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Julia Savchenko, student of

State University – Higher School of Economics

Management department, 3 year

Are private sector initiatives in the field of sustainable development more efficient than governmental? Or is it the other way round?

CONTENTS:

  1. Introduction
  2. Efficiency according to the theory of transaction costs.
  3. Different levels of CSR – different efficiency.
  4. Partnership in SD
  5. CSR and government in Russia.
  6. Conclusion

Introduction.

Social responsibility nowadays is one of the most significant movements in corporate life. Atfirst sightit doesn’t suit to the usual interpretation of afreemarketsystem. It isdifficult to realize why companies become social responsible, why they take any responsibilities unless the main aid for business is generation and maximization of profits. Fromthispointofviewthebusinessphilanthropyleadstoviolation of the owners’ interests because it prevents providing maximum return for shareholders. This is the main argument of corporative social responsibility opponents who state thatbusinessofbusinessis “to make as much many as possible while conforming to the basic rules of society” (Friedman, 19: 174).Ontheotherhand, tempo of modern living demands to new laws and realities. Since the 1960-sresearchers come to the conclusion that“businessmen or any other group have social power, the lessons of history suggest that their social responsibility should be equated with it” (Davis, 1960: 71)

Isuppose, nobody becomes to deny that the big corporations real have the serious power comparable from the state one. Howis itnecessarytobuildrelationsbetweena society and business?Should thestate placean additionalresponsibilityatbusiness? Basically, already now, the big corporations do for a society a lot of useful on a voluntary basis, at times even it is more than local authorities. Mr. Portergives variety of social initiatives of such companies as Toyota, Nestle, Microsoft and etc (Porter, Kramer, 2006) helping a society in those areas, where the state powerlessly owing to a lack of financial assets, the information and etc. If it is true that private initiatives in sustainable development are more efficient than governmental one, which is the state function then in the field of social responsibility?

Efficiency according to the theory of transaction costs.

If market is more effective, it will be reasonable to shift all the obligations in development of social responsibility on it, so society can only win. In that case, the state could reduce the taxes burden on business, assuming only control function. Is it probably to prove then, what is more effective: the market or the state? Attempt of the similar analysis within the limits of the economic theory was undertaken not once. Yet Adam Smith said, that «an invisible hand of the market» without intervention of other coordination mechanisms organized actions of independent individuals by the optimal image. As we know, events of the 20th century have affected the balance of forces, the world realized the necessity of state regulation and active social activity from the government. Similar question is now before global economy, but it concerns already social responsibility. Not long before CSR was rather exception than the rule. However now it is possible to observe more likely opposite dynamics: the popularity of CSR is rising, more and more companies let on non financial reports, organize their activity according to social standards. Economy globalization goes step forward than political one. Can we say that the state functionsand CSR are the same? Essentially, it is so, CSR is self-regulation of business –control, which doesn’t require the intervention of the state. The company can achieve the arrangement with stakeholders without intervention of the state – it was proved by Coase, using the theory of transaction costs (Coase, 1960). If the costs are low, market can solve problems and tasks without the state. If the risk of opportunism and informational asymmetry is big, it will be more effective to appear «legal law». It limits freedom of the market but it providers less costs for the society in general. As the result social responsibility and private initiatives in sustainable development mean sharp decline of transaction costs which don’t occur in consequences “legal law”, but as voluntary practice of satisfaction stakeholders’ needs in order to increase total utility.

Of course, we can find the changes in the environment which facilitate declining of transaction costs. For instance, declining of information asymmetry: it is difficult for the companies to hide negative results of their activity as Internet facilitates spreading of information much more objectively and faster. The problems by Nike with bad working conditions, by Shell Oil with situation around Brent Spar went public and let companies share social responsible business. Different kinds of transaction costs reduced: information costs because of the internet again ,bargaining and decision costs because of modern technical support systems ,policing and enforcement costs because of growing global competition and, as a result, the growing meaning of reputation. Does it mean that we have achieved such a level of transaction costs when state regulation is less effective? I suppose, it is early to state that even if level of market transaction became low it can’t be said about all market players.

Different levels of CSR – different efficiency.

Every state represents enough integral organism. Speaking of the state efficiency insustainable development, we mean the definite policy, plan of development and support of definite social directions such as working conditions, reducing the pollution, carbon emissions, growth of energo-efficiency, infrastructure development and ctr. At the same time companies and their social initiatives are various. Yet Carol said about different level of company involvement in social responsibility, and determined four main types of them: economical, legal, ethical and philanthropic responsibilities (Carroll, 1991). Each company chooses itself the level of involvement according to Carol’s pyramid. It’s that two levels of CSR are themselves government initiatives, because exactly the government introduces minimum of obligations level. Let’s see two other dimensions: sometimes business does for society more, than legal law expects, this reflects in philanthropy and putting on itself extra obligations. To my mind philanthropic and ethical activity, providing by the government in private sector is the same.In such way the government redistributes income in such way in favor of the least social protected categories, the companies are following their goals, often provide cause-related marketing. Michael Porter classifies similar initiatives and problems as “generic social issues”.They are important but business doesn’t get significant profit: it “could be important to society but are neither significantly affected by company’s operations nor influence the company’s long-term competitiveness” (Porter, Kramer, 2006: 76). In terms of our analysis that means equal effectiveness for society irrespective of who exactly spends resources: business or government. But there is another approach to sustainable development, Porter calls it “strategic CSR”. It appears when management “embed a social dimension into core value proposition” (Porter, Kramer, 2006: 82). This kind of social responsibility increases the utility of social responsibility practices for business, and as a result increases the competitiveness and profitableness of business. And when government just redistributes the incomes, companies with strategic social responsibilitycontribute in prosperity and growth of society. The fact that companies besides positive social impact develop economy means they are more effective than government. Friedman, most popular critic of CSR, has the same point of view, as Porter with Kramer, pragmatic researchers of CSR. To sum up the core idea I want to stress, that private initiatives could be more efficient, but we can’t generalize that fact. Yes, some companies have strategic and ethical vision of sustainable development. But there are still a lot of them for whom social responsibility is just a way of communication with government and publicity in order to receive the “license to operate”. In other words there is one group of companies which has reasons and aspiration to be very effective in the field of sustainable development; and there is another one which depends on government politics in social responsibilities. We come to the conclusion that there is the first point of interdependence between private and governmental efficiency.

Partnership between governmental and private initiatives in sustainable development.

On my point of view, in order to receive the highest effectiveness in sustainable development it is better to discuss the question of partnership between business and government. In my opinion, it is exactly “other way around” and such a problem state is more common. Even Porter and Kramer underlines, that “good government, the rule of law and property rights are essential for efficiency and innovation” (2006: 83). The dependence between corporations, government and society dictates the necessity of recognitions by all sides the principle of “shared value” (Porter, Kramer, 2006: 84). It seems more obvious that in CSR conceptions government took the place one of the stakeholders. It can be called the first step on the way of cooperation between private and governmental initiatives, because the matter of corporate social responsibility is to observe the interests of all stakeholders. Companies shouldprovide the dialogue with such strategic partner as government. CSR-based self-regulation couldn’t be much more effective than if it will be “more systematically integrated with political steering in joint partnered governance” (Midttun, 2008: 409).

It is important to mention that governmental support is rather complex too. So, talking about governmental and private we shouldn’t forget about developing level of institutional environment.If the government is ready to help sustainable development actively, it doesn’t mean that it will be able to provide its policy effective. The developing level of institutional environment helps and defines the success of political undertakers. “The macro-institutional innovation effects are potentially, however, the most important for responsible competitiveness” (Zadek, 2006: 338) and forms the basis of global economy wealth growth. We will come back to this question by analysis the Russian experience of cooperation government and business. But namely this factor lets western economies be more successful and strategic in CSR development.

Thegrowinginterestinpartnershipbetweengovernmentandprivatesectors reflects readiness to bring changes in current policies. AndIshouldnotice, that researches findcertaindependence between social governmental politics, activity theprivateCSR, and also development of governmental support insustainabledevelopment. Midttun determines four types of political policies in Western Europe depending on level of social involvement: Nordic, Mediterranean, Continental and Anglo Saxons (Midttun et al., 2006). Nordic countries present welfare government with higher level of social support, Anglo Saxonsare the most free-market oriented with rather restrained social support. Asaresultthegovernmentalpolicyhadformed peculiaritiesindevelopment ofprivateinitiatives.Infavorablesocialconditionscompanies have less incentivesto develop own social movement.It forms thebalance in relationships between privateandgovernmentalsocialinitiatives, complementarities. But initial level of effectiveness in governmental social support is determinative,and he define the developmentof private CSR:“advanced welfare state and labor market policy support strong industrial CSR on implicit grounds, while a more clear-cut liberalist order might support industrial CSR as part of an explicit CSR policy” (Midttun et al., 2006: 380).

Policies in cooperation with CSR.

However, despite thesignificanceof government as afacilitatorandpartnerin development ofCSR, in my opinion, it is rather vital not to put on it too much socialresponsibility. In the twentieth centurywelfarestatetraditionswere indicatorsof wellbeing exact country.Butnow, whoitwasunderlinedbeyond, private initiatives could be much more effective than governmental ones. That is why the main politic task in the field of is becoming the help and support in the development of de-centralizedprivateinitiativesinsustainabledevelopment. Many countries have already acted in such way and stimulate CSR. For example, Norway, as we have mentioned, is one of welfare oriented countries, and it has already had a ecologically and socially sustainable society, so it doesn’t develop extra stimulation for private initiative, because these “two areas run in parallel” (Albareda et al., 2008:358). ButUnitedKingdom, originally paidtosocial regulation less attentionand resources, is now used another approach. Instead an attempt of strengthening ingovernmentalsocialsector, it tended toshare socialresponsibilitieswith new born responsible business. That is why UK uses “top-down approach, although CSR is promoted at different levels of government, that encourage business to adopt socially and environmentally responsible practices and to work in partnership” (Albareda et al., 2008:356). So, thethesisofFriedman, that “doctrine of social responsibility taken seriously would extend the scope of the political mechanism to every human activity” (Friedman, 1960: 173) ,is disproved by practice. Privateinitiativesarealreadyrathereffective, that is why they could coexist with governmental ones.

CSR and government in Russia.

From my point of view development of CSR in Russia is the most striking generalization of all that was stated above about effectiveness of private and governmental initiatives in sustainable development and their partnership. Tradition of social responsibility was formed in Russia even earlier than in the West. This was connected with the development of socialism where even Friedman assumed development of CSR. The most interesting fact is that in Russia it is a curios kind of “other way”, the specific partnership between government and business. We can identify two uncommon displays of CSRin Russia:

  • anomalously high level of philanthropic donations for the country with definitely not the highest level of income and industrial development;
  • active participation of government in CSRas a major stakeholder.

Let us begin from the first point. Investments in socially responsible initiatives themselves can be the evidence of prosperity in economics and society; however it’s important that they should not be harmful for business. According to the Report of Social Investments in Russia (2008:49) ratio of social investments to pre-tax income (IP) in Russian companies in 2003was 11,25% and in 2008 it decreased up to 6,25%. Anywayitisrathersignificant figure taking into consideration that in the USA in 2004 it was 5% (Polishchuk, 2006: 62). How can we explain this liberality? First of all due to active involvement of business into the life of local communities, which simplicier depend on the company as their employer and sponsor. Often local officials shift off responsibility for the development of infrastructure, social security on the city-forming concerns. Russian companies framed on the grounds of soviet enterprises have inherited units of housing and social infrastructure which were on their balance (Polishchuk, 2006). Numerous problems with declarations also can be a great example. Distinctive feature of declarations in the USSR was continuity of populated area and the main local enterprise that fulfilled not only economical but also social functions providing conditions of vital activity for population. To ensure functioning of the company owners have to take over numerous social responsibilities. Level of such donations from business is rather high in certain areas and is reflected in details in recent research of the Institute of regional politics (2008). Setting-up of responsibilities definitely is not for the welfare of business, local officials, government and the whole society. Despite the problems with the necessity of maintenance of local communities large amount of social investments is connected also with lobbing personal interests at the local level (Juurikkala, Lazareva, 2006). Such “unofficial taxes” help companies in getting “sociallicensetooperate”. However, as any other form of corruption they reduce effectiveness of any initiative in sustainabledevelopment.

However,let’s come back to another anomalous phenomenon of CSR in Russia. In the West the main stakeholder is the society. Onthecontrary, inRussiaitisgovernment. Asaresult inthewesterncountries CSRisdevelopingunderthepressureofpublic, but in Russia CSR reflects the governmental order, presenting a special form of corruption and bureaucracy. Business is eager for the government to encourage corporate social investments. According to survey by Russian Management Association, business need for such encouragement is overwhelmingly (92%). Most respondents (76%) feel that social investments by business partly substitute governmental social expenditures (Report on Social Investments in Russia, 2008: 37-38). Indicative, that «outer» social programs of federal and regional levelsare not stated as «pure» philanthropy, thoughunderstanding of business interestis very lightweight (ReportonSocialInvestmentsinRussia, 2008:49). Certainly, itcanbeexplainedbyweaknessofcitizen society and institutions in Russia.

Conclusion.

We determined an interesting fact. Positive atthefirstsight factor, such as high level of social investments, does not mean effective sustainabledevelopment in Russia. Therearealotofreasonstoit. Themainone isfalse-partnershipbetween government and business. And government is more guilty. In this case there will be more effective to share obligations, privateandgovernmentalinitiativesinsustainabledevelopment. The Russian situation illustrates well enough that sometimes private initiatives are more efficient when they are driven by society, so they should stay rather free from government. But government should develop sustainable initiatives in order to help business. Inothermatters, some positive steps can be seen in Russia. Particularly, thegovernmenttakestheresponsibilityofsocial welfare of declarations in the nearest future, let business put on more resources on their own development (InstitutionOfRegionalPolicy, 2008) As it was told, sustainablebusiness can do for the society much more, than unprofitable one.

As a result, we should understand that the most efficient for society is the opportunity to choose. If the social responsibility is only a matter of government, then we could losethe most effective practices in CSR. Otherwise,in big countriessuch as Russia the vital for communities but not attractive for business social initiatives will fail. That is why business and governments should join forcesin order to develop sustainability. A lot of successful examples of CSR presents that it could be self-regulated and efficient. But we could reach the highest efficiency for society only if the institutional environment isable to provide the minimum of transaction costs, low level of information asymmetry and defined rights among business and government.

REFERENCES.

Albareda L., Lozano J., Tencati A. , Midttun A., Perrini F. 2008. Thechangingroleof governmentsincorporatesocial responsibility:driversand responses// Business Ethics, 17(4): 347-363.

Carroll A. 1991 The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders // Business Horizons, 1991: 39-48.

Coase R.H. 1960.The problem of social cost//Journal of Law and Economics, 3: 15-25.