholder

activism” has been increasingly replaced by expressions such as “shareholder advocacy”,

“shareholder engagement,” and “shareholder dialogue”. This signifies a shift towards reformism,

which is consistent with the larger size and moderate practices of mainstream investors.

Currently, shareholder resolutions continue to be used only by activists and religious SRI funds

and investors. With a few exceptions such as Connecticut Retirement Plans, no mainstream

institutional investor was involved in the 4 000 plus environmental and social resolutions during

the period 1999 to 2010 (ISS 2010). However, over 200 large mainstream institutional investors

signed the UN PRI during this period.

3.5.5 Transnational Space as a Key Mediator for the International Adoption of SRI

SRI networks emerged at the national level during the 1980s in the US and the UK and in

Continental European countries slightly later, during the 1990s and 2000s. However, it was

during the early 2000s that the first transnational organizations focusing on norm setting,

lobbying and the coordination of SRI were created. The European Social Investment Forum

(EuroSIF) was launched in 2001. The following years saw an explosion of transnational

organizations for responsible investors, including the UNEP Finance Initiative (UNEPFI) in

2004, the United Nations Principles of Responsible Investments in 2006 and the Carbon

Disclosure Project in 2003. UNPRI, especially, has played a key role in defining the SRI “rules



of the game” (Djelic and Quack 2003) across the globe, in setting norms and stabilizing SRI

language. Interestingly, all transnational organizations have been using “sustainability”,

“integration” and “mainstream” financial language based on claims of long-term return. All

Social Investment forums, including EuroSIF, UK SIF and US SIF have changed their S from

“Social” to “Sustainably” over the past few years. As the PRI website highlights:

“As institutional investors, we have a duty to act in the best long-term interests of our

beneficiaries. In this fiduciary role, we believe that environmental, social and corporate

governance (ESG) issues can affect the performance of investment portfolios (to varying

degrees across companies, sectors, regions, asset classes and through time). We also

recognize that applying these Principles may better align investors with broader

objectives of society.”

Similarly, the United Nations Environmental Program – Finance Initiative (UNEP FI) affirms:

“Over 190 institutions, including banks, insurers and fund managers, work with UNEP to

understand the impacts of environmental and social considerations on financial

performance.”

The table below provides the timeline of the emergence of the major transnational and national

SRI organizations:



Table 3-4The emergence of national and international SRI organizations

Name of national/transnational SRI organization Launch year

US SIF 1981

UK SIF 1991

UNEP Finance Initiative 1991

Dutch SIF 1995

French SIF 2001

Italian SIF 2005

European SIF 2001

Association for Sustainable & Responsible Investment in Asia (ASrIA) 2001

Carbon Disclosure Project investor initiative 2003

Sweden SIF 2003

UN PRI 2006

Africa Sustainable Investment Forum 2010

Senior managers at UN PRI, Innovest and EuroSIF all stated that when moving from national to

transnational it is very difficult to reconcile the different national ethical values and norms. In

contrast, the risk/return argument works across different normative frames and cultures – so it

seems to be the only logic that can be used to mobilize investors in the transnational space. This

claim signifies that returns and markets are considered value neutral, and hence exportable

beyond national and cultural boundaries.



3.5.6 The Contemporary State of SRI Frames across the World

Currently, SRI organizations use a mix of the above frames to justify their adoption of SRI

practices, depending on their structural, historical and institutional context. In the following

graph, examples of SRI language used by the largest UN PRI signatory pension funds are

provided to reflect the variability in the use of the SRI frame.

Figure 3-3Examples of socially responsible frames adopted by the largest pension funds – Source data provided in Appendix II

Australian

Super

Australian

Super

France

MAIF

France

MAIF

Finland

Government Pension

Finland

Government Pension

Danish

Supplementary Pension

Danish

Supplementary Pension

Canada

Pension Plan Board

Canada

Pension Plan Board

Australian

Government

Superann

Australian

Government

Superann

France FRRFrance FRRFrance

Caisse de depot

France

Caisse de depot

Ireland -

National Reserve

Ireland -

National Reserve

US -

CalPERS

US -

CalPERS

UK– London

Pension Authority

UK– London

Pension Authority

Sweden –

AP

Sweden –

AP

Financial frame

Res

pec

t Valu

es

Fra

me

Soci

etal

Chan

ge

Fra

me

US

CalSTRS

US

CalSTRS

As discussed in previous sections, depending on the structural attributes of the investment

community and the regulatory environment, different institutional investors have different levels

CHAPTER 33BFROM GOD TO MARKETS Discussion


of readiness for adopting a normative or financial rationale for SRI in their language. As shown

above and in Anglo-Saxon countries especially, the fiduciary duty and political opportunity

structures seem to have resulted in a wide usage of the financial frame (the integration frame, in

particular), while pension funds from Continental Europe and Scandinavia exhibit more

tendencies for adopting and sticking to normative SRI frames.

The final trend in the internationalization and mainstreaming of SRI is that over the past

two years, mainstream financial firms (MSCI Group and Thompson Reuters) have bought out all

the major international SRI research firms (Innovest, KLD and Asset4). The former CEOs and

senior managers of these companies have been replaced, while these firms have been rationalized

and reorganized as ESG services departments of the new larger firms. Two of the former

directors of Innovest and KLD mentioned that the new type of ESG research provided by these

firms is highly rationalized and risks losing its value base and “soul”.

3.6 Discussion

3.6.1 Mainstreaming and Meanings

This study provides an account of the transformation of an institutional field and of its

transnationalization in the process. The story of SRI shows how financialized SRI was

institutionalized, how the transnational space for SRI emerged, and how new world society

norms for SRI were born. The study also demonstrates how investors from countries, which were

previously “remote islands” (Meyer, Boli et al. 1997) in the field of SRI, edited and adopted SRI

world society language and templates (Czarniawska-Joerges and Sevón 1996; Sahlin and Wedlin

2008).



The study describedinstitutional changes at different levels of field, national and

transnational space. At the society level a mix of structural and ideational institutional changes

were captured. Some of these changes which played a key role in structuring of the SRI field

include: activism in 1960, fast growth of fiduciary investors and transfer of power to investors

i.e. shift to shareholder capitalism. The latter two trends are part of the broader global neoliberal

shift since the 1980s (Djelic 2006).

The following section details the structural and ideational institutional changes of the SRI

field that were influenced by and influenced the field’s meaning systems:

i. Density of the field: One of the key changes in the SRI field over the last 50 years has

been the increase in the number and diversity of organizations involved in the field

(Ahrne and Brunsson 2006). The original movement principally included NGOs and

religious investors. However, the contemporary SRI field includes national and

transnational networks and meta-organizations (Ahrne and Brunsson 2005), national and

international research firms, mainstream and value-based investment management firms,

mainstream and value-based investors, national and international conferences and

national and international business and academic journals and publications. In addition

to the diversity of organizations, their sheer number has increased significantly from

about 150 SRI investors in the US and Europe in 1980s to over 1100 UN PRI signatories

in 2011. The increased number of organizations is the result of successful resource and

political mobilization, especially over the last two decades. The increased resources

funneled into the field and the resulting economic opportunities has resulted in

emergence of several for-profit organizations in the field (McCarthy and Zald 1977). To



illustrate, CEP (US) and EIRIS (UK), research firms launched in the 1970s and 1980s are

both not-for-profit, whilst Innovest, Vigeo, Jantzi, KLD, Asset4, etc. which were founded

in the 1990s or later, were all for-profit. The new organizations that have emerged since

1990s in the SRI field belong to one of two categories: new SRI organizations dedicated

to the SRI cause (Social Movement Organizations such as UN PRI, the Carbon

Disclosure Project, Triple Bottom Line International), and incumbent organizations, such

as mainstream pension funds and investment managers, mobilized by the SRI movement.

The increased density of the movement exposes SRI actors to increased institutional

complexity and variety. This has resulted in an intense meaning-making activity and the

consequent diversification of SRI frames within the field.

ii. Density of norms and rules: The past twenty years have borne witness to the rapid

emergence of reporting and practice standards for SRI, both at the national and

transnational levels. At the national level, regulators and national SIFs have been the key

rule developers, whilst at transnational levels, UN PRI, GRI, CDP and UNEP FI, have

been the major sources for the institutionalization of harmonized language and standards.

Currently, there are over 20 international investor codes and principles to which investors

can commit. This is another concrete example of regulatory explosion, especially as new

practices are institutionalized at the transnational level (Djelic and Sahlin-Andersson

2006; Drori and Meyer 2006). These norms are playing an important role in stabilizing

the field and in providing new actors with ready-made SRI templates (although perhaps

too many). The multiplicity of competing institutions in the SRI field and their

institutionalization has resulted in the multiplicity of norms to which actors are exposed.



It remains to be seen whether all these SRI standards and codes will start a process of

convergence, as has been observed in other fields.

iii. Size of organizations: The third dimension has been the increased size and clout of the

organizations that have joined the movement. Compared to the original small and

fragmented SRI actors, new incumbent recruitees tend to be large, international firms -

big pension funds and investor management firms, such as CalPERS, ABP, UBS, Natixis

and Hendersons, for instance. Although such investors have adopted SRI in their

strategies, they have avoided the activist agenda and language of the original SRI actors.

The size of the new actors means that they have more power vis-à-vis companies.

Consequently, they have less need for external pressure and mechanisms based on

material and symbolic loss, such as shareholder resolutions. The size and purely

commercial focus of these actors have been key in the editing of the mainstream SRI

agenda from an activist agenda to a reformist one, with significant implications for the

language and meaning systems that are acceptable to them.

iv. Emergence of boundary actors as key carriers and translators of meanings: The

boundary actors between incumbent and SRI fields played an important role in adjusting

the frame used for SRI. Three types of organizations emerged as boundary actors

between the movement and the incumbents, investment management firms, SRI research

firms and SRI lobby and network organizations. Besides their spatial positioning in the

field, such actors’ short-term economic/political interests and reformist agenda facilitated

their engagement in adapting the movement’s meanings to the institutional setting of the



incumbents. Spatial positioning of actors has been highlighted as one of the key factors

defining the consequences of institutional work undertaken by actors (Mohr 2005; Djelic

and Sahlin-Andersson 2006; Zietsma and Lawrence 2010). This study shows that

“translators” emerge primarily in organization types that are reformist and that operate in

the boundary between the movement and the incumbents. Such reformist actors make the

needed compromises for having the movement comply with the institutional demands of

mainstream actors.

v. Transnational diffusion of the movement: The fifth important way the movement has

changed is that it is no longer confined merely to the US. Over the past 10 years, the

movement has undergone a significant “scale shift” (Tarrow and McAdam 2005) and has

become highly institutionalized at the transnational level, thus beginning to mobilize

investors across four continents, and with a wide range of structures, cultures and

mandates (Djelic 1998). Transnational organizations have played an interesting

translating and editing role for the frames and also in norm setting and stabilizing the

field. As illustrated, although at the national level there is significant diversity in SRI

frames, all transnational organizations have adopted the financial “integration” and “risk

and return” frames. This is an interesting case of the demonstration of the role of

transnational space in filtering and editing (Sahlin and Wedlin 2008) national differences

and circulating only one dominant meaning – the lowest common denominator of the

national investors’ institutional demands.



vi. Professionalization: Early SRI actors came from diverse backgrounds, varying from

theatre to law, to seminary and labor union activism. However, during the 1990s and

2000s, SRI professionals were increasingly expected to have a financial background.

Sustainability MBA programs were created, and having a corporate financial analyst

(CFA) certificate became a major success factor for SRI analysts. Most recent appointees

to the field of mainstream SRI, including SRI analysts, the head of EuroSIF, senior

directors at SRI research firms such as MSCI (formerly Innovest and KLD) and Thomson

Reuters (formerly Asset4) all have a financial background. This is in stark contrast to

early SRI. The financialization of the SRI profession is one of the key dimensions of the

mainstreaming of SRI, in which actors with environmental and social responsibility

values are replaced and marginalized by the new professional class more focused on

efficiency and financial technical capabilities. This is consistent with professionalization

processes in emergence of other fields such as for-profit recycling in US universities

(Lounsbury 2005) and Nouvelle Cuisine in France (Rao, Monin et al. 2003).

Professionalization is a key process that brings stability to the SRI field and its meaning

systems.

The above structural changes have had fundamental implications for the type, number and

stability of competing institutional settings to which SRI actors were exposed. As mentioned,

SRI actors have been actively pursuing change in SRI’s meaning systems to push for and adapt

to mainstreaming and its institutional demands. This was a “muddling through” effort, with

failures such as the “outperformance” / “generating alpha” frame which emerged and

disappeared over a very short period.



In the institutional work (Lawrence and Suddaby 2006) literature, meaning-making is

defined as institutional work targeting redefining normative relationships. However, there has

been no attempt to understand in what ways actors undertake “boundary work” (Zietsma and

Lawrence 2010) to adjust the frames, as the movement tries to appeal to the mainstream and

undergoes the afore-mentioned field level changes. Based on this study, the following section

outlines three types of institutional work that are theorized as fundamental ways that boundary

actors can undertake meaning-making in the mainstreaming process.

3.6.1.1 Hybridization - Seeking pragmatic legitimacy and the hybridization of

logics with incumbents

One of the key trends resulting in the mobilization of mainstream fiduciary investors was

the increased adoption of a financial frame. Initially, this move took different forms, such

as claiming that SRI funds can have competitive returns or can outperform the market.

Frames that attempt to compete with incumbent frames motivate reactive counter-frames

from the incumbents. The competition with incumbents results in the increasing

differentiation of the movement from the incumbents. The goal of such sub-movements is

transformational, rather than incremental (Den Hond and De Bakker 2007). Hybridizing

frames, on the other hand, make an attempt to appeal to incumbents and inspire

incremental change in incumbents by hybridization.

In the 2000s, environmental and social risks increasingly are presented as long-

term investments risks, and consequently, consistent with the fiduciary responsibility of

investors. Rather than competing with incumbent practices, this frame attempts to



combine and hybridize SRI practices with mainstream practices. As explained, this

framing for SRI - now adopted by all transnational SRI organizations - has been

particularly widely used by investors from the US and other Anglo-Saxon countries with

fiduciary rules. The actors involved mentioned targeting pension funds and gaining

“legitimacy on Wall Street” as primarily driving this shift. In addition, transnational

actors confirmed that the given normative reasons for SRI are different for different

investment organizations and countries; financial language and returns are the only

approach that can be uniformly applied across organizational and national boundaries.

The literature on framing covers a wide range of different scenarios where frames are

used as “strategic tools”, be it for defining the problem (diagnostic frames), for providing

a solution (prognostic frames) or for expanding the audience (bridging and extension

frames) (Benford and Snow 2000). As shown in this case, as reformist actors attempt to

adapt to the mainstream logics, they move from a competition language to a cooptation

and hybridization language. Meanwhile, radical actors – who following the success of the

movement re-emerge as a niche – continue to use competing and transformational

language.

3.6.1.2 Motivation - The move from material and symbolic loss to gain-based

incentives

Due to their highly institutionalized field and larger size, incumbent actors tend to choose

a reformist rather than a radical agenda when adopting social movement practices.

Reformism signifies a tendency to use a language of motivation (symbolic and material



gain) rather than punishment (symbolic or material loss)(Den Hond and De Bakker

2007).

During the 1980s, and for the first time, new SRI instruments focusing on

providing incentives to companies, which outperformed others on social performance

(rather than using negative incentives, name and shame and divestments), emerged.

These funds were called “best-in-class” funds and were run by the same investment

management firms that had previously provided negative screening. The expansion of

these funds in the 1990s was driven by the claims they made about the possibility of

financial gains and the outperformance of “responsible” firms. Best-in-class funds

signaled a radical change in the attitude of several SRI organizations towards firms as not

just potential sources of negative externality, but also as entities that could bring about

positive social change. In addition, such funds attempted to change company behavior

though competition between them on social responsibility. They had to compete to

become a best-in-class fund. In other words, the instrument for change used by best-in-

class funds was market-based. This was inconsistentwith early SRI instruments that had

an absolute nature (mostly negative), and hence did not use market based mechanisms

and competition. This is also reflected in the use of “risk and opportunity” language for

SRI, contrasting with early SRI where companies were perceived only as a source of risk.

3.6.1.3 Participation - From activism and pressure to dialogue and engagement

A third trend that has emerged over the last 50 years has been the move from hands-off,

external pressure through negative screening, divestments (since the 1960s), shareholder

resolutions and proxy “wars” to dialogue with companies. In the 1990s, the term



“shareholder activism” was increasingly framed as “shareholder advocacy” or

“shareholder engagement”, and larger mainstream investors began to gradually employ

“dialogue” with firms, rather than other legal instruments and name and shame. As the

EuroSIF and US-SIF reports imply, large institutional investors mostly avoid employing

shareholder resolutions and use dialogue with company management instead. This is

driven by the reformist nature of mainstream investors, compared to smaller activist

investors. In addition, based on the interviews, this change has been driven by the

increased size and greater power of mainstream investors, which results in no need for

using shareholder resolutions and other types of external negative pressure. Mechanisms

created by organizations such the UN PRI’s engagement clearing house, help investors

coordinate their engagement with companies. This further increases investors’ power to

change company behavior through dialogue. While the use of shareholder resolutions by

radical SRI investors continues to grow, the larger mainstream investors avoid using such

instruments and language.

Participation-based language and tactics have been studied in social movements

(de Bakker and den Hond 2008). These studies have highlighted the cyclical nature of

using participative and non-participative social movement tactics when undertaking

social action. This study shows that as social movements succeed and their practices

become adopted by mainstream organizations, participative language and “dialogue”

increasingly replace external pressures.



The above ideal types can help better understand the effect of the wide adoption of practices on

meaning-making and the tactics of social movements. The following table provides an overview

of the changes in the structure and language of the movement as it succeeds:

Table 3-5 Field level changes as social movements become mainstream

National/Societal institutional

changes Field level institutional changes Changes in meaning systems

1- 1960 activism trends 1- Increased density of organizations 1- Hybridization

2- Emergence and fast growth of fiduciary investors

2- Increased density of norms and rules

2- Participation

3- Increased shareholder power; shift from managerial capitalism to shareholder capitalism

3- Increased size and clout of new SRI organizations

3- Shift to positive motivations

4 -Emergence of reformist boundary actors as key carriers and translators of meanings

5- Transnationalization

6- Professionalization

These ideal types for mainstreaming “meaning-making work” contribute to the literature on

meaning-making in institutionalism. This literature is at the early stages of analyzing the types of

meaning-making work undertaken by actors in different institutional settings (Sahlin and Wedlin

2008; Zilber 2008). As for social movements framing literature, this paper can serve as an

example of how the study of institutions at multiple levels can be combined with the study of

social movement actors’ framing strategies. The study of the respective roles of structure and



embedded agency in the evolution of collective action frames has been cited as an area requiring

further empirical research and theory (Benford and Snow 2000).

3.6.2 “Institutionally Humbled” Actors and Meanings

SRI actors faced competing and conflicting demands from value-based organizations on the one-

hand and mainstream organizations on the other. The reformist boundary actors in the SRI

movement attempted to adapt their discourse and meaning-making depending on the target

audience in different times and spaces.

The methods used by individuals to organize their “hypocrisy” through the decoupling of

their discourse from their beliefs at different times and in different spaces are consistent with the

organization of hypocrisy that Brunsson and Adler (Brunsson and Adler 1989) theorize at the

organization level. However, the interesting additional dimension at the individual level is that

actors have to morally justify the adoption of logics that are not consistent with their convictions.

As shown in several cases, actors refer to the “vagueness” of the social-financial link and claim

that “the link is plausible” to justify their financial framing of SRI. The second rationale used to

morally justify their hypocrisy is highlighting the “normative superiority” of preserving the

environment and protecting society to defend meanings that are not true to their personal beliefs.

All this demonstrates that while undertaking “cultural entrepreneurship” (Lounsbury and Pollack

2001), these individuals face important decoupling challenges between their convictions and

their discourse. Studies such as this one, which attempt to understand how individuals organize

hypocrisy when dealing with conflicting institutional demands, are fundamental to understanding

CHAPTER 33BFROM GOD TO MARKETS Conclusion


how institutions condition agency (Creed, Scully et al. 2002; Djelic 2010). More studies of this

type are needed.

The financialization of SRI has gone further than most financial “translators” of SRI ever

imagined. SRI research firms have been acquired by large financial firms and are increasingly

staffed by graduates with MBAs and financial practitioners. Large investment management firms

now project SRI as a product category and/or a category of investment risk. The new financial

translation of SRI seems to have lost its turf and identity. As the former CEO of one of the

acquired SRI research firms stated, “it was not supposed to go this far”.

The actor as an individual bound in time and space (Djelic 2010) is deemed to be

surprised and humbled by the long-term consequences of the distributed, collective and

combined action of all actors across the field (Garud and Karnøe 2005; Quack 2007). Attention

to unintended long-term consequences of institutional work can add an important nuance to the

reemergence of the “strategic” actor in the institutionalist paradigm (Lawrence and Suddaby

2006; Kaghan and Lounsbury 2011).

3.7 Conclusion

The chameleon of SRI has survived and leveraged several society-wide institutional changes

over the past 50 years. Reformist boundary actors have played a key role in adjusting the

movement’s color and frame to the changing institutional environments.

The growth of social movements is embroiled with compromises as the movement

succeeds and faces the competing institutional logics of incumbent organizations and target

groups that it attempts to mobilize. In order to mobilize, the boundary social movement actors



need to appeal to their audience, describe the problem, offer a solution, build urgency and

motivate (Goffman and Berger 1974; Benford and Snow 2000). This is a dynamic process.

Depending on the complexity of the institutional setting, this process can result in many

competing translations and recombinations of the original “master frame”. While boundary

actors consciously attempt to reframe the movement to improve the mobilization of members

and resources, their agency is constrained by both their convictions and norms of the movement

and institutions of the different audiences. Such actors have to address two challenges: adjusting

and organizing the multiple frames and meanings tailored to different audiences; and addressing

the conflict between their personal beliefs and external meaning-making needs.

The story of SRI is another case of a grassroots movement mutating, succeeding, and

then becoming financialized and marketized. Interestingly, all cases of the dominance of market-

based logics over fields that were historically dominated by other logics, such as

environmentalist (Lounsbury 2005), trusteeship (Lounsbury 2007) and professional logics,

(Thornton and Ocasio 1999) have occurred over the past thirty years. These three decades have

been dominated by a neo-liberalism logic and a global move towards marketization and

financialization (Djelic 2006). At first “scholarly” glance, embedded actors seem to play an

important role in such institutional changes. What is unclear is whether the institutional work of

actors was a key determining factor in this process. Indeed, did SRI actors play a key role in this

process, or did the society-wide institutional and structural shift play the central role? If so, were

actors just playing along? Research on embedded agency (Seo and Creed 2002; Lawrence and

Suddaby 2006) needs to be attentive to long-term societal institutional trends. Scholarly attention

to long-term international, societal and field level institutional trends sometimes demonstrates



that all the seemingly “heroic” agents were doing was intelligently swimming along. Their

institutional work was a minor contributor to a wider trend.

The findings of this study about the role of transnational actors in meaning-making

expose another important area for future research. To achieve consensus and maximize

mobilization, transnational actors had to frame the problem and the solution in terms of the

commonalities between the logics of different national actors. The commonality was seeking

higher long-term returns, which was a frame perceived to be “value neutral”. As a result, all

transnational actors maintained a more market-based and financial approach to SRI, in contrast

to most national actors, who maintained a mix of normative and financial frames. More empirical

work is required to understand the specific role the actors in the boundary between national and

transnational space play in translating global templates and meanings between these two spaces

(Smith, Smith et al. 2002; Djelic and Sahlin-Andersson 2006; Della Porta, Kriesi et al. 2009).

CHAPTER 33BFROM GOD TO MARKETS References


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CHAPTER 33BFROM GOD TO MARKETS Appendix


3.9 Appendix

3.9.1 Appendix I. List of Interviewees

Interviewee Stakeholder Organization name

Steven Waygood Investment manager Aviva

Matthew Kiernan Investment Manager Innovest CEO and

Inflection Point Capital

Steven Lydenberg Research Provider KLD and Domini

Investments

Matt Christensen Transnational organization

EuroSIF

James Gifford Transnational organization

UN PRI

Perrine Dutronc Research Provider Innovest (MSCI)

My-Linh Ngo Investment Manager Hendersons

Fouad Benseddik Research Provider Vigeo

Estelle Mironesco Research Provider Vigeo

Peter Kinder Research Provider KLD and Domini

Investments

Jim Hawley Academia Advisor to CalPERS

Andy White Research Provider CoreRatings - Innovest

Winston Hickox Institutional investor CalPERS

Bill Crist Institutional investor CalPERS

CHAPTER 33BFROM GOD TO MARKETS Appendix


Interviewee Stakeholder Organization name

Tim Smith Investment Manager ICCR, US SIF and

Walden Asset Management

Alice Tepper Marlin

Not for profit organization

Social Accountability International

John Tepper Academia

NYU – former Chief Economist in the Office of the New

York City Comptroller

Tim Sheppard SRI Network - lobby

organization UKSIF

Barbara Krumsiek SRI Investment manager Calvert

Amandine Marques (outside

the sampling process)

SRI Analyst MSCI Group

CHAPTER 3 - 3BFROM GOD TO MARKETS Appendix


3.9.2 Appendix II. Examples of Social Responsible Frames of Public Pension Funds

Fund Country Rationale Terms Quote

1 AustralianSuper Australia Financial Sustainable investing - Environmental, Social & Governance (ESG) Investment Policy

AustralianSuper understands that ESG can have an impact on investment valuations

2 Australian Government Employees Superannuation Trust

Australia Financial Social, ethical, environmental and labor issues

These factors may include social, ethical, environmental and labour issues, to the extent that those issues affect the profitability of those investments.

3 Catholic Superannuation and Retirement Fund

Australia Normative Labor Standards , environmental, social and ethical issues

Managers are also required to avoid companies operating within sectors with recognised high negative social impact. This means the underlying funds will avoid exposure, either directly or indirectly through underlying managers and funds, to companies with material exposure to the production or manufacture of alcohol, armaments, gambling, pornography, tobacco and uranium.

4 Banesprev Brazil Financial social responsibility

Companies should have the exact notion that our investments are long term and in need of sustainability actions for maximum respect for the principles of the program. The main goal of our organization is to pay benefits, many contractors to start is about 35 years, and there can be no unpleasant surprises in the middle of this path

5 Canada Pension Plan Investment Board

Canada Financial Responsible Investing

As a long-term investor and owner, we believe that responsible behavior by these companies with respect to environmental, social and governance (ESG) factors can generally have a positive influence on corporate financial performance.




6 British Columbia Municipal Pension Plan

Canada Financial Responsible environmental, social and governance

This is based on the belief that if companies are aware of and responsive to the environmental and social impacts of their operations (i.e., manage these issues to at least industry/global business standards), they can reduce risk to long-term profitability. On the other hand, poor environmental and social policies can damage a company’s reputation and long-term financial performance.

7 ATP - The Danish Labour Market Supplementary Pension

Denmark Financial + Normative

Social Responsibility

The objective of the ATP Policy of Social Responsibility in Investments is two safeguard the value of ATP's investments and to be instrumental in Obtaining the lowest possible capital costs for the companies through focus on and respect for social responsibility. The aim is also for ATP's commitment to social responsibility to benefit any employees, companies and local communities affected by an ATP investment.

8 Local Government Pensions Institution

Finland Normative Social Responsibility

The social responsibility of the Local Government Pensions Institution for the municipal sector’s pensions and their funding spans generations. The decisions and actions of today create pension security for present and future employees in the municipal sector.

9 MAIF France Normative Responsible Investments

Accompagner le développement économique, participer à la réduction des vulnérabilités sociales et contribuer à une protection sociale durable.

1

0

Fonds de réserve pour les retraites – FRR

France Financial + Normative

ESG investments

Guarantees superior long term returns. The fund should control the externalities of investments for the good of society

1

1

Caisse des dépôts et consignations - CDC

France Normative and Financial

SRI (socialement responsable)

Prendre en compte les enjeux environnementaux et sociaux, le développement de l’actionnariat salarié et l’encouragement à la recherche-développement.

1

2

Munich Reinsurance AG

Germany Financial SRI, Socially Responsible Investing

The integration of ecological, social and ethical criteria into the investment process holds economic promise and is beneficial to risk and return




1

3

National Pensions Reserve Fund of Ireland

Ireland Financial Responsible Investing

As an investor in over 2,000 companies worldwide, the National Pensions Reserve Fund Commission believes that environmental, social and governance (ESG) issues impact on long-term investment performance.

1

4

Government Superannuation Fund Authority

New Zealand

Normative Responsible Investments

Under the RI Policies, the Authority has regard to serious infringements, by companies or countries, of relevant international standards relating to human rights, labour and employment, the environment, international security and disarmament, which are of such a nature that the Authority considers that ongoing investment may give rise to a risk of prejudice to New Zealand’s reputation as a responsible member of the world community.

1

5

Norwegian Government Pension Fund - Global

Norway Normative Responsible Investment

The fundamental rights of those affected by companies in which the Fund invests should be respected.

1

6

Government Employees Pension Fund of South Africa

South Africa

Normative Socially Responsible Investments

It seeks to encourage companies to strike a balance between profits and being socially responsible, and to actively manage their environmental impact.

1

7

AMF Sweden Financial Ethics and environment

AMF primarily seeks to ensure that companies' boards and management teams handle issues of ethics proactively, thereby enhancing their companies' long-term attractiveness.

1

8

AP1 Sweden Normative Ethics and environment

Första AP-fonden takes ethical and environmental consideration in its investment operations. According to the assigned mission, this is done without compromising the Fund’s overall objective of attaining a high return.

1

9

CIA (Caisse de Prevoyance du Canton de Geneve)

Switzerland

Normative SRI - Fonds Socialement Responsables

Attending to the needs of not only current but future generations.

2

0

London Pensions Fund Authority (LPFA)

UK Financial Responsible Investments

As set out in our investment principles the LPFA Board believes that this approach will deliver the best long term returns.




2

1

BBC Pension Trust Limited


Equity managers should take account of the social, environmental and ethical considerations in the selection, retention and realization of Scheme investments so far as such considerations will affect the prospects or performance of the companies in which they invest for the Scheme.

2

2

Universities Superannuation Scheme - USS


Whilst the challenge of integrating ESG factors into USS’s investment approach should not be underestimated, the potential benefits of responsible investment should be realized through improved long term corporate and investment performance.

2

3

Connecticut Retirement Plans and Trust Funds (CRPTF)

USA Normative Corporate Citizenship

The business community must be responsible for the long-term sustainable development of people and communities.

2

4

AFL-CIO Reserve Fund

USA Financial Corporate Responsibility

The trustees believe that in order to succeed over the long-term, businesses need to treat employees, suppliers and customers well, to be environmentally responsible, and to be responsive to the communities in which they operate.

2

5

CalSTRS USA Financial Responsible Investments

There’s a new way to think about wise and profitable, long-term investments. It recognizes a direct link between environmental, social and governance practices and investment performance and risk.

2

6

CalPERS USA Financial Environmental Investment Initiatives

We have a strong track record of mobilizing financial capital in new and innovative ways, consistent with the highest fiduciary standards. We are just starting to explore ways in which it can marry the jet stream of finance and the capital markets with public purpose. Our goals are to achieve positive financial returns, while fostering energy savings, sustainable growth and sound environmental practices.

(Source: Pension fund websites)



3.9.3 Appendix III. Analysis of US SIF Reports from 1995 to 2000

Year Statement on financial performance of SRI Summary SRI Strategies

1995 None None

1997 The evidence of the competitive performance of socially screened portfolios includes: o Socially screened indexes, designed for direct comparison to the S&P 500 index, are outperforming the S&P 500. Both the Domini 400 Social Index (DSI) and the Citizens Index have outperformed the S&P 500 on a total returns basis since their inception. o Socially screened mutual funds, across all major asset classes, are twice as likely as all mutual funds to get top Morningstar ratings. o A growing body of academic studies has found that socially screened portfolios provide competitive performance to investors.

Competitive performance, Superior performance

Screening Shareholder advocacy Community investing

1999 This competitive performance has continued during the recent period of market turbulence. Investors that find the concept of portfolio screening compelling are moving increasing portions of their assets into screened portfolios as they determine that they can achieve competitive performance. The evidence of the competitive performance of socially screened portfolios includes: Socially responsible mutual funds tracked by Morningstar have consistently been more likely to receive Morningstar’s highest rankings (four or five stars) than the overall universe of mutual funds.

Competitive performance

Screening Shareholder advocacy Community investing

2001 Despite the U.S. market’s sustained downturn over the past two years, socially responsible investing continues to perform competitively and attract new assets. Increasingly, investors are moving assets into screened portfolios as compelling evidence mounts with each quarter that screened funds can achieve competitive performance. The evidence of the competitive performance of socially screened portfolios includes: Socially responsible mutual funds tracked by Morningstar have consistently been more likely to receive the highest rankings from both tracking organizations than the overall universe of mutual funds. Academic studies continue to find that socially screened portfolios, when compared broadly to their unscreened counterparts, perform as well. Analysis of mutual fund asset inflows and outflows clearly indicates that investors are finding socially screened funds more attractive than other funds. Market analysis shows that screened funds typically attract and retain investor assets longer than non-screened funds.

Competitive performance, “Perform as well” more likely to receive the highest rankings

Social screening (mutual funds and separate accounts) Shareholder advocacy Screening and shareholder advocacy Community investing




2003 Academic studies continue to explode the myth that social screening inevitably leads to lower financial returns or constrains investing options beyond the acceptable threshold of a prudent fiduciary. Instead, empirical research has repeatedly confirmed that, when properly managed, risk-adjusted and controlled for investment style, socially screened portfolios perform comparably to their unscreened peers. Some researchers have even hypothesized a potential “sustainable alpha” effect for portfolios that are incorporating sustainability factors into their portfolio analysis.

Returns comparable to unscreened funds – sustainable Alpha


2005 Indeed, among corporate leaders, academic researchers, and even mainstream money managers, there is a growing realization, rooted in empirical research, that enterprises that adopt sustainable business practices will be more competitively situated to deliver stronger returns and long-term shareholder value. The emergence and evolution of different types of screening over time reflect the social investors’ roles not only in promoting stronger corporate citizenship and social responsibility but also in building long-term wealth for companies, their shareholders, their stakeholders, and the communities in which they do business. .......... Incorporating CSR and sustainability into the investment management process provides the added value of social and environmental risk analysis, additional layers of due diligence, and tools for uncovering the “materiality” of often intangible factors that nevertheless shape an enterprise’s long-term value and growth.

Long term sustainability - first mention of integration - as part of long term risk management


2007 None No explicit mention of returns


2010 A growing number of academic studies have demonstrated that SRI mutual funds perform competitively with non-SRI funds over time. Several of these peer-reviewed and published studies have been awarded the prestigious Moskowitz Prize. Additionally, more than 20 studies demonstrating that SRI mutual fund performance is comparable to that of non-SRI funds can be found at www.sristudies.org — a compendium of all the major academic studies on SRI. SRI can involve evaluating and benchmarking companies on CSR issues, analyzing corporate social and environmental risks, constructing

Competitive financial returns, comparable returns - focus on incorporation of ESG and integration

ESG Incorporation (includes negative, best in class and integration methods Shareholder advocacy Community Investing




portfolios using ESG issues, or engaging corporations to improve their CSR policies and practices.




CHAPTER 4

SOCIAL RESPONSIBILITY AND

MARKET KARMA

A Framework for Analysis of the Link

between Social and Financial Performance

of the Firms and its Failings

Paper presented at

Academy of Management Conference – 2011 – St. Antonio, US (forthcoming)

Oslo Climate-Finance Workshop 2010 – Oslo, Norway

UN Principles of Responsible Investment Academic Conference 2009 – Ottawa, Canada

Since February 2011, Imran Chowdhury ([email protected]) of ESSEC Business School has contributed to the development of this paper as a co-author.

CHAPTER 44BSOCIAL RESPONSIBILITY AND MARKET KARMA Résumé


4.1 Résumé

La responsabilité sociale des entreprises et le « karma du marché » :

fiabilité et pérennité du lien entre performances sociales et financières

Cette étude examine une idée clé de la littérature récente sur la gestion durable des

entreprises selon laquelle les entreprises responsables socialement obtiendraient de

meilleures performances financières. Ce travail intègre les différents mécanismes de

rétroaction proposés pour présenter le lien entre performances sociales et financières dans

un nouveau cadre conceptuel et présente une série de modèles d'entreprise et de contextes

de marchés pour lesquels ce lien est significativement affaibli.

Ces scénarios expliquent en partie les résultats mitigés obtenus par de nombreuses études

empiriques portant sur ce lien. Cet article propose un programme de recherche réorienté

pour mieux cerner les facteurs contextuels influençant ce lien entre les performances

sociales et financières. Cette réorientation suggère l’étude des micro-processus du

comportement socialement responsable au niveau de l'individu et du groupe, plutôt que

de mettre l'accent principal sur des études de la responsabilité sociale aux niveaux méta-

social et macro-social.

Mots-clés : performance sociale des entreprises, institutions, responsabilité sociale des

entreprises, investissement socialement responsables, théorie des parties prenantes,

durabilité

CHAPTER 44BSOCIAL RESPONSIBILITY AND MARKET KARMA Abstract


4.2 Abstract

This paper extends the research linking firms’ social and financial performance by

providing a framework that integrates all the mechanisms cited in the literature that

translate social responsibility to financial performance. The paper then sets out the

structural and ideational institutional conditions under which the social-financial

performance link is weakened.

Specifically, this paper theorizes how firm attributes and institutional mechanisms at

field, society and transnational levels can help explain the mixed results from a wide

range of empirical studies that explore this connection. Based on this analysis, the paper

introduces a re-orientated research agenda and suggests that scholars devote increased

attention to studying the micro-processes of socially responsible behavior at individual

and group levels rather than focusing dominantly on decontextualized macro- and meta-

level studies of social responsibility.

Keywords: corporate social responsibility, institutions, stakeholder theory, sustainability,

corporate ethics

CHAPTER 44BSOCIAL RESPONSIBILITY AND MARKET KARMA Introduction


4.3 Introduction

In the wake of the current global economic crisis, a focus on the social responsibility of

business is de rigueur. Recently, both Jeffery Immelt and Jack Welch, respectively the current

and former CEOs of General Electric – the world’s second-largest corporation, argued for a

capitalism that focuses not just on shareholder profits, but rather on the contributions of and to

a variety of constituencies, from customers to employees to the local community (Guerrera,

2009; Perkins, 2008). By focusing on this wide range of stakeholders, Immelt and Welch

claim, companies can generate positive financial returns as well. This change in rhetoric at the

highest levels of corporate leadership reflects a global trend towards reframing social

responsibility as “sustainability” (Gray 2010). In one of its dominant interpretations,

sustainable environmental and social behavior of firms is framed as essential for their long-

term survival and superior long-term financial performance. Financial framing for corporate

responsibility and “sustainability” have developed into world society norms (Meyer, Boli et

al. 1997) backed by several national and international organizations, norms and codes (Gray

2010). To maintain legitimacy, firms feel obliged to use the language of sustainability and to

adopt a sustainability agenda based on one of the several circulating templates for

sustainability. This trend for financialization of social responsibility can be seen as part of a

wider societal trend towards marketization, financialization and neoliberal norms and values

during the past three decades (Djelic 2006).

This change in rhetoric of business practice reflects what has been an ongoing trend in

academic discourse that calls for sustainable management of enterprises. Since the 1970s and

up to the present, an extensive body of research in organizational theory has both theoretically

and empirically explored the relationship between, on the one hand, environmental and social

performance of firms, and, on the other hand, their financial performance (Bowman and Haire



1975; Waddock and Graves 1997; Margolis and Walsh 2003; Margolis, Elfenbein et al.

2007). These studies underlie attempts to reconcile “doing well” with “doing good” in a

business context. Businesses should not only do well – in the sense of delivering positive and

increasing profits to shareholders – they should also do good – by operating in an ethical and

socially responsible manner (Jones 1995; Porter and Kramer 2011).

Nevertheless, despite this proliferation of studies, efforts to reconcile doing well with

doing good rest on relatively uncertain foundations. To a large extent, research on the impact

of social behavior on financial performance has been inconclusive and has yielded conflicting

results in many cases (Margolis and Walsh 2003; Orlitzky, Schmidt et al. 2003; Margolis,

Elfenbein et al. 2007). Additionally, the direction of causality between social and

environmental performance and financial performance is still not clear. Although many

studies claim that an increase in a firm’s social and environmental performance can positively

impact financial performance, others put forward an alternate viewpoint: that increased

financial performance can leave extra resources for firms to improve their social and financial

performance (Barnea and Rubin 2006; Margolis, Elfenbein et al. 2007). What is remarkable

about these studies is that companies are generally treated alike and contextual parameters at

different levels of society, field and firm such as companies’ value chain, geographical

footprint, market power, risk level, macroeconomic conditions, geopolitical stability and level

of civil society activity in company’s home markets are rarely controlled for. In this paper, we

argue that a context-free, under-socialized and unconditional reliance on market mechanisms

to link companies’ social performance with their financial performance has significant

shortcomings.

Drawing from the literature on organizational theory, we closely examine the notion

that sociallyresponsible behavior by firms will lead to increased financial performance, and

attempt to answer the following questions: (1) What mechanisms underlie the social-financial



performance linkage? and (2) In what institutional settings are market-based incentives

insufficient to guarantee responsible firm behavior? More specifically, we provide a

theoretical framework for analyzing the various mechanisms linking firms’ social and

financial performance. We begin by proposing three broad categories of feedback

mechanisms to explain how scholars have linked social and financial performance:

symbolic/image effects, direct effects, and explicit stakeholder claims. Subsequently, we

analyze the assumptions, which underlie these mechanisms and discuss how contextual

factors and institutional mechanisms can help explain situations where the social-financial

performance link is weakened.

Drawing on the work of Djelic and Quack (2008), we define structural and ideational

institutional factors at different levels of transnational, national, field and firm that mediate

the social-financial performance link. Thus, we emphasize that the needs, objectives and

structure of an organization attempting to achieve increased financial performance by

improving its social behavior are influenced by technical, cultural, and political factors at

different levels, which are under-emphasized, by extant models linking social and financial

performance. By developing a parsimonious framework that places special emphasis on the

interaction between the characteristics of the institutions and those of a focal organization

attempting to achieve increased financial performance through socially responsible behavior,

we aspire to unify and reconcile divergent strands of the literature addressing the link between

these phenomena.

The remainder of the paper is organized as follows. In the next section, we provide a

brief review of the diverse views of corporate social responsibility and how these have been

influenced by market-based logics, and focus particularly on theories, which attempt to link

firms’ social responsibility with financial outcomes. Subsequently, we introduce a conceptual

model, which brings together the various mechanisms, which are assumed to link social

CHAPTER 44BSOCIAL RESPONSIBILITY AND MARKET KARMA Markets and Social Responsibility


performance to financial performance. We follow this by discussing the robustness of the

assumptions underlying the model and lay out several scenarios where the assumptions do not

hold and the social-financial performance link is weakened. We pay special attention to

contexts where the social-financial performance link breaks down due to a misfit between

globally accepted norms of socially responsible corporate behavior and the characteristics of

the focal organization. Finally, we suggest that future research in this area focus more on the

context of the social and financial performance link as well as micro-processes of responsible

behavior at the individual and group level, instead of the relatively de-contextualized macro-

and meta-level studies which have thus far been the norm.

4.4 Markets and Social Responsibility

The study of business ethics has evolved over the past few decades. While business ethics

theories rooted in human sciences are more of a normative nature, theories, which have

emerged in the management and economics literature, take an economically instrumental

viewpoint on firms’ social responsibility. Terms such as Corporate Social Responsibility

(CSR) and Corporate Social Performance (CSP) (Wood 1991) emerged as part of a relative

shift in the management literature from normative and deontological understandings of a

firm’s social responsibility towards a managerial and business-oriented framing and rationale;

from an ethical absolute to a financially relative issue. The key conceptual difference between

the different viewpoints on the firm’s social responsibilities is related to whether the firm is

perceived as a purely economic entity accountable to shareholders only or a socially

embedded entity accountable to all stakeholders (Freeman 1984). We discuss each in more

detail below, as well as recent attempts in the literature to reconcile these viewpoints.



4.4.1 Firms as Purely Economic Entities Accountable to Shareholders

Economic conceptions of a firm’s social responsibilities, which view firms as purely

economic entities, have an immediate intuitive, rational appeal. They focus on the presumed

economic benefits that result from a firm following its fiduciary duty. In this conception, the

only ethical responsibility of a firm is to maximize shareholder value (Hasnas 1998). The firm

and its managers are economic instruments and agents of shareholders and all their

responsibilities are towards these shareholders.

The normative basis for this claim is the agency contract between managers and

owners. The major endorser of this viewpoint regarding the role of the firm was Milton

Friedman and his school of economic thought. Milton Friedman summarizes this “shareholder

focused” viewpoint on corporate ethics in his following much cited statement (Friedman

1970):

“There is one and only one social responsibility of business – to use its resources and

engage in activities designed to increase its profits so long as it stays within the rules

of the game, which is to say, engages in open and free competition, without deception

or fraud.”

4.4.2 Firms as Socially Embedded Entities Accountable to All Stakeholders

Whereas economic conceptions of a firm’s social responsibilities tend to focus on the

fiduciary duties of the firm and its managers towards shareholders, social conceptions tend to

emphasize the responsibility of firms to meet the needs and interests of various firm

“stakeholders” and society at large on a normative basis (Hasnas 1998). Several normative

theories have emerged, including social contract theory (Keeley 1980; Donaldson and Dunfee



1994) and normative stakeholder theory (Freeman 1984; Donaldson and Preston 1995; Jones

1995).

Stakeholder theory has been one of the most influential theories used to broaden our

understanding of the firm as a purely economic entity to one that is socially-embedded, with

exchanges and responsibility towards a wide range of stakeholders (Freeman 1984, Freeman,

Harrison 2010). As noted by Donaldson and Preston (1995), stakeholder theory has

normative, instrumental and descriptive varieties. The normative version considers managers

responsible and accountable towards all stakeholders rather than shareholders only as a purely

normative expectation. Instrumental stakeholder theory claims that attending to the concerns

and well-being of all stakeholders is in the best commercial interests of a company.

Consequently, the demand for responsible behavior towards stakeholders is instrumental to a

firm’s success, rather than being a normative responsibility (Jones 1995).

Social contract theory is another theory, which attempts to establish normative social

principles for firms. The approach of this theory is similar to the social contract approach of

Rousseau (Rousseau 1968) and Hobbes (Hampton 1986) for defining the principles that have

to be respected by governments to have legitimacy among their people. This approach is

based on defining the terms of a contract in an imaginary society where an institution type

(such as the commercial firm) does not exist, based on which society will accept the

emergence of new organizations (Keeley 1980). In other words, while the firm’s only codified

contract is with shareholders, it also has implicit contracts with society, based on which,

society permits the firm to exist and flourish. More recently, this conception of corporate

social responsibly has also been called “license to operate” (Howard Grenville, Nash et al.

2008).

There are differences between the normative demands of each of these theories from

the firm. Such demands are sometimes theorized under the reciprocity and fairness principles



towards counterparts and stakeholders (Malinowski 1959; Bosse, Phillips et al. 2009) at other

times they are based on universal rights and/or religious principles (Garriga and Melé 2004).

However, the common point of all these theories is that the firm be treated as a social entity,

rather than a purely economic entity. Consequently, they impose social responsibilities on the

firm, beyond its economic fiduciary duty towards shareholders. To avoid delving into the

differences between such normative theories – beyond the scope of this study – we

collectively refer to them in this paper as “social responsibility” theories. There is a plethora

of varying definitions of the social responsibility of the firm (Matten and Crane 2005; Matten

and Moon 2008). We define social responsibility as society’s expectation that firms minimize

negative social externalities and generate positive social externalities, with the aim of

achieving surplus in their interaction with all stakeholders, and not merely shareholders. This

definition captures the wide range of normative stakeholder demands put on the firm

regardless of the normative basis of such demands.

4.4.3 Reconciling the Economic and the Social

Stakeholder’ normative demands on the firms face significant legal and normative barriers in

the increasingly shareholder dominated firms (Davis and Thompson 1994). In the move from

managerial to shareholder capitalism, it is becoming increasingly difficult for firms to adopt a

social agenda without a positive link to shareholder value.

In an attempt to surmount this barrier, a third track of theories has emerged. This

category of theories for social responsibility of firms – which has attempted to reconcile these

two viewpoints – is usually referred to as instrumental or utilitarian corporate ethics (Quinn

and Jones 1995; Mason and Mudrack 1997; Garriga and Melé 2004). In this view, responsible

behavior by a firm towards society is a precondition for its long-term financial survival and



success. This viewpoint on corporate social responsibility resembles utilitarian branches of

religious ethics. For example, in Buddhism, based on the concept of Karma, there is a

causality relationship between human actions and nature’s reactions. In other words, Karma

dictates that the result of human behavior is reflected back to the individual. Thus, acting

ethically is not a purely normative demand; rather it results in utilitarian gains. (de Cea 1998).

A wide range of empirical quantitative research studying the relationship between the

social and economic performance of firms has been published. One of the first papers was

released in 1972 (Bragdon and Marlin 1972) and since then about 200 similar quantitative

studies have been carried out. Some have found a negative correlation between the social and

economic performance of firms. In such cases, normative social ethical principles are

considered as a cost to firms, which results in inferior economic performance for responsible

firms (Shane and Spicer 1983; Bromiley and Marcus 1989; Wright and Ferris 1997).

Conversely, other studies have found a positive relationship which supports the claims of an

instrumental approach to socially-responsible behavior (Posnikoff 1997; Waddock and Graves

1997). Finally, a number of studies have found no relationship at all between the social and

financial performance of firms (Aupperle, Carroll et al. 1985; Teoh, Pin et al. 1998). A wide

range of meta-analyses have also been carried out to explore the social-financial performance

link. For instance, Orlitzky, Schmidt, and Rynes (2003) analyzed 52 studies, Allouche and

Laroche (2005) 82 studies, Margolis and collaborators (2007) 167 studies, and Wu and Ke-ke

(2009) 121 studies. The results of these meta-analyses have also varied, with most claiming a

positive social-financial link (Orlitzky, Schmidt et al. 2003). However, others posit that the

relationship between the social and financial performance of firms is very weak indeed

(Margolis, Elfenbein et al. 2007) .

To address the inconclusiveness of the empirical studies in this area, some papers have

attempted to improve the quantitative models by controlling for a wide range of variables



including size, R&D expenditure and advertising expenses, etc. (McWilliams and Siegel

2000). Other papers have focused on the operationalization issues for corporate social

performance (Griffin 2000). Finally, certain papers have questioned the direction of the

causality link between social responsibility and financial performance. In other words, these

scholars argue that firms with more retained earnings have greater resources with which to

manage their social externalities (Hillman and Keim 2001).

With regard to the debate on the conceptual validity of instrumental corporate ethics,

several studies from different disciplines have been published over the past few years. One

example includes papers focusing on firm’s identity as a social being and the inherent

problem with an economic framing for the social self of the firm (Driver 2006). Another

category of studies point out the practical dangers with regard to the subordination of ethics to

economics (Paine 2000). Some other studies analyze cases where the social and financial

relationship is a “zero-sum game”. An example is the Jones (2006) paper, which explores

scenarios where the social-financial link is dysfunctional due to special contextual situations.

However, all these papers fall short of providing a conceptual framework for the social

responsibility business case integrating all identified mechanisms and exposing

comprehensively its inherent contextual and institutional conditionality and weaknesses.

In our analysis of the contextual and situational factors influencing translations of

firms’ socially responsible behavior to financial performance, we apply a framework rooted in

the institutional perspective. Generally, institutions are defined as structures and ideations that

bring stability and meaning to social interactions and condition the behavior of actors and are

in turn influenced by them (Meyer and Rowan 1977; Djelic and Quack 2008). Structural

dimensions of institutions include rules and systems. Ideational dimensions of institutions

include normative and cognitive frames. Institutionalism enables studies of actors embedded

in their social, cultural, political and historical contexts; an approach that has thus far been

CHAPTER 44BSOCIAL RESPONSIBILITY AND MARKET KARMA Translation of Social to Financial


selectively applied in studies linking social responsibility of firms to their financial

performance.

Several scholars have studied the role of certain institutional factors on the firm’s

adoption of social responsibility reporting, language of social responsibility, corporate social

performance and philanthropic contributions of firms. Some of these studies have analyzed

societal characteristics such as religion (Brammer, Williams et al. 2007), civil society activity

(Marquis and Toffel) and national business systems (Matten and Moon 2008); some have

focused on field or industry characteristic such as market concentration (Cottrill 1990) and

some on firm level attributes such as ownership structure (Graves and Waddock 1994).

Certainstudies have focused more on structural dimensions while others have focused on

ideational and cultural dimensions. No studies however, have analyzed the role of ideational

and structural dimensions of institutions at multiple levels in mediating the financial impact of

social responsibility. By adopting this approach, this paper attempts to bring back the societal

structures and ideations into the analysis of this link. The following sections provide an

analysis of the institutional factors at the different levels of transnational, national, field and

company attributes that mediate the link. Only through such a multi-level approach to

institutions is it possible to achieve a comprehensive understanding of the role institutions

play in the translation of social behavior to financial performance (Djelic and Quack 2008).

4.5 Translation of Social to Financial

During the past three decades, scholars have identified different economic feedback

mechanisms to explain the relationship between the social and financial performance of firms.

A number of theories focus on the symbolic aspects of social responsibility and its importance

for the legitimacy and image of firms, whilst others emphasize the direct material



consequences of social responsibility (or irresponsibility) for a firm’s financial performance

(Margolis, Elfenbein et al. 2007). In the following section, we conceptualize all these different

mechanisms under three categories of: symbolic/image effects, direct material effects and

explicit stakeholder claims.

Symbolic/image effects focus on the actions organizations can take or avoid vis-à-vis

society to improve or sustain their image, which can translate to superior financial

performance. The principal theoretical foundation for image effects is neo-institutional theory

(Meyer and Rowan 1977; DiMaggio and Powell 1983), through which social responsibility

can be regarded as an institutional requirement that a firm has to comply with to maintain its

legitimacy and to survive (Jennings and Zandbergen 1995; Campbell 2007). For the

legitimacy and image arguments for the instrumentality of social responsibility, marketing,

branding and consumer behavior literature has been another rich source of conceptual and

empirical studies (Argenti and Druckenmiller 2004; Werther 2005; Becker-Olsen, Cudmore et

al. 2006; Luo and Bhattacharya 2006). In such studies, the effect of superior social behavior

on consumers’ perception and purchasing behavior is analyzed. Event analysis is one of the

key types of empirical studies, which attempt to prove the image/symbolic effect. Such studies

analyze the effect of negative environmental and social events and the related publicity on a

firm’s financial performance (McWilliams, Siegel et al. 1999).

The second mechanism, direct material effects, focuses on the material consequences

of social responsibility on stakeholders’ performance on which the firm depends. For scholars

who study the direct effects of socially responsible behavior, the focus is on the level of

resource dependence between a focal firm and its stakeholders. Given the level of dependency

of a firm on its stakeholders, it is in its interest to sustain well-functioning stakeholders. Two

examples of such theories are the instrumental iteration of stakeholder theory (Donaldson and

Preston 1995; Jones 1995) and the resource dependency theory (Moir 2001). For example, it



is in a firm’s best interests to maintain suppliers that can produce the firms’ needed inputs

sustainably and efficiently. Another example is the effects of high stress and lack of

motivation of employees on a firm’s financial performance. Consequently, it is in a firm’s

best interests to invest in the well-being of its employees (Turban and Greening 1997;

Moshavi and Terborg 2002).

The third and final mechanism, explicit stakeholder claims, emphasizes

externalities which are transformed to explicit financial claims through the institutions

representing stakeholders (McGuire, Sundgren et al. 1988). Such explicit claims can be either

in the form of state’s regulation of externalities backed by sanctioning, explicit pressure and

claims by non-state actors or marketization of the externality as a commodity. Regulatory

explicit claims are fines, settlements or remediation costs resulting from regulatory breaches

and litigations. Example of claims put by non-state actors is social movement pressure on the

firms with the aim of generating symbolic and material gain and loss for the firm based on its

externalities. An example of a marketized externality is carbon emissions and carbon markets.

What differentiates “explicit stakeholder claims” from the other two mechanisms is that in

this case, a stakeholder representing itself, another stakeholder or wider society intentionally

creates symbolic or material gain/loss opportunities for the firm to motivate responsible

behavior.

In addition to these three mechanisms referred to in the literature, interestingly, in

some cases, no detailed explanation is attempted and the social responsibility of a firm is

interpreted simply as a sign of the “good quality of the firm’s management”, suggested to be

conducive to a firm’s superior financial performance (Bowman and Haire 1975; Akpinar,

Jiang et al. 2008).



Figure 4-1 Mechanisms linking social and financial performance of firms

Figure 4-1 illustrates these arguments by showing the three mechanisms, as well as the factors

mediating the linkage between a focal firm and its stakeholders. The figure also demonstrates

how the three mechanisms can reinforce each another. For example, a lawsuit against a firm

(explicit claim) beyond a direct fine or negative ruling can also compromise its image (image

effect). Another example is the increased risk of litigation (explicit stakeholder claims) for a

firm whose image has been compromised by its weak social performance. A further example

is a company with strong environmental risk mitigation policies and practices. Under the

“direct effect” mechanism, it is claimed that, not only does such a company benefit from less

environmental litigation and pay fewer financial penalties (direct effects), it also reaps



symbolic benefits from its environmental performance by being seen by stakeholders as a

“green” or responsible firm.

To understand the potential failures in this conceptual framework, it is important to

study the fundamental assumptions and mediating factors for each mechanism claimed to

underpin the social-financial link. We outline each of the three major social-financial linkage

mechanisms below and provide institutional scenarios where the mechanism reaches the

limits of action.

4.5.1 Image Effects

The effect of a firm’s social performance on its image is one of the most cited mechanisms for

the financial instrumentality of social responsibility (Bowman and Haire 1975; McGuire,

Sundgren et al. 1988; McWilliams and Siegel 2000; Hillman and Keim 2001; Campbell

2007). A change in the perceived image of a firm is claimed to affect stakeholder trust in the

firm and its behavior, and hence the firm’s access to the resources provided by such

stakeholders. Such resources can be capital (Turban and Greening 1997), market demand and

consumer goodwill (Turban and Greening 1997; Luo and Bhattacharya 2006) or a talented

work force (Moskowitz 1975; Turban and Greening 1997). For the symbolic/image related

social-financial performance link to be functional, we argue that the following preconditions

should be in place and that the underlying assumptions should hold true. The details of the

process are demonstrated in the figure below.



Figure 44-2 Process and assumptions for the symbolic/image effects

Information capture about firm externalities: One of the challenges regarding the

reflection of a firm’s social behavior\ on its financial performance is the prerequisite that

information about the externality be captured and subsequently reach stakeholders (Shane and

Spicer 1983; Deegan and Rankin 1996). Information capture can occur either through a firm’s

official disclosure and reporting mechanisms or by third party capture of information through

regulatory bodies, non-governmental organizations and media, etc. (Shane and Spicer 1983).

The quality and relevance of accounts of firm’s “sustainability” have been widely criticized in

the academic literature on environmental accounting (Bebbington, Gray et al. 1999; Gray

2010).

In addition, in jurisdictions where the regulatory platform is weak and other possible

information providers (such as NGOs and news agencies) have no presence or legal right to

access information about a firm’s externality, inferior social performance will have minimal

effects on a firm’s financial performance. Examples include labor related concerns in China

and Vietnam (Winstanley, Clark et al. 2002) and waste dumping issues in Africa (Schmidt

2006), which in many cases can remain unexposed for long periods of time. In such cases,



regulatory enforcement capacity, normative values of target communities and civil society

activity in those countries and communities are key factors mediating stakeholders’ staying

informed about the firm’s social behavior.

Globalization is increasingly separating supply and demand markets. Compared to the

demand side, the production process is more socially cost intensive, meaning that most labor

issues and environmental risks are on the production side (Midttun, Dirdal et al. 2007). The

procurement of raw material and production in the majority of multinational firms occur in

different countries from where their primary markets are located. This means, in the case

where a firm imposes significant social costs on production markets, the image of the firm

and its community relationships on the demand side are not directly affected. For a company’s

demand side image to be affected by its supply side social behavior, information about its

behavior has to be captured and communicated to demand side markets (such as in the famous

case of Nike’s use of child labor in China). Assuming that the capture and transmission of this

information are perfect; in such cases (this is far from reality in most cases, due to the lack of

sufficient information infrastructure, access and journalism in the production country) another

precondition remains to be fulfilled before a social externality translates to an impact on

financial performance.

In the case of traditional local firms, the social cost of production and demand are in

the same society. However, in the modern MNC with separate production and demand

markets, for this argument to work, the consumer must change his/her behavior based on a

sense of solidarity with affected stakeholder thousands of kilometers away. For this

precondition to hold; values, norms and civil society activity (Marquis and Toffel 2011) at the

transnational level and in the demand markets play a key role.

Consequently, it can be argued that in multinational firms, the process for the

translation of social externalities to financial impact is more complex and multi-factorial. In



other words, such a process is dependent on several highly volatile parameters, including civil

society activity in the production markets, information capture in the production markets,

institutional environment in the demand markets and consumer behavior changes based on

social costs borne by relatively remote and disconnected societies.

Based on this discussion, we argue that the increasing separation of stakeholders’

social spaces, especially production and consumption societies, weakens the relationship

between social and financial performance in multinational firms. Factors such as reinforced

regulatory platforms, better firm reporting and more activity by relevant third party

information capture entities such as NGOs can help partially resolve weaknesses in

information capture, and subsequently the failures in this area.

Changes in a firm’s image in the eyes of stakeholders: Following stakeholder access to

information about a firm’s externalities, for the image/legitimacy based argument to work, the

stakeholders’ perceived image of the firm should change as a result. This argument is based

on several assumptions: first, that the business model of the firm is highly dependent on

image; and second that the stakeholders’ perceived image of the firm is influenced by its

social behavior.

With regard to the assumption of the importance of image to a firm, in many scenarios

(detailed below), this assumption does not hold true. The importance of image to a firm can

be partially judged by how much it spends on marketing as a proportion of total revenues

(Yoo, Donthu et al. 2000). Consequently, this parameter is of vital importance when using the

image argument for the social-financial performance link.

Vertical disintegration has been one of the pervasive trends in the capitalist world over

the past three decades in many sectors (Herrigel and Wittke 2005). As a result, instead of one

entity which employs all the capital needed to produce, distribute and sell, increasingly, these



functions are carried out in different companies. Consequently, there are progressively more

business-to-business(B-to-B) than business-to-customer (B-to-C) firms. The marketing efforts

of a B-to-B firm are typically based on a one-on-one relationship and public image plays a

less important role in the company’s financial performance than in a B-to-C firm (Coviello

and Brodie 2001). This is supported by the finding that the average marketing expense in a B-

to-B company adjusted for company size is significantly lower compared to a B-to-C firm

(Lam, Shankar et al. 2004). This is especially true of B-to-B businesses selling to a highly

concentrated market place with a few major clients.

For example, at least three firm types are involved in drug production in the

pharmaceutical sector: active ingredient suppliers (dominantly in China), bulk generics

manufacturers (highly concentrated in India) and pharmaceutical companies. As recently as

15 years ago, these three processes occurred inside the pharmaceutical company itself (Dixon,

Lawton et al. 2009). The chemical active ingredient manufacturers in China who sell to bulk

manufacturers who in-turn sell their products to pharmaceutical companies are mostly

unknown to the wider public.

In some sectors, such as the automotive industry, the number of companies vertically

aligned in the production and distribution process is as high as six (Fine, Clausing et al.

1998). As a result, customer facing companies’ share of the global capital markets is on a

shrinking trend. This implies that the share of global capital markets that is public image

conscious is decreasing because of vertical disintegration. Consequently, the image argument

used pervasively as a link between social and financial performance is less functional in an

expanding part of global capital markets (made up of B-to-B firms), especially where clients

constitute a small number of large firms. It could be argued that the customer-facing company

has a commercial interest in keeping the social behavior of its suppliers in check (Carter

2000). However, this argument can be challenged since such supplier checks are significantly



diluted in longer vertical B-to-B company chains. In other words, the social controls imposed

by the customer-facing automobile manufacturer on its suppliers are hardly expected to affect

all the multiple levels of suppliers involved in the production in the same way.

As this discussion shows, the importance of a firm’s image to its financial

performance is conditional. Consequently, any study exploring the image-based social-

financial performance link without taking into consideration the relative importance of image

and marketing in a firm’s operations misses an important mediating variable.

Change in the behavior of stakeholders towards a firm because of changes in the firm’s

image: For the image-based arguments to be valid, stakeholders (consumers, in particular)

must modify their behavior because of a change in the firm’s image. This change in image is,

in turn, incumbent on stakeholders receiving information on the firm’s social performance.

The implicit assumptions underlying the change in stakeholder behavior is that efficient

markets exist between stakeholders and the firm. In other words, stakeholders have the

necessary freedom of choice and mobility to replace the firm with another one.

However, when a company holds significant market power in its relations with

customers, suppliers and human resources, etc., the image of the firm will not have significant

impact on the behavior of such stakeholders (Lyon and Maxwell 2008). For example, in the

case of a large retail firm and its fragmented suppliers, the dominance of the retail firm in the

relationship with its suppliers results in a lack of choice of buyer for suppliers (Petrovic and

Hamilton 2005). In such cases, the firm has free rein regarding its social behavior without

having to concern itself with its relationship with suppliers or their potential move to other

buyers. The same is true of societies during times of economic crises and high unemployment.

Here, the choices of potential employees are limited and consequently a firm’s image cannot

significantly influence its access to human resources. The same is true of a consumer



purchasing a product for which purchasing elasticity is low: the consumer is obliged to

purchase the essential good. In a monopoly situation, the consumer will not alter his/her

purchasing behavior in the face of high positive or negative social externalities of a firm and

any resulting changes in its image. The increasing consolidation trends in different sectors and

the formation of regional, temporal or global monopolies (Beccarello 1997) can further

hamper the mechanisms for the translation of social externalities to financial impact for firms.

It should be noted that depending on the level of mobility of the various stakeholders

(suppliers, employees, consumers, etc.), monopolies do not necessarily need to be

international or national: instead, they can be bound in limited time or geographical scopes.

An example is the pharmaceutical company that has a monopoly over a drug through holding

its patent. In such cases, given the low image elasticity of consumer behavior for drugs and

the monopoly of the company over the drug, efficient markets do not operate between the

consumer and the firm, and the consumer is less inclined to modify his/her behavior as a

result of a change in the firm’s perceived image. In such cases, there is a failure in the social

responsibility business case, and the firm has no economic incentive to improve its social

performance and, subsequently image, simply because there is low image elasticity of

stakeholder behavior.

Another factor that mediates change of stakeholder behavior in response to social

behavior of the company is the normative/cognitive context in which the stakeholder is

embedded. For example, customers from a community with a strong religious background

might not change their purchasing behavior in the same way compared to other communities.

The level of activity of civil society in the demand markets is another key factor. Civil society

actors play a key role in framing the externality and creating the urgency needed for the

customers to change their purchasing behavior (Luo and Bhattacharya 2006).



Impact on mid- to long-term financial performance: An interesting aspect of the image-

based social responsibility business case is the time horizon of the promised future financial

improvements. For the social responsibility business case to be valid, the time horizon of the

claimed financial results of the social performance change should be consistent with the

firm’s business model. Most social-financial performance linkage arguments promise “long-

term” superior financial performance for socially responsible firms. While some externalities

– violating the law, for instance – can result in short-term image effects, the majority of

positive externalities and a large portion of negative externalities are presumed to have long-

term financial consequences for firms (McWilliams and Siegel 2000).

An important question to answer, then, is the following: which types of firms are likely

to be interested in long-term financial performance? The time horizon of a firm’s business is

dependent on its risk profile. In other words, if a firm has a high-risk level, the importance

and value of its long-term future cash flows is lower and consequently it has an inherent

financial interest to provide greater attention to short-term issues in its business decisions1.

One attribute that has been empirically proven to decrease a firm’s risk level is the increased

size of the firm (Chan and Chen 1988). This is consistent with the argumentation that small

firms have less capacity for diversification of access to markets, supplies and human

resources which results in less resilience and higher risk levels (Errunza and Senbet 1984).

Consequently, for small firms, the present value of the expected future cash flows resulting

from attention to social responsibility – especially the type of activities with claimed longer-

term benefits, such as charity and high environmental standards in emerging-market

operations – is lower than that assumed for a larger firm.

From this reasoning, we can conclude that when instrumental ethics are the key

rationale for social responsibility, small firms have less motivation to be responsible. Hence,



arguments grounded in the assumption that a firm’s social performance can drive its financial

performance may not be a reliable driver for responsible social behavior for small firms.

Conversely, it has been observed that small firms whose governance is more

management- or entrepreneur-centric (versus shareholder-centric) (Corbetta and Montemerlo

1999) are more likely to undertake philanthropic activities in local communities than larger

firms. This finding is often linked to the preferences of owners of small firms (Madden, Scaife

et al. 2006). When smaller firms do engage in socially-responsible activities, such activities

are more likely to be based on normative principles rather than on expected long-term profit

maximization (Spence and Rutherfoord 2001). In other words, small firms are more likely to

view their social responsibility-related activities as a “duty” to their local community, rather

than as an externally imposed encumbrance.

Another class of firms with proven high levels of risk are firms in financial distress

(Andrade and Kaplan 1998). Specifically, firms with a high default-risk value long-term cash

flows less than firms in a stable financial condition. This means a firm with a high default risk

has little motivation to take socially responsible actions for achieving long-term financial

returns. In contrast, the preoccupation of such firms is short-term survival. One interesting

manifestation of the effect of financial distress or difficulty on social responsibility was

observed when at the peak of the current credit crisis, in some large financial institutions, such

as Citibank and a number of other investment firms, one of the first cost cutting activities was

firing the sustainable investment teams2.

The financial distress and company size examples are provided to demonstrate that

social responsibility initiatives claimed to achieve long-term returns are not financially viable

in high-risk firms/sectors/societies. Beyond firm size and financial distress, several field and

society level factors can be identified which systematically increase a firm’s risk levels. For

example, during times of crises and in highly volatile business environments, countries or



sectors – the higher levels of risk have the potential to affect a company’s level of interest in

social responsibility, especially when ethics are primarily of an instrumental nature. In other

words, interest in long-term financial performance is highly dependent on the social,

economic and political context of the business and on its structure. Interestingly, a wide range

of studies have analyzed the impact of social responsibility on corporate risk (Orlitzky and

Benjamin 2001), however no empirical studies so far have explored the impact of firm risk

levels on its interest in social responsibility.

In this section, we provided a detailed analysis of the process and the underlying

assumptions of the image and legitimacy argument for a social-financial performance link. As

discussed, we believe that the underlying assumptions do not hold true in many different

structural and ideational institutional environments. This means that any image-based social

responsibility business case is conditional and the typical empirical study of the social-

financial performance link should be informed of the institutional prerequisites for this

business case to hold true. In the next section, we offer an analysis of the second social

responsibility business case: the direct performance effect of social externalities on

stakeholder performance.

4.5.2 Direct Effects of Social Externalities on Stakeholder Performance

The second class of social-financial link arguments is related to the direct effects of social

externalities of a firm on a stakeholder(s)’s well-being and performance. In turn, this affects

the firm’s performance, as well. As a basic example, overworked and unmotivated employees

tend have lower performance. This can subsequently impact a firm’s performance negatively

(Bowen and Ostroff 2004). Another example is firm which invests in its surrounding

communities, and when this investment positively influences the social health of these



communities, the long-term consumption of its products may be positively affected. The same

arguments apply to universal issues such as global warming, which can affect the viability of

communities in the mid- to long-run. This can subsequently affect a firm’s operations in those

communities (Freedman and Jaggi 2005). In the following section, we outline the mechanism

underlying this process and the underlying assumptions. The below figure provides a

summary of the process and the related assumptions for the “direct effect” social-financial

performance links.

Figure 4-3 Process and assumptions for the direct effects

Impact of firm externalities on stakeholder performance:For a firm to be able to affect the

performance of a stakeholder, the scale of its externalities needs to be sufficiently large

compared to the size of the stakeholder. For example, a firm’s behavior can directly affect the

performance of its employees because a one-to-one relationship between the firm and its

workforce exists. Conversely, with regard to externalities which affect the community,



environment or society as a whole, the firm-society relationship is one-to-many, meaning that

the firm’s externalities play a relatively small role compared to many other variables affecting

the viability of a community or a society. In such cases, the larger the firm, the more

important the role its externalities will have in affecting the community and social conditions

– and consequently the stronger this business case will be. With regard to universal issues

such as global warming, the firm has to be a large multinational or must work in collective

action along with other firms to achieve tangible impact. Thus, a small firm’s financial

interest in such one-to-many cases is to free ride rather than to control its social externalities.

Compromised firm performance resulting from compromised stakeholder

performance:For a firm to be affected by a change in the stakeholder’s performance resulting

from its externalities, a number of assumptions should hold. We outline these below.

High level of dependence on the affected stakeholder: In sectors highly dependent on human

capital and access to a talented workforce (consulting, professional services and financial

services, for example), low levels of motivation resulting from a firm’s mismanagement of its

human capital can have significant financial performance effects (Moskowitz 1975).

However, in manufacturing firms, human capital is not a key source of competitive advantage

and the dominant forms of a firm’s human capital are replaceable at low cost. Consequently,

high employee turnover and other side effects of human resource related externalities might

not come at a big cost to the firm. Based on this argument, for the business case to work, the

firm should have a high level of dependency on the affected stakeholder.



Irreplacibility of the stakeholder’s resource input to the firm:In some cases, if a firm’s

externalities result in compromised performance of a stakeholder, it can switch to another

provider of the same resource supplied by the original stakeholder. For example, a large retail

firm has a multitude of choices with regard to suppliers for different products. Consequently,

if price pressures of the retail firm result in financial distress of a supplier, it can switch to

another supplier in the same or different geographic areas to procure the same product. The

stakeholder’s resources provided to the firm should not be replaceable at low cost for this

business case of social responsibility to be viable.

The time horizon of financial impact:The financial returns of managing externalities

affecting the supply of resources from a stakeholder through affecting stakeholder

performance can range from short to long term. For example, the mismanagement of human

capital can have short- to mid-term financial consequences (Moskowitz 1975; Waring and

Lewer 2004), while large-scale issues such as global warming might take longer to affect the

firm. As previously mentioned in the “image effects” section, the time horizon of such

financial impact should be relevant to a firm’s business model and risk level. For high risk

firms, the present value of the long-term financial benefits in this area can be insignificant and

hence the viability of this business case, especially with regard to long-term benefits, is highly

dependent on a firm’s risk level.

4.5.3 Explicit Stakeholder Claims

A third mechanism for the translation of social performance to financial performance is

translation of the social externality to explicit financial claims by the organization(s)

representing the affected stakeholder(s). The term explicit stakeholder claims is borrowed



from stakeholder theory (Wood and Jones 1995). Any stakeholder can take upon itself to take

action aimed at translating the firm’s externalities to symbolic or material gain or loss for the

firm. Such explicit claims come in three broad categories: i-marketized externalities, ii-

regulatory fines, lawsuits and iii- social movement pressure. We explore each of these claims

in this section.

Marketized externalities: Marketized externalities arise in a number of situations. One

example of a marketed externality is carbon emissions for which markets exist in several

countries (Paterson 2007). Another example is when externalities are evaluated by the

government and reflected in companies’ financial performance through tax incentives for

positive externalities and punitive taxes for negative externalities (Stavins 2003). An example

is tax exemption for philanthropic activities of the companies. In other words, under this

mechanism the cost/benefit of firm’s externalities to stakeholders is translated to a

cost/benefit for the firm through market-based processes, be it managed by the government or

organizations.

Fines and lawsuits: Another mechanism for the translation of firms’ externalities to explicit

stakeholder claims is sanctioning based on laws, codes and regulations. All such institutional

constraints on a firm can translate firm’s externalities to symbolic or material losses for the

firm. The effect of lawsuits and fines on a firm’s financial performance has been widely

researched in “event analysis” types of studies (McGuire, Sundgren et al. 1988; Cohen, Fenn

et al. 1995; McWilliams, Siegel et al. 1999), with most papers demonstrating a short-term

effect and many claiming a lagging effect.



Social movement pressure: Besides governments, civil society actors also play an important

role in making explicit claims to the firms regarding their externalities. Such actors act at

community, national and international levels. The tactics that they use to cause the firm

symbolic and material gain and loss has been studied in social movements literature (Della

Porta and Tarrow 2005; Den Hond and De Bakker 2007). Examples of such directed pressures

on firms include name and shame campaigns, divestment campaigns and more radical tactics

incurring direct material loss such as picketing and damaging company assets

Three separate processes, illustrated below, each with its underlying mediating variables come

together to link explicit claims by the organizations representing the affected stakeholders to

firm’s financial performance.

Figure 4-4Process and assumptions for the explicit stakeholder claims

Information capture of firm externalities: As in the case of image, for the implicit costs to

stakeholders to become explicit, information about such externalities should first be captured:



it can then reach the stakeholders’ representative bodies. As discussed under the “image

section” above, this information capture and different modes of accounting for a firm’s social

performance are imperfect, and thus places limits on what actions stakeholders can actually

undertake.

Material and/or symbolic gain or loss caused by a stakeholder in response to the firm

externalities: For a firm’s externalities to be translated to explicit costs for the firm,

institutions representing the stakeholder should be in place with sanctioning powers over the

firm. In many countries, regulatory and judiciary platforms are weak: consequently, a firm’s

externalities might not translate to fines or litigations against it. One solution to this problem

is to hold companies responsible in their home countries for their externalities overseas. This

approach has been proven to be effective for controlling global child labor and its adverse

effects (Winstanley, Clark et al. 2002). The Foreign Corrupt Act is another example of

controlling negative externalities in other countries through introducing punitive measures in

the home country.

However, while such regulations have not become sufficiently pervasive and when the

institutions of the country where the externalities are generated are weak, this business case

for social responsibility remains fragile. The same argument applies to societies where market

mechanisms for valuating firms’ externalities (such as carbon markets) are underdeveloped.

As for the social movements, again depending on the activity and capacity of civil

society actors in firms’ countries’ of operation the scale of symbolic and material gain and

loss that they can cause the firm varies.

Overall, the translation of firm externalities to gain or loss by a specific claimant

stakeholder is the mechanism most reliant on the institutional setting of the societies in which



the firm operates. Such institutional factors include regulatory enforcement, civil society

activity and general normative environment of such societies.

Explicit stakeholder claims have been cited to have two types of financial impact on

firms: one is mediated by the effect on a firm’s image and the other is related to the direct cost

of fines, settlements, or social movement activities borne by a firm. Earlier sections of this

paper provided a discussion of the image/symbolic mechanism. With regard to fines,

settlements and social movements’ direct financial costs for the firm, it should be pointed out

that for the business case to hold, such costs should be financially higher than the firm’s

savings from externalizing its costs. In other words, through the combined effect of image

impact and direct financial effect of the explicit claims, the business case for a firm’s social

responsibility can become viable, albeit with the precondition that the range of assumptions

discussed above come true.

The below figure provides a summary of the failings in the social-financial

performance link’s mediating variables.



Figure 44-5 Summary of the failings of the link between social and financial performance

In the preceding section, we provided a detailed analysis of the social-financial performance

link. It should be noted that in the instances where the business case has flaws and the

underlying assumptions do not hold, social responsibility can come at a cost and can thus

have negative financial consequences for firms.

Finally, an argument that is usually cited to link the management of social externalities

and financial performance is that if a firm manages its social and environmental risks and

opportunities well, it can be taken as a sign of high management quality (Akpinar, Jiang et al.

2008), and high management quality should, in turn, result in improved financial

performance. The fiduciary duty of managers is to maximize shareholder value. As discussed

CHAPTER 44BSOCIAL RESPONSIBILITY AND MARKET KARMA Discussion and Concluding Remarks


in the above scenarios, in many contexts, the focus on decreasing social externalities does not

lead to improved financial performance and does not create shareholder value. Consequently,

in the purely instrumental viewpoint on corporate ethics, decreasing negative externalities and

increasing the positive ones in such scenarios goes against managers’ fiduciary duty and can

be conversely judged as a sign of “low quality of management”. Among the claimed links

between a firm’s social and financial performance, the “management quality” argument is the

vaguest, rendering a detailed critique of this argument difficult.

4.6 Discussion and Concluding Remarks

This papers attempted to remind us that as any other exchange, the social-financial

performance link is socially embedded (Granovetter 1985), and is mediated by a wide range

of structural and ideational (Djelic and Quack 2008:300) institutional factors at the company,

field and society and transnational levels. The below table lists some of the firm attributes and

institutional factors at field, society and transnational levels that mediate translation of social

behavior to financial performance.



Table 44-1List of some key firm attributes and institutional variables mediating the social-financial performance link

Company level Field level Societal level Transnational level

Structural Ideational Structural Ideational Structural Ideational Structural Ideational

Symbolic / image effects

-Image dependency of firm (marketing expenses) -Company risk level (company size, company solvency) -Company business model (B-to-B vs. B-to-C)

-Importance of image to internal and external firm stakeholders

-Market concentration and Market power of the firm -Sector risk level

Existence of field level environmental and social precedents and field level reputation issues (e.g. oil/gas and env)

-Strength of civil society groups in target societies where externalities are generated - Strength of civil society groups in communities where key stakeholders such as customers are located -Socio-political stability/risk of countries where the company operates

-Existence of norms of activism in target societies where externalities are generated - Dominant normative attitude towards the firm(s) in communities where key firm stakeholder such as customers are located

-Existence of transnational social movements -Existence of transnational codes / soft laws backed by different institutional pressures for adoption

Existence and strength of transnational norms in the area of firm's externalities (e.g. human rights, labor rights, etc)

Direct effects

-Dependency of firm on affected stakeholder -Firm size (and the scale of its impact on stakeholder's performance)

Market power of the stakeholder(s) in the field and vis-à-vis the firm and its replaceability

Socio-political stability/risk of countries where the company operates

Explicit

claims

-Gains from externalizing costs should exceed explicit stakeholder claims

Existence of sector level codes/soft laws for firms’ social behavior and whether they are backed by sanctions

Existence of field level norms / values that facilitate making explicit claims

-Strength of legal and regulatory enforcement -Existence of markets for externalities -Level of civil society activity - Size and power of contesting stakeholder -Socio-political stability/risk of target societies

-Dominant normative attitude of target communities where externalities are generated towards the firm (s) -Existence of norms of activism in target societies where externalities are generated

Existence of transnational codes / soft laws backed by different institutional pressures for adoption



As discussed, there are ongoing trends in global institutional environment that distort one or

many of the above mediating variables and hence the relationship between social and

financial performance. Examples of such fast-growing trends include the vertical

disintegration of the product/services value chains and the separation of stakeholders’ social

spaces (for example, the separation of production and demand markets). Other arguments,

such as firm size and financial distress and their impact on the social performance of firms are

not necessarily growing trends, but both are significantly affected by global and regional

economic cycles.

The attempt to reconcile a firm’s fiduciary duty of shareholder value maximization

with its social role is a helpful exercise. This can result in the development of new business

models which decrease negative social externalities and increase positive ones, whilst

simultaneously creating shareholder value (such as bottom of pyramid business models – e.g.,

(Prahalad 2006). However, when the ethical role of a firm is seen as an economic question

and ethics are purely instrumental, the management of externalities becomes a strategic,

relative and financial question. In such an approach, as with any other “project”, decisions

concerning the management of externalities are influenced by factors such as a firm’s risk

level, business model and its institutional environment at different levels. Consequently, in

many cases, decisions aimed at economic maximization (as described in the previous section)

might not coincide with the minimization of negative externalities or the maximization of a

firm’s positive externalities. Given the existence of such conditionalities and flaws in the

social and financial performance link, the question that arises is whether the markets qualify

to be the primary reference for managers’ decisions regarding a firm’s social responsibility.

In addition, attention to the failures in the economic case of social responsibility can

affect the way the self-regulation of social externalities by firms is being recommended by

some academics and practitioners as the preferred mode for controlling firms’ social behavior



(Zimmerman 2000). As mentioned earlier, the current credit crisis has provided an

opportunity to expose the failings in self-regulation (Eichengreen 2008). The karma of the

markets seems to be selective and the ethical judgments of the markets are highly conditional

and context sensitive.

Specifically, with regard to the socially responsible investment space, the pervasive

assumption that firms and portfolios with better management of social externalities have

better financial performance does not seem to hold in the scenarios mentioned earlier. As

described in this paper, more social “responsibility” can result in inferior short or long-term

financial performance in many cases, and such cases are becoming increasingly pervasive due

to phenomena such as vertical disintegration, off-shoring and industrial consolidation.

Consequently, in the construction of socially responsible portfolios, if higher returns are also

part of the objective, the business models of firms, their risk levels and the institutional

environment of societies where their key stakeholders are located should be taken into

consideration. It should be highlighted that for large or “universal shareholders” who invest

across different sectors and geographic zones, a different business case conceptualized under

universal shareholder theory exists (Hawley and Williams 2007). For such investors, while for

one firm or sector in their portfolio there might not be a sustainable economic case for acting

responsibly, at the portfolio level there are arguments for responsibility. In such cases,

externalities in one sector can be a cost to other sectors/companies in their portfolio.

To address the mentioned divergences between a firm’s financial interests and its

normative social responsibilities, several paths can be taken, such as regulation and

socialization processes for increased attention to deontological ethics by investors and

managers. To reinforce the validity of instrumental ethics as a means of assuring responsible

firm behavior, concerned stakeholders and firms should pay more attention to the failings in

the corporate social responsibility business case and attempt to address them. Certain business



case failures, such as information capture about externalities, might be solvable through better

reporting, increased regulatory and civil society activity and third party social footprint audits,

for instance. However, failures in the social responsibility business case resulting from firms’

inherent attributes, such as a high-risk level or the strategic unimportance of a firm’s image,

seem to be more difficult to address. In such cases, external institutional constraints,

regulations and commitment to normative business ethics by managers and shareholders seem

to be required to guarantee socially responsible firm behavior (Evan and Freeman 1988).

This signifies a need to move from the dominant type of decontextualized and under-

socialized empirical studies of corporate social responsibility, which are at macro or meta

level, to studies of micro-processes of social responsibility (Jones 1991). This means bringing

actors and institutions back into the social responsibility literature and better understanding

how responsible or irresponsible behavior is constructed at the individual and group level.

Such studies can attempt to better comprehend how dominant norms and values condition the

responsible behavior of actors at different levels.

Along these lines, one theory with significant potential for demystifying individual

and group level construction of responsible behavior is the anthropological concept of

reciprocity, as advanced by the Polish-British social anthropologist Bronislaw Malinowksi.

Malinowski’s understanding of reciprocity was first introduced in his landmark work

Argonauts of the Western Pacific (1922) and more fully developed in Crime and Custom in

Savage Society (1959). This concept emphasizes the obligations that individuals in a society

have to each other, and implies that conformity to social norms, however burdensome, orders

the structure of exchange between individuals and thereby ensures the long-term stability of

both these exchange relations and the social order itself. Anthropological studies of micro-

foundations of social responsibility can shed light on social processes through which

deontological corporate ethics can be better integrated in individual and group behavior.



As for scholars conducting quantitative empirical research on the link between social

behavior and the financial performance of the firms, we believe the conceptual model

introduced in this paper can replace existing simple regressions along only one of the

mentioned mechanisms. We believe only by studying all the three mechanisms and their

interrelations simultaneously in a structured equation model and by controlling for all the

mentioned structural and ideational mediating variables can we comprehensively explore this

question. Where a mediating variable is not easy to operationalize or measure, the least that

quantitative empirical researchers can do is to acknowledge such variables and to highlight

them in the qualitative discussions in their papers.

4.6.1 Concluding Remarks

This paper makes two contributions to the literature on the link between social and financial

performance of firms. First, it introduces a novel conceptual framework, which integrates the

range of mechanisms used to explain the relationship between firms’ social behavior and

financial performance. Second, it uses this framework to analyze and challenge some of the

institutional assumptions underlying the mechanisms claimed to link social behavior and

financial performance, specifically illustrating these points through business case failures in

corporate social responsibility, where one or several of the underlying assumptions do not

hold true.

Through exploring such assumptions and business case failures, we believe that

several major breakthroughs can occur in the corporate social responsibility and socially

responsible investment research areas.

We hope that our paper will inform research examining the social-financial

performance link by ensuring that future studies take into account the role of the institutional



setting in determining the strength and direction of the social-financial performance link. By

undertaking a more nuanced analysis of contextual variables, such as a firm’s business model,

market power, risk level, and level of civil society activity such studies can be better

controlled and lead to more robust empirical studies.

Given the failing of the link exposed in this paper, research on social responsibility of

firms can move towards exploring ways to address failures in the different corporate social

responsibility business cases in different institutional contexts. Additionally, where there is a

failure in the social responsibility business case, research can explore other ways of

integrating normative social responsibility demands in the firm’s operations to ensure

responsible firm behavior.



NOTES

Here, we do not delve into the questions of the decision-making process and relativity and the

boundedness of rationality. Rather, we base our argument on the same assumption of

rationality that is inherent in the argument of proponents of instrumental firm ethics. Such

proponents demand that managers act in a socially responsible way to achieve long-term

superior financial performance. This assumes managers’ rationality and strategic choice.

2 Responsible Investor 2008; http://www.responsible-investor.com/home/article/citi_sri/


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CHAPTER 5

DISCUSSION AND CONCLUSION

CHAPTER 55BDISCUSSION AND CONCLUSION The Two Empirical Studies - Differences and Complementarities


5.1 The Two Empirical Studies - Differences and Complementarities

In both the empirical stories explored for this dissertation project, it appears that multiple

institutional logics articulated at different levels constrain but also enable the behavior of actors.

Together, these two studies provide a vivid illustration that this dense institutional setting has

two main consequences. First, it is a source of stability and stickiness through time. Second,

competing and co-existing institutional logics can be selectively mobilized by different actors,

generating bricolage, bifurcation, change and transformation.

The following section provides a discussions of the key differences between the two

empirical fields and the ways these two studies complement each other. The areas of

complementarity discussed below are the studies’ levels of analysis, the balance they establish in

attending to structures vs. agency and the role that transnational space and world society norms

play in them.

5.1.1 Level of Analysis

The case of the SWFs is an eleven-month process of institution building in the transnational

space and illustrates the role that different culturally conditioned interpretations play in this

process. In the SRI case, we observe changes in the field’s meaning systems over a period of 50

years due to both societal institutional changes such as the emergence of fiduciary investors and

the move towards managerial capitalism on the one hand, and the distributed agency of social

movement actors, on the other hand.



The SWFs case allows us to capture the impact of national institutional frames on the

micro processes of transnational institution building. Due to its short time horizon and focus on

micro processes, this study does not,however, cover longer-term institutional and practice

changes within the sovereign wealth funds and the field that would result from the introduction

of the code. This study does not explore the emergence of a transnational community (Djelic and

Quack 2010) that could emerge and be structured in the coming year, following the introduction

of the code.

In contrast, the study of SRI covers the lifecycle of the SRI movement and the evolution

of its meaning systems as it became appropriated by a mainstream financial community. This

study captures the macro processes of field level institutional change, the emerging

organizational and institutional structures of the field and the role, in that context, of social

movement actors.

Combined, the two studies illustrate both how under the influence of a social movement a

world society norms emerges and the field structure and its meaning systems evolve over time,

and how the micro-process of circulation and adoption of world society frames is dense with

institutional conflicts, differences and muddling through by actors.

5.1.2 The Institutionally Humbled Actor, Meanings and Interpretations

Another key point of complementarity between the two studies is the balance each study strikes

in its attention to institutions and actors. In the study of SWFs, the primary focus is on the role of

national institutions in shaping actors’ interpretations and behavior. This study does not attempt

to analyze the strategies adopted by the actors to influence the transnational institution building



process. In contrast, the study of SRI focuses on the role of actors and how they strategically

mobilized and edited meanings. This was to appeal to mainstream actors under the changing

institutional setting. Overall, the two studies together attempt to provide a comprehensive

understanding of how soft actors and their strategies and institutions at multiple layers co-

construct the field and its meaning systems.

The two studies expose some of the institutional, temporal and spatial constraints on the

actors, all of which show how their rationalities are constrained and humbled. In the study of

SWFs, the actors’ attitudes emerge primarily as cultural, rather than rational, and their attitudes

change over time as institutional conditions change. In the case of Singapore, the study shows

how the attitudes towards transparency evolved in the early 2000s, as following the Asian crisis,

Asian countries competed to regain credibility and legitimacy in international markets.

The SRI study, however, exposes yet another key constraint that humbles the institutional

actor. In this case, actors strategize to achieve short-term goals, such as mobilizing a new

mainstream investor or motivating regulatory changes. However, these actors are spatially and

temporally bounded (Djelic 2010). They cannot anticipate the consequential impact of a broadly

distributed agency within the field and of the interplay between a multiplicity of bounded

strategies. The latter would result in field level changes that individual actors probably would not

have expected. In the space of two decades, the financial frame for SRI became fully

institutionalized and several international organizations, such as the UN PRI, became potent

instruments for its global circulation. The acceptance of SRI in the mainstream financial

community resulted in the buyout of most major international SRI research firms by large

financial firms. It also resulted in an emerging, purely financial approach to SRI, where only

those environmental and social issues which had a “material” impact on firms’ financial



performance were taken into account. The original “translator-diffusers” of the financial frame

for SRI – most of whom had an environmentalist background – never imagined that the

financialization of SRI would go that far.

The two empirical studies point out the different ways that actors’ meaning and

interpretive systems are institutionally constructed. These studies show that ultimately, it is the

distributed agency (Garud and Karnøe 2005; Quack 2007) of institutionally embedded actors

over time that structures the field rather than the intervention of any single heroic actor (Beckert

1999).

5.1.3 Transnational Space and Meanings

The two studies are also complementary in their treatment of the world society and the

transnational space. The SRI study illustrates the emergence of SRI transnational space and the

key role it played in changing the meaning systems of the field. In the case of SWFs however,

the norm of transparency is already fully institutionalized and transnational organizations such as

the IMF are already well-established. This study captures instead how a well-established

transnational norm and its diffusion through the IMF faced difficulty due to the increased power

and influence of non-Western actors. The increased power of non-Western actors in this case

coincides with an attempt by the IMF and Western countries receiving SWF investments to

diffuse the Western norm of transparency to these organizations. This is an interesting case

exposing the changing social dynamics of the circulation of world society norms in the

increasingly multi-lateral world.



In the SRI case, however, we observe a field in the making. In less than five decades we

observe the transformation of the field from fragmented and disconnected organizations in the

US and UK to a highly dense and organized field throughout the world, with multiple national

and transnational organizations involved in norm setting and coordination across the field and a

SRI professional class appearing. During the same period, we observe how SRI emerges as a fast

expanding, world society norm (Meyer, Boli et al. 1997), which results in the widespread

translation and adoption by investors from vastly different institutional backgrounds. As of the

time of analysis, investors from over 20 countries had signed the UN PRI, and the Africa

Sustainable Investment Forum and ASRIA have been founded to coordinate the SRI activities of

Africa and Asia, respectively.

The SRI paper shows how the transnational actors endorsing SRI adopted a

predominantly financial frame and avoided the question of moral and ethical values. This was to

avoid facing the messy and varied value schemes of different countries and investors. They

chose to focus instead on the common theme of market returns from SRI funds with the objective

of identifying what would be acceptable across national and cultural boundaries. This study

shows how the emergence of transnational actors played a key role in the emergence of

financially-based SRI as the dominant interpretation of SRI and how a world society norm was

constructed through the mediation of national and international organizations for SRI in the

space of fifteen years.

Both cases show how institutions travel horizontally and vertically between different

layers of organizations (Djelic and Sahlin-Andersson 2006), how national norms diffuse in the

transnational space, and how the transnational norms conflict and co-opt with national norms in

conditioning local actors’ interpretations and meaning-making. However, in one case, the focus

CHAPTER 55BDISCUSSION AND CONCLUSION Contributions


is primarily on the diffusion of an established norm, while in the other we observe the emergence

of a new world society norm.

5.2 Contributions

This dissertation makes several contributions to theory and practice. In the following section,

these contributions are described.

5.2.1 Contributions to Theory

The common theoretical themes between the two empirical studies are a) the multi-layer

institutional analysis and b) the respective role of actors and structures in the conditioning and

constitution of meanings and interpretations. The common contributions of these studies are in

these two areas. In addition, each study draws upon and contributes to other research paradigms,

including accountability, transparency, code setting, corporate social responsibility and social

movements. The following section provides details about the contributions of this dissertation in

these areas:

5.2.1.1 Studies of Meanings and Interpretations

This dissertation contributes to studies of construction, maintenance, change and discontinuation

of meanings in institutional fields. Several calls have been made for refocusing attention on the

content of institutions and how meanings mediate the circulation, translation and adoption of



new values, norms and practices (Djelic and Sahlin-Andersson 2006; Suddaby, Elsbach et al.

2007; Sahlin and Wedlin 2008; Zilber 2008).

This dissertation contributes to understanding how institutions at different levels affect

the interpretations of actors and the way they constitute meanings. Another key dimension of this

contribution is study of the meanings in a non-Western context (in the case of the study of

SWFs). There is a particularly acute need for such studies that look at the interplay between the

transnational space and non-Western institutional systems.

5.2.1.2 Institutional Account of Non-Western Societies

Few studies have thus far attempted to apply institutional analysis to non-Western societies.

Thornton and Ocasio (2007) state that the “global multi-national context provides fertile ground

for new research” on institutional logics. The need for more attention to the role played by

different national institutions in the construction of the transnational space has also been aptly

articulated in the contemporary literature on transnational governance (Djelic and Quack 2008).

Studies such as this one attempt to respond to this need by utilizing existing institutional

frameworks to provide a better understanding of the transnational institution building process , in

particular, for non-Western organizations. Especially, given the increasingly multilateral political

and economic world, there is an increasing need for cultural studies of non-Western countries

and how they influence and are influenced by transnational norms.



5.2.1.3 Transparency and Accountability

Transparency pressures underlie practices of accounting, control and audit (Roberts 2009).

Studies of transparency so far have helped understand the ethical, social, cultural and practical

implications of transparency, both in governments and markets (Tsoukas 1997; Strathern 2000;

Power 2004; Messner 2009). However, all current conceptualizations of transparency have

neglected the role of actors’ interpretations of transparency on how it affects organizations and

societies.

In the Hood and Heald (2006) volume on transparency, transparency is categorized into

different types, including horizontal vs. vertical. The study of SWFs shows how such

classifications have an important interpretive dimension. For example, this study shows that

Singapore representatives perceive IMF’s transparency demands as horizontal and business-

oriented, while the Middle Eastern SWFs perceive the same information demands as essentially

vertical and revealing a domination project on the part of the IMF and certain Western powers.

An interpretive and culturally-embedded review of the existing conceptual frameworks on

transparency can help better understand the impact of the fast expanding “information society” in

different cultural settings.

5.2.1.4 Interpretive Accounting

This dissertation applies interpretive accounting approaches to the study of the evolution of

actors’ interpretations of transparency in the transnational space. Current interpretive accounting

studies (Dent 1991; Ahrens 2008) have focused on practices inside the organization and, in



addition, have not captured the role of national institutions and organizational cultures on actors’

interpretations. The paper on SWFs brings the study of interpretations to the cross-organizational

and transnational domain. In addition, this study brings attention to the role of institutions at

multiple levels of the transnational, national, field and organization levels in conditioning actors’

interpretations of transparency. This is aligned with the calls in accounting studies for more

research into the institutional dynamics of emerging standards for transparency, audit and

accounting disclosure (Hopwood 2009).

5.2.1.5 Transnational Governance

Several scholars have emphasized that the study of processes of transnational institution building

cannot be carried out without attention to national cultures and the way they trickle-up towards

the transnational space (Djelic and Quack 2003). Such scholars have highlighted the need for

process-focused studies of transnational institution building that take into consideration the

national, field level and organizational contexts and how they influence and are influenced by

transnational institutions.

Both empirical studies in this dissertation use a multi-level analytical strategy to explore

how institutions affect interpretation and meaning making for different kinds of actors.

Currently, most empirical studies of institutions focus only on field or national level institutions.

These two studies strive to focus on the multi-level interplay of institutional logics and how this

multi-level interplay affects actors. In particular, these studies expose the circulation and

translation role that the transnational actors and organizations play in this process.



5.2.1.6 Social Movements

The study of SRI can serve as an example of how the study of institutions at multiple levels can

be combined with the study of social movement actors’ framing strategies. Most existing studies

of collective action framing in social movements are actor-focused and the role of institutions at

multiple levels in shaping action is mostly neglected. The study of the respective roles of

structure and embedded agency in the evolution of collective action frames has been cited as an

area requiring further empirical research and theory (Benford and Snow 2000).

5.2.1.7 Socially Responsible Investments

There is a large body of literature on the history of SRI and its mainstreaming (Hutton,

D'Antonio et al. 1998; Sparkes 2002; Schueth 2003). However, none has attempted to elucidate

what mainstreaming actually means from an institutional perspective, and what types of frame

adjustments are undertaken by boundary actors to adapt to the institutional environment of

incumbent actors. This paper sheds light on how in a period of 20 years, SRI has moved from

being dominantly about values and norms, to the 2010 formulation of SRI as essential to the

long-term financial performance and sustainability of large institutional investors.

5.2.1.8 Corporate Social Responsibility

The paper on social responsibility and market karma introduces a conceptual model that can

enable more nuanced and comprehensive studies of the link between social and financial

performance. Prior to this paper, no comprehensive conceptual model existed to deconstruct this



link and the mediating and moderating variables involved in its functioning. In addition, this

paper exposes the potential failing of this link and how in many different institutional contexts,

social responsibility not only fails to result in better financial performance, but might even come

at a cost. Research attempting to expose the failings in the link between social and financial

performance has been undertaken (Jones 1995), but no studies have attempted to structure the

link and its potential failings in the form of an integrated conceptual model. Attention to

institutional context can enrich the methods used in the wide body of empirical research on the

social-financial performance link.

5.2.2 Contributions to Practice

As Bourdieu emphasizes, making institutions explicit and visible should be a key objective of

social science. Invisible and taken-for-granted institutions are instruments of domination and

play a key role in stabilizing and maintaining existing social hierarchies and structures. Bourdieu

(1983) believes that by bringing to light the values and norms that underlie our way of life, the

social scientist can motivate change in societies and equip citizens with a better understanding of

the implicit rules of the game. Both empirical studies in this dissertation attempt to expose taken-

for-granted institutions and how they influence individual and collective behavior. In addition,

this dissertation makes specific contributions to practice in the following areas.



5.2.2.1 Regulation of Transparency and Accountability

As the case of IMF-regulation of SWFs shows, international organizations continue to apply

Western principles to non-Western countries and organizations without bearing in mind cultural

differences and their impact on the receptiveness of such societies to Western norms and

principles. In the case of disclosure and transparency, there have been many transnational

organizations and codes, which continue to push for more transparency, both in the private and

public sectors. Several IMF and World Bank transparency initiatives, Freedom of Information

acts, the IFRS and corporate governance initiatives, such as the International Corporate

Governance Network (ICGN), all push for more detailed and harmonized disclosure by states

and corporations. This dissertation illustrates the fact that cultural differences have an important

role to play in the way different organizations and individuals react to such disclosure and

transparency demands. This dissertation provides the policy makers and regulators with an

explanatory tool that helps understand and foresee the reaction of their diverse counterparts to

their transparency demands. This has important implications for the way transparency and

disclosure standards and codes are worded to minimize conflict with national values and norms

and hence maximize the compliance and performativity of such codes and standards.

5.2.2.2 Social Responsibility

The responsible investment domain is dominated by the language of risk and return, and most of

the large pension funds signing into SRI cite the possibility of the long-term impact of SRI on

their returns – at least as part of their argument. The empirical study on SRI shows how the



financial language for SRI resulted from society level institutional changes and “soft” agency of

a loose network of SRI actors. This study reminds all investors that the current risk/return-based

frame is the result of a long term institutionalization process, and not the fruit of empirical proofs

of the financial returns of SRI. As a result, the sustainability and the “doing well by doing good”

arguments should be used with caution given their empirical weakness and conditionality.

The paper on social responsibility and market karma further explores the cases where

social responsibility might even come at a cost. In such scenarios, several practical

considerations come to mind, which include:

I- Where the social-financial performance link fails, markets cannot be relied upon

to ensure responsible corporate behavior, and other mechanisms for controlling

firm externalities – such as regulation – might be needed.

II- Studying the failures of the social-financial performance link can bring attention

to ways of fixing such failings. For example, attention to B-to-B firms hidden

down the value chain – who currently face no legitimacy and reputational

pressure – can motivate civil society actors to bring more visibility to the

practices of such firms. In the case of firms in financial distress, attention to their

inherent high risk and short-termism can motivate environmental and social

analysis firms and rating agencies to pay special attention to the environmental

and social footprint of such firms. In the same line, civil society actors will have

to pay extra attention to expose the externalities of firms with a high market

power where the firm’s stakeholders are dominated by the firm and have little

possibility for translating its externalities to symbolic or material gains and loss

for the firm. Such attempts to address the failings of the link can compensate for

CHAPTER 55BDISCUSSION AND CONCLUSION Limitations of the Research


the failing of one of the three mechanisms (e.g. symbolic, direct effect or explicit

stakeholder claims) by reinforcing one or both of the other mechanisms.

III- Responsible investors can use the scenarios explained in this paper to decide in

what part of their portfolio responsibility can result in higher returns. By paying

attention to the business context, investors can achieve a better understanding of

the return implications of using environmental and social criteria in their

investment practices.

IV- In business education there has been a trend for teaching corporate social

responsibility based on sustainability and financial arguments rather than adopting

normative approaches to the social responsibility of firms (White and Taft 2004).

The conceptual model introduced in this paper can be used in such courses to

provide a systemic understanding of the link between the firms’ social and

financial performance. In addition, the model helps the students question the link

and to understand that relying on the business case only, does not guarantee social

responsibility.

5.3 Limitations of the Research

The road towards compiling this work has not always been smooth, and at many stages, I was

obliged to tackle empirical and theoretical challenges. While several challenges have been

addressed, others remain unresolved. The below section describes these unresolved challenges

and limitations.



5.3.1 Number of Interviews

In the study of SWFs, the number of interviews (a total of nine) was limited by the fact that the

total number of active participants in the negotiations was just above 20. In addition,

confidentiality concerns and the political sensitivity of the negotiations resulted in the difficulty

of finding willing interviewees – especially from Middle Eastern countries. However, given that

all interviewees recounted their interpretations of the same set of events, after six interviews I

arrived at the saturation point regarding participants’ accounts of the negotiations and the types

of conflicts that emerged. In addition, I attempted to diversify my sources of qualitative data to

address this concern. I relied on wide-ranging sources of documentary evidence to understand

the SWFs’ perspectives of transparency and their behavior during the negotiations.

Moreover, among the three SWFs studied, I only succeeded in interviewing the

Norwegian and Singapore representatives, and the Kuwait fund representatives did not accept to

participate in an interview. I endeavored to address this issue by a thorough analysis of the

Kuwaiti representatives’ profiles, KIA’s website and press releases. In addition, I used various

third party accounts from negotiation participants to understand the concerns raised by the

Kuwait fund during the negotiations and the behavior of its representatives.

In the SRI study, I could not interview all the individuals whose names were mentioned

in the snowball sampling process. I succeeded in interviewing 21 out of the 29 names. Of the

remaining eight, one person has passed away and the remaining eight have so far been

irresponsive to interview requests. My interview rate (21/29) is however, consistent or superior

to other studies using the snowball sampling methodology (Curtis and Zurcher 1973; Heirich

1977; Opp 1988). In addition, I succeeded in finding other audio/video and textual materials on



four out of the remaining nine individuals, which helped me, to some extent, to understand their

viewpoints about different aspects of reframing of SRI.

5.3.2 Sampling Issues

Another methodological challenge that I faced in the SWF study is that I did not succeed in

constructing a full 2 by 2 matrix around the type of government and level of international market

integration criteria. The case that is missing from the sample is an SWF, which represents both a

high level of integration into markets and a democratic power structure (Norway Low/High,

Singapore High/Low and Kuwait Low/Low). The Australian fund was the only one fulfilling

these criteria. However, this fund was founded a short period before the IMF negotiations.

Consequently, a lack of structure at the SWF and little investment activity at the time of

negotiations made it incomparable to the other SWFs in the sample. The Alberta and Alaska

funds were also consistent with the High/High criteria. However, both are state level funds in a

federal government. This makes their structure and relationship to the government very different

from the other funds.

5.3.3 Insufficient Study of Unofficial “Behind the Scene” Political Processes

In analyzing the SWFs, I was not able to study the political processes occurring behind the

scenes and outside the negotiations process. In several other studies, behind the scenes processes

have been shown to play a key role in conditioning the behavior of actors in the negotiations.

This was not included in my analysis, since data about such unofficial bilateral processes were



not available. However, given the fact that my study focused on interpretations and attitudes,

rather than decisions and the official stance of the SWFs, I do not believe that this factor had a

significant effect on the study’s findings.

5.3.4 Insufficient Granularity in the Analysis of Information Types

Another challenge in the study of SWFs was that I did not have reliable data to study

participants’ reactions to different types of information disclosure demands. For example, my

study does not differentiate between process and outcome (Hood and Heald 2006) information

disclosure demands. The duration of time elapsed between the interviews and the negotiations

(which ranged from three months to one and a half years) and the lack of access to meeting

minutes kept by the IMF made such an inquiry impossible. While this study breaks grounds in

understanding cultural attitudes to transparency pressures and audit, more granular studies for

different types of transparency demands would need to be undertaken in other empirical settings.

5.3.5 Inattention to the Role of Networks

The paper on SRI does not attempt to map the network of actors and organizations involved in

the diffusion of the financial frame. I consider that adding a network-based and spatial study of

the SRI field (Mohr 2005) can yield additional important findings about the institutional linkages

at different levels and how they facilitated the widespread circulation and adoption of SRI over

the past two decades.

CHAPTER 55BDISCUSSION AND CONCLUSION Future Research Directions


5.3.6 A Static Model of the Social-Financial Performance Link

The conceptual model developed in “Social Responsibility and Market Karma” currently

provides a static understanding of the way social behavior translates to financial performance. I

believe in the future revisions of the paper, the model should be made dynamic so that it also

exposes the longitudinal interactions between the three mechanisms involved and how they

evolve over time.

The final section of this dissertation lays out future research that can build upon the

methods and findings of this dissertation.

5.4 Future Research Directions

While conducting the inquiry, besides my main theoretical questions, several patterns in data and

questions emerged, which I could not explain/explore as part of this thesis. Some of these

potential areas for future research are detailed below:

5.4.1 Performativity

The study of SWFs focused on the impact of the national institutional context on the concerns

and behavior of the SWFs and their representatives towards transparency demands of the IMF.

However, this study did not cover the intended and unintended practical impacts of the

introduction of soft laws. In accounting, there have not been many studies which attempt to

provide an understanding of the practice level impact, i.e. the performativity (MacKenzie 2004)



of the adoption of voluntary codes in different institutional contexts. The ideal types that I have

introduced for the attitude to transparency could be further developed to conceptualize how the

intended and unintended impacts of voluntary code adoption are different for each type. A

practice level study of SWFs would be challenging because of their high level of secretiveness in

most of the cases. Such a study could be undertaken in a different empirical setting. The same

applies to the study of the mainstreaming of SRI: while this study sheds light on meaning-

making and the role of actors in the movement, the practical implications and performativity of

adopting SRI practices by mainstream investors remains unknown. In the process of the

financialization of SRI and the move to the mainstream, it remains to be studied whether the

outcome was consistent with the original goals of the SRI movement.

5.4.2 Interpretive Studies of Accounting

Currently, interpretive studies of transparency, accountability and audit mostly focus on

organizations and organizational practices and do not take into consideration the field level,

national and transnational institutions and their impact on perceptions and practices in these

areas (Boland 1993; Ahrens 2008; Kakkuri-Knuuttila, Lukka et al. 2008).The study of SWFs’

regulation provides an example of how interpretive accounting studies can be combined with

analysis of institutions at multiple levels. Such studies are especially relevant in the transnational

space because of the vast cultural difference between the representatives of different countries.

This type of research is increasingly valid, as emerging market economies achieved increasing

economic influence and demand heard in international organizations.



As for the concept of transparency, the current conceptual frameworks are all “acultural”,

implicitly assuming a Western cultural context. This study can be a starting point for better

situating transparency as a culturally-embedded concept and better understanding how the

historical role of information in the economic and political organization of different countries

and organizations can impact their interpretations of transparency and their reactions to

transparency demands.

5.4.3 Unintended Consequences of Institutional Work

In current studies which use the institutional work framework (Zietsma and Lawrence 2010),

most of the focus is on the intended consequences of the institutional work. Some scholars have

questioned the rationalistic and under-embedded actors sometimes assumed in the institutional

work literature (Djelic 2010; Kaghan and Lounsbury 2011). An important area missing in this

literature is whether institutional work achieves its intended consequences, and what the

unintended consequences of institutional work are.

In my study of SRI, all actors involved in the financial reframing of SRI mention the

widespread adoption of SRI as their intention. A mix of personal financial interests and societal

goals are mentioned as underlying interests for their goal of the wider adoption of SRI practices.

However, as emerged in several interviews, certain actors involved in this framing work did not

foresee mainstreaming to go this far - they believed that mainstreaming has ultimately turned

SRI into a financial instrument and that it has compromised, in the process, the original

environmental and social agenda of the movement. The exploration of unintended consequences

of institutional work is another important area where additional empirical research in needed.



Such studies could expose whether the intended consequences of institutional work is sustainable

and in what circumstances, in the long-run, structures and wider societal institutional trends

dominate the intentions and actions of the agents.

5.4.4 Types of Transparency Demands

In the literature on transparency, different types of transparency demands are conceptualized,

such as surveillance vs. openness vs. transparency (Hood and Heald 2006). Other types of

transparency categories include real-time vs. retrospective transparency and process vs. outcome

transparency (Hood and Heald 2006). In this study, the only dimensions of transparency that I

could differentiate based on my empirical data were targeted (disclosure) vs. public transparency

and vertical vs. horizontal transparency. More research is needed to shed light on the impact of

national institutions towards different types of transparency demands. Such research – beyond its

academic contribution – will be instrumental to more informed policy-making and regulation for

transparency and accountability.

5.4.5 Empirical Studies of Failings of the Social-Financial Performance Link

In my paper on social responsibility and market karma, I lay out a conceptual framework for the

social-financial performance link, including the three interrelated mechanisms of

“symbolic/image effects”, “direct effects” and “explicit stakeholder effects”. So far, empirical

quests to explore the link between social and financial performance have studied only one out of

these three mechanisms at a time (Margolis and Walsh 2003; Margolis, Elfenbein et al. 2007).


Using this conceptual framework, future empirical research can explore this link in a more

comprehensive manner. In addition, this paper lays out scenarios where social performance does

not translate into financial performance. Future empirical studies are needed to prove these

claimed failings.



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RESUME SUBSTANTIEL EN FRANCAIS


Chapter 7

RESUME SUBSTANTIEL

EN FRANCAIS

La Construction du Sens

Le rôle des institutions et des acteurs

sociaux dans la construction conjointe des

systèmes interprétatifs et sémantiques

Afshin Mehrpouya

RESUME SUBSTANTIEL EN FRANCAIS


La présente thèse étudie l'interaction entre structure et agence dans le contexte d'une

institutionnalisation sur plusieurs niveaux. Les institutions interagissent de manière complexe sur

le terrain et aux niveaux national et transnational. Cette dynamique complexe conditionne tant

les interprétations et les convictions générées par les acteurs que leur mobilisation du sens pour

mettre en pratique interprétations et convictions en pratique dans le cas d'exigences multiples.

La présente thèse s'appuie sur deux études empiriques originales.

1. Une première étude faisant suite au processus transnational de réglementation des

fonds souverains de novembre 2007 à octobre 2008

2. Une seconde étude portant sur l'évolution sémantique dans le domaine de

l'investissement socialement responsable (ISR) des années 1960 à nos jours (2011)

La présente thèse se base sur ces études empiriques pour proposer trois documents de recherche

qui répondent au même éventail de questions. Ces articles sont intitulés :

1. Fonds souverains, fonds monétaire international et transparence : différents acteurs,

différents sens ?

2. Du dieu aux marchés: le rôle des acteurs et des institutions dans la


3. La responsabilité sociale des entreprises et le « karma du marché » : fiabilité et

pérennité du lien entre performances sociales et financières

RESUME SUBSTANTIEL EN FRANCAIS Présentation des trois articles


La présente thèse se base sur des méthodes de recherche qualitative et une combinaison

d'observation des participants, d'entretiens semi-structurés et de sources documentaires. L'auteur

a de plus exercé pendant quatre ans les fonctions d'analyste de notation environnementale et

sociale en Amérique du Nord et en Europe. Sa carrière l'avait auparavant amené à travailler en

collaboration étroite avec plusieurs fonds souverains.

7.1 Présentation des trois articles

7.1.1 Fonds souverains, fonds monétaire international et transparence : différents

acteurs, différents sens ?

Cet article présente une analyse du processus de création d'institutions transnationales ayant pour

objectif l'amélioration de la transparence et de la gouvernance des fonds souverains. Ce

processus a été mené par le Fonds monétaire international. Cet article étudie les différentes

interprétations du concept de transparence autour de la table de négociations et montre la forte

influence des contraintes organisationnelles et des cadres institutionnels nationaux sur ces

interprétations. Ces différentes acceptions marquent le processus transnational de création

institutionnelle et ses résultats.

RESUME SUBSTANTIEL EN FRANCAIS Présentation des trois articles


7.1.2 Du dieu aux marchés: le rôle des acteurs et des institutions dans la


Cet article fait suite à une importante transformation de la conceptualisation et du vocabulaire

employé dans le domaine des investissements socialement responsables (ISR). Lorsque les

acteurs du marché financier classique ont commencé à s'emparer de l'ISR, un réseau peu

structuré d'acteurs sociaux a construit du sens et adopté un vocabulaire tenant compte des

demandes institutionnelles des organisations financières. Cette adaptation sémantique entrait

parfois en conflit avec leurs convictions personnelles.

7.1.3 La responsabilité sociale des entreprises et le « karma du marché » : fiabilité

et pérennité du lien entre performances sociales et financières

Ce troisième article est un document de réflexion mettant en exergue les facteurs contextuels et

institutionnels influençant le lien entre la responsabilité sociale des entreprises et leurs

performances financières. Il propose un modèle conceptuel des impacts possibles des

performances sociales sur les performances financières d'une entreprise. Il introduit ensuite

différentes caractéristiques relatives à l'entreprise ainsi que des scénarios institutionnels

structurels et idéiques sur le terrain, dans l'entreprise et au niveau transnational, suppléant le

modèle conceptuel lorsque ce dernier ne fonctionne pas. Dans de tels cas, non seulement la

responsabilité sociale ne donne pas d'avantage financier, mais elle a même un coût pour

l'entreprise.

RESUME SUBSTANTIEL EN FRANCAIS Contributions


7.2 Contributions

La présente thèse se propose d'apporter une contribution tant au débat théorique qu'à la pratique.

7.2.1 Contributions à la théorie

Les contributions principales de ces travaux exposés dans ce chapitre touchent aux domaines

suivants :

7.2.1.1 Théorie des institutions et de la sémantique

Les recherches présentées dans la thèse montrent à l'aide de méthodes interprétatives et

de méthodes institutionnelles à plusieurs niveaux comment les institutions conditionnent

les interprétations et la création du sens de la part des différents acteurs. Le corpus de

recherche actuel ne propose que peu d'analyses de la création sémantique sous l'angle de

la transnationalité.

7.2.1.2 Étude institutionnelle des acteurs non-Occidentaux

Cette étude des fonds souverains examine les cadres institutionnels transnationaux non-

occidentaux, contextes souvent négligés par les études actuelles portant sur la

gouvernance transnationale.



7.2.1.3 Transparence et responsabilité

L'étude des fonds souverains offre un cadre permettant d'analyser comment les demandes de

transparence sont interprétées par les acteurs des institutions organisationnelles et nationales en

fonction du conditionnement de ces dernières. Le rôle des institutions dans la conceptualisation

de la transparence par les acteurs a jusqu'à présent souvent été ignoré. En se concentrant sur les

aspects transnationaux et non-occidentaux, cet article apporte un éclairage unique à la recherche

sur la transparence et la responsabilité.

7.2.1.4 Gouvernance transnationale

Dans ces études, nous soulignons le rôle des acteurs transnationaux dans la transposition et

l'adaptation de modèles aux environnements institutionnels nationaux et organisationnels du

public visés par ces modèles. Là encore, peu d'études se sont penchées sur le rôle des acteurs

transnationaux dans la création et l'évolution sémantique dans l'espace national, en particulier

pour des contextes non-occidentaux.

7.2.1.5 Responsabilité sociale des entreprises

L'article La responsabilité sociale des entreprises et le « karma du marché » développe un cadre

unique et prudent d'étude du lien entre la responsabilité sociale des entreprises et leurs

performances financières. Cette étude expose en outre les facteurs institutionnels conditionnant

le bon fonctionnement de ce lien. Ce cadre conceptuel peut éclairer la recherche sur le lien entre



RSE et performance financière des entreprises. De plus, en mettant en évidence la

conditionnalité institutionnelle de ce lien, cet article souligne la nécessité de recherches basées

sur des études davantage centrées sur les processus et portant sur la structuration du

comportement socialement responsable.

7.2.2 Contributions à la pratique

La présente thèse contribue également à l'étude des pratiques des domaines de la transparence et

de la responsabilité et des investissements socialement responsables.

7.2.2.1 Pour les autorités nationales et transnationales de réglementation de la

publication des informations et de la transparence

Les types-idéaux développés pour le conditionnement institutionnel de l'interprétation de la

transparence peuvent fournir aux responsables de l'audit et de la transparence un outil explicatif

majeur, en particulier dans les contextes transnationaux. A l'aide de ce cadre, ils peuvent lors du

développement des codes prendre en considération l'impact de la culture nationale sur

l'interprétation de la transparence afin de favoriser leur adoption et leur respect.

7.2.2.2 Responsables, autorités de réglementation et investisseurs responsables

Les travaux sur la RSE figurant dans la présente thèse mettent en lumière les différents facteurs

conditionnant le lien entre performance sociale et performance financière. Prendre ces facteurs

RESUME SUBSTANTIEL EN FRANCAIS Limites de la thèse et pistes pour l’avenir


en considération peut permettre aux investisseurs responsables de mieux appréhender les

conséquences des investissements responsables sur leur portefeuille, et permettre aux autorités de

réglementation de comprendre dans quels cas les marchés ne sont pas en mesure d'inciter à des

choix socialement responsables, auquel cas des réglementations peuvent être nécessaires ; la

société civile peut chercher à influencer ces conditions institutionnelles pour inciter davantage

les entreprises à adopter des modèles responsables.

7.3 Limites de la thèse et pistes pour l’avenir

Les limites de la présente thèse sont les suivantes :

1- Le faible nombre d'entretiens dans l'étude sur les fonds souverains du fait de questions de

confidentialité et du peu de participants actifs dans les négociations

2- L'absence d'un cas pour les paramètres « forte intégration au marché et gouvernance

démocratique » dans l'échantillon 2x2 des fonds souverains, aucun fonds souverain

acceptable présentant ces paramètres n'existant.

3- Le manque de granularité dans l'étude des interprétations de la transparence pour

différents types de transparence, par exemple pour l'opposition processus-résultat ou

synchronie-diachronie (Hood et al, 2006). Cette carence est due à l'insuffisance des

données empiriques permettant d'évaluer les interprétations que font les acteurs des

différents types de transparence.

Les pistes d'explorations proposées pour de futures recherches sont les suivantes :

RESUME SUBSTANTIEL EN FRANCAIS Limites de la thèse et pistes pour l’avenir


1- Recherches sur l'impact des interprétations divergentes de la transparence sur la

transposition, l'application et les niveaux d'adoption souhaités ainsi que sur les

conséquences involontaires des codes de transparence au sein des organisations.

2- Étude des conséquences involontaires du travail institutionnel dues à l'ancrage

spatiotemporel des acteurs.

3- Études empiriques basées sur le cadre analytique introduit par la présente thèse du lien

entre performances sociales et financières.

4- Études de la façon dont les différents acteurs gèrent des demandes institutionnelles

conflictuelles et parallèles et les concilient avec leurs convictions personnelles. Des

études de l'hypocrisie organisationnelle au niveau de l'individu sont indispensables à la

compréhension des interactions entre structures et agences et de leur construction

sémantique conjointe.



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