The constraints approach - Strategic Management

There are opponents of the stakeholder approach as well as supporters. Argenti argues:If ‘the stakeholder approach’ merely asserted that ‘companies perform better the more closely they engage everyone affected by their operations’ there would be little dissent: even the most rabid capitalist could accept that. But the theory goes far beyond that; it declares that the company should be run for all those who may be deemed to have a stake in it. His criticisms are based on owner’s rights, the lack of homogeneity between the various stakeholders, and practical problems.

He concludes: The stakeholder theory is an idea whose time has long run out. It claims that companies should be run for the benefit of all, an impossible dream which, significantly, inspired such well-meaning disasters as nationalisation. In reality human organisations involve two distinct relationships: they are designed to confer advantage on one specific set of people – their intended beneficiaries. But, in order to operate effectively, they must engage the enthusiasm of all those other people who are affected by their activities and so must offer them some inducement. The stakeholder theory is not just philosophically misconceived, it has practical consequences to society that are profoundly damaging and deeply unethical.

The approach of many writers on strategic management is to suggest that ethical and moral obligations are constraints which the organisation sets according to it perception of how it should behave. Constraints may be defined as things which for moral or ethical reasons the company will not do, despite the fact that to do them would put the company a long way towards the achievement of its profit objectives. Ansoff14 uses a simpler definition: ‘constraints are decision rules, which exclude certain options from the firm’s freedom actions.’ Argenti provides a basically similar approach.

Ansoff makes a distinction between constraints and responsibilities. Under his classification a responsibility is something which a company accepts and which adds to its expense without in any way reducing its freedom of strategic action. Thus a company may, as many companies do, accept a liability to support a particular charitable foundation, or an employee’s pension fund, but these actions in no way exclude any options from its strategy. The difference between a responsibility and a constraint is that a constraint does inhibit a company’s freedom of action.

An important principle is that constraints must be defined and written down as part of the planning process (and, of course, this also includes certain of the major constraints imposed by law). Only when they are clearly defined can the chief executive be sure that they are clearly communicated through the organisation. The fact that this sort of policy action is called a constraint does not mean that it is in any way negative. The negative ‘Thou shalt not steal’ can be interpreted as the very positive ‘be honest’.

It must be stressed that it is as important to define the constraints as to define any other element in a corporate plan. Only after this act is it possible for the organisation to be sure that its plans and day-to-day actions truly reflect the philosophies of the chief executive. The defined constraints become an integral part of the company’s corporate plans, and should be one of the criteria against which the plans and strategies are measured. The reason for clearly stating the constraints is practical, not academic. It is so that they can be used in the running of the business. In their application in planning constraints stand next to objectives, which means that most of the discussion on this subject also has a bearing on the subject.

In an ideal world more attention would perhaps be given to defining the c nstraints caused by ethical and moral considerations than is usually customary in modern business. Argenti16 is perhaps a little idealistic in his views: Unfortunately, however, it was found to be only too easy to run a company so that it satisfied the shareholders – but failed to satisfy – indeed bitterly dissatisfied – other groups. Gradually, therefore, over the past few decades the shareholder has dropped from first beneficiary to the last – or so it would appear at first sight. In fact, he has always been last, he had always been the residual beneficiary after all other expenses of running the company have been met; the difference is only that most companies now recognise what some did not before, that it is not morally acceptable to take advantage of one’s employees, suppliers, or customers even if it were possible (and in modern conditions, with full employment and vigorous competition, it seldom is).

Thus the shareholder received, and still receives, whatever profit was left over from the company’s operations; the distinction being that nowadays there is less left over because companies in general meet their social obligations instead of neglecting them. Drucker’s view of what should happen is perhaps a useful note on which to summarise the debate so far. But what is most important is that management realise it must consider the impact of every business policy and business action upon society. It has to consider whether the action is likely to promote the public good, to advance the basic beliefs of our society, to contribute to its stability, strength and harmony.

Cadbury should have the last words on ethical issues, from his article that won the Harvard Business Review 1986 Annual Ethics in Business Prize. Among his many practical and thoughtful comments are two statements. One is that ‘shelving hard decisions is the least ethical course’ of action for a chief executive, and of course, many ethical decisions are neither easy to take, nor pleasant to implement. My own interpretation of this is that the golden glow of righteousness over a no-bribes policy in the Third World is easier to maintain when it does not mean making a large number of people redundant in the home country through lack of work.

Moral decisions with no consequences are not the ones that cause sleepless nights! The second is that ‘actions are unethical if they won’t stand scrutiny’. He argues that openness and ethics go together. Openness is also, I believe, the best way to disarm outside suspicion of companies’ motives and actions. Disclosure is not a panacea for improving the relations between business and society, but the willingness to operate an open system is the foundation of those relations. Business needs to be open to the views of society and open in return about its own activities; this is essential for the establishment of trust.

Social audit
Hargreaves and Dauman, whose book (published in 1975) unfortunately is now out of print, state:
The idea of a social audit for organisations, particularly in business, is new. Indeed the term ‘social audit’ itself is still interpreted differently by different people. To some it means the public disclosure of a company’s social performance. To others it means the internal (confidential) evaluation of a company’s social responsibility performance. Others go further and define the social audit as a comprehensive evaluation of the way a company discharges all its responsibilities, to shareholders, customers, employees and suppliers, to the wider community, indeed to all its stakeholders.They suggest a number of reasons why organisations should conduct a social audit.

First, social responsibility is becoming an issue which is important to the growth and survival of the organisation. Second, like it or not, many organisations, without giving consent, are subject to social audits by external organisations. Many of these have a particular political axe to grind. Reports have been published on a number of companies by the Public Interest Research Centre, and Social Audits Ltd of the UK and by the Project on Corporate Responsibility in the USA. Companies such as general Motors, Tube Investments and Avon Rubber have been the targets.

A third reason advanced by the authors is the ever-increasing requirement for disclosure in various countries, and their belief that industry is better off moving in advance of legislation, and thereby setting the pace and the rules that follow. They see as a fourth reason the pressure by shareholders for more information. Since they wrote their book there have been developments on all fronts, including the setting up of a number of ethical unit trusts which will only invest in companies that make acceptable products and behave in an ethical way, as defined by the unit trust.

There is no one universally acceptable way of conducting a social audit. Wheeler and Sillanp¨a¨a provide a detailed description of the method used by The Body Shop which is of value to anyone who may wish to explore the subject in detail. One school of thought moves into social accounting, the idea that all social actions, negative and positive can be quantified and presented either as a broad numerical statement, or even more precisely as a form of balance sheet. This concept is very difficult to make workable.

There are enough problems over the judgement areas in normal accounting, to show the problems that could arise when almost every statement was a judgement. If the intention is to use the social audit as one element in the formulation of strategy within a company, and the purpose is totally internal, the resultant report should become another way of helping to relate the internal elements of the organisation to the external environment. Such an audit might be approached by listing the critical issues, some of which may also be partially covered by legislation, and the constituents who have a concern with the firm.

Against these lists it is then possible to evaluate every strategy, policy and operating practice of the organisation. It would probably be necessary to repeat this exercise at various organisational levels: by business unit, by functional area, by geographical location, and by department. Immediately one can see that this is not a small task, while those that have been involved in quality audits for BS 5750 (ISO 9000) accreditation will be aware of the work involved in a much narrower aspect of policy and performance audit. The types of issue that might be considered will vary over time, as what is considered socially important changes over time, as we have seen.

However, they might include consumer responsiveness, health and safety, environmental pollution, use of scarce raw materials, Third World actions, employment of women or of ethnic minorities, energy utilisation and many more. Constituents have been defined in the preceding chapter when we looked at the Neubauer/ Solomon method of analysing the environment. Indeed, one can visualise the construction of matrices with scoring systems to help identify the success and problem areas.

In periods of recession, pressure on organisations to conduct social audits tends to alleviate, as organisations grapple with the more immediate task of staying solvent. Green issues have now become the most pressing, and some authorities now urge organisations to undertake audits of green issues. Vandermerwe and Oliff argue that consumers are willing to buy green. They argue the need for a green audit, and the development of strategies across all functions. Most organisations have given some thought to green issues, and my experience is that they are even more complicated than other social issues.

An organisation may clean up its own act, and be convinced that it creates no pollution, but unless it looks right across the chain of supply through to the ultimate consumer, it may simply be shifting the problem elsewhere. Perhaps it uses a raw material which is in itself safe and non polluting, but the supplier who makes it has to create a toxic waste. Maybe the packaging used is beautifully clean and hygienic, but will not biodegrade after use. Any audit needs to be very broad, and conducted with action in mind.

Vandermerwe and Oliff argue that organisations should set green goals. They list:

  • Identifying benchmarks for green performance
  • Determining the opportunities and risks from the ‘green wave’ 159
  • Extend strategic planning to cover a broad range of green scenarios
  • Undertake a careful assessment of the costs and benefits of being a green company.

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