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David Wheeler is Erivan K. Haub Professor and Barry Colbert isSenior Research Fellow in the Business and Sustainability
Programme in the Schulich School of Business, York University,Toronto, Canada. R. Edward Freeman is the Elis and Signe Olsson
Professor of Business Administration and Director of the Olsson
Centre for Applied Ethics in the Darden School of Business,University of Virginia, Charlottesville, USA.
Focusing on Value:Reconciling Corporate SocialResponsibility, Sustainabilityand a Stakeholder Approach
in a Network Worldby
David Wheeler, Barry Colbert and R. Edward Freeman
Two decades ago, Peter Drucker [1] famously asserted: the proper
social responsibility of business is to tame the dragon, that is to turn a
social problem into economic opportunity and economic benefit, into
productive capacity, into human competence, into well paid jobs, and into
wealth. In the intervening years there has developed a lively public
debate over the role of business in society most acutely with respect
to the supposed social and environmental impacts of economic globalization.
This development has led to the concerns of anti-globalization protestors
on issues like third world development, poverty, the environment and
employment being echoed by large numbers of ordinary citizens worldwide
[2]. More recently, a heightened sense of international insecurity has
added further urgency to questions surrounding the role of business in
society [3].
Academic debates on the purpose of business have tended tofocus on the interplay between the rights of investors versus those of
other stakeholders. In Anglophone jurisdictions, backed by the weight of
company law and corporate governance practice, strategic management
How does corporate social responsibility and sustainable development relate to the
creation of business value?
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theorists tend to emphasise a simple agency theory of the firm predicatedon essentially economic principles; whereas stakeholder theorists advance
both normative and instrumental constructions of how and why business
creates value for its various constituencies [4]. However, in the context
of wider societal developments, i.e. globalization, international security
issues, etc., both agency theorists and stakeholder theorists of the firm are
now having to address three interwoven concepts: (i) corporate social
responsibility (CSR); (ii) susta inable deve lopment; and (iii) a
stakeholder approach to strategic management. These concepts are
often assumed to be consonant but are variously advocated from political,
sociological, ethical, ecological and business perspectives [5]. Their
academic and civil society proponents frequently employ normativeovertones and assumptions, but sometimes balance their arguments
according to the commentator, the context or the audience with a more
instrumental business case. Thus it is safe to assume that even
proponents and sympathetic practitioners risk becoming confused.
To address this problem, we wish to move the discussion to a
place where it becomes grounded in the assumed central occupation of
practi tioners, i.e. the creation of business value. However, we
acknowledge that even the concept of business value carries ambiguity,
with academics, commentators and business practitioners all searching
for more useful and compelling ways to describe value and the value
creation process. In a world that is becoming ever richer in informationand opinion, it is increasingly clear that intangible business assets in
particular and business value in general cannot adequately be described
in purely economic terms [6]. Similarly, it seems incomplete to describe
other forms of intangible value created by business e.g. reputational
value, brand value, etc., without some reference to how these relate to
economic value over the long term.
So, although we begin this paper by asserting that the creation ofvalueis the central motive force of market economies, and by extensionthe primary purpose of private enterprise, we also acknowledge the
paradox that value may be defined by different actors in different ways.Following these two premises our aim is to put forward a simpleframework to reconcile the concepts of corporate social responsibilityand sustainable development (or sustainability in business terms) with astakeholder approach, through a focus on the creation of value asdefined by different actors and networks as an integrating ground. We
believe that a business model that places value creation at its core willallow concepts of CSR, sustainability and the stakeholder approach to findtheir natural homes, whether at a strategic or a managerial level. We willnot attempt to redefine or refine the three terms; simply to demonstratetheir practical consonance as they are presently understood.
The structure of this paper is as follows. First we offer a range ofcontemporary business stories to ground our discussion, and to illustrate
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some emerging forms of discourse in what some commentators refer toas the new or network economy. We then present a simple navigational
tool that we believe will assist managers in navigating the relationship
between business and society in the context of value creation. By way
of illustration we relate our stories to that tool. Finally, we discuss the
theoretical and practical implications of our arguments.
The New Economy and the Growing Recognition of Communities
of Interest or Value-Based Networks
Advocates of new economic and social paradigms believe that the world
is changing fundamentally [7]. They assert that new technologies andeconomic globalization are changing the very nature of business, with
increasing emphasis being placed on the centrality of knowledge and
innovation generated increasingly through networks [8]. The advent of
the so-called new or network economy has, in turn, given rise to new
forms of discourse surrounding the nature and purpose of the firm,
business strategy and the process of value creation [9]. And these raise
new questions of corporate social responsibility and sustainability [10].
In Anglophone marketplaces such as the US, the UK, Canada and
Australia, long-standing assumptions about how to maximize the
effectiveness of the firm (as measured by traditional metrics such as
profits or economic value added) have been tempered by the novelrecognition at least in some quarters [11] that in certain circumstances
the creation of communities and social networks united by a common
sense of what is valuableis a pre-requisite to economic pay-off. This
argument may be made for a range of business sectors: from information
and communications technologies through life sciences, energy and
natural resources. So, in this paper, we will present narratives from all of
these sectors. But first we should say a little about the phenomenon which
some call the new or network economy and how this phenomenon
leads to the need to consider new communities with a common sense of
how value is created and appreciated. We shall refer to these communities
as value-based networks (VBNs).
Echoing many of the concerns of Putnam [12] in The Future of
Success,Robert Reich critiques the notion that communities should be
discussed simply in commercial terms in the US whilst noting the specific
nature of the value offered to individual joiners by new groups such as
cyber-communities [13]. He notes the socially divisive impacts of new
sorting mechanisms in residential, educational, social security and
health domains whilst wistfully marvelling at the burgeoning array of deals
and opportunities for individual customization of value added services
offered as by-products of globalization. These products are avidly
accessed by new groups of users and consumers keen to avoid missing
great deals, whether they are customers, investors or potential employees.
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The critical factor here for Reich seems to be the speed with which thesenew groups form and, presumably, may also collapse facilitated by
the advent of new communications technologies.
Less critical observers of globalized deal-making, customization
and other technology-enabled business activities than Robert Reich have
coined a range of terms to describe the value creation phenomena they
are witnessing. E-business commentators refer to business webs,
communities of creation and relational or network capital [14] in
almost exactly the same terms as management theorists would use
references to inter-firm networks and intra-organizational linkages,
stakeholder value and social capital [15].
In Digital Capital, Don Tapscott and co-workers cite James
Moore [16] as having blazing insight when he wrote about business
ecosystems of customers, suppliers, lead producers, competitors and
other stakeholders who co-evolve their capabilities and roles. Tapscott
et al describe digital industry b-webs as places where sets of contributors
come together to create value for customers and wealth for their
shareholders..inventing new value propositions, transforming the rules
of competition, and mobilizing people and resources to unprecedented
levels of performance.
Similarly, in Tech-Venture, Mohan Sawhney and co-workers citeFrederick Reichheld, author of the Loyalty Effect, in making a case for
relational capital claiming In a network world, where everyone and
everything is connected, economic value behaves very differently than in
the traditional world [17]. Sawhney et al go on to provide quite detailed
examples of how to measure intangible assets i.e. intellectual capital
defined as human capital, structural capital and relational capital.
In Rosabeth Moss Kanters in-depth study of the e-business world
described inEvolve!, a rich constellation of terms is coined to describe the
processes of on-line community and network building many with
evocative allusions to space travel. Rather more seriously, Kanter arguesthat community-building is as crucial to the value-creation propositions of
well-established players such as IBM and Hewlett-Packard as for new
entrant firms such as Abuzz, e-Bay and Razorfish [18]. Based on her
direct interviews, surveys and observations, Kanter provides five lessons
on how to build value-driving collaborative networks in e-business and
proposes seven competencies required to maintain them. She notes:
Many people have written about the rise of dynamic networks of
partnerships...but not many have recognized the extraordinary shift of
consciousness it takes to live in such a world.
Two companies strongly associated with these phenomena (and,
indeed, frequently cited both by Reich and Kanter) are Amazon.com and
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America Online (AOL). In Amazon.coms case the firm has had to workvery hard at establishing a conventional model of profitability and economic
value-added for investors, but few commentators would dismiss the
companys success in rapidly creating interlocking value-based networks
(VBNs) that have been the source of enormous levels of investment,
trading and deal-making with diverse partners. By last quarter 2001,
Amazon.com had still to reach profitability, but after a difficult year for
many in the e-business world, the firm maintained a market capitalization
of more than $4 billion and in 2001 a poor year for many stocks the
companys share price dropped only 30 per cent, closing the year at just
under $11. Having appreciated a little in the first quarter 2002, at mid-
year the stock was around $12. This more realistic price effectivelyreturned Amazon.com to mid-1998 stock price levels having reached
highs of more than $100 in 1999 and 2000 [19]. In their case, two core
competencies have emerged: (i) rapid and effective joint venturing with
multiple actors in widely differing business arenas; and (ii) maintenance
and development of well understood VBNs seeking customized value for
their dollars.
AOLs record-breaking merger with Time Warner in January 2000
demonstrated a potentially astronomic level of economic and social value-
add through uniting complementary VBNs in communications and
entertainment [20]. In a world of rapidly convergent media technologies,
AOLs timing seemed impeccable effectively taking over TimeWarners movie, music and entertainment businesses when AOLs stock
could not have been stronger and grafting them on to a set of semi-captive
audience subscribers to internet services (i.e. AOL, Compuserve,
Netscape, etc.) now numbering more than 150 million people. AOLs
2001 was pretty good; the company ended the year with the release of the
movie The Lord of the Ringsand an annual loss of market value of just
4.9 per cent and a market capitalization of more than $135 billion [21]. US
subscriber on-line sales increased to $33 billion in 2001 i.e. + 67 per cent
on the previous year. 2002 has not treated AOL quite so kindly, with
further share price declines leading to erosion of market capitalization to
just under $43 billion by mid-year, although earnings remained relativelystrong [22]. Perhaps on a significantly larger scale, AOLs core
competencies are not dissimilar to those of Amazon.com and the company
has an interesting way of describing its strategy: our business plan will
be based on adding value to peoples lives [23].
Yahoo! and eBay may also be cited as firms for whom it may be
argued that their entire market valuation is predicated on the quality of the
VBNs they unite and serve on a global basis [24]. Again, it is the sheer
speed and scale with which a variety of communities of interest have
formed around these companies which makes the phenomenon noteworthy.
Since inception in 1995 eBay grew to a community of 42.4 million and $1.1
billion sales in 2001/2002, with a staggering 1.5 billion web-site page views
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per month. The company is known for its relatively conservativeforecasts and has enjoyed a relatively stable stock price ($50-$60 for
most of 2002), real earnings, and a market capitalization in July 2002 of
nearly $15 billion [25].
In contrast to firms like Cisco and Nortel, whose businesses depend
far more on the hardware side of the new communications technologies,
Yahoo! and eBay made reasonable progress for all stakeholders during
2001. But even in the torrid recent experiences of Cisco and Nortel and
their stakeholders, some instructive lessons may be drawn with respect
to the importance of rapidly forming and re-forming VBNs and how those
communities might interpret the question of value.
During 2001, Cisco experienced a one year loss of value of 51.5
per cent and a significant reduction in head count; in late July 2002 stock
was trading at $12.5, similar to prices in 1997/98, but somewhat short of
the 1999 high of $80 [26]. Ciscos 2001 market value decline was similar
to Ontario-based Nortels 49.5 per cent loss in shareholder value for the
same period, a timeframe which included nearly halving the companys
workforce and the posting of a record-breaking single quarter loss of
$CAN 19.2 billion. By July 2002, Nortels stock price was trading at
around 10 per cent of its 97/98 price of $10-15, but even more significantly
awry of its 1999 high of around $80, but it was recommended as a buy by
at least one analyst who believed the stock had good prospects of reaching$2 [27].
Cisco and Nortel were once renowned for their employee friendly
practices, corporate philanthropy and their ability to forge trust-based,
productive relationships with business partners and acquired/merged
businesses. Indeed, Charles OReilly and Jeffrey Pfeffer in Hidden
Valueand Rosabeth Moss Kanter inEvolve!, both used Cisco as a model
for describing the skills required to manage acquisitions, collaboration and
competition with business partners in the new economy [28]. But there
are lessons in adversity, and some of the most powerful in the cases of
Nortel and Cisco relate to the question of transparency, where theinterlocking VBNs included business partners, suppliers, employees and
investors.
In November 2000, Nortel CEO John Roth asserted, looking
forward to 2001.we continue to expect to grow significantly faster than
the market, with anticipated growth in earnings per share in the 30 to 35
per cent range [29]. This assertion proved somewhat misleading for all
stakeholders when in mid-February 2001 the company announced a profit
warning and promptly lost a third of its value [30]. Continuing the theme
and drawing attention to the dangers of unaudited, proforma announcements
from companies in volatile markets, in November 2001 the San Francisco
Chronicle posed the question What do you get if you marry a creative
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writer with an aggressive accountant? The answer: Ciscos thirdquarter earnings news release [31].
We are not arguing that these exemplars of firms riding the
network economy demonstrate anything fundamentally new with respect
to the way market economies work. But what these stories do illustrate
is that value-based networks on the software and the hardware side of the
economy comprise large numbers of customers, employees, investors and
business partners whose interests converge in a rapid, visible and mutually
dependent way. Any question of one group taking undue advantage or of
non-transparency affects all. These companies stories demonstrate the
interdependence (both long term and short term) of stakeholders and theirinterlocking VBNs within a broad community of interest [32].
The cases described so far suggest that there may be nothinginherentlystakeholder-inclusive, socially responsible or sustainable inthe normative senseabout information and communications technology(ICT) firms in the network economy. But let us examine another highgrowth, high technology sector phenomenon, namely biotechnology, totest this observation further.
Few would argue that the success of life sciences companies isvery much predicated on the degree to which they can successfully win
public support for the merits of their businesses and mobilize VBNs fortheir offerings, be they foods, drugs or other products [33]. Theirnetworks include a broad array of consumers, users, health, agriculturaland civil society organizations, research institutions, and governments. Inthis respect, the acute difficulties experienced by Monsanto a companywhich failed to address European consumer and other stakeholdersconcerns about genetic modification of foods can be contrasted withthe more peaceful and successful strategies of avowedly stakeholderinclusive, socially responsible and sustainability-minded biotechnologyfirms such as Denmarks Novo Group.
In 1995, Monsanto acquired a CEO in Bob Shapiro who was
almost messianic in his desire to convert the 100 year old chemicals firminto a 21st century sustainable agribusiness using gene technology [34].
Unfortunately for Shapiro and Monsanto, small scale farmers were less
than impressed by the new dependencies which might arise for them and
a major backlash occurred in European consumer markets as a result of
perceived imposition of unlabelled, genetically modified food, ingredients
[35]. Despite several years and $8 billion of aggressive acquisitions, that
saw Monsanto propelled to number two position in the agrichemicals
business in 1998, confidence in the company, its products and its leadership
began to wane.
Following a failed merger with American Home Products in 1998,
by late 1999 investor confidence in the future for genetically modified
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seeds and foods had slumped. The company was bought by Pharmaciain March 2000, largely to gain access to the GD Searle pharmaceutical
division. And in November 2001, Pharmacia announced it would be
selling its 85 per cent stake in the remainder of the under performing
Monsanto agribusiness, much to the relief of its investors. With further
problems of alleged patent infringements in 2002, Monsantos stock price
continued its downward glide from an average of more than $30 through
most of 2001 to under $15 by July 2002 [36]. Rather poignantly, both
Shapiro and the new President and CEO Hendrik A. Verfaillie expressed
mea culpato stakeholders, in Shapiros case to a Greenpeace conference,
and in Verfaillies to a November 2001 Farm Journal Conference in
Washington D.C., where he stated that Monsanto was so blinded by itsenthusiasm for (this) great new technology that it missed the concerns the
technology raised for many people [37]. The company now has five
pledge commitments to make good on the original commitment i t made
to sustainable agriculture in 1990 under the headings respect, transparency,
dialogue, sharing and benefits [38].
In contrast to Monsantos misfortunes, Danish life sciences firmNovo Group (now trading as Novo Nordisk and Novozymes) is deeplyinvolved in genetic modification and yet maintains highly interactive andconstructive relationships with stakeholders and publishes a highly ratedenvironmental and social report each year. These skills have helped the
firm to maintain a strong reputation whilst de-merging its main businessesin late 1999 with a subsequent doubling of shareholder value [39].
Again, these two stories seem to show that biotechnology firmsare not inherently responsible, inclusive or sustainable by nature, but wecan perhaps detect a common pattern the convergence of the interestsof the firm with those of stakeholders and societal interests representedwithin VBNs.
Let us now examine some stories from more traditional sectorswhere there is a longer history of stakeholder approaches to strategy.Indeed, it is in energy production, mining, forestry and oil and gas
industries that references to stakeholder approaches, sustainability andcorporate social responsibility are found most frequently, and where
phenomena such as corporate transparency and dialogue on environmental
and social performance are often best developed [40].
The recent history of power deregulation and privatization of
utilities in the UK and the US provides much evidence for VBN
phenomena both positive and negative. But, with the possible recent
exception of WorldCom, few stories can rival that of Enron for
demonstrating the short and long term symbiosis of networks of investors,
employees, business partners and customers. Seldom can a company
have suffered such rapid and catastrophic failure and embroiled so manystakeholders and networks at one time. With echoes of the transparency
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and reporting problems alluded to above in another sector, Enron wascondemned for overstating profits and keeping billions of dollars in
liabilities off the balance sheet [41]. Early on in the debcle, Ken Johnson,
spokesperson for Senator Billy Tauzin, Chair of the US Congress Energy
and Commerce Committee noted that Enrons partnerships created a
sort of accounting black hole. And, in the context of this paper, financial
analyst Jon Kyle Cartright observed rather perceptively: The majority of
the asset value at Enron was the trading operations. And the assets of that
are really personnel and customer relationships none of which tend to
survive bankruptcy [42]. Again, Enron was a firm well known for at least
some employee-friendly practices and maintained a good reputation for
corporate philanthropy.
In oil and gas, a number of Anglophone companies have discovered
that in the presence of supportive social networks, access to sources of
natural capital (e.g. oil and gas reserves) may be enhanced and business
opportunity and profitability increases. The difficulties experienced by
Shell during the 1990s have been described explicitly in terms of
catastrophic failures in stakeholder relationship [43]. But because of their
reputational and potential economic consequences these failures were
addressed in a highly instrumental fashion, with the result that the
company regained much of its former license to operate with key
stakeholder groups. Thus, with the possible exception of Nigeria, Shell no
longer experiences severe political difficulties as a direct result of its trackrecord on social or environmental performance. In contrast to Shell, two
companies in the same sector, BP and Suncor (in Canada), have avoided
such catastrophic mishaps, although BP has experienced criticism for its
joint venture operations in Colombia and with PetroChina. As a result, BP
and Suncor secured clear community support for important exploration
and production opportunities in Alaska and Alberta respectively and
consequent competitive and commercial advantage [44]. Many would
assert that these industries are not inherently responsible, stakeholder
inclusive or sustainable, but again in these stories we can detect some
evidence for the convergence of stakeholder and societal interests and
the pursuit of successful business outcomes.
As already noted, in presenting these narratives, we are not seeking
to draw attention to entirely new phenomena, still less to claim a causal
relationship between responsible, stakeholder-inclusive behaviours by
firms and subsequent commercial sustainability. We simply note that if
it was ever possible to assert that investors might secure disproportionate
value over the long term by ignoring or negating the claims and interests
of other stakeholders (or vice versa), there are some powerful
contemporary stories from a wide variety of sectors which suggest the
contrary. At a minimum, we might describe these cases as demonstrating
the value of stakeholder approaches to strategy in diverse sectors and
begin, therefore, to make a case for pluralistic definitions of value.
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We will now present our navigational tool and thereby hope todemonstrate the practical utility of value creation as an organizing
principle for reconciling CSR, sustainability and a stakeholder approach.
Reconciling a Stakeholder Approach, Corporate Social
Responsibility and Sustainability with the Creation of Value: A
Navigational Tool
Carroll has reviewed a number of models for describing how concepts of
ethics and corporate social responsibility may be embraced by business
[45]. Two models in particular have undiminished relevance today. The
US Committee for Economic Development, in 1971 [46], describedcorporate social responsibility as: (i) related to products, jobs and economic
growth; (ii) related to societal expectations; and (iii) related to activities
aimed at improving the social environment of the firm. Sethis 1975 [47]
three level model included: (i) social obligation (a response to legal and
market constraints); (ii) social responsibility (congruent with societal
norms); and (iii) social responsiveness (adaptive, anticipatory and
preventive).
In both the CED and Sethi models, the first tier was about
compliance, while the second tier required an ability to respond to and
balance reasonable stakeholder requests and to internalize basic societal
expectations perhaps with trade-offs. Consistent with this thinking,Roger Martin has recently referred to the discretionary strategic choices
available to corporations in terms of social responsibility and contrasted
them with less negotiable components of a civil foundation of norms and
expectations, emphasising that the foundation has different characteristics
in different cultures [48]. We would argue that it is in the discretionary
domain that long term strategic advantage resides and where corporations
require the capabilities to navigate complexity and engage and integrate
external stakeholders, i.e. VBNs, in service of the maximization of value
however the stakeholders and network members choose to define it
[49].
If we take these three tier models as a starting point for our
exploration of how firms may create value across the three dimensions of
the aspirational notion of sustainability, i.e. economic, social and ecological,
the picture depicted in Figure 1 emerges, where we may distinguish
between three types of corporate culture [50] with respect to organizational
attitudes to stakeholders and the creation of value:
Level 1 a compliance culture, where the organizationalunit is not especially engaged with its stakeholders but where
basic societal norms are respected and thus the organization
seeks to avoid the unacceptable destruction of value(either:
economic, social or ecological);
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Level 2 a relationship management culture, where theorganization recognizes the instrumental value of good
relations with immediate stakeholders, e.g. customers,
workers, communities and business partners, and seeks to
provide what value is appropriate in each case, within the
limits of what is possible and usually after the demands of
investors are satisfied; we might also describe this as a
value-neutralor trade-off perspective, typically associated
with effective corporate philanthropy and stakeholder
communications; and,
Level 3 a sustainable organization culture, where theorganization recognizes the interdependencies and synergiesbetween the firm, its stakeholders, VBNs and society, and
seeks to maximize the creation of valuesimultaneously in
economic, social and ecological terms.
Each of these levels might be representative of a stakeholder
approach in the sense that each is cognizant of a wider set of obligations;
and, indeed, each could be considered ethical as they exist in the
continuum do no harm to do maximum good. Each level may be
associated with one or more definitions of corporate social responsibility,
from the highly normative: everything should be legislated (Level 1), to
the more instrumental and voluntaristic business case (Level 2). Whatdistinguishes the levels however is the depth of understanding of the
nature of value for the firm and its stakeholders and our belief that
economic, social and ecological sustainability resides in Level 3.
Figure 1: Framework for Classifying Organizational Cultures
Level 3
Level 2
Level 1
Sustainable OrganizationCulture
Value maximised and integrated:economically, socially and ecologically.Organization takes a societal level focusand seeks synergistic outcomes betweenvalue dimensions.
Relationship Management
Culture
Value created but typically traded off.
Compliance CultureValue preserved consistentwith laws and norms.
Do Maximum Good . i.e. CreateMaximumvalue
Do Minimum Harm . i.e. AvoidDestroyingvalue
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Culture is defined in Figure 1 as the values, beliefs and assumptionsof the organization (after Schein, 1985).
In proposing such an integrative framework, we are not suggesting
that firms have static cultures or that they can, should or do operate only
in one mode with respect to all stakeholders at all times [51]. Values,
beliefs and assumptions change and it is important to understand that any
such prescription would be antithetical to our basic premise. There are
relationships with stakeholders and value-based networks associated
with firms which will vary over time in terms of: (i) the orientation the firm
brings; (ii) the orientation the stakeholder group or VBN may bring; and
(iii) the economic, social and environmental context and constraints. Theimportant thing from our perspective is for the organization and its
stakeholders:
i) be cognizant of economic, social and ecological contextfor
strategic reasons ;
ii) to recognize and be able to describe what is happening within
and around the firm over timefor managerial reasons; and
thus develop capabilities..
iii) to focus on value and the processes of creation of value in
both the short term and the long term for reasons of
competitiveness and performance.
Relating our contemporary stories to the framework, we now have
some new possibilities for narrative.
For example, we can describe the Cisco and Nortel stories as
examples of firms operating with high levels of ambition to create short-
term economic and social value, whilst presumably believing themselves
relatively unaffected and unconstrained on issues of ecological value,
possibly treating these as Level 1 requirements. But the result in the
longer term was rather lower levels of economic and social delivery, with
investors, workers and business partners all sharing the eventual pain of
dislocation. Interestingly, depending on ones perspective, these twocompanies were either very unlucky or their corporate cultures allowed
them to become grossly disconnected from their economic realities and
negligent of their stakeholders long-term interests. Those taking the
latter view would undoubtedly point to the lack of candour with which the
seriousness of the developing business situation was related to stakeholders.
Whatever their history and former ambitions to create Level 3 type
outcomes, the story since 2001 has been one of rapid decline to fire
fighting on or even below Level 1, in order to avoid the ignominy of
complete organizational failure. Whilst continuing to trade, these two
firms have struggled to preserve social and economic value and by the end
of 2001 their sustainability was therefore in question. Certainly in terms
of the investor perspective of value, Cisco was (by July 2002) only valued
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similarly to its market capitalization of 1997 and Nortel much lower eventhan that.
We can relate the story of Monsanto in terms of somewhat flawed
Level 3 ambition matched by Level 1 performance. Here was a company
with a culture which apparently espoused the synergistic creation of
economic, social and ecological value but which courted controversy on
stakeholder perspectives of ecological value and totally failed to deliver
on social value for key stakeholders. We can also compare Monsanto
with Novo Group a company that currently appears to maintain both
the culture and the capabilities to operate at Level 3, to the general
approval of most stakeholders. Novo has shown up as sustainablebecause of its approach to value creation; Monsanto has not.
We can describe Shells story since 1995 as having moved from a
Level 1 culture, in terms of values, beliefs and indeed behaviours, through
to Level 2 in terms of the companys performance and its development of
new capabilities for stakeholder responsiveness, growing social and
economic value with some consistency. It may even be argued that Shell
is aspiring to Level 3 in terms of espoused values and strategy for the
longer term. In contrast, BP and Suncor seem to have maintained a longer
and more credible track record at Level 2, and may thus appear more
comfortable and credible when they espouse Level 3 type values and
beliefs on economic and social value. However, where all thesecompanies may yet be challenged is in their long-term ecological
sustainabili ty. Although all three have nascent renewable energy
businesses, none would claim that their overwhelming reliance on fossil
fuels is consistent with global sustainability. Thus, it may be argued that
these firms are currently creating economic and social value but eroding
ecological value (what some would call natural capital). Whatever their
stated philosophies, they will require new technologies and matching
organizational capabilities to achieve Level 3 performance.
In each of these cases, it is possible to apply normative, ethical or
moralistic judgements. With the gifts of hindsight and perfect knowledge,we can all express where we think it was right (or wrong) for a firm to
be at any given point in time. In terms of stakeholder orientation and the
creation of value, Shell should have been more like BP and Suncor in 1995,
Monsanto should have been more like Novo between 1995 and 1998,
Nortel and Cisco should have been generally more grounded and more
honest with themselves and their stakeholders when faced with
catastrophic changes in market conditions and, perhaps, more generally
as conservative as e-Bay with respect to investor relations.
But, we do not believe these judgements are especially helpful.
And whilst the framework may be used retrospectively in a descriptive
sense as we have done here we believe its real value lies in being
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used as a prompt for assessing organizational approaches to stakeholdersand value creation in the present and future. For example, we can use the
framework to pose some very simple questions that every manager and
entrepreneur might ask of their existing business, product, or service, or
indeed of a proposed new venture:
1) Is our value proposition feasible? Can it be done within thecurrently accepted societal framework of how we treat eachother? Does it operate at Level 1 (do minimum harm) or atLevel 3 (do maximum good)?
2) Is there support for the proposition from those groups that areaffected? Is there a process for gaining stakeholder
cooperation and support for the proposition? Is value createdfor each stakeholder group in a synergistic way, avoidingexcessive trade-offs?
3) Can the value that is created be sustained over time economically, socially and environmentally? As we havenoted this is both a short term and long term issue and aculture and capability issue.
Value propositions which fail any of these questions risk failing tocreate lasting value and may not ultimately be practically feasible. It may
be the case that some value propositions may take from one stakeholder
group and give to another, but surely there are enough horror stories for
us to see the error of our ways here.
In this analysis we are not arguing that organizations seek to treat
stakeholders equally, but that the voluntary agreements and norms which
define value creation in a capitalist society must be respected. Fraud and
lack of transparency do not respect these agreements and clearly fail the
first question. Business developments which do not meet basic expectations
of stakeholders fail the second. And, business ideas that do not create
economic value and maximize social and environmental gain over the long
term will not be sustainable.
We will now turn to the theoretical implications of this approach.
Reconciling Corporate Social Responsibility and Sustainability
with a Stakeholder Approach to the Creation of Value: Theoretical
Implications
Our collection of stories and observations about the creation of value and
convergent rather than divergent interests of stakeholders leads us to two
conclusions. First, that value creation is the primary motivator for
virtually all business activity, and that in certain industries the locus of
value creation may rest outsidethe single firm. We have coined the term
value-based networks or VBNs to acknowledge that stakeholders aresometimes grouped in key networks with a common sense of what is
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valuable. Second, a critical characteristic of successful, i.e. sustainable,business models is that they need to recognize explicitly the importance
of acknowledging multiple perspectives in defining value. The process
of defining and creating value is fundamentally pluralistic and iterative,
i.e. socially constructed within networks associated with firms (the
VBNs), and thus the business firm is a key player in the construction of
what we may one day recognize as a viable, sustainable society. These
observations have potentially profound implications for the nature of
business.
For decades, writers and scholars have raised the question In
whose interests should corporations serve? from the perspective of lawand corporate governance, with the attendant wrangling over the rights
and duties of business firms in society [52]. With the rise of managerial
capitalism, and the de factoseparation of ownership from control, ideas
concerning property rights began to shift in the early twentieth century,
and there was a call for greater recognition of corporations as social
institutions. That inquiry coalesced over time into the field known as
corporate social responsibility (CSR) and, latterly, corporate citizenship
[53], in which the primary aim was to draw attention to the social impact
of business activity. The main tenor of work in the field of CSR is an
ethical appeal to organizational leaders to minimize the harm done by
corporations in the pursuit of profits and, in some cases, to make a case
for linking conventional philanthropy to constructive community involvement[54]. Ideas in CSR have been extended into investigations of corporate
social performance (CSP), wherein a normative ethical conception of the
corporation is used as an independent variable to measure the dependent
variable of firm performance, mainly on financial metrics [55]. Discussions
of CSR and CSP have been readily accommodated within stakeholder
frameworks [56].
Over the past fifteen years, stakeholder theoryhas emerged as a
primary organizing framework undergirding all of business ethics [57],
and is more recently gaining ground as a viable framework in the field of
strategy [58]. Stakeholder theory is not so much a formal unified theoryas a broad research tradition that encompasses philosophy, ethics, political
theory, economics, law and organizational social science. In its applied
form we therefore refer to a stakeholder approach. Philosophers and
social scientists have converged on stakeholder theory from different
points, and for different reasons [59]. The former see a stakeholder focus
as a way to foreground the idea that business should be accountable to
others; the latter have seized stakeholders as a useful unit of analysis to
depict the social effects of business activity. In the mainstream of
Anglophone business, however, a stakeholder approach has yet fullyto
supersede the shareholder primacy model of corporate governance,
though a narrower, but still responsive construction (which we have
termed stakeholder relationship management) is now commonplace.
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Stakeholder theory is concerned with value creation on multiplefronts, with social justice, with stability, and with the role of business in
society. Stakeholders are most often defined in relation to a focal
organization or business firm and, so, stakeholder concepts are usually
anchored at the organizational level. We saw in the illustrative stories that
the locus of value creation increasingly resides beyond the boundaries of
the single firm, in what we termed value-based networks. For that
reason, it is strategically useful to add a third level to the mix, one that is
centered outside the firm, at the societal level. Sustainable development
or sustainability(in business terms) is a construct whose foundational
ideas are consonant with those of stakeholder theory and which allows
such a bridge to important global societal issues.
There are many definitions of sustainable development, but few
that are simultaneously authoritative and satisfying. Most cited is that of
the World Commission on Environment and Development (WCED), the
Brundtland Commission: development that meets the needs of the
present without compromising the ability of future generations to meet
their own needs [60].
From a business perspective, the World Business Council on
Sustainable Development, which comprises 150 of the worlds largest
companies and which operates at the CEO level, now explicitly and
effortlessly describes the purpose of business in terms of threeresponsibilities: to create economic, social and environmental value [61].
This in part reflects the popularization of the concepts of sustainability
and the triple bottom line rhetorical devices coined by Elkington [62],
which have created a safe linguistic haven for business, government and
civil society, allowing previously antagonistic players to share a common
vision of the longer term, rather than simply fight over an unsatisfactory
current reality [63].
Also employing the linguistic logic of the accountancy profession,
the term social capital is now in vogue as a means of describing the value
embedded in stakeholder relationships within and external to the firm[64]. Similarly, the concept of natural capital [65] is seen by environmental
commentators as a useful construct, again harnessing the power of the
term capital. We can postulate that all of these devices serve to create
new meaning for the nature of capitalism far in advance of how it has
been conceptualized and operated in English-speaking countries to date,
and perhaps more relevant to the needs of a globalized and increasingly
complex and insecure world.
At a humanistic level, Ehrenfeld [66] refers to such definitions as
variants of the current economic development paradigm, which in itself is
unsustainable. Jennings and Zandbergen suggested that the definition of
sustainability be more closely connected to the social system and the
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natural ecology, and offered this: sustainability is a concept embeddedin a larger theory about how the ecological system and the social system
must relate to each other in order to remain intact over long periods of
time [67].
We believe (like the WBCSD) that there is merit in defining
sustainability in simple, pragmatic terms as value creation on three
dimensions: economic, social and environmental. As noted, this is
consistent with the thinking of Elkington and the business case arguments
advocated by leading academic commentators in the field such as Stuart
Hart [68].
However, so that we have some aspirational point of focus for
anchoring the notion of value we will also cite the more expansive
definition of sustainability offered by Ehrenfeld [69]:
I define sustainability as the possibility that humans and other
life forms will flourish on the earth forever. Flourishing means not
only survival, but also the realization of whatever we as humans
declare makes life good and meaningful, including notions like
justice, freedom, and dignity. And as a possibility, sustainability is
a guide to actions that will or can achieve its central vision of
flourishing for time immemorialIt is a future vision from which we
can construct our present way of being.
If sustainability is an ideal toward which society and business can
continually strive, the way we strive is by creating value, i.e. creating
outcomes that are consistent with the idealof sustainability along social,
environmental and economic dimensions.
Questions of sustainable development are intimately concerned
with the nature of society, of justice, of liberty, of the value of each
individual as an end in itself; in that sense sustainability in business is
stakeholder theory writ large. If stakeholder theory is concerned with the
essential character of a firm, sustainability in business helps bridge to theconcerns of a global society. Stakeholder theory exists as a set of
narratives, as a genre of stories about how organizations create value.
Thus, stakeholder concepts are highly relevant and useful to thinking
about sustainability and sustainable development, although from a
humanistic perspective it might be argued that the former do not necessarily
fully stand as a proxy for the latter; that is, embracing stakeholder notions
of value and striving for sustainability are consistent but not synonymous.
Some measure of conflict (or creative tension) is inherent and
unavoidable in the intermingling of stakeholder perspectives and attendant
value systems. Resolving or leveraging the trade-offs and potential
synergies in such tension is abetted by guidance from a higher-order set
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of end values, a common aspirational agenda. The concept of sustainability,defined as an ideal, offers such a value framework. Sustainability is not
equatedper sewith environmentalism, social justice, economic prosperity
or spiritual development, though all of those ideals are consistent with a
sustainability mindset. Nor is it concerned only with long term
consequences. It is aspirational in nature, a meta-ideal, one inherently
infused with societal values of justice, integrity, reverence, respect,
community and mutual prosperity.
A business model consonant with societal aspirations to sustainable
development might encompass, accommodate and evince a similar value
set. Therefore it can be argued that a stakeholder approach, with itsinherent values of freedom, responsibility, justice, inclusion, participation,
and mutual dependence in service of creating value for different actors,
offers the best hope in effecting the pursuit of global as well as organizational
sustainability.
Conclusions and Practical Implications
According to F. Scott Fitzgerald, the test of a first class mind is the ability
to hold two opposing ideas in the head at the same time and still retain the
ability to function. We may apply this epigram to the idea that there is
some sort of choice to be made between the interests of the firm, its
stakeholders and society an academic debate to which we alluded inour introduction. Our view, as stated by Freeman (2000), is that the
choice is spurious and that in simple terms stakeholder capitalism sets a
high standard, recognizes the commonsense practical world of business
today, and asks managers to get on with the task of creating value for all
stakeholders.
Some would argue that the best firms have always sought to
leverage their communities of interest for the instrumental purpose of
creating value. In many cases they have done this by balancing (or ideally
integrating) stakeholder interests and combining them with a clear vision
of what is achievable for customers, employees, investors and otherstakeholders whatever their corporate officers may have said to the
analysts or investors at annual general meetings [70].
Happily, the evidence is now mounting that what is said to one
stakeholder group, i.e. the investors, need no longer be in conflict with
what is said to employees, customers, supply chain partners and local
communities. A wide range of empirical studies [71], together with
growing evidence of correlation of environmental, social and economic
performance from special stock market indices, e.g. the Dow Jones
Group Sustainability Index and others [72], demonstrate that stakeholders
and value-based networks may be celebrated without apology or convoluted
ethical reasoning [73]. This may soon help to eliminate a potent historical
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source of double-speak by corporate Board members and executiveofficers as well as the limitless potential for cognitive dissonance caused
by the disconnect between the rhetoric of corporate leaders and
stakeholders actual experience.
Again, the practical evidence is compelling. Whether it is a
recognition of the strategic value of reputation [74], or brand value [75],
few business leaders today ignore the tangible business benefits of loyal,
trust-based relationships with networks of customers, suppliers and
distributors [76]. The same point is made in the sociology, human
resources and organizational behaviour literatures with respect to
relationships with employees [77], and in the strategy and generalmanagement literature with respect to relationships with a broad range of
stakeholders who may bring resources of innovation and loyalty in an
increasingly competitive world [78]. And this explains, at least in part, the
success in strategic management terms of techniques such as the
balanced scorecard or the business excellence model of the European
Foundation for Quality Management [79], both of which give at least
equal weight to customer and employee relationship factors as to financial
factors. All these systems do is to turn a strategic stakeholder approach
into an implementable management framework with appropriate metricsattached.
In the non-Anglophone world, where corporate governance andcorporate law provisions have not been predicated on the primacy ofinvestors interests, e.g. in Continental Europe and Asia, it may be arguedthat this approach is somewhat less than novel. Notwithstanding recentsetbacks in some economies, e.g. Japan, relatively sophisticatedapproaches to balancing and integrating the interests of differentstakeholders and maximizing the economic and social value of the firmhave long been a hallmark of the most successful mainstream continentalEuropean and Asian businesses [80].
The navigational framework offered here, building from the businessstories described at the outset and our observations of the way the world
now works, captures the idea that firms with the necessary capabilities tounderstand where they can (i) avoid destroying value (doing harm asdefined by different actors), and (ii) maximize opportunities for creatingvalue (doing good as defined by those same actors), are those that will
prosper in the long term. Moving from compliance, to attention tostakeholder needs, to pursuit of valuesimultaneouslyin all three dimensionsof sustainability requires that organizations develop the necessary cultureand internal capabilities to do so. Value creation at the highest levelrequires an ability to build value-based networks where all stakeholderssee merit in their association with and support for a business.
As noted, there is much theoretical controversy in the literature
between normative and instrumental stakeholder approaches, but we
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have argued that a more careful and pragmatic look finds very little thatis of substance. We have not proposed a way to integrate a stakeholder
approach, CSR and sustainability, but we have suggested how we can
begin to talk about them in the context of creating value to avoid the
seeming points of linguistic or conceptual conflict. Despite the undoubted
enormity of the problems faced by the world insecurity, development,
ecological and social stress we hope this may avoid unhelpful versions
of the CSR and sustainability stories dragging everyone down. In our
experience this only serves to alienate practitioners and kill the creativity
of managers and policy-makers.
Perhaps the problem has been that traditionally we have tended totake too narrow a view of each of these ideas. Stakeholder theory has
never been just about social issues. It is about real customers, suppliers,
investors, employees and communities, and integrating and sustaining
these relationships as part of a community with a common sense of what
is valuable. Likewise, sustainability is not just about environmental issues.
There is no real distinction between nature and culture. And there is no
necessary dichotomy between sustainability and profitability.
The abiding challenge, of course, is the temporal one. Perhaps,
particularly in view of the speed and scale with which value-based
networks now form and reform, real value must be created for all
community members including investors in the short term if it is tobe worth sustaining. The practices associated with a stakeholder approach,
including CSR, relationship management and sustainability cannot be
separated from the very basics of what makes a business tick, both in
terms of vision and aspiration and as immediate day-to-day priorities:
good HR management, excellent customer service, effective delivery of
returns, maintenance of license to operate with community groups and so
on.
In presenting these ideas we hope we have provided some clues as
to how this challenge may be addressed. But we recognize that many
more narratives, with underpinning qualitative and quantitative evidence,will need to be assembled in order that managers, stakeholders and their
networks can learn and act together more effectively in the creation and
appreciation of value. Druckers 1982 assertion and F Scott Fitzgeralds
maxim imply nothing less. Perhaps, then, it will not be too long before we
can begin to assert that the business of business is the creation of
sustainable value economic, social and ecological.
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[48] See Martin, R.L., The Virtue Matrix: Calculating the Return on
Corporate Responsibility, Harvard Business Review, March
2002.[49] Wheeler has further developed issues of sustainability and
organizational capability in a manuscript for the forthcoming
Blackwell title, Leading in Turbulent Times, to be edited by
Burke, R. and C. Cooper.
[50] Here we use the definition of Schein, E., Organization, Culture
and Leadership, San Francisco: Jossey-Bass, 1985, i.e. that
corporate culture comprises an amalgam of the values, beliefs and
assumptions of the organization.
[51] A similar point has been made recently by I.M. Jawahar and G.L.
McLaughlin in relating the dynamic nature of stakeholder
relationships to the life cycle of the firm in their article,Toward a
Descriptive Stakeholder Theory: An Organizational Life CycleApproach,Academy of Management Review, 26, No. 3, pp. 397-
414.
[52] A. A. Berle and G. Means, Private Property and the Modern
Corporation, New York: MacMillan, 1932; A. A. Berle, Power
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[53] McIntosh, M., D. Leipziger, K. Jones and J. Coleman, Corporate
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[54] For example a recent article in California Management Review
made a strong case for linking corporate social initiatives to key
drivers and core competencies of the firm but made little or no
reference to the potential economic, social or environmental value
add of the products and services of the firm; see Hess, D., N.
Rogovsky and T.W. Dunfee, The Next Wave of Corporate
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Community Involvement: Corporate Social Initiatives, CaliforniaManagement Review, 44, No.2, 2002, pp. 110-125.
[55] For overviews see Carroll, A.B., Business and Society: Ethics
and Stakeholder Management,Cincinnati, OH: South-Western,
1989; Carroll, A., Business and Society: Ethics and Stakeholder
Management, (2nd ed.), Cincinnati: South-Western Publishing,
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New Millennium: Corporate Social Responsibility and Models of
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2000, pp. 33-42; Wood, D., Social Issues in Management: Theory
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[56] Clarkson, M. B. E., Defining, Evaluating, and Managing Corporate
Social Performance: A Stakeholder Management Model, in
Research in Corporate Social Performance and Policy, edited
by J. E. Post, pp. 331-358, Greenwich, CT: JAI Press, 1991;
Clarkson, M. B. E., A Stakeholder Framework for Analyzing and
Evaluating Corporate Social Performance, Academy of
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[57] A. B. Carroll, Understanding Stakeholder Thinking: Themes from
a Finnish Conference, in The Corporation and its Stakeholders:
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[58] Freeman, 2001, op. cit., Hillman and Keim, op. cit.
[59] Freeman, 2000, op. cit.
[60] WCED, World Commission on Environment and Development,
Our Common Future, Oxford, England: Oxford University Press,
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[61] Watts, P. and R. Holme, Meeting Changing Expectations.
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[63] To borrow terminology from the learning organization concept of
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[64] Cohen and Prusak, op. cit.; Adler and Kwon, op. cit.; Svendsen,
A.C., Boutilier, R.G, Abbott, R. and Wheeler, D., Measuring the
Business Value of Stakeholder Relationships, Report to the
Canadian Institute of Chartered Accountants Available at
www.cica.ca., Vancouver, BC: Centre for Innovation in
Management, Simon Fraser University, 2001.
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[65] Hawken, P., A. Lovins and L.H. Lovins, Natural Capitalism.Creating the Next Industrial Revolution, Boston, MA: Little
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[66] Ehrenfeld, J., Being and Havingness,Forum for Applied Research
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[68] Hart, S., A Natural-Resource-Based View of the Firm,Academy
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[69] Ehrenfeld, op. cit., p. 36-7.
[70] Kotter, J. and J. Heskett, Corporate Culture and Performance,
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[71] Waddock, S.A. and S.B. Graves, The Corporate Social
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[72] Feltmate, B.W., B.A. Schofield and R.W. Yachnin, Sustainable
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[73] Hillman, Amy J. and Gerald D. Keim, Shareholder Value,
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[74] Fombrun, C., Reputation: Realizing Value from the Corporate
Image, Boston, MA: Harvard Business School Press, 1996;
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Freeman and J.S. Harrison, pp. 289-312, Oxford: Blackwell
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[75] Kochan, N. (ed.), The World's Greatest Brands, New York: New
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Pringle, H., and W. Gordon.,Brand Manners. How to Create the
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Self Confident Organization to Live the Brand, Chichester, UK:John Wiley, 2001; Pringle, H. and M. Thompson, Brand Spirit,
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[76] Reichheld, op. cit.
[77] Coleman, J., Social Capital in the Creation of Human Capital,
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B., Firm Resources and Sustained Competitive Advantage,
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[78] Freeman, 1984, op. cit., Freeman 2001, op. cit.; G. Hamel and
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C.K. Prahalad, Competing for the Future, Boston, MA: Harvard
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Managing and Partnering with External Stakeholders,Academyof Management Executive,10, No. 2, 1996, pp. 46-55; Wheeler
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[79] For a discussion on the balanced scorecard, see Kaplan, R.S. and
D.P. Norton, The Balanced Scorecard: Translating Strategy
into Action, Boston, MA: Harvard Business School Press, 1996;
Kaplan, R.S. and D.P. Norton, The Strategy-Focused
Organization: How Balanced Scorecard Companies Thrive in
the New Business Environment, Boston, MA: Harvard Business
School Press, 2001. The EFQM business excellence model isdescribed in Wheeler and Sillanp, 1997, op. cit.
[80] Wheeler and Sillanp, 1998, op. cit.