Name: Kristty Bajaa

Date: June 23th, 2014

Institutional complementarity between Corporate Governance and
Corporate Social Responsibility: a comparative institutional analysis
of three capitalisms

This paper analyzes the complementary institutional theory and the three models
of capitalism that helps to specify and define the relationship between corporate
governance and corporate social responsibility.

First, Institutional theory defines an institution as a regularity in social behavior
that is agreed by all members of society, specifies behavior in specific recurrent
situations like auto policies formulated or made by any external authority. In the article
says that CSR is part of the complementary institutional theory to corporate governance
and companies. It is completely true because it helps to the economic development
through collaboration with various stakeholders (employees, local community etc.) to
improve the quality of life. Companies that implement social and environmentally
responsible activities as part of their business strategy have a positive and sustainable
impact on growth, development and poverty reduction. If a company implements these
activities in a consistent way, It can help to improve access to goods and services,
quality jobs, new opportunities for economic activities that generate self-employment
and can help generate value chains responsible.

There are three motivations of the institutional theory and three models of
capitalism that are related each other. Those dimensions answer the question why firms
adopt CSR. The motivations are: Instrumental, relational and moral and the models of
capitalism are: Liberal market, coordinated and state market economy.

Liberal market economy is a doctrine of capitalism and It opposes to the other
models as coordinated and state-market economy. Liberal market also advocates
minimal interference by the state in economic relations between individuals, classes or
nations. It can be said that liberal market is free from state intervention. It guides
capitalism as the only system able to ensure that everyone can exercise freely whatever
they want, which leads to an optimal production capacity, steady economic growth and
a welfare state. This is the reason why Liberal market economy is related with
instrumental motivation because its driven by self- interest.

Liberal market economy uses instrumental motivation because its associated
with international competitiveness too. The competition in liberal market economy
results in technological improvements, efficiency gains and increased economic growth
that benefit the whole of society. The pursuit of maximum profit by firms and the
competition that arises between them is an important incentive for economic growth.
The company cannot remain static, but must innovate, whether to continue placing their
products on the market and not disappear as others have done, is better adapted to the
free market and thus compete for consumers because they are getting better quality
product. Competition makes companies selling cheaper and better quality products.
Countries like USA and UK described CSR as part of the core strategic value for
example. Coca cola and Pepsi. Both are Americans companies which have always had a
great rivalry over the years has generated a benefit to the consumer. In the liberal
market where many companies compete for the same customer base, companies should
carefully consider the prices and quality to attract new customers and retain existing
ones. In this case, CSR is based on shareholder oriented because they just want to
maximize their profits and being in the competitive market without involvement of the
community.

The second type of capitalism is the coordinated market economy that is like a
mixed economy in which the economic system incorporates a mixture of privately
owned and government or control. It is a degree of private economic freedom (including
privately owned industry), mixed with centralized economic planning and government
regulation (which may include market regulation environmental and welfare concerns,
or government ownership and management of some of the national media production or
social objectives). In the article, there is an important concept called neo-corporatist,
which is a voluntary agreement in which state takes part in public decision-making. It
can stimulate or hinder the development of CSR.
A good corporate government determines the distribution of rights and
responsibilities among different participants in the business, such as the board,
managers, shareholders and other parties to maintain an interest in the company. It also
provides the structure through which the company objectives are set, the means to
achieve and how to monitor their performance. In this way, companies become more
responsible and it is easier for them to develop CSR. In contrast, there are governments,
which try to limit the CSR and this occurs more in developing countries because there
are a lot of corruption, unstable policies, lack of trust and family-owned companies.
Corporate governance is required to have a certain level of government oversight to
prevent increased levels of corruption. This is especially true in the areas of corporate
finance and the banking industry deregulation.

Coordinated market economy use relational motivation which is driven by the
necessity to maintain cooperative relationship among stakeholders for example
companies in the northern Europe apply this type of capitalism.
Thats the case of Siemens, which is the largest Germany Company about engineering
and electronics. It offers services in the areas of energy, health, city planning, and
financial services industry. According to its website, the company has made an effort to
make the three areas of sustainability (business, environment and society).
To achieve this, they rely on continuous dialogue with their stakeholders, and focus
their strategy on three of the areas that can help as a company: education in science and
technology, social and humanitarian assistance, environmental protection and
conservation.
In the education area, Siemens supports education and initiatives because
promote the development of young people. They offer practical professional, training of
engineers, technical conferences, etc. This allows helping employees and society in
general. The company also develops health days, focused on prevention, early detection,
diagnosis and basic care of employees and their families. In order to improve the quality
of life of their employees and neighbors, Siemens SA Manufacturing and Siemens
Foundation promote cultural and sports initiatives, where there is the inclusion of
people in the environment, strengthening the efforts made in community recreation and
leisure area.
In the environment aspect, more than 110 employees with their families planted
500 trees (Guayacanes, Cedros and Chical) in Churuguaco sidewalks, Colombia. It
was unquestionably an environmental success and teamwork with the collaboration and
participation of Quality Management and Environment and Siemens Foundation.
In this way the development of organizational culture was achieved around the
protection of the environment, politics and aligned with corporate values of Siemens.
Employees from Siemens say that they are responsible citizens because they are
committed to the protection of the environment. The government also have promotes
greater business transparency and help Siemens to take better decision according with
the community. They have also produced better quality products because the
government requires that their products must be carried out under ISO certifications and
standards. In this way ensuring compliance with the requirements of their products and
generate higher quality products that satisfy consumer needs.
In conclusion, Siemens is a private company mixed with centralized economic
planning and government regulation. It is definitely a leader within their industry, which
has struggled to attract customer solutions that are not only effective, but also
ecological.

The last type of capitalism is State-led market or the term "state capitalism" is
often used in two different ways: first, as an economical way in which the state takes the
role of the capitalist entrepreneur, exploiting workers for the interest of the State. The
federal mail system or state-owned railways are examples of this type of state
capitalism. In Russia, this form of state capitalism dominates the industry: work is
planned, funded and managed by the State; industry directors are appointed by the State
and benefits are considered income of the state.
Second, State-led market is the situation which capitalist enterprises are controlled by
the state (Forbes, 2013). This definition is, however, misguided, because there is still a
way of private property although the owner of a company is no longer the sole manager
because his power is restricted.
In this dimension, top managers are sensitive to the state, which induce
development motivation for CSR. In this market, CSR and corporate governance is not
easily separable. For example: PetroEcuador is an oil company, which is managed by
the Ecuadorian government. They are trying to apply CSR with the help of the
government because their mission is to create wealth and sustainable development for
Ecuador, with committed human talent, managing cost and efficiently transport
processes, refining, storage and domestic and international marketing of hydrocarbons,
ensuring domestic supply of products with quality, quantity, timeliness, and social
responsibility environmental.

In conclusion, Coordinated market economy is the best model of capitalism,
which uses relational motivation as a complementary institutional theory. In this
market, one person does not take decisions because the government also engages to
maintain the balance between economic and social objectives between individual and
community objectives. The governance framework is established in order to promote
efficient use of resources and, equally, to require accountability for the management of
those resources. CSR is related with this model of capitalism because their ethical
values in which the coordinated market economy is based on principles as human
dignity, the common good, solidarity and subsidiarity, to achieve an equal economic
growth.


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