Responsible Investment and the Claim of Corporate Change

Elisa M. Zarbafi Responsible Investment and the Claim of Corporate Change

GABLER RESEARCH EBS Forschung Schriftenreihe der EBS Universität für Wirtschaft und Recht i. Gr. EBS Business School · Wiesbaden

Herausgegeben von Prof. Dr. Falko Fecht

Band 79

Die im Sommer 2010 aus der European Business School International University, Schloss Reichartshausen entstandene EBS Universität für Wirtschaft und Recht (i. Gr.) gGmbH ist die erste Wirtschaftsuniversität in Deutschland. Dieser Vorreiterrolle fühlen sich ihre Professoren und Doktoranden in Forschung und Lehre verpflichtet. Mit der Schriftenreihe präsentiert die EBS Universität für Wirtschaft und Recht i. Gr. ausgewählte Ergebnisse ihrer betriebs- und volkswirtschaftlichen Forschung.

Elisa M. Zarbafi

Responsible Investment and the Claim of Corporate Change A Sensemaking Perspective on How Institutional Investors May Drive Corporate Social Responsibility With a foreword by Prof. Dr. Ulrich Grimm

RESEARCH

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

EBS Universität für Wirtschaft und Recht i. Gr. | EBS Business School | Wiesbaden, 2009 D 1540

1st Edition 2011 All rights reserved © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011 Editorial Office: Stefanie Brich | Britta Göhrisch-Radmacher Gabler Verlag is a brand of Springer Fachmedien. Springer Fachmedien is part of Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: KünkelLopka Medienentwicklung, Heidelberg Printed on acid-free paper Printed in Germany ISBN 978-3-8349-1976-2

Foreword Corporate Social Responsibility has been an appreciative, albeit academic issue for several years. As a result of the recent financial and economic crisis, it is now not only a topical issue in contemporary times, but is also becoming increasingly important in business practice. Leading managers are confronted with the question as to what extent their organizations accept the responsibility to protect the communities and the environment in which they operate.

This book explores how and if at all significant players in capital markets, namely institutional investors, place their focus on socially responsible management and how they are best able to use their influence.

The deep-rooted understanding that managerial decision-making processes are not only the result of objective analyses, but rather are shaped by the many varied interactions within social systems, delivers the theoretical basis of the dissertation at hand. The author is guided by Karl Weick's sensemaking approach, and with her own particular brand of enthusiasm and passion applies this approach to the relationship between organizations and institutional investors. In sum, Elisa Minou Zarbafi delivers compelling arguments for the construction and reconstruction of these relationships.

The acceptance of the proposed approach in business practice would be an effective means to prevent the development of a crisis such as we have recently experienced. In this respect, I hope this book will be widely read both in theory and practice.

Professor Dr. Ulrich Grimm EBS Business School, Germany

This book covers a huge ground and body of literature, focusing its theoretical critique/analysis on responsible investment, which to my knowledge, is rarely if ever approached from Zarbafi’s perspective: social psychology generally, and ‘sense making’ in particular. In this regard, the book is unique. While complex and grounded in a literature that many in the field of responsible investment are not in the least familiar with, it leads to a compelling read, something not true, in my experience, of even the best 'revised' Ph.D. dissertations.

Professor Dr. James P. Hawley Elfenworks Center for the Study of Fiduciary Capitalism, St. Mary's College, California

Preface The work embodied in this book is based upon my belief that the integration of social responsibility into corporate policies and practices can play a major role in securing long-term shareholder value. Also, I believe that institutional investors can play a major role in driving the social responsibility of their portfolio companies - as long as both, the investor and the company, recognize social responsibility as a continuous change process in which their own individual members bring structure and events into existence and set them into action. Both beliefs are central to the manuscript at hand which looks at responsible investment and the claim of corporate change from a social psychology perspective. The manuscript represents a revised version of my doctoral thesis and was defended at EBS Business School, Germany, in 2009. I wish to thank my supervisors, Ulrich Grimm (EBS Business School, Chair of Strategic Management) and Dirk Schiereck (University of Darmstadt, Chair of Corporate Finance) for their advice and support during my doctoral studies. In particular, I would like to thank Ulrich Grimm for introducing me into the world of constructivism and social psychology and for giving me the opportunity to pass these ideas on to our students and other interested researchers in the field of responsible investment. I also thank James P. Hawley (Saint Mary's College of California, Director of the Elfenworks Center for the Study of Fiduciary Capitalism), David J. Linden (Bangor University, School of Psychology), and Andreas Rasche (The University of Warwick, Warwick Business School) for their in-depth review of my manuscript. Thank you for the time and effort you put into reading my thesis as well as for your wise and helpful comments that I greatly appreciated. Finally, I would like to thank all my friends and doctoral colleagues who shared this journey with me for their continuous support and positive attitude. I wish to express my greatest thanks to my parents, my sister Nassrin, and my friend Fabian for their unquestioning support. Without your infinite patience, understanding, and love, this thesis would have never become reality. Elisa Minou Zarbafi

Summary of Contents List of Figures .............................................................................................................. XV List of Abbreviations ............................................................................................... XVII 1

Introduction............................................................................................................. 1 1.1 1.2 1.3 1.4 1.5

2

Responsible Investment and the Claim of Corporate Change ....................... 25 2.1 2.2 2.3

3

4.2 4.3 4.4

How Institutional Investors and Corporations Enact Their Sense of Responsibility ........................................................................................... 103 How Institutional Investors and Corporations Interact ............................ 161 How Institutional Investors May Change a Corporation’s Sense  Responsibility ....................................................................................... 194 Interim Conclusion II: A Process Model of Responsible Investment as a Driver of Corporate Social Responsibility ........................................ 216

Implications for Practitioners and Researchers ............................................. 221 5.1 5.2

6

Responsible Investment in the Light of Agency Theory ............................ 55 Towards a New Conceptualization of Responsible Investment ................. 63 Introducing Sensemaking Studies as Underlying Theory .......................... 77 Interim Conclusion I: A Framework to Analyze Responsible Investment as a Driver of Corporate Social Responsibility .......................................... 96

Making Sense of Responsible Investment as A Driver  Corporate Social Responsibility ..................................................................103 4.1

5

The Phenomenon of Responsible Investment ............................................ 25 The Practice of Responsible Investment .................................................... 36 The Link to Corporate Social Responsibility ............................................. 49

Towards a Process Model of Responsible Investment ..................................... 55 3.1 3.2 3.3 3.4

4

Context and Motivation of the Study ........................................................... 1 Previous Literature and Research Relevance ............................................... 4 Research Approach and Theory Perspective ................................................ 9 Research Objective and Scope of the Study ............................................... 17 Course of Investigation............................................................................... 20

Implications for Institutional Investors .................................................... 221 Implications for Researchers .................................................................... 227

Concluding Remarks.......................................................................................... 233

Appendix ...................................................................................................................... 2 Bibliography ................................................................................................................ 24

Contents        1

Introduction............................................................................................................. 1 1.1 1.2 1.3 1.4 1.5

2

Context and Motivation of the Study ........................................................... 1 Previous Literature and Research Relevance ............................................... 4 Research Approach and Theory Perspective ................................................ 9 Research Objective and Scope of the Study ............................................... 17 Course of Investigation............................................................................... 20

Responsible Investment and the Claim of Corporate Change ....................... 25 2.1 The Phenomenon of Responsible Investment ............................................ 25 2.1.1 Introduction and Definitions .................................................................. 25 2.1.2 The Evolution of Responsible Investment ............................................. 28 2.1.3 The Role of Institutional Investors as Responsible Owners .................. 32 2.2 The Practice of Responsible Investment .................................................... 36 2.2.1 Responsible Analysis: The Entry Decision ............................................ 37 2.2.1.1 Screening ........................................................................................ 37 2.2.1.2 Enhanced Analysis ......................................................................... 40 2.2.2 Responsible Ownership: The Loyalty Decision..................................... 42 2.2.2.1 Engagement .................................................................................... 43 2.2.2.2 Activism ......................................................................................... 44 2.3 The Link to Corporate Social Responsibility ............................................. 49 2.3.1 The Concept of Corporate Social Responsibility ................................... 49 2.3.2 Investor Responsibility and the Claim of Corporate Change................. 53

3

Towards a Process Model of Responsible Investment ..................................... 55 3.1 Responsible Investment in the Light of Agency Theory ............................ 55 3.1.1 Responsible Investment and the Principal-Agent Paradigm .................. 55 3.1.2 Underlying Assumptions........................................................................ 61 3.2 Towards a New Conceptualization of Responsible Investment ................. 63 3.2.1 Limitations of the Principal-Agent Paradigm ........................................ 64 3.2.2 The Need for a New Conceptualization of Responsible Investment as Sensemaking Process ............................................................................. 74 3.3 Introducing Sensemaking Studies as Underlying Theory .......................... 77 3.3.1 Enactment............................................................................................... 78 3.3.2 Double Interact ....................................................................................... 86 3.3.3 Continuous Change ................................................................................ 91 3.4 Interim Conclusion I: A Framework to Analyze Responsible Investment as a Driver of Corporate Social Responsibility .......................................... 96

XII



Contents

  ! " #  $ % !  ! & '( 4.1

How Institutional Investors and Corporations Enact Their Sense of Responsibility ........................................................................................... 103 4.1.1 Preliminary Remarks............................................................................ 104 4.1.1.1 Enacted Responsible Investment.................................................. 104 4.1.1.2 Enacted Corporate Social Responsibility..................................... 105 4.1.2 Belief-driven Processes of Sensemaking ............................................. 106 4.1.2.1 Arguing ........................................................................................ 107 4.1.2.1.1 Level of Cognition: Identity Orientation.................................. 107 4.1.2.1.2 Level of Action: Identity Defense Mechanisms ...................... 113 4.1.2.2 Expecting ..................................................................................... 121 4.1.2.2.1 Level of Cognition: Role Expectations .................................... 121 4.1.2.2.2 Level of Action: Behavioural Confirmation ............................ 129 4.1.3 Action-driven Processes of Sensemaking ............................................ 135 4.1.3.1 Committing .................................................................................. 136 4.1.3.1.1 Level of Action: Behavioural Commitment............................. 136 4.1.3.1.2 Level of Cognition: Justification.............................................. 142 4.1.3.2 Manipulating ................................................................................ 147 4.1.3.2.1 Level of Action: Invention ....................................................... 147 4.1.3.2.2 Level of Cognition: Legitimacy ............................................... 157 4.2 How Institutional Investors and Corporations Interact ............................ 161 4.2.1 Preliminary Remarks............................................................................ 161 4.2.1.1 Influence as Outcome of Collective Sensemaking....................... 162 4.2.1.2 Collective Sensemaking through Reciprocal Inquiry .................. 163 4.2.2 Processes and Outcomes of Reciprocal Inquiry................................... 166 4.2.2.1 Collective Sensemaking through Observing................................ 167 4.2.2.1.1 Observing ................................................................................. 167 4.2.2.1.2 Minimal Collective Sensemaking ............................................ 170 4.2.2.2 Collective Sensemaking through Asking ..................................... 173 4.2.2.2.1 Asking ...................................................................................... 173 4.2.2.2.2 Fragmented Collective Sensemaking....................................... 176 4.2.2.3 Collective Sensemaking through Telling ..................................... 179 4.2.2.3.1 Telling ...................................................................................... 179 4.2.2.3.2 Restricted Collective Sensemaking.......................................... 182 4.2.2.4 Collective Sensemaking through Generating............................... 187 4.2.2.4.1 Generating ................................................................................ 187 4.2.2.4.2 Enhanced Collective Sensemaking .......................................... 191 4.3 How Institutional Investors May Change a Corporation’s Sense  Responsibility....................................................................................... 194 4.3.1 Preliminary Remarks............................................................................ 195 4.3.1.1 Corporate Social Responsibility as Continuous Change Process 195 4.3.1.2 The Logic of Intervention in Continuous Change........................ 198

Contents

XIII

4.3.2 Processes of Intervention ..................................................................... 201 4.3.2.1 Freeze ........................................................................................... 201 4.3.2.2 Rebalance ..................................................................................... 204 4.3.2.3 Unfreeze ....................................................................................... 213 4.4 Interim Conclusion II: A Process Model of Responsible Investment as a Driver of Corporate Social Responsibility ........................................ 216 5

Implications for Practitioners and Researchers ............................................. 221 5.1 Implications for Institutional Investors .................................................... 221 5.1.1 Tie Your Beliefs and Actions: Investor Responsibility Matters .......... 221 5.1.2 Balance Advocacy and Inquiry: Engagement is the Way Forward ..... 224 5.1.3 Focus Attention: The Logic of Attraction............................................ 225 5.2 Implications for Researchers .................................................................... 227 5.2.1 Exploring the Plurality of Organizational Phenomena from Multiple Perspectives........................................................................... 227 5.2.2 Continuing Research on the Claim of Corporate Change as Resulting from Sensemaking Processes............................................... 229

6

Concluding Remarks.......................................................................................... 233

Appendix ...................................................................................................................... 239 Bibliography ................................................................................................................ 245

List of Figures Fig. 1: Paradigms in social science according to Burrell and Morgan....................... 13 Fig. 2: Research problem and corresponding research objectives. ............................ 18 Fig. 3: Course of investigation. .................................................................................. 24 Fig. 4: SAM’s practice of responsible investment. .................................................... 42 Fig. 5: The ‘SANE BP’ 2001 shareholder proposal of Greenpeace. ......................... 46 Fig. 6: Logsdon and van Buren’s model of the shareholder resolution process. ....... 47 Fig. 7: The four practices of responsible investment. ................................................ 48 Fig. 8: Carroll’s four-part model of CSR ................................................................... 51 Fig. 9: Relationship CS and CSR according to Wempe and Kaptein. ....................... 52 Fig. 10: A model of a principal-agent relation........................................................... 58 Fig. 11: An overview of agency theory’s assumptions. ............................................. 63 Fig. 12: Assessment of agency theory’s assumptions in their application to responsible investment. ................................................................................ 74 Fig. 13: Towards a new conceptualization of responsible investment as sensemaking process..................................................................................... 77 Fig. 14: The relationship between enactment, organizing, and sensemaking............ 80 Fig. 15: Weick’s process of organizing...................................................................... 82 Fig. 16: Beliefs and actions as drivers of sensemaking. ............................................ 83 Fig. 17: Making sense through tying beliefs and actions......................................... 85 Fig. 18: The double interact. ...................................................................................... 86 Fig. 19: Interlocking behaviour cycles in selection process according to Weick. ..... 88 Fig. 20: Weick and Quinn’s comparison of episodic and continuous change. .......... 93 Fig. 21: Intervention theory in continuous change processes. ................................... 95 Fig. 22: Underlying assumptions of sensemaking. .................................................... 96

XVI



List of Figures

Fig. 23: Research questions in the light of sensemaking studies. ............................ 100 Fig. 24: A framework to analyze responsible investment as a driver of CSR. ........ 101 Fig. 25: Belief-driven processes of sensemaking..................................................... 106 Fig. 26: Belief-driven processes in making sense of responsibility......................... 135 Fig. 27: Action-driven processes of sensemaking.................................................... 136 Fig. 28: Action-driven processes in making sense of responsibility........................ 161 Fig. 29: Processes of advocacy and inquiry according to Ross and Roberts. .......... 166 Fig. 30: Collective sensemaking through observing. ............................................... 171 Fig. 31: Collective sensemaking through asking. .................................................... 177 Fig. 32: Senge’s snowball effect of reinforcing advocacy....................................... 183 Fig. 33: Collective sensemaking through telling. .................................................... 186 Fig. 34: Collective sensemaking through generating............................................... 192 Fig. 35: Processes and outcomes of reciprocal inquiry in responsible investment.. 194 Fig. 36: A process model of responsible investment as a driver of CSR................. 219 Fig. 37: Propositions for investor responsibility...................................................... 242 Fig. 38: Propositions for CSR. ................................................................................. 242 Fig. 39: Propositions for reciprocal inquiry. ............................................................ 243 Fig. 40: Propositions for transformational leadership.............................................. 243

List of Abbreviations ABP

Stichting Pensioenfonds ABP (National Civil Pension Fund)

AG

Aktiengesellschaft

AGM

annual general meeting

AUM

assets under management

AXA IM

AXA Investment Managers

BNP PAM

Banque National de Paris Paribas Asset Management

BP

British Petroleum Company

BTPS

British Telecommunications’ Pension Scheme

CalPers

California Public Employees' Retirement System

CDP

Carbon Disclosure Project

CEO

chief executive officer

CFP

corporate financial performance

CMS

certified management standards

CS

corporate sustainability

CSP

corporate social performance

CSR

corporate social responsibility

DJSI

Dow Jones Sustainability Indexes

e.g.

exempli gratia (for example)

EAI

Enhanced Analytics Initiative

EC

European Commission

egip

European Group of Investor Protection

EMH

efficient market hypothesis

EOS

Equity Ownership Services

ESG

environmental, social, and corporate governance

et al.

et alii (and others)

EUR

Euro

Eurosif

European Social Investment Forum

fig.

figure

FTSE4Good Financial Times and London Stock Exchange for Good GRI

Global Reporting Initiative

ibid.

ibidem (at the same place)

XVIII

List of Abbreviations

i.e.

id est (that is)

ILO

International Labour Organization

IR

investor relations

ISO

International Organization for Standardization

MIC

methyl isocyanate

MNC

multi-national corporation

NGO

non-governmental organization

NL

The Netherlands

p.

page

P-A

principal-agent

para.

paragraph

PFZW

Stichting Pensioenfonds Zorg en Welzijn (Pension Fund for Care and Well-Being)

plc

public limited company

pp.

pages

PRI

Principles for Responsible Investment

SA

Social Accountability

SAM

Sustainable Asset Management

SEC

Securities and Exchange Commission

SEE

social, environmental, and ethical

SIF

Social Investment Forum

SRI

socially responsible investment

SWOT

strengths, weaknesses, opportunities, threats

TQM

Total Quality Management

UK

United Kingdom

UN

United Nations

UNEP

United Nations Environment Programme

UNEP FI

United Nations Environment Programme Finance Initiative

US

United States

USD

United States Dollars

WpHG

Wertpapierhandelsgesetz

WpÜG

Wertpapiererwerbs- und Übernahmegesetz

WWF

World Wide Fund for Nature

1

Introduction We cannot underestimate the influence of financial services and the potential impacts of the world’s most powerful private institutions on delivering a more intelligent management of the environment and its nature-based assets. Nor should we forget the fundamental importance of these assets that intimately support our financial institutions, economies, capital markets and, ultimately, all life on Earth. (Achim Steiner, UNEP Executive Director)

1.1

Context and Motivation of the Study

In today’s global and integrated economy, the long-term value and success of a company are inevitably linked to its environmental, social and corporate governance (ESG) performance. The relevant corporate policies and ensuing practices are frequently summarized under the term Corporate Social Responsibility (CSR). The Economist (2008) acknowledges “with regret” that “CSR has arrived”. A survey conducted by Oppenheim and colleagues (2007) further proves that social and environmental issues1 have climbed to the top of the socio-political agenda of senior executives around the globe. Today’s “climate of heightened scrutiny toward corporate behaviour” (Basu and Palazzo, 2008, p. 122) has pressured corporations no longer to ignore their responsibility to protect the communities and the environment in which they operate (Sparkes, 2002; Waddock, 2000). The current financial crisis and the widespread lack of trust in the private sector added further momentum to this quest for social legitimacy. Hence, by engaging in CSR initiatives, such as reducing carbon gas emissions, fighting against child labour, or establishing a clear governance structure, corporations are trying to fulfil societal demands, and, at the same time, legitimize their business operations (Gilbert and Rasche, 2007).

1

We define ‘issue’ very generally following Dutton and her colleagues (2001) as “any event, development, or trend with implications for organizational performance” (p. 410). With regard to the problem under study we thereby specifically focus on an organization’s environmental, social, and governance performance.

E. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7_1, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

2

1

Introduction

Stakeholders2 play a major role in identifying, driving, and monitoring the social responsibility of large corporations (Aguilera et al., 2007; Goodstein and Wicks, 2007; Mitchell et al. 1997). So far, national governments have failed to define the responsibilities of the corporate sector adequately on a global scale (Boatright, 2000; Rasche et al., 2007). Many studies have consequently looked at other potential stakeholders such as activist groups (e.g. den Hond and de Bakker, 2007), consumers (e.g. Klein et al., 2004), and employees (e.g. Yu, 2008) and analyzed their impact on corporate behaviour. Conversely, shareholders, which can be conceptualised as financial stakeholders, have until recently been largely ignored in this context. Maximization of shareholder value3 was considered to be their interest, and this was often thought the opposite of what was assumed to be good for society; a concern that has certainly been confirmed by the recent developments of the US credit crisis. The dichotomy between shareholders and society can be traced back to the long-standing debate between traditional economists, who suggest that the only social responsibility of a firm is to “use its resources ... to increase its profits” (Friedman, 1962, p. 62), and business and society scholars with Edward Freeman (1984) as their most prominent advocate, who argue that the ‘modern corporation’ has an obligation towards all stakeholders that goes beyond the maximization of the wealth of equity holders (Mackey et al., 2007, p. 817). However, a closer look at recent trends in the financial industry and current publications reveals that we urgently need to rethink this dichotomy that has been maintained for such a long time. In fact, financial institutions such as large pension funds, mutual funds, and other institutional investors have started to become concerned with a company’s exposure to social and environmental risks. Through their investments in the corporate sector they have direct access to a management’s decision-making (Scholtens, 2006). For instance, institutional investors have increasingly challenged

2

3

Freeman (1984) defines a stakeholder in an organization as “any group or individual who can affect or is affected by the achievement of the organization's objective” (p. 25). A “stake” in an organization in terms of stakeholder theory rests on “legal, moral, or presumed” claims, and on the capacity to affect an organization’s “behavior, direction, process, or outcomes” (Mitchell et al., 1997, p. 858). The maximization of shareholder value refers to the idea that the ultimate measure of a company’s success is to enrich its owners. A shareholder’s money should thereby yield a higher return than the shareholder himself could yield by investing the money in other assets with the same risk profile (Rappaport, 1986).

1 Introduction

 3

large corporations to improve their disclosures and management systems on issues such as climate change, supply chain labour standards, and corruption. The rationale for these demands is that the integration of CSR related issues can play a major role in securing long-term shareholder returns while at the same time delivering broader social welfare (Sullivan and Mackenzie, 2006, p. 13). So far, the most prominent avenue that enables financial institutions to use their funds to promote CSR is via the stock market. Institutional investors can select shares on the basis of the company’s CSR and thus pursue a policy of (socially) responsible investment4. For example, institutional investors may deliberately exclude companies that harm the society or the environment from their portfolio, or they include those being known as good corporate citizens5. By doing so, institutional investors integrate social concerns into their daily decision-making. Some large pension funds like the California Public Employees' Retirement System (CalPers) also use their ownership rights to express their concerns and challenge company boards on CSR issues (CalPers, 2008). In recent years, the market for responsible investment has grown significantly in both the US and Europe. In the US, 2.71 trillion USD, equalling 11 percent of total assets under management (AUM), were involved in responsible investment in 2007 (USSIF, 2008). In Europe, the responsible investment market climbed from 1 trillion EUR in 2005 to 2.7 trillion EUR at the end of 2007 (Eurosif, 2008). These figures clearly indicate that financial institutions have started to subscribe to CSR in their investment decisions. Although responsible investment has a long history (see below, section 2.1.2), it is still a young and emerging topic for mainstream academic research. The role of financial stakeholders in fostering socially and ecologically sound corporate conduct should therefore remain a central theme for research in management science for the foreseeable future.

4

5

Please note that we use responsible investment as an umbrella term for all related investment approaches that are known in academic and practitioner literature such as ‘socially responsible’, ‘ethical’, ‘sustainable’, ‘green’ investing. Within the scope of our study we will only concentrate on responsible investment via the stock market. Alternatively, one can invest via private equity or directly such as community investing. They are, however, not subject of this study. The term ‘corporate citizen’ has emerged out of the CSR discussion and signifies a company being aware of its political role in a globalizing society and taking on its social and environmental responsibility (Scherer and Palazzo, 2007).

4

1

Introduction

In line with Jeucken (2004), Scholtens and colleagues (2008), Scholtens (2006), Sjöström (2008), and Sparkes and Cowton (2004), we therefore propose to analyze the role of financial stakeholders such as institutional investors as a driver of CSR. However, in contrast to the existing literature, the distinct motivation of our study is to focus on how institutional investors may drive large corporations to become socially responsible. This involves the analysis of the two parties affected, the investor and the corporation, and their interaction. We believe that in the light of uncontested importance of CSR it is essential for corporate management to discuss CSR related issues and strategy making together with their shareholders. In addition, we encourage institutional investors to start rethinking their yet predominant role as passive shareholders and getting involved with corporate management. The influence of financial institutions in delivering socially responsible business conduct is assumed to be high and we are interested in finding out how to make use of it. Thus, in writing this thesis, we have not aimed to clarify whether or not financial stakeholders have an impact on CSR or whether or not corporations should engage in CSR. Our aim was rather to understand the complex nature of responsible investment, and to identify the critical underlying processes that allow institutional investors to have an impact on a corporate management’s decision-making with regard to CSR.

1.2

Previous Literature and Research Relevance

The role of financial stakeholders in advancing CSR is a young research topic which has so far been dominated by practitioner literature (e.g., Domini, 2001; Mansley, 2000; Sparkes, 2002; Sullivan and Mackenzie, 2006).6 Descriptive case studies of socalled ethical funds, socially responsible investment (SRI) funds, pension funds, and other mutual funds are the predominant research method.7 From this literature we can conclude that there is a broad consensus among practitioners that “making a difference and making money” (Domini, 2001) are the two declared objectives of respon-

6 7

For an overview of existing practitioner literature see Broadhurst et al. (2003). The majority of the responsible investment cases we found were concerned with the role of pension funds in driving corporate change towards more social responsibility. This is particularly due to the funds’ enormous size compared to other institutional investors, especially in the US and the UK, and their long-term investment horizon that forces their fund managers to take environmental and social risks seriously (see e.g., Sullivan and Mackenzie, 2006).

1 Introduction

 5

sible investment. ‘Making a difference’ in this context expresses the claim of promoting better corporate social and environmental practice (Lewis and Mackenzie, 2000) and is thus the focus of our study. Further academic research on this “claim of corporate change” (Haigh and Hazelton, 2004, p. 61), however, is still nascent and largely dominated by empirical studies (David et al., 2007; Jeucken, 2004; Haigh and Hazelton, 2004; Scholtens, 2006; Sjöström, 2008). So far, we can identify two predominant (but not mutually exclusive) arguments that have been introduced to assess the potential influence of ‘responsible investors’ on corporate change. The first argument refers to the sensitivity of the share price to investment decisions (hereafter: the ‘share price’ argument). The second argument elaborates on the effectiveness of ownership rights to change a corporate policies and practices with regard to CSR (hereafter: the ‘ownership’ argument). Proponents of the first argument investigate if the decision whether to invest in or ignore a specific company significantly affects that company’s share price (due to e.g., market signalling) and, thus, translates into a superior or inferior shareholder return for the investor. Assuming that (i) the share price reflects the aggregated opinion of the financial market, and (ii) the company is driven by shareholder value maximization corporate management would then abide by the norms of responsible investment and strive for the social and ethical decision-making demanded by its shareholders (Sullivan and Mackenzie, 2006). Empirical studies broadly relating to this argument are vast and involve three subsets: (1) Event studies that explore the effect of ESG related announcements, such as the in- or exclusion of specific companies from the FTSE4Good Index, or the enactment of corporate governance guidelines, on a company’s share price (e.g. Curran and Moran, 2007; Picou and Rubach, 2006); (2) cross-sectional regression analyses that elaborate on the relationship between a company’s social performance and its financial performance (e.g., Margolis and Walsh, 2001; Waddock and Graves, 1997; see Orlitzky et al., 2003, for a literature review on this topic); and (3) studies comparing the economic performance of social and conventional mutual funds (e.g., Bauer et al., 2007; Bauer et al., 2006; Bauer et al., 2005; Bello, 2005; Kreander et al., 2005; Mill, 2006; Scholtens, 2005;

6

1

Introduction

Statman, 2000). A closer look at the findings of those studies, however, reveals that the empirical evidence of the share price argument is questionable. Findings vary largely and cannot be generalized, owing to the heterogeneity of selected research methods, short time periods of investigation, and vastly different interpretations of the CSR concept (Schumacher-Hummel, 2005, pp. 139-148). The situation is similar for the much fewer theoretical papers that support the share price argument. Haigh and Hazelton (2004, p. 61) identified a ‘cost of capital’ logic, in line with Bruyn (1987) and Harte and his colleagues (1991). It goes back to the claim of responsible investment fund managers that their funds would raise or lower a company’s cost of capital structure due to the law of capital supply and demand, which in turn affects a share price to fall or rise. However, Haigh and Hazelton (2004) come to the conclusion that it is unlikely that a single responsible investor will create economic effects due to an often negligible share in the company; thus, it is unlikely that he can affect corporate change. In contrast, Rivoli (2003) supports the share price argument. She challenges the horizontal demand curve assumption8 made by Shleifer (1986) and shows how market imperfections such as divergent opinions of responsible investors, and incurring transaction costs can cause a downward slope in the demand curve for equities which may then result in a share price that is sensitive to screening decisions. She concludes that, in the case of perfect markets responsible investment may not have an impact on firm behaviour through its effects on investor’s required returns; however, it should affect firm behaviour under the condition of market imperfection (Rivoli, 2003, p. 285).9 The second argument mentioned above, the ownership argument, explains the impact of responsible investment on corporate change after the investment decision has been made and applies to scenarios where responsible investors hold a substantial share in

8

9

The horizontal demand curve assumption by Shleifer (1986) in the context of equity markets implies that an individual investor’s actions (e.g., adding stocks to a portfolio) have no effect on the market price of a good, i.e. the share price of a company due to a perfectly competitive market. If no investor has the ability to influence the share price of a company, the demand curve facing each individual investor must be perfectly elastic (horizontal). This idea has initially been brought forward by Boatright (1999) who early argued that for social corporate policies to cause higher returns for SRI funds the market has to be inefficient in identifying or pricing the link between social policies and performance.

1 Introduction

 7

a company. This argument can be traced back to agency theory10 and elaborates on the use of formal governance mechanisms to influence corporate decision-making. This approach is commonly labelled “shareholder activism” (see Sjöström, 2008 for an overview). It is presumed that by effectively using his ownership rights an investor is able to better align his interests with that of corporate management so that a superior shareholder value and better social performance can be achieved.11 Ownership rights include writing shareholder proposals, appointing the board of directors, and divesting, and can be exercised alone or together with other institutional investors in a collaborative shareholder initiative. Although this argument has a stronger theoretical foundation than the share price argument, most articles solely concentrate on the use of ownership rights to increase a company’s governance in the light of Jensen and Meckling’s (1976) agency theory (see e.g., Bassen, 2002; Del Guercio and Hawkins, 1999; Gillan and Starks, 2000; Karpoff et al., 1996; Wahal, 1996). A sound elaboration on shareholder activism as driver of CSR has been almost absent for the last decades (for a few exceptions see Clark and Hebb, 2004; Hoffmann, 1996; Logsdon and Van Buren, 2008a; McLaren, 2004; O’Rourke, 2003; Vandekerckhove et al., 2008). A recent literature review on the role of active shareholder in advancing CSR by Sjöström (2008) reveals that existing studies are largely descriptive and empirical in nature and do not investigate how and why certain phenomena emerge and develop.12 This is reflected by a large body of literature concerned with the descriptive study of shareholder proposals, their “issues, voting results and targets” (ibid., p. 145), most of them taking place in the US. Prominent studies include the work of Proffitt and Spicer (2006) who examined the proxy seasons13 of 19692003, Graves and colleagues (2001) covering an 11 year period of 1988-1998, Campbell and colleagues (1999) focusing on the 1997 proxy season, and Logsdon and Van Buren (2008b) who investigate how shareholder activists use the resolution

10

Agency theory suggests that the firm can be viewed as a ‘nexus of contracts’ between resource holders. An agency relationship exists whenever one or more individuals, called principals, hire one or more other individuals, called agents, to perform some service on behalf of the principal. It will be further explained in section 3.1. 11 As such, the ownership argument also relies on the sensitivity of the share price. However, we decided to list both separately. The point in time of the investor’s action serves as distinguishing criterion: before and after the investment. 12 Additional literature reviews can be found in Karpoff (1998) and Black (1998). 13 A proxy season describes the period of time in which stockholders of a company are allowed to submit proposals for a vote at a company’s annual meeting.

8

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Introduction

process to promote social justice during the period 1999-2005. Two related studies by Rehbein and colleagues (2004) and Clark and colleagues (2008) both pay attention to which corporations are targeted by shareholder proposals. However, the question whether and how shareholder activism has an effect on corporate change remains largely unanswered. Only a small body of empirical work explicitly addresses this topic (see David et al., 2007; Johnson and Greening, 1999; Nelson, 2006; Neubaum and Zahra, 2006; Smith, 1996). However, findings are dissonant. Smith (1996) and Nelson (2006) both investigate the effect of the activist American pension fund CalPers on improved social performance and shareholder wealth but come to opposite results. Neubaum and Zahra (2006) show a positive correlation between active ownership and corporate social performance (CSP), which is disproved by David and his colleagues (2007), who find that the submission of shareholder proposals can be even destructive to CSP. In summary, the existing body of literature has failed to establish any clear consensus as to whether responsible investment decision making has a positive impact on corporate policies and practice or not. Neither the share price argument nor the ownership argument has led to consistent findings. This underscores the substantial lack of a robust conceptual basis on which empirical work can rest (Owen, 1990). Theoretical arguments have been “poor” (Scholtens, 2006, p. 19) and, according to Haigh and Hazelton (2004), “the limited amount of theoretical work done on the use of financial markets as a mechanism for social responsibility has been exploratory in nature, limited in scope, and largely, has accepted institutional investments as appropriate structures for social responsibility” (p. 65). In line with Sjöström (2008) we therefore see a strong research opportunity to question and advance previous findings and to strive for a theoretically sound and conceptually robust analysis of the use of financial markets to promote CSR. Hence, the motivation of this study is to help reorient SRI research away from the search for replicable empirical findings to explain the influence of investors on corporate change towards a quest for a deeper understanding of the underlying processes and drivers of whether and when investors may influence corporate management to truly become socially responsible. With our approach we provide a conceptual basis

1 Introduction

 9

that frames responsible investment as a series of social processes in which institutional investors and corporate management interact and strive for a joint understanding of what is valuable and sustainable for the company. An analysis of the sociopsychological drivers such as mental models, cause maps, values and expectations constituting the nature of such an interaction further allows us to take a closer look at what is expected to change: the organizational reality of corporate social responsibility. Surprisingly, a deeper analysis of this dimension has been missing from the majority of existing studies. According to Sjöström (2008, p. 152), most previous work has pictured CSR at the surface only by looking at a company’s year-to-year performance within some random CSR ranking.

1.3

Research Approach and Theory Perspective

In the light of the previous findings, the next section aims at bringing our research into relation to the philosophy of science. This allows us to give further insight into the context of our arguments by differentiating our research approach from the work of other scholars. As we call for a consideration of institutional investors’ potential influence on corporations as embedded in social processes rather than deriving from economic-based governance structures such as efficient markets or ownership rights we will introduce sensemaking studies by the social psychologist Karl E. Weick (1995a, 1979) as the theory perspective we consider as adequate within the scope of this study. The section closes with a brief comment on the level of analysis. Research approach According to Thommen (1986, pp. 31-48), the classification of research in relation to the philosophy of science includes an analysis of (1) our research problem, (2) our scientific understanding of management, (3) the methods used to conduct our research and (4) the purpose our research aims to serve.14 Research problem: As indicated above, our research problem concerns the claim of institutional investors to promote corporate change with regard to CSR issues. Since

14

See also Scherer (1999) for a similar approach.

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Introduction

neither empirical nor theoretical work along the principles of classic economic research has produced robust and consistent support for this claim, our primary objective is to develop an alternative theoretical framework that informs practitioners and further research on the social processes that enable institutional investors to influence corporate practice. Scientific understanding of management: Our approach reflects the position of Ulrich (2001a, 2001b) who considers management studies as an applied social science in which the research problem stems from practice. Ulrich (2001a, p. 34) maintains that problems are not naturally given but result from human actions. They must consequently not be solved by explaining existing reality with general laws but “managed” (Weick, 2003, p. 188) by creating new realities from which plausible implications for practitioners can be derived.15 Our study adds to this by bringing into play a new theoretical perspective that supplements existing economic-based research and helps practitioners to explore the precipitating causes of responsible investing. However, we maintain that our study is not oriented towards practitioners only, but offers a way of reasoning that both, practitioners and researchers, can use jointly to make sense of their problems (Weick 1995a, p. 90). Finally, applied social science calls for an interdisciplinary approach to a research problem (Ulrich 2001b, p. 215) which is reflected in our attempt to combine management theory with insights from social psychology as we will see later on. Research method: As demonstrated in our literature review, existing studies have failed to come up with consistent findings on the role of institutional investors in driving CSR. We are thus confronted with a lack of a solid theoretical foundation which would be a necessary pre-requisite for empirical investigation to arrive at useful results (Schanz, 1977, p. 67). In choosing a theoretical approach to our underlying research problem we draw upon the advice of Sutton and Staw (1995) to reorient research away from “dust-bowl empiricism” (p. 380) towards a process of “theorizing” (Weick, 1995b, p. 385) that aims at building meaningful arguments on which further empirical work such as field analysis can rest. Hence, our research is concep15

See Ulrich and Hill (1976, p. 305) who distinguish between fundamental and applied science. As opposed to applied science, fundamental science is concerned with the explanation of existing reality by general theories and laws.

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11

tual and follows a deductive logic that aims at ordering complex phenomena based on theoretical insights (Chalmers, 2001, pp. 35-37; Thommen, 1986, pp. 42-47). The necessity of such an approach in the field of responsible investment has been further stressed by Sjöström (2008) who reminds us that researchers should not “disconnect from theoretical perspectives or refrain form deeper analysis that contributes towards valuable insights regarding the different dimensions of the topic” (p. 152). Research purpose: In order to reflect on the purpose of our research, we need to shed light on the paradigmatic16 assumptions that guide our research. Paradigms refer to the ‘worldview’ of a researcher and consist of ontological and epistemological claims about the nature of science and society (Burrell and Morgan, 1979). These vary across academic disciplines and have caused a persistent debate on how to understand and study the world (Patton, 2002, p. 571); so far, a commitment to a universal set of research goals being served by different means does not exist (Pfeffer, 1993, p. 617).17 Hence, to allow for an adequate judgement of the contribution of our study to existing literature in the field of responsible investment, it is necessary to clarify our assumptions first and to differentiate our research from the work of other scholars (Scherer, 2006).18 As shown earlier, responsible investment as a driver of CSR has only been investigated at the surface. We have witnessed a rudimentary understanding of CSR on which empirical work in the field of responsible investment currently rests and which does not reflect the complexity of this phenomenon; especially with regard to the highly subjective character of what is assumed to be ethical and socially responsible. We agree with Pentland (1999) who maintains that the “critical challenge in organizational theory is how to move from surface structure to deep structure” (p. 712), and thus, in line with Granovetter (1985), propose to develop a holistic understand-

16

The term ‘paradigm’ originally stems from Kuhn (1962). Although Kuhn has left the audience with a wide array of different interpretations of the paradigm concept, we refer to Morgan (1980) who defines the term paradigm “in its metatheoretical or philosophical sense to denote an implicit or explicit view of reality” (pp. 606-7). 17 The debate over competing paradigm is commonly referred to as the discussion of incommensurability. While Burrell and Morgan (1979) maintain that competing paradigms cannot be combined, thus are incommensurable, a growing number of scholars have argued that “multiparadigm perspectives” can be a fruitful contribution to theory building (Gioia and Pitre, 1990, p. 584). 18 See also Whetten (1989, p. 491) who elaborates on what constitutes a theoretical contribution.

12

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Introduction

ing of the social nature of the organizing processes that are involved in the practice of responsible investment.19 By emphasizing the social rather than the economic (and thus, reductionist) view of organizational activities we follow the arguments of interpretive sociology (Garfinkel, 1967; Schütz, 1967), the sociology of knowledge (Berger and Luckmann, 1966), and social psychology (Weick, 1979). We assume organizational realities to be “ongoing social constructions, emerging from the skilful accomplishments through which organizational members impose themselves upon their world to create meaningful and sensible structure” (Morgan, 1980, p. 617). Hence, we do not fully deny the ontological status of organizations. Rather our research aims at explaining shared multiple realities as resulting from organized individual actions and the respective cognitions of these actions (Daft and Weick, 1984; Smircich and Stubbart, 1985; Weick, 1995a, 1979). Knowledge can thus not be obtained on an objective and independent basis, but depends on a person’s subjective interpretation and “mirrors the subject more than anything else” (Landry, 1995, p. 324). Drawing upon the influential work of Burrell and Morgan (1979) and their endeavour to differentiate the paradigms prevailing in the social sciences in general, and organizational theory in particular, our research approach thus follows an interpretive view of social reality.20 Paradigms according to Burrell and Morgan (1979, p. 22) can be organized with regard to the different sets of fundamental assumptions about the nature of science, reflected in the subjective-objective dimension, and the nature of society, reflected in the radical change-regulation dimension.21 Four paradigms were identified: radical humanism, radical structuralism, interpretivism, and functionalism (see figure 1).22

19

The need for a social conception of economic action had been emphasized in early times by Granovetter (1985) who criticized the universalizing nature of organizational economic perspectives and emphasized the “social embeddedness” of economic activity. 20 For similar approaches that have redefined or extended the work of Burrell and Morgan (1979) see also Astley and Van de Ven (1983) and Deetz (1996). 21 Please note that the framework provided by Burrell and Morgan (1979) should not be taken as a complete mirror of all meta-theoretical world-views prevalent in social science. However, it offers guidance and an adequate scheme to classify our study in relation to the research of other scholars. For a critical investigation see Kakkuri-Knuuttila et al. (2008) and Willmott (1993). 22 We will only focus on functionalism and interpretivism as both are relevant for the problem under study. For a detailed overview of radical humanism and radical structuralism see Deetz (1996).

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1 Introduction

Radical Change Radical Humanist

Radical Structuralist

Subjective

Objective Interpretivist

Functionalist

Regulation Fig. 1: Paradigms in social science according to Burrell and Morgan (adapted from Burell and Morgan, 1979, p. 22).

The interpretive paradigm is characterized by a subjectivist stance towards the nature of science. This is reflected by the assumption that reality is socially constructed (Berger and Luckmann, 1966) and can only be grasped by studying the processes through which it is created, sustained and changed by human beings (Garfinkel, 1967; Schütz, 1967). It is thus the endeavour to reveal how “the-taken-for granted becomes taken-for-granted” (Czarniawska, 2003, p. 137), or framed differently, how individuals make sense of their environment (Weick, 1995a, 1979).23 In contrast, the functionalist paradigm takes an objectivist view and assumes that social reality has a real and concrete existence (like the natural world) and can be thought of a “network of determinate relationships between constituent parts” (Morgan and Smircich, 1980, p. 495). Both paradigms share the concern of producing an ordered and regulated state of society.24 In the light of the problem under study the majority of existing research on responsible investment as driver of CSR in general, and corporate governance in particular, draws upon causal quantitative models and refers to traditional economic thoughts such as arguments from agency theory and modern portfolio theory. It thus assumes a classical objectivist worldview. The focus on functionalist research is however not surprising as the functionalist paradigm still represents by far the dominant way of 23

24

The conceptualization of a constructed environment in contrast to a determined environment within the interpretive paradigm has further been intensified by Astley and Van de Ven (1983). For an in-depth comparison of both paradigms see Morgan and Smircich (1980).

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Introduction

studying the world in social science (Gioia and Pitre, 1990, p. 586). Yet we can witness a small, but growing group of the academics that have started to question the assumptions underlying a functionalist view in our chosen field of research (see Ingley and Walt, 2001). Returning to our research purpose, we take one more step forward and aim at showing how an interpretive approach, with its different stance toward what is meaningful, can enrich and extend the theory, research, and practice of responsible investment. Hence, in the tradition of interpretive theorists, our goal is to improve the understanding of the deeply rooted processes such as sensemaking involved when institutional investors claim to affect corporate change towards a stronger CSR. We do not intend to formulate laws and predictions, but to create interest, to irritate, and to come up with novel ideas on how to study and practice responsible investment.25 Theory perspective Based on our assumptions we therefore consider the practice of responsible investment and CSR as organizational realities that are enacted through the social construction and interaction processes of corporations’ and financial institution’s organizational members. Here, our particular interest is to find out about how these organizing processes interrelate and influence each other so that CSR can emerge and develop. Such a view suggests a so called process theory, as opposed to entity-driven theories that regard organizational effectiveness a function of organizational structure.26 In process theory, characteristic patterns of events, such as change and development, are fundamental theoretical constructs. The objective is to “identify the generative mechanisms that cause observed events to happen and the particular circumstances or contingencies behind these causal mechanisms” (Van de Ven and Poole, 1995, p. 512). One of the most influential and promising writers in this line of research is the organization theorist Karl E. Weick (1995a, 1979) who developed the construct of sensemaking drawing upon concepts of social psychology (Czarniawska,

25

26

In this context, Stern and Barley (1996) have reminded us that “one need not turn to legendary social theorists to discover that, in the long run, ideas overshadow methods” (p. 158). This is still the predominant theoretical rationale in organization theory and, among others, has been championed by Donaldson (2001; 1996) and his structural contingency theory.

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2006).27 Weick conceptualizes organizations as a process, not a structure – a verb, not a noun: “Without verbs, people would not see motion, change, and flow; people would see only static displays and spines” (Weick, 1979, p. 44).28 We think that a discussion of the problem under study from a sensemaking perspective is thus worthwhile as it adds a ‘verb’ to an already existing ‘noun’ and accomplishes the language of responsible investment. Further reasons for choosing this theory perspective are as follows. First, our study is about developing responsibility. We look at how institutional investors and large corporations, alone and together, translate their understanding of responsibility into practice and how this translation can be accelerated. Responsibility, however, in a retrospective sense, implies some previous action for which one bears the responsibility towards those being affected by these actions. Hence, one should rather argue that we need to look at the activities of institutional investors and corporations first if we want to find out about their notion of responsibility. Especially with regard to the CSR debate we think it is important to understand that it is actions, not cognitions, that finally decide whether, e.g., a corporation will pursue a climate-friendly environmental policy or not. This brings us to Weick’s sensemaking approach of which the retrospective argument and the subsequent focus on human activity are core elements: “How can I know what I think till I see what I say29” (Wallas, 1926, p. 106, cited in Weick, 1995a, p. 12). With his framework of an enacted environment Weick (1979) clearly argues that it is us and our actions that produce “part of the environment [we] face” (p. 30). He further reminds us that “there is not some kind of monolithic, singular, fixed environment that exists detached from and external to these people” (p. 31, emphasis in the original). Hence, through our actions, which may include hardly visible as well as far-reaching decisions, we bring realities into being (see also Chia, 2003, who conceptualizes organizing as a worldmaking process). In the light of the problem under study we are thus convinced that a sensemaking perspective will shed a new (and brighter) light on the discussion of which responsibility we actually bear towards our world and how to foster it. 27

See Morgan (1980, pp. 607-17) for a classification of sensemaking into the interpretive paradigm. Weick (1979, pp. 42-44) therefore prefers to talk about organizing instead of organization to emphasize the dynamic nature of organizational activities. 29 ‘To say’, here, refers to the actions of people and should thus be understood as ‘to do’. 28

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Introduction

Second, our study takes place in a time full of dynamic and fast changing developments that force the private sector, both financial and industrial, to fight proactively and quickly against incurring social and environmental risks. By adopting a sensemaking perspective we are able to provide a robust conceptual basis for the study of responsible investment because we account for this continuous flow of events. Weick (2003) positions his idea of an enacted environment against other theories as follows: “One thing enactment does is that is buys conceptual flexibility ... All three of the current mainstream positions (transaction costs, institutional theory, and population ecology) make sense only so long as we presume that stasis rather than dynamics are what we need to explain, that reification of an invisible hand is a legitimate conceptual move, that everyday interacting and conversing are inconsequential, that there is an ontological difference between macro and micro levels of analysis, that people tell the truth when they fill out survey instruments …” (p. 188, emphasis added). Third, our study investigates how institutional investors can drive corporations to become truly socially responsible, not only at the surface. This is particularly important because of the high reputation and financial risks involved when a company is singled out as morally deficient. This risk has materialized through falling share prices in the cases of Nike, or Nestlé (Manokha, 2004, pp. 56-57).30 In the light of many critics that accuse the private sector of pursuing ‘window-dressing’ and not ‘walking the talk’ (Ciulla, 2005) when it comes to the implementation of CSR, our special concern is thus not to stay at the surface and simply documenting responsible investment and CSR activities, but to interrogate more closely and to understand their inducing causes such as underlying cause-effect relationships. As pointed out by Basu and Palazzo (2008) a sensemaking perspective allows studying those factors that “might trigger or shape such activities in the first place” (p. 123) and thus, reveal the critical differences among organizations in terms of how they enact their notion of responsibility (see also Brickson, 2007): “What they do makes the difference. What they think they know informs what they think they do, but they could be mistaken, and often are” (Westwood and Clegg, 2003, p. 184).

30

Nestlé, for example, had been severely boycotted by consumers for pushing its powdered milk for nursing in Africa when breast milk was safer. Thousands of babies died because the mothers mixed the powder-milk with feculent water (see Chetley, 1986).

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Level of analysis There is a broad agreement that sensemaking happens on the individual level (e.g. Simon, 1991), or differently framed, on the ‘micro-level’ (Astley and Van de Ven, 1983). This is a plausible assumption since the referent in most research on sensemaking tends to be small such as a conversation, face-to-face interaction or a small group (Weick, 2003, p. 189). Starting from the individual level it is important to “study the process by which information is moved around within the organization and ‘reality’ or ‘learnings’ are created” (Weick and Ashford, 2001, p. 727) to be able to find out about organizational sensemaking. However, the distinction between the micro and macro level is not as easy as it appears. As (Weick, 2003) maintains “… people are in a complex reciprocal relationship with their environments. The italicized words emphasize that the referent is collective rather than individual, that causality is mutual rather than unilateral, and that the circumstances people confront are malleable and multiple, rather than monolithic and singular” (p. 186). Although our study primarily focuses on individual beliefs and actions, the reader should be aware of the fact that individual actions always happen in relation to a social context and that this context is always shaped by individual action. Thus, “the least productive way to see and say anything important about organizations is to partition the world arbitrarily into separate macro and micro domains” (ibid., p. 192).

1.4

Research Objective and Scope of the Study

Research objective Considering these insights the objectives of this study are threefold. 1. According to Weick (2003), “the question for organization theory is, what are the mechanisms by which social order shapes and is shaped by the hermeneutics of action?” (p. 192). Hence, our first research objective is to develop a theoretical framework for understanding and organizing the processes that often are taken-for-granted in the practice of responsible investing and that of CSR.

18

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Introduction

2. Based on Weick’s conceptualization of organizational realities as enacted environments, our second research objective is to derive a process model of responsible investment that illustrates how the internal sensemaking processes of both institutional investors and corporations interrelate and correspond to provoke corporate change towards a stronger orientation of CSR. Our model allows for a conceptual analysis of responsible investment as a driver of CSR that has not been taken up within the academic discussion so far. 3. Our third research objective is to inform future empirical research and practice by proposing an array of actions that might be taken in order to advance the role of institutional investors in fostering the practice of CSR. Figure 2 illustrates how our research objectives are derived from the problem under study and the gap identified in previous literature.

Research problem Responsible investment and the contested claim of corporate change towards CSR

Research gap • • •

Only little academic work on the role of financial stakeholders in advancing CSR Overemphasis on descriptive and empirical work Lack of a theoretical robust foundation on which empirical work can rest

Research objective • To develop a theoretical framework to understand and organize the deeply rooted processes underlying the practice of responsible investing and that of CSR • To derive a process model of responsible investing that illustrates how these processes of both institutional investors and corporations interrelate and correspond • To inform future empirical research and managerial practice by proposing an array of possible actions of how the claim of corporate change can be realized Sensemaking studies as underlying theoretical perspective

Fig. 2: Research problem and corresponding research objectives.

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Scope of the study In general, management studies face the difficult task of taking into account the complex nature of a problem under study and, at the same time, reducing complexity in order to be able to derive useful recommendations for managerial practice (Ulrich 2001b, p. 215). Organizational scholars are thus forced to make trade-offs between generality, simplicity, and accuracy (Weick 1979). As indicated above our research purpose is to question the taken-for-granted paradigm that has so far dictated these trade-offs in the field of responsible investment. However, with regard to our concrete research objectives outlined above, the difficult task of balancing complexity also applies to us. Though we aim at enriching the discussion of responsible investment as a driver of CSR by adopting an interpretive worldview, we have to be aware that we can only come up with an alternative trade-off between generality and accuracy that clearly represents a limitation to the scope of our study. Our study thereby represents a trade-off that closely follows the logic of plausibility (Weick, 1995a). We are not interested in deriving general laws nor are we able to come up with a fully accurate picture of how responsible investment as driver of CSR can be portrayed. Rather, we aim at providing the reader with a plausible story of how to make sense of responsible investment and its impact on CSR. A closely related second limitation refers to the choice of paradigmatic assumptions underlying this study. In a Weickian sense, we have enacted our own research site by assuming an interpretive worldview, and thus have to be aware that our beliefs and actions direct our writings (Weick, 1989). Hence, our critique of existing literature (and trade-offs made by other scholars) derive from our chosen paradigmatic assumptions and have to be understood within the scope of this paradigm and not as a universally valid statement. We therefore acknowledge that we depend on our own normative judgements as they influence the approach and the outcomes of this study (Ulrich 2001a, 2001b). As Astley (1985) maintains, “we already harbor conceptions of what is to be studied; our theories determine what will count as a fact in the first place” (p. 498).

20

1.5

1

Introduction

Course of Investigation

To reach these objectives we proceed as follows. In chapter two we provide a generic overview of the phenomenon of responsible investment, its origins, and the various practices that institutional investors engage in when integrating ESG issues into their investment analysis and ownership practices such as screening, enhanced analysis, engagement and activism. The last part of chapter two is devoted to clarifying the link between responsible investment and CSR thereby pointing to the claim of corporate change as this is the prevalent matter of this study. This chapter is rather descriptive in nature and supposed to introduce some basic terminology to provide the reader with guidance of how we understand responsible investment and how we think it is related to CSR. While chapter two presents a basic introduction to the field of responsible investment, chapter three builds upon our brief literature review in section 1.2 and identifies the dominant research methods and underlying theories in existing scholarly research on responsible investment that are used to explain the impact of institutional investors on corporate change. We find that existing research uses insights from agency theory as reference points when theorizing about responsible investment and that it predominantly locates the relation between investors and managers within the principal-agent paradigm. A closer look at the taken-for-granted assumptions of scholars however reveals that these assumptions rarely fit into the prevailing context of responsible investment. We therefore argue that agency theory-driven research might be limited in its ability to account for the complexity underlying the field of responsible investment in general, and the claim by institutional investors to promote CSR in particular, and has thus to be fundamentally re-thought. Based on our criticism we propose sensemaking studies by Karl E. Weick as alternative paradigm for the study of responsible investment and its potential impact on CSR and introduce three major constitutive constructs of sensemaking that we believe form an adequate framework to address the problem under study: enactment, double interact, and continuous change. From these constructs we finally derive a theoretical framework of how we propose to analyze responsible investment as a driver of CSR that will guide the reader through our subsequent analysis. By criticizing the assumptions of agency

1 Introduction

21

theory and outlining the need for an alternative paradigm for the study of responsible investment, chapter three thus represents the turning point of the investigation. The distinct aim of this chapter is thereby first to reveal taken-for-granted assumptions within the academic community concerned with the study of responsible investment, and second to rebalance those assumptions by outlining their limitations and – since limitations come with opportunities – identifying opportunities for a new theoretical framework that enriches existing literature in the field of responsible investment by offering a process interpretation of the agency problem. To answer the question of how responsible investment may drive CSR, chapter four develops a process model of responsible investment that builds upon the three cornerstones of sensemaking identified above: enactment, double interact and continuous change. We thereby argue that the claim of corporate change in the light of responsible investment needs to be investigated with regard to three overarching research questions: First, how do institutional investors and corporations, both taken separately, enact their sense of responsibility (section 4.1)? This research question aims at revealing the deeply rooted social processes involved when organizational members make sense of responsibility which have largely been underestimated by structural approaches. It is the necessary groundwork to be able to understand the precipitating causes of what in the end is what people refer to as ‘responsible investment’ and ‘CSR’. A deeper analysis of the underlying internal sensemaking processes such as defending collective self-esteem, confirming one’s long held expectations, justifying irrevocable actions, and legitimizing ‘manipulative processes’ such as coalition building and policy dialogue enables us to reveal real differences among organizations and thereby accounting for the true heterogeneity of both institutional investors and corporations that we are facing in reality. Also, this section contributes to a new understanding of organizational responsibility as it conceptualizes responsibility not as an isolated, static phenomenon, but as emerging out of organizational members’ mutual activities. Second, how do institutional investors and corporations interact and collectively make sense of responsibility (section 4.2)? Based on the construct of double interact-

22

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Introduction

ing we argue that the influence activity of institutional investors should not be looked at as a single act but is part of a mutual social interaction. This allows for a dual focus of both corporate and investor responsibility and explains why our first research question looks at how both, institutional investors and corporations enact their sense of responsibility. By proposing that both parties need to bring in their understanding of responsibility when collectively making sense, this section thus sheds a new light on how corporate control may be conceptualized within the realm of responsible investment. In detail, the section allocates the spectrum of responsible investment approaches, as introduced in chapter two, to the various interacting processes involved when institutional investors are trying to influence corporate management. Linking the various interacting process with potential sensemaking outcomes further enables us to derive normative statements on which interacting process is best positioned to influence corporate behaviour. Third, how may institutional investors change a corporation’s sense of responsibility (section 4.3)? Based on the construct of continuous change this section comes up with a distinct intervention theory that informs institutional investors on how to proceed when corporate change is desired. We thereby argue that the majority of existing research has failed to look at CSR as an ongoing accomplishment that does not need to be triggered nor can it be enforced. CSR framed as a continuous change process rather suggests that institutional investors need to redirect something which is already under way. Drawing upon the various sensemaking processes outlined in section 4.1, this part of our analysis is, however, not concerned with introducing different content-based CSR models. Rather, it aims at providing the reader with intervention processes through which institutional investors may redirect the process of organizing CSR such as issue-selling and impression management. Chapter four closes with a summary of the previous sections and integrates the findings into a process model of sensemaking that conceptualizes responsible investment as a driver of CSR. Based on this new conceptualization of responsible investment in the light of sensemaking studies, chapter five derives constructive implications for institutional investors and provides scholars with a research agenda that informs about possible future

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investigations thereby referring to the propositions identified in chapter four. The distinct aim of this section is to encourage researchers and practitioners within the field of responsible investment to question their taken-for-granted assumptions and to recognize the active sensemaking efforts of agents and the transformative power of action. Chapter six concludes with outlining the contributions of this study. We thereby take a retrospective view and reflect on how the theoretical insights taken from sensemaking studies have enriched the discussion on responsible investment and may so in future, but also, how they have guided our course of investigation. Figure 3 depicts the course of investigation and illustrates how the chapters are organized.

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(1) INTRODUCTION

(2) RESPONSIBLE INVESTMENT AND THE CLAIM OF CORPORATE CHANGE (2.1) The Phenomenon of Responsible Investment

(2.2) The Practice of Responsible Investment

(2.3) The Link to Corporate Social Responsibility

(3) TOWARDS A PROCESS MODEL OF RESPONSIBLE INVESTMENT (3.1) Responsible Investment in the Light of Agency Theory

(3.2) Towards a New Conceptualization of Responsible Investment

Limitations

(3.3) Introducing Sensemaking Studies as Underlying Theory A

(3.3.1) Enactment

B

(3.3.2) Double Interact

(3.3.3) Continuous Change

(3.4) Interim Conclusion I: A Framework to Analyze Responsible Investment as a Driver of CSR

(4) MAKING SENSE OF RESPONSIBLE INVESTMENT AS A DRIVER OF CSR (4.1) How Institutional Investors and Corporations Enact Their Sense of Responsibility

(4.2) How Institutional Investors and Corporations Double Interact

(4.3) How Institutional Investors May Change a Corporation‘s Sense of Responsibility

(4.4) Interim Conclusion II: A Process Model of Responsible Investment as a Driver of CSR

(5) IMPLICATIONS FOR PRACTITIONERS AND RESEARCHERS (5.1) Implications for Practitioners

(5.2) Implications for Researchers

(6) CONCLUDING REMARKS

Fig. 3: Course of investigation.

2

Responsible Investment and the Claim of Corporate Change “… socially responsible investing practices are not merely discretionary and desirable activities; they are a necessary imperative, which both the corporations and public pension funds, and other large institutional holders, will ignore at serious peril to themselves.” (Sethi, 2005)

As mentioned in the introduction, responsible investment is a widely discussed link between the stock market and CSR (Scholtens, 2006). It provides the mechanisms through which public shareholders can exert influence on corporate behaviour and is thus the focus of our study. We start this chapter by providing the reader with some terms and definitions relevant for the study of responsible investment, and giving insight into the history and the key actors involved. We proceed by identifying four different approaches of how to practice responsible investment, before we then clarify the link to CSR.

2.1

The Phenomenon of Responsible Investment

2.1.1 Introduction and Definitions When it comes to defining responsible investment, we can witness a jungle of diverse labels; we find different labels for the same activity, or same labels for different activities. There is widespread confusion about the various expressions used to describe responsible investment (Sparkes and Cowton, 2004, p. 46; Sullivan and Mackenzie, 2006, p. 14). The main objective of this section is therefore to provide a clear definition of how we understand responsible investment and how it relates to CSR.

E. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7_2, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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In short, we define responsible investment as the integration of environmental, social and governance (ESG) considerations31 into (a) the investment analysis and portfolio selection processes, and/ or (b) ownership policies and practices such as the use of voting rights, while at the same time maintaining a reasonable financial return.32 Similar definitions, but with varying accentuations, can be found in Renneboog and colleagues (2008), Sparkes (2002), Sparkes and Cowton (2004), and Sullivan and Mackenzie (2006). Thus, responsible investment on the equity side affects two fundamental decision-making processes. First, it is concerned with the identification and the assessment of prospective investment opportunities (Scholtens, 2006), which we summarize as entry decision. Second, it affects the so-called loyalty decision, a theoretical concept brought forward by the economist Hirschman (1970). Applied to the stock market, Hirschman elaborated on the question whether an investor should use his ‘voice’ to influence companies in their way of using the fund, or ‘exit’, i.e. divest in case of a conflict of interests among investor and management. In general, responsible investment combines two basic objectives or claims: Financial return and social good (Sparkes, 2002). This twofold aim rests on the following assumptions: First, responsible investors believe in the business case of corporate ESG activities, claiming that in the short run, responsible investment funds will show a similar performance to conventional funds, while in the long run they will even bring superior financial returns. Second, responsible investors believe that based on their investment decisions they have the right and the ability to change corporate behaviour towards a stronger notion of social responsibility, thus ‘making a difference’ (Haigh and Hazelton, 2004; Rivoli, 2003; Smith, 2005). The combination of both, financial return and social good is the key characteristic of responsible investment: it “distinguishes […] responsible investment from ordinary investment (which shares the first goal but is indifferent to the second), from […] activism (which

31

Instead of ESG, some authors prefer to speak of social, environmental and ethical (SEE) issues. While SEE strengthens the ethical dimension of responsible investment, ESG emerged out of an attempt to include the corporate governance debate into the responsible investment movement. However, in academic and practitioner literature both concepts are often used interchangeably. 32 With our definition we closely follow the Principles for Responsible Investment (PRI), an investor initiative to promote socially responsible behaviour. We will come back to this initiative at a later stage of the study.

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shares the second goal but is indifferent to the first)” (Hudson and Wehrell, 2005, p. 281).33 Although most academic and practitioner literature uses the term socially responsible investing or investment (SRI) to describe this investment practice (e.g. Bello, 2005; Haigh and Hazelton, 2004; Juravle and Lewis, 2008; Kinder, 2005; Sparkes, 2002; Sparkes and Cowton, 2004; Vandekerckhove et al., 2007), we will refer to ‘responsible investment’, in line with Sullivan and Mackenzie (2006), as an umbrella concept for all related and similar approaches. The reason behind is that most literature in the field of SRI solely focus on the integration of subsets of ESG criteria into the portfolio selection process, such as a categorical exclusion of tobacco companies from the investment universe; thus, they are concerned with the entry decision but leave out the loyalty dimension. This is reflected by the large majority of publications on ethical investing or investment (e.g. Harte et al., 1991; Mackenzie and Lewis, 1999; Schaefer, 2004; Sparkes, 2001), which was the older term for SRI and is often used interchangeably with it (Sparkes and Cowton, 2004, p. 46). Further examples of studies that mainly focus on portfolio selection refer to green (see Heinkel et al., 2001; Simpson 1991, cited in Sparkes and Cowton), eco (see Schaltegger and Figge, 1999), principal-based (see Ulrich et al., 1998), social (see Bruyn, 1987; Kinder et al., 1992; Moskowitz 1997), triple-bottom-line (see Rubinstein, 2003), and sustainable (see Szczesny and Wilhelm, 2005) investing or investment. The loyalty question of responsible investment is addressed by a growing body of literature describing and analyzing formal rights such as voting rights or shareholder resolutions, as mechanisms to engage with companies on ESG issues after the investment is made with the objective of influencing corporate actions (see David et al., 2007; Del Guercio and Hawkins, 1999; Gillan and Starks, 2000; McLaren, 2004; O’Rourke, 2003; Sjöström, 2007). Most of the studies refer to shareholder or

33

The difference to conventional investment is best clarified by Sparkes (2002): “The key distinguishing feature of […] responsible investment lies in the construction of equity portfolios whose investment objectives combine social, environmental and financial goals. When practised by institutional investors this means attempting to obtain a return on invested capital approaching that of the overall stock market” (pp. 26-27).

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investor activism, a term that is best known from the corporate governance34 literature, others use shareholder or investor advocacy (Schueth, 2003; Smith, 2005), engagement (Martin et al., 2007; Vandekerckhove et al., 2008, 2007), or simply action (Ward, 1986). While some authors use these terms to mean exactly the same thing, others make a clear distinction between them. Sparkes (2002, pp. 35-38), for example, contrasts advocacy with shareholder activism. In his view, advocacy can be defined as a single-issue campaign that has no financial concerns but seeks confrontation and publicity only; it is mostly conducted by Non-Governmental Organizations (NGOs). Sparkes (2002) thus maintains that it does not reflect the idea of responsible investment being a combination of financial and ESG objectives.35 After having clarified the definitional basis of responsible investment our next section deals with the ‘old’ religious roots and origins of this investment practice. Also, we will examine why some authors (Schueth, 2003; Sparkes and Cowton, 2004; Sullivan and Mackenzie, 2006) argue that responsible investment has developed from a margin industry to a mainstream phenomenon.

2.1.2 The Evolution of Responsible Investment Responsible investment is not a new phenomenon (Kinder et al., 1992, p. 3). The origins for what we call responsible investment can be traced back to Jewish, Christian, or Islamic traditions (Renneboog et al., 2008, p. 3). Those religions, representing a certain set of beliefs and practices, framed the way money should be used in a ‘good’ manner, and thus, reflected an ethical36 approach to investment. That may be the reason why the older term used for responsible investment is ethical investment and investing (Sparkes and Cowton, 2004; see e.g., Domini, 1984). The most prominent ‘ethical investors’ were the UK churches, such as the Church of England, the Methodist Church, or the Religious Society of Friends, also known as 34

Corporate governance in the light of the principal-agent paradigm will be discussed in the next chapter. 35 The difference between engagement and activism will be part of chapter 2.2. 36 Ethics “is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for any given situation”; morality “is concerned with the norms, values and beliefs embedded in social processes which define right and wrong for an individual or a community” (Crane and Matten, 2004, p. 11).

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Quakers. They strictly avoided investing in companies that were related to anything that went against their religion. As such, they were the pioneers in ethical investment and were followed by many others. The Catholic Church, for example, refused anything which was not in line with the Old Testament. In 1139, they imposed a prohibition on usury which was held up until the 19th century. In the 17th century, it was the Quakers in North America and England who did not invest in weapons or products obtained through slavery. In the 18th century, John Wesley, the founder of Methodism, called on his followers not to use their money for anything that exploits the weaknesses of others. The Methodist church in the UK thus refused to invest in socalled ‘sin stocks’ that included all companies engaged in the production of armour, alcohol, tobacco, and gambling (Renneboog et al., 2008, p. 3; Schueth, 2003, pp. 189-190). The first modern ethical fund was founded in 1928. Following religious traditions, it screened companies on their ethical performance and avoided all ‘sinful’ companies (Kinder and Domini, 1997, p. 14). This investment practice represents the so-called ‘avoidance’ approach meaning that portfolios deliberately exclude certain industries of the stock market (Sparkes, 2002, p. 27). Still, most ethical funds in the US act under this premises, according to Schepers and Sethi (2003). The expansion of the idea of ethical investing led to the emergence of a totally new investment industry: socially responsible investment. At that time it represented a small, but growing niche market in the overall global investment market. However, while ethical investment was grounded on general religious norms and standards, SRI was more individually oriented and reflected the moral beliefs of individual investors (Renneboog et al., 2008, p. 3). This logically resulted in an enormous amount of different funds all focusing on specific aspects, some more interested in social issues, some more in the environmental dimension, e.g. green investing. In the 1960s, the demand for SRI products grew substantially, particularly fuelled by the Vietnam War and the anti-war and civil rights movements. These movements made citizens, and specifically investors, extremely sensitive to unfair and harmful governmental and/ or corporate activities, such as the misuse of human rights, and their impact on society (Ward, 1986). In this context, the revolution of information and communication technologies in the light of the globalization further added to this

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increasing focus on issues of social responsibility and thus strengthened the growth of SRI (McCann et al., 2003, p. 19). An important milestone in the evolution of responsible investment was the first SRI mutual fund, the Pax World fund, founded in 1971 in the US. It was originally directed to investors who opposed militarism in general and the Vietnam War in particular. It allowed investors to pool their resources and to be part of a collective investment vehicle that expresses their concerns about companies engaged in all kind of weapon production (Renneboog et al., 2008, p. 3). Today the Pax World fund manages more than 2.6 billion USD and is dedicated to all kind of corporate social, environmental, and governance issues. It incorporates ESG issues into the portfolio selection process but also engages actively with companies on these issues once it is invested (Pax World, 2008). The next major engine of the growth of SRI was the cruelty of South Africa’s racist system of apartheid in the 1980s (Heese, 2005). As Sparkes (2002, p. 52) states: “If Vietnam unlocked the door to socially responsible investment, South Africa kicked it open”. SRI Investors from around the world pressured companies and the government of South Africa to dismantle apartheid and urged mutual funds to divest their money from South African companies and Western firms with South African subsidiaries. This campaign was one of the most successful moments in the SRI history leading to several state regulations such as the Californian law amendment in which pension funds were required to divest over 6 billion USD from companies with activities in South Africa (ibid., p. 54). In fact, the boycott of those companies provides one of the very few examples where SRI investors had a significant influence on companies’ stock prices (Haigh and Hazelton, 2004, p. 64). Although there was no significant change in share prices right after the divestment, Kumar and colleagues (2002) found out that US and European firms showed abnormal stock returns after SRI fund managers publicly declared the end of sanctions. Environmental disasters such as the Chernobyl nuclear power plant incident in 1986, or the Exxon Valdez oil spill in 1989 further strengthened the public awareness of environmental risks. This resulted in more and more consumers willing to pay a premium for ethical products, and investors starting to include social and environ-

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mental risks into their decision-making (Schueth, 2003, p. 190). In the 1990s another dimension in the light of the CSR debate gained enormous public attention and was of particular interest to investors: corporate governance. Corporate scandals such as Enron focused on the lack of governance structures in large companies and its financial consequences and added governance as extra dimension to the triple bottom line approach to SRI (Renneboog et al., 2008, p. 3). This finally resulted in the now common term ‘ESG’ considerations as criteria for investment decision-making. To date, the focus of SRI funds has reoriented towards the environmental dimension. Like governments and NGOs, fund managers are primarily concerned with the exposure of companies to climate change. They have started to engage in numerous collaborative projects to pressure companies to fight the climate change, such as reduce their greenhouse gas emissions. The most prominent project is the Carbon Disclosure Project (CDP) which coordinates the collaborative efforts of institutional investors with USD 57 trillion of assets under management in seeking comparable data on the world largest companies’ exposure to climate change. So far, the CDP has build up the largest repository of corporate greenhouse gas emissions data as well as helped institutional investors to engage in dialogue with companies (CDP, 2008). We can conclude that, for more than one decade now, a growing number of institutional investors including asset managers, insurance companies and pension funds have started to be serious about SRI (Mallin, 2004, p. 80; Sparkes and Cowton, 2004, p. 49). They have adopted a longer term investment horizon and increasingly believe that ‘ethics pays’ – at least in the long run (Sullivan and Mackenzie, 2006). The adoption of SRI by mainstream institutional investors can be seen “as a major landmark in the maturing of SRI” (Sparkes and Cowton, 2004, p. 46). SRI has begun to enter the mainstream of investment practice (McCann et al., 2003, p. 19), pushed by a significant client demand (Hellsten and Mallin, 2006, p. 399; Schueth, 2003, p. 191). In this sense and together with the increasing use of shareholder rights, authors have started to call this investment practice responsible investment which offers a broader perspective on an industry that earlier was considered a niche market (see Sullivan and Mackenzie, 2006). Yet, there is a lively debate about the actual adoption of SRI by mainstream institutional investors, and thus about the potential of

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mainstreaming SRI, with some authors arguing in favour (see Bruyn, 1987; Friedman and Miles, 2001; Mansley, 2000, p. 1; McCann et al., 2003; Sparkes and Cowton, 2004) and some remaining sceptical (see Haigh and Hazelton, 2004).37 However, they almost all agree with Solomon and his colleagues (2002) that if responsible investment is meant to be about fostering CSR “the role of the institutional investment community is essential” (p. 1, cited in Sparkes and Cowton, 2004, p. 49). The next section is thus dedicated to the role of institutional investors as key actors in driving responsible investment.

2.1.3 The Role of Institutional Investors as Responsible Owners The focus of this study is on what is known as the institutional market, which is defined as investments managed or controlled by institutional investors, including pension funds, mutual funds, insurance companies, banks and other pooled investment vehicles. Hence, institutional investors are financial intermediaries; their role in the economy is to act on behalf of others who invest their savings and pensions in those funds. It is in their fiduciary duty to act in the best interest of their beneficiaries which according to conventional finance theory is the maximization of shareholder value (Sullivan and Mackenzie, 2006, p. 15). With regard to total institutional ownership on a national level, the largest types of institutional investors usually are pension funds, both public and private38, followed by mutual funds. Insurance companies and banks make up the smaller part of institutional ownership (for a detailed overview of institutional ownership in the US, see Ryan and Schneider, 2003). The same is true for the ‘responsible ownership’ structure in the UK and the US, both leading markets with regard to responsible investment (Kinder et al., 1992, p. 665). As mentioned above, an adoption of ESG criteria by large institutional investors is essential if corporate and social change is desired. In the UK, which is the fastest growing responsible investment market in Europe (Eurosif, 2008), institutional investors control more than half of the largest companies’ equities. On an aggregated basis, they would have a substantial influence on the company’s business operations

37 38

See Juravle and Lewis (2008) for an excellent analysis of the impediments to mainstreaming SRI. Whether a public fund is private or public depends on the sector employment of their members.

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as well as the pricing of company shares (Sullivan and Mackenzie, 2006, p. 15).39 Latest figures approve a tremendous growth of the responsible investment market. In the US, SRI assets under management (AUM) make up a total of 2.71 trillion USD in 2007 (as of 31 December 2007), representing to date 11 percent of total AUM. In the last three years it rose by more than 18 percent. Total AUM of the broader investment universe only increased by less than 3 percent in the same period of time. The amount of SRI AUM thereby represents all assets involved in either socially screened funds40 or shareholder activism (US SIF, 2008).41 In Europe, the most advanced responsible investment market is the UK with a total of 959 billion EUR invested in SRI assets including screened funds, activist funds and other related assets (as of 31 December 2007). The value of UK SRI funds thereby shows a substantial growth rate of 38 percent from 2005 to 2007, with a compound annual growth rate of 19 percent (UK SIF, 2008). The shift towards a stronger incorporation of environmental, social and particularly governance issues can certainly be traced back to client demands, as shown in the last section, but also to regulatory changes. Examples of such regulations include, in 2000, the amendment to the UK Pension Act of 1995, after which pension funds have to disclose the extent to which they incorporate ESG issues into their investment decision making process, or the Renewable Energy Act in Germany, effective since 1991, which has given a tax advantage to funds investing in wind energy (Renneboog et al., 2008, p. 5). As a result, alternative funds and pension funds have become increasingly active in taking SRI seriously (Hellsten and Mallin, 2006, p. 399). Some of the world’s largest pension funds, like CalPers in the US, the British Coal and the Universities Superannuation Scheme in the UK, or the Dutch Pension Fund for Public Employees (ABP), publicly declare to incorporate ESG considerations into their investment decision-making processes, both before and after the investment

39

If and how they are able to foster CSR, still remains questionable, which is why it will be subject of this study. 40 Socially screened funds include mutual funds representing the largest share, exchange-traded funds, closed-end funds, tracked separately in 2007, alternative investment funds, such as social venture capital, double- and triple-bottom-line private equity, and hedge funds, typically organized as unregistered limited partnerships or limited liability companies, and other pooled products. 41 A tiny part consists of community investing, which will be neglected as it is not part of this study.

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(Mallin, 2004, p. 80). CalPers, for example, together with other institutional investors spurred the tobacco divestment of the late 1990s (Renneboog et al., 2008, p. 4). The most significant transformation that pension funds and other institutional investors have undergone is reflected in their perceived role as active owners to promote socially responsible behaviour. In addition to screened social and environmental funds, investors have become increasingly aware of their potential – and the necessity – of actively influencing corporate management through the use of their shareholder rights (Kinder et al., 1992, p. 100). The emergence of this shareholder rights movement (Davis and Thompson, 1994) in the late 1980s particularly took place in the Anglo-American countries (Aguilera et al., 2007, p. 845) and is still reflected in the record number of shareholder resolutions on corporate governance and/ or CSR filed by institutional investors in the last three years in the US (US SIF, 2008). This activist and “noisy” (Aguilera et al., 2007, p. 846) behaviour of investors is a rather new social phenomenon. In the past (and in some countries still to date), shareholder as ‘owners’ of the company were primarily passive and silent due to the dominant logic of dispersed ownership (Berle and Means, 1932) and efficient markets (Fama, 1980).42 Dispersed ownership was the result of the separation of ownership and control in the 1930s, when companies grew large, and control shifted to professional managers. Ownership, on the contrary, was split among a vast number of “unorganized stockholders who were removed from the day-to-day management of the firm” (Davis and Thompson, 1994, p. 141). The monitoring of how the firms were run was guaranteed by the efficient market hypothesis (EMH) (Fama, 1980). The EMH implies that capital markets are efficient in adjusting the share price of a company to the best information available about the company’s future performance. Thus, the share price fully reflects changes in the performance and acts as a monitoring device of corporate management. This in turn implies that “shareholder passivity is the appropriate outcome of an efficient division of labor between those who are good at owning [in the sense of risk-bearing] and those who are good at managing” 42

Dispersed ownership is a widely acknowledged logic and is vastly used in academic literature to explain passive ownership. However, it should be noted that it primarily refers to ‘AngloAmerican’ countries. Germany and Japan also represent a very passive ownership culture, but in contrast to the Anglo-American model, are characterized by long-term debt finance and an ownership structure of large blockholders (Aguilera et al., 2007, pp. 844-45).

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(Davis and Thompson, 1994, p. 146). Davis and Thompson (1994) further argue that shareholder passivity originates out of a combination of rational ignorance and a lack of expertise, two arguments derived from agency theorists. Rational ignorance in this sense implies that it does not pay for a shareholder to invest in voting capabilities considering the fact that his vote does not matter to the management due to his small share. The lack of expertise results out of his primary role as risk-bearer. Close to these arguments lies the free-rider problem (Olson, 1971) meaning that there is a lack of individual incentives to bear the costs of active ownership while the benefit of improved corporate governance would be spread around all investors. Further reasons for the passivity of institutional investors can be traced back to strict regulations preventing investors from becoming active owners (Black, 1990). Most legal restrictions evolve out of a perceived mistrust against financial power. In the US, joint efforts, such as communications among more than ten institutional investors to discuss voting politics, had to be approved by the Securities and Exchange Commission (SEC) until late 1992 (Davis and Thompson, 1994, p. 148). In Germany, those joint efforts are still under scrutiny. In 2007, the German Federal Cabinet approved a draft of the Risk Limitation Act that aimed at hindering or even avoiding economically “undesirable” activities of financial investors such as “acting in concert” that is deemed to occur if two shareholders coordinate their conduct to influence the business direction of the issuer. Such coordinated action can involve the attribution of voting rights or other conduct prior to a shareholders’ meeting (Risikobegrenzungsgesetz, 2008). Since 2008, the draft bill has been subject to several amendments and has been mitigated to a substantial degree, ironically, mostly because of the collaborative engagement of active SRI institutional investors with the German government.43 For the last two decades, however, we have witnessed a dramatic change in the role that institutional investors play as shareholders in corporate affairs, with a particular focus on the US and the UK: “Passive ownership has given way to active involvement” (Kinder et al., 1992, p. 100). In the light of the corporate governance debate,

43

We will come back to the role of institutional investors in mitigating the Risk Limitation Act as part of our main analysis in chapter four.

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institutional investors have started to actively monitor corporate management, trying to align the divergent interests of management and shareholders (Jensen and Meckling, 1976).44 They increasingly control (not only ratify) the outcome of shareholder proposals at Annual General Meetings (AGM), they appoint the board of directors (as monitoring authority, see Fama and Jensen, 1983), and they frequently use their voting rights. Yet, the major part of activist efforts is centred on corporate governance issues because Enron and WorldCom have clearly demonstrated that poor governance can affect the financial bottom lines (Kinder et al., 1992, p. 101). Although the US SIF (2008) figures indicate a substantial growth in the US responsible investment market, activism for CSR is still in its infancy. Thus, the discussion about the role and responsibilities of investors on ESG issues remains open. Many authors still maintain that the share of responsible investors is too small to actually have a role to play (see Haigh and Hazelton 2004, p. 61). However, some scholars maintain that the size of the share is not necessarily the only mechanism to influence corporate behaviour (see Sjöström, 2007). As we will later see the way how the influence is exerted should not be neglected. Our next section will thus provide a more detailed description of the various responsible investment practices, such as screening and activism.

2.2

The Practice of Responsible Investment

The objective of responsible investment is to combine financial return with social good. In practice, we find various investment approaches how to achieve this goal. As mentioned above, one can distinguish between those approaches addressing the entry and those affecting the loyalty decision. After reviewing the academic and practitioner literature, as well as public statements of relevant institutional investors such as CalPers, we identified four different approaches: Screening, enhanced analysis, engagement, and activism. While the first two approaches affect the entry decision and refer to the investment analysis and portfolio selection processes (in short: ‘analysis’), engagement and activism involve ownership practices (in short: ‘owner-

44

Responsible investment in the light of the corporate governance debate will be further explained in chapter three.

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ship’) that relate to the loyalty decision. Institutional investors may use them in combination or on their own to enhance the ESG performance of the target companies.

2.2.1 Responsible Analysis: The Entry Decision According to our definition the integration of ESG considerations into investment decision-making distinguishes responsible investment from conventional investment. ESG integration is defined as the “inclusion by asset managers of SEE/CG45-risk and opportunities into traditional investment analysis and stock weighting and/ or selection processes” (UK SIF, 2008). The following sections look at the underlying processes: (1) screening used to identify the responsible investment universe based on exand inclusion criteria, and (2) enhanced analysis as a practice primarily used by mainstream institutional investors to incorporate ESG metrics into traditional riskreturn analysis and portfolio modelling. These processes can be undertaken either internally by the fund manager and/ or externally by a specialist research firm and/ or rating agency, who supply the information to the fund manager (Sullivan and Mackenzie, 2006).46

2.2.1.1

Screening

The ultimate objective of screening is the information gathering and processing to identify prospective investment opportunities (Scholtens, 2006, p. 21). In light of responsible investment screening results in an exclusion or inclusion of companies or industries. ESG criteria are thereby used as a filter to determine (and isolate) the investment universe. Social mutual funds are typical examples of investments using screening techniques. Three different screening methods are to be distinguished: negative, positive, and best-in-class.

45

46

SEE/CG stands for social, environment, and ethical/ corporate governance and can be used interchangeably with ESG. Research firms such as the German oekom Research AG play an important role in providing ESG information to the fund manager, but also in interacting with the company through sending out questionnaires. We will come back to the role of research firms in chapter four. In this section we will not further distinguish between who is conducting the analysis, rather we are interested in how the analysis is being conducted.

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Negative screening: Negative screening is probably the best known responsible investment approach amongst consumers. It implies the categorical exclusion of companies from the investment universe based on ESG considerations (Schueth, 2003, p. 190). It goes back to the dominant idea of former churches and religious groups that avoided investing in companies that were judged as unethical (Sparkes and Cowton, 2004, p. 47). Still, to date, many SRI mutual funds, especially in the US, use the socalled ‘avoidance’ approach and exclude whole industries from their portfolios such as armoury, tobacco, gambling, pornography, alcohol, and also recently nuclear power (Szczesny and Wilhelm, 2005, p. 10). By doing so, investors are able to align their portfolio with a certain set of values and beliefs which is why Kinder (2005, p. 11) calls this approach “value-based”. These values might either originate from the institutional investor’s personal beliefs, typically the case for mission-based institutions, or they reflect the prevalent consumers’, i.e. the individual investors’ interests, which is often the case for large SRI mutual funds. Investors may consequently gain a return only from companies that – in their perspective – do not harm others. According to Webley et al. (2001, p. 38) this investment style makes them ‘feel good’, while at the same time, increases their integrity. As Schueth (2003, p. 190) argues, integrity, or “moral purity” (an intentionally provocative term used by Simon et al., 1972, p. 25), thereby represents the primary investor motivation. It is again important to note that excluding a so-called ‘evil-company’ from the portfolio necessarily is an active decision. Not explicitly avoiding it would imply that “one implicitly condones [the company’s] immoral behaviour” (Larmer, 1997, p. 400). However, in light of the value pluralism that we are confronting in today’s globalized society such an ‘absolutistic’ avoidance approach is not without criticism (Sparkes and Cowton, 2004, pp. 47-48). That is why a less rigorous form of screening has emerged in the responsible investment industry: positive screening. Positive screening: A positive screening approach implies the search for exemplary companies that outperform in ESG areas and the deliberate inclusion of those companies into an investment portfolio. Hence, it does not ‘punish’ companies for not being socially and environmentally responsible but ‘rewards’ those companies with outstanding performance in for example employer-employee relations, or the reduction of greenhouse gas emissions (Schueth, 2003, p. 190). Thus, companies will be

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included due to their positive contributions to society and the environment, or due to transparent corporate governance. The best known example of positive screening is ‘green’ investing. In light of the increasing environmental consciousness back in the 1980s, the first funds using positive criteria were so-called eco-tech funds. These funds concentrated their investments in the industry of new environmental technology products that aimed at protecting our planet (Schaltegger and Figge, 1999, p. 6). However, pure positive screening is not a very widely used practice amongst SRI mutual funds (Schepers and Sethi, 2003). First, due to a limited portfolio diversification positively screened funds may bear a high investment risk. Second, the assessment of ‘good’ companies has proved to be even harder than of ‘bad’ companies considering diverging moral norms and standards. It requires an analysis of highly complex issues such as product safety, diversity, or workplace conditions (in contrast to negative screens that are more black and white). However, especially the social dimension of corporate responsibility is hard to measure and thus, difficult to serve as the sole ground for a portfolio construction (Sparkes and Cowton, 2004, p. 48). Due to these obstacles, an alternative, but related screening approach has emerged: best-in-class. Best-in-class screening: Best-in-class screening, also known as preference approach, aims generating comparative criteria to create an investment universe out of the leading companies with regard to ESG performance from every industry (Vandekerckhove et al., 2007, p. 403). Hence, unlike positive or negative screening, this approach does not compare across industries or even excludes whole sectors. So for example, a fund manager who has to invest in automotive stocks may select the automotive company with the best financial performance and most effective carbon emission management. The advantage of best-in-class is that it allows the investor to have a diversified portfolio and still incorporate ESG considerations into the decisionmaking process. Examples of funds using best-in-class screening are eco-efficiency funds. In contrast to eco-tech funds, these funds do not necessarily include companies with environmentally friendly products, but represent companies from all kind of industries that are rated ‘best-in-class’ with regard to their eco-efficiency. Ecoefficiency is defined by increased energy efficiency, reduction of use of chemicals with global warming potential, water use, increased material productivity, and many

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others (Schumacher-Hummel, 2005, pp. 88-92).47 The best known example, however, of a best-in-class approach to managing responsible investment are the Dow Jones Sustainability Indexes (DJSI). The indexes were found by the Dow Jones Company and the Swiss Sustainable Asset Management (SAM) company in 1999 as the first global index group tracking the financial performance of companies being assessed as industry leaders with regard to ESG issues (SAM, 2008). It is important to mention that all three screening approaches solely refer to the process of removing/ adding companies from/ to the investment universe based on ESG criteria. The valuation of these companies, however, is not (yet) affected by ESG considerations. This would be part of the so-called enhanced analysis which is explained in the next section.

2.2.1.2

Enhanced Analysis

While screening is the process of identifying the investment universe based on absolute ESG criteria, we define enhanced analysis48 as the process of translating ESG data into financial and reputational risk measures and incorporate them into fundamental investment analysis and portfolio selection methodology for the purpose of making ‘responsible’ stock picking decisions. This is in line with Sullivan and colleagues (2006, p. 59) who refer to screening approaches as ‘SEE-driven analysis’ (or value-based analysis, see above) in contrast to ‘enhanced analysis’ driven by financial indicators. Overall, enhanced analysis aims at shifting traditional investment analysis away from short-term oriented financial metrics such as quarterly earnings towards a more long-term oriented valuation of stocks with regard to a company’s ESG performance (Enhanced Analytics Initiative, 2008). The motivation of enhanced analysis is the acknowledgement that ‘not yet financial’ factors such as the ESG performance drive corporate performance in the long run. These factors are often beyond the span of variables that are integrated into conventional investment analysis. Therefore, enhanced analysis represents a more 47 48

Each criterion is weighted differently from industry to industry, but is consistent within an industry. Enhanced analysis is a common terminology in practitioner language but is rarely found in academic literature. However, it is considered the most important approach in the attempt to mainstreaming responsible investment (Sullivan and Mackenzie, 2006).

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holistic investment approach than a pure screening approach and is based on the investment belief (rather than on ethical values) that the integration of ESG issues ensures more efficient allocation of capital, hence, improves overall market returns (AXA IM, 2008). This, of course, implies an underlying belief in market imperfections as investors with better information on ESG than others are able to trade on that information to their advantage (Sullivan and Mackenzie, 2006). As Juravle and Lewis (2008) indicate, major mainstream institutional investors such as AXA Investment Managers (AXA IM) or BNP Paribas Asset Management (BNP PAM) have already started to shift their engagement in responsible investment “from an ethics-driven concern to a pragmatic risk-management issue” (p. 292). This allows them to approach responsible investment not with an ESG agenda per se, but with a fiduciary investment agenda that integrates ESG factors to the extent that they have an impact on risk and return of companies and sectors (AXA IM, 2008). In practice, we sometimes find a combination of both, screening and enhanced analysis. The asset manager SAM, for example, first identifies a qualified investment universe, based on positive and best-in-class screening. The screening mechanism thus has a filtering function. Then, SAM derives an optimal portfolio based on integrating ESG factors into the calculation of alpha (see figure 4).49 ESG factors consequently have a direct influence on the weighting of single portfolio positions.

49

Alpha is defined as the excess rate of return on a portfolio relative to the return of the benchmark index, here the Dow Jones Index.

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1. Selection of investment universe 2. Selection of portfolio

Dow Jones global investment universe

Sustainability analysis

Investment universe

Filter

Qualified universe

Quantitative portfolio selection

SAM-Research

Optimal portfolio

Portfolio Management

Fig. 4: SAM’s practice of responsible investment (adapted from SAM, 2008).

2.2.2 Responsible Ownership: The Loyalty Decision As indicated above, the loyalty decision involves the ownership practices of institutional investors. Hence, we look at those actions where investors raise their “voice” (Hirschman, 1970) to participate in corporate management’s decision-making with regard to ESG related issues after the investment was made, or they divest (McLaren, 2004, p. 193). In our study we differentiate between shareholder engagement and activism. Although both concepts are sometimes used interchangeably (see Clark and Hebb, 2004), we argue that activism includes all formal rights such as voting against management while engagement represents an informal approach to responsible investment, such as “behind closed doors” (Friedman and Miles, 2001, p. 536) negotiations. In distinguishing between formal and informal we follow Davis and Thompson (1994) who already made this distinction in their early article on shareholder activism and corporate control.50

50

Some authors like Scholtens (2006) and Schueth (2003) have introduced engagement as a subcategory of activism. However, we believe that especially with regard to the different notions of both terms, with engagement often representing the ‘softer’ (see Solomon et al., 2004) way of influencing corporate management, a clear distinction between formal and informal is useful within the scope of this study.

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2.2.2.1

43

Engagement

Shareholder engagement or ‘engagement-SRI’ (see Vandekerckhove et al., 2007), has recently gained much attention within the field of responsible investment. It represents an informal approach to participating in corporate management’s decisionmaking and has been increasingly discussed as the favoured responsible investment approach of institutional investors in their attempt to drive CSR (Collier, 2004; Sparkes and Cowton, 2004; Vandekerckhove et al., 2008, 2007). When an investor engages in corporate management, he attempts to directly influence corporate behaviour through dialogue. In this dialogue he raises his concerns with regard to the integration of ESG issues into corporate policies and practices and asks for response from management. In contrast to screening and enhanced analysis, engagement is thus “not about ‘what corporation to invest in and which not’ but rather ‘what corporation should be lobbied and influenced’” (Vandekerckhove et al., 2008, p. 80) and how to practice this.51 According to Lewis and Mackenzie (2000, p. 217) typical engagement activities of UK fund managers such as Friends Provident Stewardship, and Jupiter Ecology, include one-to-one meetings with managers, writing letters, and conducting industry surveys and discussing the results with management.52 As Vandekerckhove and his colleagues (2007, p. 404) maintain the crucial element in engagement is thus the communication process between the investor and corporate management and the management’s willingness to discuss ESG related issues with its shareholders. This two-way communication process was also emphasized by Hoffman (1996) in his early work on shareholder action of the Coalition for Environmentally Responsible Economies (CERES). A general motivation of engagement according to Holland (1998) and Sullivan and Mackenzie (2006) is the information advantage that investors may gain in privately held dialogues as opposed to publicly disclosed shareholder resolutions. This, of 51

In a case study with UK investment managers Gifford (2004) identifies various factors that are relevant for effectively influencing corporate behaviour such as the type and strength of the arguments brought forward against management or the commitment that an investor has organizationwide towards the integration of ESG issues. We will come back to this in chapter four. 52 Further activities not directly addressing a specific company consist of publishing articles, generating media or press coverage, and collaborating with other investors (Lewis and Mackenzie, 2000, p. 217). Within the scope of our study, we will solely refer to engagement activities as those directly addressing corporate management.

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course, is closely related to the investment belief that ESG integration leads to financial outperformance in the long run due to information inefficiencies. Other scholars however argue that the decision whether to pursue an informal or formal approach to responsible investment depends on geographic criteria. They find that engagement is the preferred ownership practice in Europe, whereas formal activism is predominantly used in the US (Sparkes and Cowton, 2004, p. 51; Vandekerckhove et al., 2008, 2007). This can certainly be traced back to different cultural backgrounds with the US as being a more compliance-driven country and Europe as having a softer, more integrity-driven approach to ethical concerns (see Paine, 1994, for an in-depth comparison of compliance versus integrity-driven notions of ethics). Also, in reviewing the legislation on shareholder rights in various regions, Kinder and his colleagues (1992, p. 667) find that shareholder action is much more constrained in the UK than it is in the US implying that engaging in dialogue is often the more prudent way of influencing corporate decision-making from a legal perspective. To further clarify the difference between engagement and activism our next section addresses shareholder activism.

2.2.2.2

Activism

Shareholder activism is narrowly defined as the use of formal rights attached to ordinary shares such as filing shareholder resolutions at an AGM, voting against management, or divesting from a company, to influence or challenge the way a corporation is doing business. In a broader sense, shareholder activism also includes public media campaigning to exert pressure on corporate management. Often, activism occurs in collaborative shareholder initiatives where institutional investors “utilise their unique rights to facilitate change” (Sparkes and Cowton, 2004, p. 51). The primary interest of activist shareholders has always been to concentrate on underperforming companies and to pressure them to act in the best interest of their shareholders, thus, maximizing shareholder value (Gillan and Starks, 2000). Probably the best known example of activism is regarding corporate governance issues. Reporting scandals such as Enron and World.com clearly showed the relationship between good performance and good corporate governance and led to an enormous

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increase of activism for more disclosure and transparency (O’Rourke, 2003, p. 230). Activism for CSR however has only recently gained more attention, especially in light of climate change risks and gender issues (see chapter 2.1.2). Here, activist shareholders aim at encouraging companies to improve their CSR management and, as indicated earlier, to maximize shareholder value in the long run (O’Rourke, 2003; Sjöström, 2008). One can distinguish between four strategies of activist shareholders to influence a company: (1) filing shareholder resolutions (see Del Guercio and Hawkins, 1999), (2) voting (see Davey, 1991), (3) public campaigning (see Rehfeld, 1998), and (4) divestment (see Palmiter, 2002). Filing shareholder resolutions: Shareholders have the formal right to submit their concerns about the way a company handles ESG risks for a presentation at the AGM in front of other shareholders and corporate management to vote upon it. These concerns are put together in a shareholder resolution, also known as shareholder proposal or ‘social proxy’, and come in form of a request or a recommendation (O’Rourke, 2003, p. 232; Scholtens, 2006, p. 21; see figure 5 for an example). The first official church sponsored shareholder resolution was filed by the Episcopal Church in 1971. It concerned General Motors and their operations in South Africa (Kinder et al., 1992, p. 108). Since then, there has been a substantial increase in shareholder resolutions on social issues (Proffitt and Spicer, 2006; Rehbein et al., 2004). Especially in the US they have become a widely accepted tool for shareholders to tackle conflicting interests with the corporate management (Sparkes and Cowton, 2004, p. 51).53

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Filing shareholder resolutions typically are bound to legal restrictions of the specific country such as a minimum percentage of ownership of stock. For more details on legal requirements see O’Rourke (2003).

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The 2001 Proposal Despite its claims to be moving ‘beyond petroleum’, BP remains firmly wedded to fossil fuels. Oil and gas make up 99,9% of its investments. This is inconsistent with the company’s public call for precautionary action on climate change – and takes no account of the effects of future climate protection measures, which are likely to restrict the production and sale of fossil fuels. Greenpeace has therefore submitted a resolution to BP’s AGM, calling on the Board to publish a report, by end of 2001, outlining how it will make the transition from fossil fuels to renewable energy.

Fig. 5: The ‘SANE BP’ 2001 shareholder proposal of Greenpeace (adapted from O’Rourke, 2003, p. 235).

In general, a shareholder resolution process may lead to three outcomes. A resolution can be withdrawn, omitted, or it can be voted on. If a resolution is withdrawn by the shareholder it may indicate that a company is willing to negotiate the issue with the shareholder and to meet his requirements in a foreseeable future. A further enforcement of the resolution is thus no longer necessary. A resolution can also be omitted by the corporation for several reasons which are regulated by legal entities such as the SEC in the US. Reasons may include that a company is already implementing the proposal or that the proposal is part of ordinary management functions and thus not relevant to discuss it further at the AGM. If a resolution is neither withdrawn nor omitted it goes to the vote at the AGM. The investor who filed the resolution presents it in front of other shareholders and corporate management (O’Rourke, 2003, pp. 232-34). In general, proxies on ESG issues have only gained little support at AGMs so far; however, they raise public awareness and often force corporate management to at least think about it and respond positively at a later point of time (Sparkes and Cowton, 2004, p. 51). The entire process of filing a shareholder resolution is best pictured by Logsdon and van Buren (2008a). They identify three fundamental steps, and label the three different outcomes of the process as ‘accommodative’ (=withdrawal), ‘reactive’ (=omission), or ‘defensive’ (=vote) firm response to a shareholder resolution (see figure 6). Since most of the resolutions are withdrawn due to successful dialogues between corporate management and the shareholder, Logsdon and van Buren (2008a) added ‘proactive’ as a fourth firm response.

2 Responsible Investment and the Claim of Corporate Change

Step 1 Shareholder Activists Identify Issues

Step 2 Activists Create Strategy and Target Firms With Resolutions

Write Letter File Resolution

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Step 3 Firms Respond

Activists‘ Preference Ordering Proactive: Dialogue between firm and activists Accomodative: Resolution withdrawn because firm acquiesces to shareholder demand Defensive: Vote by shareholders Reactive: Firm requests omission to SEC

Fig. 6: Logsdon and van Buren’s model of the shareholder resolution process (adapted from Logsdon and Van Buren, 2008a, p. 3).

Voting: In addition to the vote on shareholder resolutions, shareholders have the formal right to vote to approve the appointment of board directors and auditors, the board’s compensation policy, and often the annual report (Mackenzie, 2006, pp. 2627). Also, they can use their voting rights to participate in corporate decisionmaking, or even interfere in case of conflicting interests, if changes in corporate strategy or possible mergers are planned. Here, of course, a substantial stake of ownership is crucial (Scholtens, 2006, p. 21). Public campaigning: Another way of pursuing shareholder activism is to raise public awareness of a particular corporate misbehaviour through intense public campaigning (Sparkes and Cowton, 2004, p. 52). Publicity has proved to be an effective tool of changing corporate behaviour especially in the light of CSR. While purely financial concerns do not necessarily attract a wide public’s interests, social and environmental concerns expressed by large shareholder groups may result in emotional reactions by society such as large consumer boycotts as in the case of Nestlé or Shell. Divestment: Coming back to Albert Hirschman’s (1970) distinction between ‘voice’ and ‘exit’ a last option of shareholders to influence an organization and to express their concerns is by divesting from it (Lewis and Mackenzie, 2000, p. 215). Palmiter (2002) argues that the “threat (actual or implied) [of shareholders] of selling their holdings and driving down the price of the targeted company” (pp. 1437-38) has turned out to be a potentially effective way of changing corporate decision-making. Often, these threats are based on private information that shareholders gained in behind-the-scenes negotiations with corporate management. However, divestment has

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not always proved to be a successful way in aligning the interests of shareholder and management. While the threat of a potential exit may be effective in discouraging management from making ‘bad’ decisions, it however, in a proactive sense, has failed to encourage management to take ‘good’ actions (Admati and Pfleiderer, 2007, p. 2-3). Hence, since activism for CSR typically involves the request for ‘good’ action, divestment has been rarely chosen as activism strategy. Especially in the case of large pension funds, divestment of underperforming companies is not always an option; “often the holdings are so large that the shares cannot be sold without driving the price down and suffering further losses” (Gillan and Starks, 2000, p. 278). For a summary of the four practices of responsible investment see figure 7 below. Responsible Investment Responsible Analysis

Responsible Ownership

Screening

Engagement*

Æ ESG criteria as a filter to determine the investment universe

Æ Informal approach to express ESG concerns through dialogue

-

-

Negative screening Positive screening Best-in-class screening

-

One-to-one meetings with corporate management Writing letters Conducting surveys as basis for negotiations

Enhanced analysis

Activism*

Æ ESG criteria as risk measures to determine portfolio selection

Æ Formal approach to express ESG concerns through pressure

-

-

-

Integration of ESG issues into risk and return analysis Subsequent integration of ESG issues into the weighting of portfolio positions

Filing shareholder resolutions Voting Public campaigning Divestment * can be done individually or collectively

Fig. 7: The four practices of responsible investment.

These four approaches may be used in combination. Large pension funds for example, are known for both, their screening culture as well as their ongoing dialogues with corporate management which we have introduced as engagement mechanism. Often, these negotiations take place in a first phase and are followed by an activist strategy such as filing shareholder resolutions at a later stage (CalPers, 2008).

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2.3

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The Link to Corporate Social Responsibility

So far, we can maintain that responsible investors take into account, evaluate, and act upon their perceptions of how companies are governed, and how they deal with environmental challenges and social concerns. This, generally speaking, relates responsible investment to the concept of CSR (Hill et al., 2007; Sparkes and Cowton, 2004). In this regard, Sparkes (2002, p. 42) argues that CSR and responsible investment are “mirror images of each other”. Both concepts strive for the generation of financial and social good; CSR reflects the view point of the company, responsible investment that of the related investor. Since CSR has not yet been addressed so far, the next section provides a brief introduction to the concept of CSR, before we then take a closer look at how it is related to responsible investment.

2.3.1 The Concept of Corporate Social Responsibility According to Donaldson (2003), “few business academics can doubt the presence of a rising desire today for answers in the area of ethics and social responsibility” (p. 363). Large corporations are increasingly held accountable for their actions and have begun to publish ‘CSR’ or ‘sustainability’ reports to inform the public of their exposure to social and environmental issues. In the meantime, private sector institutions like the Global Reporting Initiative (GRI) and public policy makers like the European Commission (EC) have discussed CSR and sustainability aspects in working groups and tried to define best practice guidelines (Brown and Fraser, 2006, p. 103). Some best practice guidelines have resulted in global standards such as the UN Global Compact or the social accountability standard SA 8000. These standards help corporations identifying their responsibilities and integrating them into their management systems and/ or their production processes and supply chains (Aguilera et al., 2007; Waddock et al., 2002). However, although CSR appears to be a popular theme in corporate policies and practices, it remains a fuzzy and poorly defined concept (Marrewijk, 2003; Pedersen, 2006). The number of articles on CSR is vast (Campbell, 2007, p. 948); some authors even speak of CSR as a “tortured concept within the academic literature” (Godfrey

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and Hatch, 2007, p. 87). Moon (2007, p. 297) emphasizes that CSR is far too complex to be generalized across organizations which all have different impacts on society and environment they may be held accountable for. Also, the uncontested pluralism of values that we face to date makes it difficult to come up with a universalized vision of ethics in general, and CSR in particular (Leisinger 2005). In an extensive review of the academic literature Carroll (1999) identifies and discusses over 25 different definitions of CSR and finds that the variety in conceptual definitions necessarily leads to a confusing variety in possible CSR measures and implementation methods. Thus, we are bound to agree with Pedersen (2006) that “there has never been and probably never will be consensus on the definition of CSR” (p. 139). At this point of the study, however, we have to compromise on the complex nature of CSR and will shortly introduce some of the well known conceptual definitions that lay the ground for our further analysis. To start with, an often quoted definition of CSR can be found in a statement by the EC. They describe CSR “a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis" (EC, 2001). The systematic reasoning about a conceptual framework for CSR, however, started in the US in the early 1960s and moved to Europe not until a few decades later (Crane and Matten, 2004, p. 41). Probably the most accepted model of CSR is the ‘Four-Part Model of Corporate Social Responsibility’ by Archie Carroll (1979). It serves at identifying the responsibilities corporations have to bear in front of society. According to Carroll (1991), CSR can be considered as a multi-layered concept which can be differentiated into four interrelated aspects – economic, legal, ethical, and philanthropic responsibilities (see figure 8).

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Philanthropic Responsibilities

Desired by society

Ethical Responsibilities

Legal Responsibilities

Expected by society

Required by society

Economic Responsibilities

Required by society

Fig. 8: Carroll’s four-part model of CSR (adapted from Carroll, 1991, cited in Crane and Matten, 2004, p. 43).

A ‘true’ social responsibility requires the meeting of all four levels consecutively (Carroll and Buchholtz, 2006, p. 35). Within this model, the satisfaction of economic responsibilities comprises a reasonable return on investment, safe and adequately paid jobs and good quality at a fair price. Legal responsibility obliges corporations to abide by the law as codification of society’s moral views. Ethical responsibility goes beyond the legal framework and demands that corporations voluntarily act the way society expects them to. Finally, the fourth level of CSR includes the philanthropic54 responsibility addressing all issues which are desired by society, but not necessarily expected such as charitable donations (Carroll, 1991, p. 42). Another widely accepted view on CSR is the ‘triple-bottom-line’ (TBL) framework. TBL, or “People, Planet, Profit” (Elkington, 1997), is an approach to CSR that identifies three important responsibilities a company has to bear: economic, social, and environmental responsibility. TBL accounting, for example, would refer to the use of economic, social and environmental measures in the assessment of a company's performance (Crane and Matten, 2004, p. 20). The TBL approach originally stems from the debate around corporate sustainability. ‘Sustainability’ or ‘sustainable development’ has been defined by Brundtland (1987) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. ‘Corporate sustainability’ (CS) thus relates the concept of sustainability to the corporate world and is only to be achieved if economic, social and environ-

54

Philanthropy has Greek roots and means ‘the love of the fellow human’.

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mental concerns are resolved and balanced. This process of resolving and balancing is then what Wempe and Kaptein (2002) refer to as CSR and view as an intermediary phase in a corporation’s attempt to become sustainable (see figure 9).

Corporate Sustainability Corporate Social Responsibility P R O F I T

P E O P L E

P L A N E T

Fig. 9: Relationship CS and CSR according to Wempe and Kaptein (adapted from Wempe and Kaptein, 2002, cited in Marrewijk, 2003, p. 101).

Hence, in combining economic with social and environmental responsibility the TBL approach to CSR tries to bridge the gap in academic literature between the primacy of shareholder wealth maximization (Friedman, 1962) and the primacy of managing the relationships with all stakeholders being affected by a corporation such as consumers, employees, and the environment (Donaldson and Preston, 1995; Freeman, 1984; Freeman and Reed, 1983; Mintzberg et al., 2002; Phillips, 2003).55 Taken together, the intense debate about CSR intends to promote a vision of business accountability to a wide range of stakeholders. It accounts for the concerns about environmental protection, transparency, and the well-being of employees and civil society in general. The emergence of this TBL thinking has, in fact, forced many corporations not only to concentrate on maximizing shareholder value but also to take a closer look at their impacts on society and environment. However, we like to emphasize that the actual meaning of the responsibilities that corporations bear in front of their shareholders, society and their environment can only be grasped and determined in situ - when a corporation actually translates those responsibilities from 55

Since the economic dimension implies the maximization of shareholder value, it can be used here as a substitute for all governance related issues that try to align the interests of shareholders with those of management.

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53

theory into practice (Moon et al., 2004). In this context, a new academic field has emerged that concentrates on the processes being involved when implementing CSR (Basu and Palazzo, 2008; Godfrey and Hatch, 2007). We will come back to this process-oriented view of CSR at a later point of this study and will now stay with the TBL approach to CSR as it best represents the basis on which most shareholder initiatives in the field of responsible investment currently rest. The next and last section of this chapter will finally clarify how we think CSR and responsible investment are interrelated.

2.3.2 Investor Responsibility and the Claim of Corporate Change We identified two links between responsible investment and CSR that we consider as relevant within the scope of this study. The first link concerns the prevalent matter of our discussion. It is the claim of corporate change in which responsible investment acts as a driver of CSR. The second linkage is more implicit and concerns the social responsibility of an investor (‘investor responsibility’), which one might argue is inherent to the term responsible investment. However, we think it is reasonable to mention it separately. First, as claimed by Mackenzie and Lewis (1999) investors seek to change companies and push them towards a better corporate performance with regard to economic, social and environmental issues. This may include a reduction in greenhouse gas emissions, adherence to global ethical standards such as the UN Global Compact or SA 8000, or an improved governance structure. Mackenzie and Lewis (1999) argue that by promoting socially responsible behaviour investors are able to facilitate, on an aggregated basis, social change. This may be done either (i) indirectly, by incorporating ESG factors into the portfolio selection decision, or (ii) directly, by using their shareholder rights to influence a company’s way of enacting CSR. As mentioned in our introduction, previous literature has so far come up with two possible mechanisms through which responsible investment can unfold its potential effect on corporate change with regard to CSR. First, Haigh and Hazelton (2004) as well as Scholtens (2006) identify the impact of investment decisions on the cost of capital structure of a company as a mechanism to force management to align its business

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activities with the investor’s demands. Second, a change in corporate behaviour is likely if shareholders use their ownership rights as influence channel. Both arguments have shed a new light on the relation between responsible investment and CSR and stimulated the discussion if or if not responsible investment acts as a driver of CSR. However, the debate yet remains open. Second, we would like to emphasize that responsible investment does not only aim at increasing the social responsibility of business companies but also, in case of institutional investment, it stresses the ‘corporate’ responsibility of the executive investment house. It reflects a more conscious, and thorough way of taking investment decisions, hence it (ideally) enhances the responsibility of fund management, too. The Principles for Responsible Investment (PRI), a joint initiative of the UN Global Compact and the UN Environment Programme Finance Initiative (UNEP FI), launched in 2006, provide institutional investors with a list of possible actions for integrating ESG issues into mainstream investment decision-making and ownership practices. Thus, they aim at improving the process of investing by offering investors guidance in becoming more responsible (PRI, 2008). Interestingly, much has been written about the potential of responsible investment to foster the social responsibility of big corporations, but very little is said on its effect on the ‘corporate’ responsibility of investment funds, or financial intermediaries in general (for an exception see Dembinski et al., 2003, and Hellsten and Mallin, 2006, who touch upon this question by asking how responsible or ethical is responsible investment). In the light of the global credit crisis to date, we think that this linkage between responsible investment and CSR is too important to be neglected. Having outlined the inevitable interdependencies between responsible investment and CSR our next step will be to develop a theoretical framework that we think is best positioned to elaborate in more detail how we believe responsible investment and CSR cohere.

3

Towards a Process Model of Responsible Investment Action indeed is the sole medium of expression for ethics. (Jane Addams, Nobel Peace Prize winner 1931)

After the description of responsible investment, its various manifestations and its link to CSR in chapter two, this chapter looks at how responsible investment as a driver for CSR may be theoretically conceptualized. In general, the practice of responsible investment involves two parties: the institutional investor and the corporation, represented by the corporate management. Thus, to understand and analyze the impact of institutional investors on the social responsibility of the corporations in which they invest, it is essential to look at how they relate (Martin et al., 2007). We will start this chapter by reviewing how previous authors have commented on the relations between investors and managers in general, before we then outline the limitations of this way of research for the study of responsible investment. Based on these insights and those from sensemaking studies (Weick, 1995a, 1979) as underlying theory we will then derive new ideas on how to conceptualize responsible investment as a driver of CSR. This chapter closes with a theoretical framework that will guide us through our subsequent analysis.

3.1

Responsible Investment in the Light of Agency Theory

3.1.1 Responsible Investment and the Principal-Agent Paradigm Introduction to agency theory The relations between investors and corporate management have been investigated predominantly by finance theorists and lawyers under the domain of corporate governance (Ingley and Walt, 2004; Martin et al., 2007; see Clarke, 2004, for an indepth overview of corporate governance). As Shleifer and Vishny (1997) argue, “corporate governance deals with the agency problem: the separation of management and finance. The fundamental question of corporate governance is how to assure fiE. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7_3, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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nanciers that they get a return on their financial investment” (p. 773, emphasis added). The agency problem goes back to the contractual view of the firm which was developed in early times by Coase (1937). Based on this view, mainstream AngloAmerican corporate governance theories treat the relationship between investors and corporate managers as one between principals and agents (Daily et al., 2003; Eisenhardt, 1989; Fama, 1980; Jensen and Meckling, 1976). Jensen (2000) defines an “agency relationship [as] a contract under which one or more persons – the principal(s) – engage another person – the agent – to perform some service on their behalf that involves delegating some decision-making authority to the agent” (pp. 85-6). The corporate firm is thereby viewed as a “legal fiction which serves as a nexus for contracting relationships and which is also characterised by the existence of divisible residual claims on the assets and cash flows of the organization which can generally be sold without permission of the other contracting individuals” (Jensen and Meckling, 1976, p. 311, emphasis in the original). From an agency perspective, managers (agents) are thus engaged by their shareholders (principals) who are the owners of financial capital which is supplied to the firm in return for a residual claim on the firm’s net profit (Fama and Jensen, 1983). Assuming efficient markets (Fama, 1980) agency theorists further argue that the value of the residual claim is reflected by the share price of the company. Hence, agency theory provides the underlying rational for governance structures that strive for shareholder value maximization (Martin et al., 2007). However, shareholder value results from corporate management’ decision-making which cannot be monitored directly by shareholders or significantly influenced due to the logic of dispersed shareholder ownership (Berle and Means, 1932). It can only be determined ex post. The central problem – referred to as agency problem – for shareholders is thus how to align their interests with those of corporate management given information asymmetries and incomplete contracts (Shleifer and Vishny, 1997). Hence, the main concern of (positivist) agency theory56 is how to resolve this conflict of interest and to

56

In an attempt to classify existing academic literature in the field of agency theory Eisenhardt (1989) identifies “positivist agency theory” as the line of research that predominantly investigates on the relationship between shareholders and managers (p. 59). Further relationships which are not subject to this study may include those between managers and employees, consumers and sellers, etc. They are summarized under “P-A research” (p. 60).

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minimize agency costs under the premise of personal utility maximization (Jensen and Meckling, 1976; Davis and Thompson, 1994, p. 144).57 According to Eisenhardt (1989), two main arguments of how to reduce agency costs between investors and managers have been brought forward: (1) incentive payments for executives that are aligned with shareholder interests (Jensen and Meckling, 1976; Jensen and Murphy, 1990), and (2) better information systems such as efficient capital and labour markets (Fama, 1980) or a shareholder-elected board of directors that monitors and controls corporate management’s decision-making (Fama and Jensen, 1983). If none of these governance mechanisms succeed in disciplining corporate management the last option would be to buy control of the firm in form of a hostile takeover (Fama, 1980; Manne, 1965). However, in the light of the corporate governance debate in the 1990s provoked by reporting scandals and misbehaviour of some boards of directors, and an increase of concentrated ownership by large institutional investors, some scholars revisited existing governance structures and called for legal rights such as voting rights to protect shareholder interests and give shareholders more power to influence managerial discretion (Davis and Thompson, 1994; Shleifer and Vishny, 1997; Useem, 1996). Still coming from an agency perspective, Shleifer and Vishny (1997) argue that ownership rights would improve existing information systems and increase transparency, thus minimizing agency costs. A simplifying model of a principal-agent (P-A) relation is presented in figure 10.

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Agency costs are defined by Jensen and Meckling (1976) as “(1) the monitoring expenditures by the principal, (2) the bonding expenditures by the agent, (3) the residual loss” (p. 308). A further interest lies in resolving the problem of risk sharing that occurs when the principal and the agent have contrasting risk attitudes (Eisenhardt, 1989, p. 58).

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Conflict of Interests

Max Utility Function

hires

P

A

Max Utility Function

performs

Fig. 10: A model of a principal-agent relation.

Responsible investment as principal-agent relation As indicated in our introductory remarks, we argue that the majority of existing academic literature on the impact of responsible investment on managerial practice draws upon agency theory and thus is geared to the two postulates of minimizing agency costs and maximizing shareholder returns. The first line of enquiry that we identified focuses on the sensitivity of the share price to (mal-) behaviour as disciplining force for corporate management to act in accordance with CSR related issues (summarized under the share price argument). The second line of enquiry concentrates on the use of ownership rights as enforcement mechanism (summarized under the ownership argument). The following paragraphs explain in more detail how these two arguments echo the postulates of agency theory. Share price argument: Existing academic literature on the sensitivity of the share price with regard to CSR related decision-making of large corporations follows the argumentation of Fama (1980) and assumes efficient capital and labour markets as appropriate tool to discipline corporate management and, in a pro-active sense, to provoke corporate change. The maximization of shareholder value is then the underlying foundation principle of the EMH (Fama, 1980; Jensen and Meckling, 1976). A large pension fund would, for example, engage the management of a firm to coordinate the firm’s contracting relationships, and to initiate and implement exchanges between the nexus of its various stakeholders such as shareholders, employees, customers, and suppliers so that an optimum shareholder value based on long term ESG considerations can be guaranteed. If any misbehaviour of corporate management

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occurs with regard to CSR such as the abuse of human rights, environmental pollution or corruption, this should ideally be reflected in falling share prices of that company. Hence, the share price is assumed to act as a disciplining force of corporate management in the sense that ‘good’ behaviour is rewarded and ‘bad’ behaviour punished (Davidson et al., 1995, p. 178). There are various reasons brought forward to explain the share price sensitivity such as rise of a company’s cost of capital due to divestiture announcements by large institutional shareholders or consumer boycotts that result in a lower net operating profit. In an agency theory model of stock market reactions to unpopular corporate behaviour, Davidson and colleagues (1995) find indeed that consumer boycotts are associated with significant negative stock market reactions; however, they find no evidence for the potential effect of divestiture announcements on the share price. A change in corporate behaviour given the premise of shareholder value maximization is thus only likely to occur in the case of organized consumer boycotts. Ownership argument: The ownership argument in the light of the P-A paradigm goes back to the ‘newer’ agency theory brought forward by Shleifer and Vishny (1997). It elaborates on the potential effect of shareholder activist behaviour on disciplining management towards a socially responsible and environmentally friendly corporate conduct. It argues that the conflict of interests between management and investors resulting from information asymmetries and incomplete contracts cannot be resolved purely based on stock market reactions to corporate behaviour. Instead, to remedy this deficiency, shareholders should make use of their legal power such as filing shareholder resolutions and voting rights to control corporate management or engage in dialogue with the management to release privately held information, thus to increase transparency and minimize agency costs (McLaren, 2004). This informational advantage, however, makes only sense in semi-efficient markets. That is why some authors still maintain that activist behaviour cannot be financially justified (Pozen, 1994) given the fact that markets are efficient and investors are able to simply divest from companies which they consider as unethical or irresponsible. Also, they emphasize the risk of free-riders that arises when activist investors bear the costs of monitoring a firm while the gains are distributed across all of their peers, including the less active ones (see Admati et al., 1994, for an investigation). In short,

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they argue that the costs of monitoring a firm would exceed the gain in shareholder value which partly explains the limited attention and money institutional investors have paid to activism (Bainbridge, 1995; Black, 1998); some authors even speak of a passive ownership culture and “rational ignorance” (Thompson and Davis, 1997, p. 152). Despite these critics however exercising ‘voice’ rather than ‘exit’ has become an increasingly popular topic in responsible investment (Clark and Hebb, 2004; Davis and Thompson, 1994; McLaren, 2004; Proffitt and Spicer, 2006; Smith, 1996; Sullivan and Mackenzie, 2006). Especially large pension funds have difficulties to simply sell their stocks if they are unsatisfied with a company’s ESG performance. Due to the growing size of their holdings in individual companies as well as in the overall market a divestment strategy would occasionally lead to a destabilization of the company’s stock or that of the total market. Hence, most large pension funds are forced to stay with a company even in cases of conflicting interests and exercise their voice to influence management practices and ensure an optimum shareholder value (Sethi, 2005). Another argument in favour of shareholder activism for CSR has been brought forward by Hawley and Williams (2007, 2000): “universal ownership”. The term universal ownership goes back to Monks and Minow’s (1995) book on corporate governance and accounts for the fact that many institutional investors, especially large pension funds in the US, own a wide array of asset classes across various economic sectors so that their portfolio effectively mirrors a part of the broad economy. Hawley and Williams (2000) argue that encouraging a company to pursue a socially responsible business strategy may cause an increase in monitoring costs in the short run, thus raising agency costs, but it also creates positive externalities such as a healthier environment for the entire corporate sector. Since a universal investor owns cross-sections of the economy, he will consequently benefit from these positive externalities, too, which in the long run, will exceed monitoring costs, thus reducing agency costs and ensuring an optimum fund performance. As indicated in the introduction, academic literature on the effect of stock market returns and activist shareholder behaviour on corporate social performance does exist however is limited in scope. While most theoretical papers are geared to the P-A re-

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lation of investors and managers and argue via the postulate of minimizing agency costs, the empirical evidence for this conceptualization of responsible investment remains vague and often contradictory (see for example, David et al., 2007; Nelson, 2006; Neubaum and Zahra, 2006; Smith, 1996). Our special interest is thus to find out why these empirical results are so often contradictory. To this effect, we will take a closer look at the underlying assumptions of an agency theoretical conceptualization of responsible investment.

3.1.2 Underlying Assumptions In our introduction we have emphasized that it is always important to reveal the underlying paradigmatic assumptions that guide academic research. Before we will continue with outlining the limitations of existing literature in the field of responsible investment that we perceive as relevant with regard to the problem under study, this section is thus devoted to the underlying assumptions of agency theory. In general, agency theory represents a “functionalist theory in that it explains the most significant aspects of corporate structure in terms of their presumed efficiency properties … to minimize agency costs and maximize returns to shareholders” (Davis and Thompson, 1994, p. 146). Hence, by explaining the formation of an organization as “a function of rationally economic responses to markets” (Westwood and Clegg, 2003, p. 7) agency theory assumes a causal determinism without accounting for changes caused by human intentionality which also might have a significant effect on the constitution of organizations (Ghoshal, 2005). The engine that drives agency theory is the EMH that suggests viewing the firm as being surrounded by efficient markets that adjust rapidly to new circumstances. Markets are thus in or near equilibrium and informational efficient (Barney and Ouchi, 1986; Fama, 1980; Fama and Jensen, 1983). This implies that principals and agents are free to “entry into and exit from contractual relationships” (Hill and Jones, 1992, p. 135). The EMH further presumes that principals and agents are rational economic actors whose decision-making is based on self-interest, risk aversion and rationality. Their preferences are assumed to be constant. As outlined above, the unit of analysis in agency theory is the dyadic contract between a principal and an agent whereby the principal hires an agent who

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performs some services on behalf of the principal (Eisenhardt, 1989; Ryan and Schneider, 2003). Due to diverging self-interests, the P-A relation between investors and managers suffer from a “partial goal conflict among participants” (Eisenhardt, 1989, p. 59). The investor’s sole interest is to maximize the return that is derived from holding a capital stock of a firm, i.e. to maximize his own utility function by optimizing risk and reward. The success criterion is a firm’s efficiency (Fama, 1980; Oviatt, 1988). The manager’s interest however is to maximize a utility function that includes job security, remuneration, power and status (Hill and Jones, 1992; Williamson, 1964). His effectiveness criterion is the size of the firm that can be increased through expansion and mergers and acquisitions which may not necessarily increase shareholder value (Marris, 1964). This conflict of interest (as necessary condition) causes agency costs since shareholders may be subject to opportunistic manager behaviour due an existing information asymmetry between investors and managers (as sufficient condition). To protect the interests of the shareholders agency theorists therefore argue that these agency costs have to be minimized through governance structures (see previous section). These governance structures are measured against their ability to maximize shareholder value and thus, are “economic-based contractual solutions” (Ryan and Schneider, 2003, p. 405, emphasis added). Finally, in viewing the organization and organizational relationships as an entity of contracts and not as a conglomerate of ongoing social processes, agency theory suggests a static approach to the study of organizational phenomena. For example, it considers the P-A relation at a single point in time without taking into account the case of changing preferences over time (Pastoriza and Ariño, 2008). The following figure 11 summarizes all assumptions. We classified them along three dimensions: basic paradigmatic assumptions, assumptions concerning the P-A relation, and assumptions on the time dimension.

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Fig. 11: An overview of agency theory’s assumptions.

3.2

Towards a New Conceptualization of Responsible Investment

As shown above, most research on responsible investment continue to take place within the P-A relation paradigm and try to explain which governance structures are needed to change corporate policies and practices with regard to CSR. To date, as stated in our introductory remarks, academic literature has yielded mixed results on how effective these mechanisms are, which may be due, in part, to researchers’ lack of understanding of the many social and political processes that underlie this ‘claim of corporate change’. Our next section thus assesses the assumptions inherent to previous conceptualizations of the investor-manager relation in its application to responsible investment and outlines its limitations. Based on this assessment we then derive the need for a new, potentially richer conceptualization of responsible investment in the light of Weick’s sensemaking approach.

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3.2.1 Limitations of the Principal-Agent Paradigm In general, we agree with Ghoshal (2005) that agency theory’s assumptions help in structuring and solving P-A models if viewed from a mathematical stance however they do not reflect reality. Considering ethical concerns as becoming a central part of corporate decision-making, we argue that agency theory’s (amoral) assumptions are far too reductionist in nature to be able to mirror the complexity of the phenomenon responsible investment both in research and in practice. The next paragraphs thus concern the assessment of agency theory’s assumptions along the three dimensions identified earlier, (1) basic paradigmatic assumptions, assumptions (2) on the P-A relation and (3) on the time dimension, and the reasoning behind our argument. Assessment of basic paradigmatic assumptions Organizations as determined by rationally economic responses to markets: The belief in “causal determinism” to justify all dimensions of organizational performance (Ghoshal, 2005, p. 77) is a central feature of economic thinking and, according to Ghoshal (2005), frees us from taking the individual responsibility for our actions since all aspects of human intentionality are ignored. With regard to the social responsibility of both corporations and investors the assumption of organizational adaptation to markets is equally challenging. So far there is no (and probably never will be) objective and transparent market that tells us what action is morally ‘right’ or ‘wrong’, and more importantly, which CSR policies and practices will lead to an optimum shareholder value.58 Kelemen and Hassard (2003) remind us that “it is now widely recognized that we live in uncertain times defined in terms of constant change and inability to secure final meanings located in an ‘objective’ reality” (p. 75). Which actions are to be taken if one wants to be responsible towards society and our environment is still a question that is largely subject to personal moral values and attitudes and less frequently one of pure rational decision-making. Hence, in the case of responsible investment, it is more than a ‘gloomy vision’ (Ghoshal, 2005) of corporations to have a prescriptive universal framework of ethical requirements that they just have to fulfil to satisfy their ‘responsible’ shareholders. Rather, ethical deci58

See, for example, Orlitzky et al., 2003, for a brilliant meta-analysis of the mixed results of academic research on the relation between CSP and corporate financial performance (CFP).

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sion making with regard to questions such as which norms to abide, or which dimension of CSR to prioritize is an active process of top management (and equally one of their shareholders). It is a process that reveals what they think is responsible and in the long run profitable for the firm, or framed differently, how they enact or shape their environment (Pfeffer and Salancik, 1978; Weick, 1979). Efficient market hypothesis: The EMH is central to agency theory because it is the underlying theoretical foundation for why it is rational for organizations to adapt to their environment. However, the EMH has been increasingly challenged by behavioural finance theorists over the last decade (see e.g., Daniel et al., 2002) and might have also come to its limits considering the sub prime crisis in the US and its consequences for the global financial market. Market inefficiencies such as information inefficiencies, over- and under-evaluation (De Bondt, 1993), or emotion-based judgements by investors (Hirshleifer, 2001), just to name a few, are valid reasons to reconsider the primacy of shareholder wealth maximization as foundation of corporate behaviour. Information inefficiencies are thereby especially relevant for the case of responsible investment. Agency theorist view information as a commodity that is available but costly (Fama, 1980); however, as Oviatt (1988) maintains “some information may be unknowable for some or all parties, and skills may be idiosyncratic and, thus, unavailable to some parties” (p. 215, see also Williamson, 1985). Since CSR clearly belongs to the intangible assets of a corporation it is not easy to measure but more importantly, it is not always to obtain. Many corporations fear that a too transparent CSR policy may have negative effects on their reputation, and hence, they do not publish all information. Consider, for example, a corporation that improved its social labour standards and officially announces to have abandoned child labour in its production sites. This, of course, implies that previously, this corporation was involved in child labour which retrospectively casts a damning light on that corporation and may negatively impact its reputation. Another important aspect that runs counter the EMH is that institutional investment markets both in the US and in Europe no longer reflect the image of a diffused and inattentive shareholder ownership as described by Berle and Means (1932). Instead, it is characterized by an increased shareholder activism and concentrated ownership

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of large institutional investors such as public pension funds (Davis and Thompson, 1994; Useem, 1996). As indicated in our previous section, this concentrated ownership has caused those institutional investors holding a large stake in a corporation to no longer have the freedom to exit the company once they are dissatisfied with corporate management; at least not without taking a substantial loss. Also, the rapid rise of antitakeover laws has further impeded those investors to simply buy control of those firms (Davis and Thompson, 1994, p. 146; Ryan and Schneider, 2003, p. 410). In the case of responsible investment, large pension plans are therefore often forced to stay with the company and lobby for change (Sethi, 2005). The assumption of equilibrium as advocated by Fama (1980) is thus dropped and we have to admit the existence of barriers to entry and exit from contractual relationships. These may result in considerable power differentials between principals and agents affecting both P-A relations and governance structures policing those relations (Hill and Jones, 1992, p. 135). Behavioural assumption of rational economic actors: In their latest article on responsible investment Juravle and Lewis (2008) declare the belief in rational economic actors, next to the assumptions of efficient markets, as major impediments to understanding and mainstreaming (socially) responsible investment. In general, behavioural finance theorists have found that overconfidence (Thaler, 1993), heuristic simplification and emotion-based decision-making (Hirshleifer, 2001) are common phenomena that run counter the assumption of rational economic behaviour of both principals and agents (Juravle and Lewis, 2008, p. 293). With a particular focus on responsible investors we want to point to two relevant phenomena. First, Sias (2004) finds empirical evidence that, specifically in pension funds, investment decisionmaking often follows the so-called herding mentality and is rarely based on purely rational criteria. Second, rational decision-making in economic theories refer to the optimization of risk and return but do not consider emotional criteria such as happiness or religious motives to play a role in making portfolio decisions. Beal et al. (2005), for example, include psychic returns into the utility function of investors, and Lewis (2002) proves evidence for religious motivations of most responsible investors when funding companies. In this context scholars have increasingly called for more distinct alternatives to the neo-classical assumption of self-interest and a utility func-

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tion purely based on economic factors (Ghoshal, 2005; Mintzberg et al., 2002; Simon, 1986). Haigh (2006, p. 998) even argues that self-interest and ethics are incompatible. Thus, the legitimacy of decision-making in business in general, and in responsible investment in particular, can hardly derive from economic rationality and profit maximization only but builds upon ethical motivations, too (Ulrich, 2001; Ulrich and Maak, 1996).59 With regard to corporate management, the view of the manager as self-interested, opportunistic and “win-at-any-cost business leader” (Ghoshal, 2005, p. 85) who does not fulfil the contractual obligation towards its principal has been criticized (Ryan and Schneider, 2003, p. 404). As outlined in our introduction, CSR has become a central theme in top management decision making which show that managers have adopted a broader societal and political interest and are not necessarily the purely self-interested individuals seeking individual profit as indicated by most press releases to date. Of course, we are not about to close our eyes in front of scandals such as Enron and WorldCom or the recent fraud affair around Bernard Madoff. However, we agree with Ghoshal (2005) and other authors that self-interest and opportunistic behaviour should not be the foundation of behavioural assumptions on organizational phenomena, especially not if relating to moral concerns. Assessment of assumptions concerning P-A relation Nexus of dyadic contracts: In general, agency theorists maintain that the dyadic contract is a valid approach to any complex phenomenon by conceptualizing it as a series of such contracts, for example, the organization as a “nexus of contracts” (Fama and Jensen, 1983; Jensen and Ruback, 1983). However, when applying the dyadic approach to the P-A relation between institutional investors and managers, one needs to acknowledge that with regard to the responsible investment market most investors play a dual role. Pension funds and insurance companies, for example, are both principals and agents since they act as financial intermediaries between their beneficial owners (employees and insurance policy holders) and corporate management. On the 59

Here, Ghoshal (2005) takes one more step and argues that by “propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility” (p. 76). In line with Ghoshal and Moran (1996) he further maintains that by adopting the assumptions outlined above we rather stimulate amoral behaviour instead of reducing it.

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one hand, they have the fiduciary responsibility towards their beneficiaries, thus they are their agents, and on the other hand, they act as principals since they invest in companies and engage corporate management to run the firm (Ingley and Walt, 2004, p. 534). Hence, when conceptualizing the relation between investors and managers it is essential to reconsider the concept of ownership as proposed by Fama (1980) and account for the true heterogeneity of institutional investors (Ryan and Schneider, 2002, 2003). A further shortcoming of the dyadic contract model is that it glosses over the problems created by power differentials as resulting for example from an enormous consolidation of ownership or joint shareholder activism efforts (Hill and Jones, 1992; Ryan and Schneider, 2003). More than 60 percent of US public equity is held by institutional investors. As Hill and Jones (1992, p. 148) argue principals are not to be considered as victims only but frequently have enough power to be able to participate in corporate management’s decision-making. Hence, corporate policies and practices are increasingly subject to negotiations and coercive power by shareholders especially within the field of CSR where no clear guidelines about which actions to take exist. The rise of shareholder activism and engagement efforts especially in the US and the UK responsible investment market is one example that proves evidence of that recent trend (Sullivan and Mackenzie, 2006). Thus, from our perspective, the dyadic contract approach clearly needs to be extended towards a more mutual communication effort between principals and agents. Conflict of interest: Conflicting interests between principals and agents are the necessary condition for any P-A relationship. However, we need to acknowledge that this conflict is to a large part due the shareholders’ presumed amoral standing in relation to the management of their portfolio companies. So far, the contract outcome of a P-A relation has been measured only in terms of shareholder wealth maximization and does not include the claims of other stakeholders (Seth and Thomas, 1994). The dichotomy between shareholder and stakeholder interests, as advocated in the introduction, has over a long time dominated academic research, both economic (e.g., Friedman, 1962) and stakeholder literature (e.g., Freeman, 1984; Donaldson and Preston, 1995). However, in line with Ryan and Schneider (2003, p. 412) we think that it

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is arguably important to reconsider the shareholder profile applied in both agency and stakeholder theory because it neglects the significant differences among investors themselves. Responsible investors including labour-union pension funds, public pension funds, and SRI funds like the Pax World Fund, for example, combine financial motives with broader societal objectives and thus, also mirror stakeholder interests (ibid., p. 414; see also Ryan and Schneider, 2002). In encouraging management to consider the long-term aspects of their operations in terms of their impact on society, environment, and corporate governance issues, the interests of shareholders do not conflict with managers’ interests considering the raising importance of CSR related aspects on today’s top management business agenda (Oppenheim et al., 2007). As Hill and Jones (1992, pp. 137-38), for example, indicate improving labour standards and working conditions may increase labour productivity which in turn, provides management with greater resources for the growth of their company, thus satisfying their individual utility function. One reason for investor’s adherence to broader societal concerns may be, as claimed by Bollen (2007), a multi-attribute utility function that does not only involve the maximization of the return on their investment but also the personal and ethical values (Renneboog et al., 2008, in press). Hence, we would suggest viewing shareholder wealth maximization not as the only possible contract outcome, but rather, in line with Fiss and Zajac (2006), as a normative belief about how to design corporate structure. Our aim is thus not to de-legitimize its relevance for running a firm; however, we hold that it can not fully characterize and determine the way people act, or should act. Hence, it should not be the task to look at which governance structure solves best the conflict of interest between principals and agents based on the primary of shareholder wealth maximization, but rather, which underlying beliefs have caused us to take which action respectively and which other beliefs may lead us to new actions. Information asymmetry: Assuming that both responsible investors and managers strive for broader societal objectives the relationship between the investor and the manager can still be analyzed in terms of information flows or knowledge, as advocated by agency theorists. Also, the assumption that the agent may have an informational advantage over the principal and may be tempted to exploit this can be main-

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tained to some extent as the investor is not directly involved in the daily decisionmaking process of corporate management. As Ryan and Schneider (2003, p. 408) argue the Enron case with its complex off-balance-sheet funding techniques is a prominent example of such an abuse of ‘hidden knowledge’. However, while Ryan and Schneider (2003) in their critical review of agency driven literature on responsible investment simply question the ability of existing governance structures to reduce this information asymmetry, we call into question the assumption of information asymmetry itself. When it comes to responsible investment, we argue that it is less the information asymmetry that may impede the alignment of principals’ and agents’ interests, but rather, principals and agents are confronted with an ‘information plurality’ on CSR and corporate governance related issues due to the many diverging personal viewpoints on moral norms and standards by the various actors involved. This information plurality leads to an explosion of different ways how to interpret and make sense of what ought to be ‘right’ and ‘wrong’, or ‘profitable’ (for those groups purely adhering to shareholder wealth maximization). Hence, we assume principals and agents primarily confronted with a feeling of equivocality (Weick, 1979) about how to make sense of corporate socially responsible behaviour which rather causes a meaning conflict between both parties than a pure conflict of interest. This new perspective clearly emphasizes the aspect of how information is processed and enacted and acknowledges for the fact that misinterpretations of apparently objective facts may lead to severe conflicts between both contracting parties. Based on these insights we thus argue that it should not be the task of ‘maximizing’ the amount of information to align principals’ and agents’ interest through information gathering governance structures, but to look for mechanisms that allow for a meaningful management of information, i.e. that allow for collaborative sensemaking (Weick, 1995a). Economic-based governance structures: As outlined above, we are sceptical about the ability of existing economic-based governance structures within the P-A paradigm to protect shareholder interests when these interests do not include financial motives only but are also subject to ESG related concerns. From our perspective the main shortcoming of these governance structures is its reduction to its potential contribution to increasing corporate efficiency through better information systems and

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incentive payments (Eisenhardt, 1989). Also, the effectiveness of these structures is controversially discussed in academic literature (Davis and Thompson, 1994, p. 149). Schelling (1960), for example, maintains that governance structures can only succeed if perceived as credible (Hill and Jones, 1992, p. 141). This aspect has often been overlooked. A board of directors, for example, is credible only if truly independent from the top management of a firm. A threat of divestment, i.e. exit from a contractual relationship (Hirschman, 1970), is credible only if the investor is not ‘locked in’ to a relationship (Hill and Jones, 1992, p. 142) due to his large holdings of a firm. US pension funds have thus increasingly abandoned the so-called ‘Wall Street Walk’ as effective governance mechanism and, rather, have started to use their voice to discipline management (Sethi, 2005). To enrich the debate around the effectiveness of governance structures, Ryan and Schneider (2003, p. 406) have thus proposed to extend agency theory and to look at conflict resolution as resulting from the means of power and politics of principals and agents. However, we argue that credibility is also strongly linked to the question of how credibility is perceived which brings us back to the question of how people make sense of their surroundings. We thus propose that, if shareholder wealth in combination with broader societal objectives is the desired contract outcome, governance mechanisms of the investor-manager relation should also be oriented towards a reconciliation of diverging meanings on organizational phenomena specifically when it comes to ESG related aspects. Hence, we are rather interested in governance processes of how to influence people’s efforts to make sense of their environment as these processes in the end make up what people then may refer to as ‘governance structure’. Assessment of assumptions on time dimension Static approach to organizations and organizational relationships as an entity of contracts: In general, agency theory driven research views the effectiveness of organizations and organizational relationships as a function of the ability to create and design structures that ‘fit’ environment demands (Westwood and Clegg, 2003, p. 31). However, specifically with regard to ESG-related issues, the demands that the ‘external’ reality imposes on a corporation should rather be viewed as the social outcome of interacting stakeholders attempting to make sense of their surrounding

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world. Equally, the implementation of these stakeholder demands, i.e. what is then referred to as CSR, is the social outcome of organization members’ interactions. In line with Czarniawska (2003) we therefore argue that it is equally important to research for the processes by which the social meanings and representations of environment demands are constructed. As Munro (2003) argues, a pure concern for structure lacks to account for the variety of changes and mutations of organizational forms and relationships that emerge on a constant basis. ‘Order’ has thus to be rethought from a static approach towards a more dynamic perspective of order as always being in flux and subject to change (Chan, 2003). In this respect, Hill and Jones (1992) remind us that “one the central features of the real world is that the only constant is change” (p. 136). Hence, with regard to the interaction between investors and managers we suggest to (re-) emphasize human agency (Perrow, 1986) and to view this relationship as an ongoing accomplishment where it is important to understand the underlying social processes through which both investors and managers come to decisions and enact their strategies (see also Scherer and Dowling, 1995).60 Constant preferences of principals and agents: One assumption of agency theory is that principals and agents have constant preferences. Hence, agency theorists look at the P-A relation at a single point in time without taking into account that human actors may learn and change their preferences as a result of their interactions (Pastoriza and Ariño, 2008). This assumption is especially questionable considering the fact that most institutional investors being active in the responsible investment market often engage in numerous negotiation rounds with corporate management before they decide either to invest or divest, or use their formal ownership rights to lobby for change (Vandekerckhove et al., 2007, 2008). Hence, to study the relation between responsible investors and managers in a meaningful way it is essential to adopt a perspective that allows for continuously changing parameters such as knowledge base and preferences.

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Human agency has largely been left out by economic theories. As Reed (1999) argues, theories drawing upon economic rationalism share assumptions “that unify internal administrative forms and external market conditions by means of an evolutionary logic which subordinates collective and individual action to efficiency and survival imperatives largely beyond human influence” (p. 33).

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In summary we can maintain that information inefficiencies and value pluralism concerning what constitutes a socially responsible company, a changing and unstable environment, the (mal) functioning of existing governance structures, and the recent trend of a concentrated ownership structure as well as the rise in shareholder engagement and activism efforts call into question the assumptions held in agency theory. In particular, we are sceptical about the ability of the P-A paradigm to account for the magnitude of social processes that are involved in the specific field of responsible investment and its attempt to drive CSR.61 However, it should be noted at this point that it is not our aim to de-legitimize existing literature on responsible investment that draws upon agency theory; rather we want to supplement current research with a new, potentially richer conceptualization of the relation between investors and managers within our chosen field of research.62 Figure 12 summarizes the findings of this section.

Assessment of Agency Theory’s Assumptions in Their Application to Responsible Investment

Basic Paradigmatic Assumptions

Organizations intentionally enact their notion of CSR Information inefficiencies concerning disclosure of ESG related issues Concentrated ownership as barrier to exit from contract Herding mentality and ethical motivations of SRI and pension funds Investors and managers have both broader societal interests

Assumptions P-A Relation

Heterogeneity and dual role of institutional investors Conflict of interest does not necessarily exist when it comes to CSR Information plurality rather than asymmetry due to subjective and thus often diverging notions of what is perceived as socially responsible Efficiency is not the sole success factor for governance structures, credibility and legitimacy also play an important role

Assumptions Time Dimension

ESG demands are the social outcome of interacting stakeholders; CSR is the social outcome of interacting organization members Shareholder engagement and activism may lead to changing preferences as result of interaction

Fig. 12: Assessment of agency theory’s assumptions in their application to responsible investment. 61

In this context, Perrow (1986) complained that the issues stressed by agency theory are trivial. The question which social processes are needed to establish appropriate routines for control, coordination, and innovation are neglected (Oviatt, 1988, p. 215). 62 As Clegg and Ross-Smith (2003) maintain the task of scholarly research should not be one of delegitimizing existing scientific approaches, but one of re-legitimizing pluralism.

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3.2.2 The Need for a New Conceptualization of Responsible Investment as Sensemaking Process Previous findings illustrate the view that economic-based governance structures are debatable mechanisms to control a company’s CSR as they lack “both face validity and empirical support” (Ghoshal, 2005, p. 81). While we acknowledge the prominence of the question of institutional structure in organization science since its foundation in Weber (Hinings, 2003) we also have to recognize that the P-A approach to responsible investment often contradicts with reality and overlooks the question of which factors actually drive the process of institutionalization such as cognitive cause maps or mental frames. Ghoshal (2005) thus poses a valid question: “Why do we not fundamentally rethink the corporate governance issue?” (p. 81, emphasis in the original). As we agree with Gioia and Pitre (1990) who argue that “the use of any single research paradigm produces too narrow a view to reflect the multifaceted nature of organizational reality” (p. 584) we thus see a strong need to look for an alternative conceptualization of responsible investment as a driver of CSR. In recent years various scholars have tried to come up with new paradigms such as Davis and Thompson (1994) who propose a social movement perspective on corporate control, or Westphal and Zajac (1998) who argue for a social interpretation of the agency problem drawing upon a symbolic management perspective on corporate governance. As Davis and Thompson (1994) argue “corporate control is inherently political, and politics is accomplished by coalitions of mutually acquainted actors that recognize or construct a common interest … Social movement theory adds insight into the process by which actors translate shared interests into collective action” (p. 152). Research building upon this argument includes the work of den Hond and de Bakker (2007), Derry and Waikar (2008), King (2008), King and Soule (2007), and Rao and his colleagues (2000). This perspective has without doubt enriched the debate on corporate governance in general; however we think that looking at how to strengthen the position of shareholders through collective action in order to facilitate access to corporate management is not enough if a change in corporate practices and policies with regard to CSR is desired. In our view, it ignores the fact that shareholder interests have to be

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negotiated and mentally shared with corporate management, too, to guarantee an adequate implementation of these interests on an organizational level. This is particularly true for CSR related interests as they affect deeply rooted personal assumptions and values of organizational members and are not as easy to implement and enforce top-down as, for example, cost reduction strategies (Cramer et al., 2004). In summary, social movement theory still tries to explain the formation of an organization as a function of political struggles between investors and managers as well as social structures going beyond the organization (Davis and Thompson, 1994). The embeddedness of corporate governance in social processes both within and between organizations is however neglected. A different description of the relation between investors and managers was brought forward by Westphal and Zajac (1998) who suggest solving the agency problem through the introduction of symbolic action rather than economic-based governance structures. They argue that conflicting interests between investors and managers may be aligned through the use of a ‘socially legitimate language’ which enables managers to pretend to satisfy shareholders’ demands, thus solving the conflict, without sacrificing on their own utility function. While we acknowledge the authors’ attempt to incorporate human intentionality into the P-A paradigm, we are sceptical about their contribution to the study of responsible investment. From our perspective their research still relies too much on agency theory’s behavioural assumptions such as self-interest and rationally economic actors. In addition, by examining the effectiveness of symbolic action as a function of stock market reactions, Westphal and Zajac (1998) still seem to view the formation of organizations and organizational relationships primarily as a function of market forces than of human agency. However, as outlined in our assessment of agency theory’s assumptions, the relation between investors and managers should rather be viewed as a reciprocal process of joint enactment of what constitutes a profitable, and in the case of responsible investment, socially responsible company. We therefore argue that a potentially richer conceptualization of corporate governance is to consider it as embedded in social processes, i.e. to look at what investors and corporate management actually do when it comes to the integration of ESG related issues, both within responsible investment

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practices and the implementation of CSR within a company. Such an approach further implies that the success of shareholder actions may not be a function of an organization’s efficiency but rather as depending on internal determinants such as underlying beliefs and sensemaking processes which have been ignored so far in academic literature on corporate control in general, and responsible investment in particular. Hence, our study aims at enriching existing literature in the field of responsible investment by offering a process interpretation of the agency problem. While conventional economic perspectives focus on the reduction of agency costs resulting from introducing economic-based governance structures to resolve conflicting interests of agents and principals, we conceive the agency problem as one of reducing a cognitive conflict resulting from different sensemaking processes through the uncovering of deeply-rooted and often invisible beliefs and actions. As underlying theoretical foundation we thus need a theory that emphasizes human agency as proposed by Bartunek (1984) and Pettigrew (1985) (see limitations of basic paradigmatic assumptions), focuses on the social processes of interaction (see limitations of assumptions concerning the P-A relation) and allows for a dynamic perspective that accounts for the fact that parameters may change over time (see limitations of assumptions on time dimension). Based on these insights we consider Karl E. Weick’s (1995a, 1979) sensemaking studies as an adequate theory perspective from which we have selected the concepts of enactment, double interact and continuous change as the most relevant ones with regard to the problem under study (see figure 13). Since they present the theoretical foundation of our subsequent analysis the next section introduces all three concepts in more detail as well as points to their ability as opposed to the underlying assumptions of agency theory to make sense of the social processes that underlie corporate control.

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Towards a New Conceptualization of Responsible Investment as Sensemaking Process Basic Paradigmatic Assumptions

Need for a stronger emphasis on human agency

Assumptions P-A Relation

Need for a stronger emphasis on the social processes of interaction

Assumptions Time Dimension

Need for a stronger emphasis on the dynamics of organizations

ENACTMENT

DOUBLE INTERACT

CONTINUOUS CHANGE

Fig. 13: Towards a new conceptualization of responsible investment as sensemaking process.

3.3

Introducing Sensemaking Studies as Underlying Theory

Various scholars have developed models to describe how people make sense of issues and events in their environment (Milliken, 1990, p. 43; Daft and Weick, 1984, p. 286). March and Olsen (1975), for example, take a behavioural perspective and consider sensemaking as part of experiential learning in which “individuals and organizations make sense of their experience and modify behaviour in terms of their interpretations” (p. 157). Starbuck and Milliken (1988) take a cognitive perspective and observe that “sensemaking has many distinct aspects – comprehending, understanding, explaining, attributing, extrapolating, and predicting, at least” (p. 51). Thomas and his colleagues (1993) note that sensemaking “involves the reciprocal interaction of information seeking, meaning ascription, and action” and that “each element of this sense making process is presumed to have some relationship to performance” (p. 240). Within the scope of our study we will concentrate on the work of Weick and colleagues (2005) who define sensemaking as an “ongoing retrospective development of plausible images that rationalize what people are doing”; they further emphasize “its central role in the determination of human behaviour … because it is

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the primary site where meanings materialize that inform and constrain identity and action” (p. 409). The next sections will introduce three constitutive concepts of sensemaking brought forward by Weick and his colleagues.

3.3.1 Enactment With regard to our previous findings we agree with Morgan and Smircich (1980) who argue that “once one relaxes the ontological assumption that the world is a concrete structure, and admits that human beings, far from merely responding to the social world, may actively contribute to its creation, the dominant methods become increasingly unsatisfactory, and indeed inappropriate … any methods that closes the subject of study within the confines of a laboratory, or merely contents itself with the production of narrow empirical snapshots of isolated phenomena at fixed points in time, does not do complete justice to the nature of the subject” (p. 498). To talk about sensemaking however “is to talk about reality as an ongoing accomplishment that takes form when people make retrospective sense of the situations in which they find themselves and their creations” (Weick, 1995a, p. 15).63 Human agency is thus “at the root of the complex and ambiguous environments we need to make sense of and act upon” (Gioia, 2006, p. 1715). The central argument of sensemaking that human beings contribute to the creation of their environment, or that they even invent their environment (ibid.), is based on the idea of enactment. “Enactment, at a minimum, changes the actor from inactive to active and, in doing so, deepens the actor’s stake in what is being done and in its outcome” (Weick, 2003, p. 186). Rooted in the work of Garfinkel (1967) the concept of enactment thus focuses our attention to what people actually do since it is their actions that make the difference: “[T]he actor’s own actions are first order determinants of the sense that situations have” (Garfinkel, 1967, p. 115). Weick (2003) further argues that enactment “helps people see the environment as something other than resources, institutional precedents, promises, uninterpreted information, niches, 63

The retrospective character of sensemaking is perhaps the most distinctive feature of the Weickian approach to sensemaking compared to other scholars. Drawing upon the work of Schütz (1967) and his analysis of “meaningful lived experience” Weick (1995a) argues that people may only know what they are doing after they have done it. Their actions guide their cognitions, and their cognitions in a reciprocal sense, guide their actions.

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models to mimic, markets, liabilities, and costs. The ‘something other’ is that all of those preceding features are names, punctuations, and interpretations imposed in the interest of meaning. If one is puzzled, then ‘finding’ an organization to mimic, an institutional guideline to follow, a resource to be hoarded, a market to be saturated, or a liability to be skirted are ways to make sense and allocate effort” (p. 189). In short, enactment concerns two questions: “What’s the story?” and “Now what?” (ibid., p. 186). The first question “has the force of bringing an event into existence” because it requires that people notice an event at first stance; the second question “has the force of bringing meaning into existence, meaning that … [individuals] hope is stable enough for them to act into the future, continue to act, and to have the sense that they remain in touch with the continuing flow of experience” (Weick et al., 2005, p. 410). Weick and his colleagues further maintain: “Answers to the questions ‘what’s the story’ emerge from retrospect, connections with past experience, and dialogue among people who act on behalf of larger social units. Answers to the question ‘now what?’ emerge from presumptions about the future, articulation concurrent with action, and projects that become increasingly clear as they unfold” (ibid., p. 413). Hence, enactment “is about the stubborn insistence that people act in order to develop a sense of what they should do next” (Weick, 2003, p. 186). How they develop this sense is pictured in Weick’s (1969, 1979) conceptualization of organizing. Organizing, seen as the operative image of organization, “is one in which organization emerges through sensemaking, not one in which organization precedes sensemaking or one in which sensemaking is produced by organizations” (Weick et al., 2005, p. 410). To clarify the relationship among the terms enactment, organizing and sensemaking Weick (2003) calls enactment as “the ‘glue’ that joins organizing with sense making” (p. 186). He and his colleagues further hold: “… people organize to make sense of equivocal inputs and enact this sense back into the world to make that world more orderly” (Weick et al., 2005, p. 410; see also Weick, 1969, pp. 40-42; for an illustration see figure 14). The relationship between enactment, organizing, and sensemaking is described in the following paragraph.

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… create order

… enact back … Equivocal inputs…

… make sense …

?

… organize …

Fig. 14: The relationship between enactment, organizing, and sensemaking.

Process of organizing In his early work, Weick (1979, 1969) viewed sensemaking as an ‘intraorganizational evolution’ (Weick et al., 2005, p. 413) assuming an ongoing process of organizing through which sense is created, maintained, and revisited. Weick (1979) defines organizing as a “consensually validated grammar for reducing equivocality by means of sensible interlocked behaviors …Organizing is like a grammar in the sense that it is a systematic account of some rules and conventions by which sets of interlocked behaviors are assembled to form social processes that are intelligible to actors. It is also a grammar in the sense that it consists of rules for forming variables and causal linkages into meaningful structures (later called cause maps) that summarize the recent experience of the people who are organized” (pp. 34).64 Framed differently, organizing is “an attempt to order the intrinsic flux of human action, to channel it toward certain ends, to give it a particular shape, through

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The substance of organizing is, here referred to as interlocked behaviour (Buckley, 1967), what Weick (1979) also calls a double interact describing a circular process of interaction (Allport, 1924) and will be explained in our next section.

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generalizing and institutionalizing particular meanings and rules” (Tsoukas and Chia, 2002, p. 570). Weick’s conceptualization of the process of organizing goes back to Campbell’s (1965) application of evolutionary epistemology to social behaviour and proposes a sequence of four elements of organizing: ecological change, enactment, selection, and retention (see figure 15). Ecological changes are the discrepancies and equivocalities of ongoing projects that may attract people’s attention, confuse them and trigger action: “Ecological changes provide the enactable environment, the raw materials for sense-making” (Weick, 1979, p. 130). Enactment consists in the bracketing and noticing of some part of the stream of experience and isolating it for further attention. These activities are the primary step in imposing an order upon the flux of circumstances however they are still “relatively crude acts of categorization” (Weick et al., 2005, p. 414) and subject to a variety of possible meanings. Selection is about placing some finite set of interpretive schemes on the bracketed material, i.e. reducing its equivocality. These interpretive schemes are often referred to as cause maps or mental models as they guide us in our way of making sense of equivocal displays (Weick, 1979, p. 131). The aim of the selection sequence is to come up with a “locally plausible story” (Weick et al., 2005, p. 414) that, once it is stored in the organizing process of retention, gains further substance and may be used for further application. This further application includes feeding back to the processes of enactment, i.e. current equivocalities are filtered according to prior experience, and those of selection, i.e. remaining equivocalities are reduced according to existing cause maps. The overall ‘product’ of the process of organizing is called ‘enacted environment’ (Weick, 1979, p. 131) and again emphasizes that the environment people face is nothing else than the output of their own organizing efforts. An ‘enacted environment’ implies that the organization is neither determined by the environment nor is its decision freedom restricted by it. Rather, organizations and environment are mutually dependent (Grimm, 1996). This mutual dependency between people and their environment is also captured in the reciprocal relationship between ecological change and enactment implying that a stimulus does not only trigger a response but also (en)active sensemaking (Weick, 1979, p. 166).

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Noticing and bracketing

Ecological change

Enactment

Making sense of equivocal displays

Storing plausible cause maps

Selection

Retention

Feedback on enactment and selection

Fig. 15: Weick’s process of organizing (adapted and modified from Weick, 1979, p. 132).

One specifically interesting question with regard to the problem under study is how sensemaking activities within organizations can be influenced, and thus how collective meaning can be created. We will approach this question by arguing that organizational members need to make sense a situation before they can establish social institutions. The way organizational members select from a set of explanatory models thereby depends on which information they have noticed at first instance – the socalled cue (also known as “point of reference”, see Smircich and Morgan, 1982, p. 258). Also, organizational members may draw upon their previous experience to make sense of a situation. Retention and enactment thus constitute the selection process as they determine the finite design of the enacted environment. Enactment controls sensemaking because it produces the raw material which is then made sensible. This mirrors again the retrospective character of sensemaking, since “[s]ense is made of previous actions” (Weick, 1979, p. 133). Retention controls sensemaking because retained cause maps serve as guidance for the selection of plausible stories which then again become stored in form of expectations on cause-effect relationships. The recursivity involved in sensemaking is further emphasized by the fact that retention constrains enactment (which then again influences selection) since the retained enacted environment filters what is noticed and bracketed. This again stresses Weick’s argument that “people in organizations repeatedly impose that which they later claim imposes on them” (ibid., p. 153). If we follow Weick’s (1979) recipe of sensemaking “How can I know what I think until I see what I say” (p. 133),

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retention is then what someone ‘thinks he knows’, thus it represents his beliefs. Enactment, as indicated earlier, is what someone ‘says’, or does, and thus it builds upon human actions. Selection finally concerns the process by which organizational members tie their beliefs and actions and is referred to what someone ‘sees’. Hence, beliefs and actions are drivers of sensemaking activities (Weick, 1979, p. 135; see figure 16).

Actions

Ecological change

Enactment

Beliefs

Selection

Retention

Direct control Indirect control

Fig. 16: Beliefs and actions as drivers of sensemaking.

Beliefs and actions are embedded in so-called minimal sensible structures, also called frames (Goffman, 1974), that people ‘draw on’ when constructing roles and interpreting their environment (Weick, 1995a, p. 107). On the one hand, beliefs are embedded typically in frames such as ideologies or paradigms. Ideologies, for example, are defined as a “shared, relatively coherently interrelated set of emotionally charged beliefs, values, and norms that bind some people together and help them to make sense of their worlds” (Trice and Beyer, 1993, p. 33). Hence, “believing is seeing” (Weick, 1979, p. 135) and due to the circularity inherent to the process of organizing also implies a self-fulfilling prophecy as our beliefs initiate actions that again lend substance to what we believe (Weick, 1995a, p. 134). On the other hand, actions may also (if not primarily) drive our sensemaking process. In line with Starbuck (1983) Weick considers organizations as activity systems, rather than stable rational systems as proposed by agency theorists. He argues that organizations are loosely coupled65 systems “in which action is underspecified, inadequately rationalized, and monitored only when deviations are extreme … The net result is that there is consid-

65

Loose coupling describes two systems that are linked by few common variables or weak common variables (Orton and Weick, 1990; Weick, 1976).

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erable autonomous action that unfolds independent of formal system requirements and in response to a variety of signals” (Weick, 1995a, p. 134). These actions produce the raw material which people then see in order to find out about what they think. Thus they build the condition for further sensemaking. In total, Weick (1995a) identifies four processes intended to create or enlarge meaning that are driven by beliefs and actions: arguing, expecting, committing, and manipulating which will be explained in the following paragraphs. Belief-driven processes: People vary greatly in their beliefs and values and therefore cannot collectively make sense of their surrounding environment without engaging in arguments. ‘Arguing’ can be understood as an attempt to reduce the amount of contradicting beliefs that are considered as relevant in order to facilitate unified, collective sensemaking. Sensemaking may also occur through ‘expecting’. Expectations facilitate collective sensemaking efforts as they guide people’s actions in a way that is already pre-defined. Hence, by having specific expectations, people might adjust their actions such as filtering equivocal input according to their prophecies so that ‘empty’ expectations are filled with meaning. Sensemaking based on expectations is a common organizational phenomenon considering the fact that most organizations to date are pre-occupied with predictions, strategic planning, and foresight (Weick, 1995a, pp. 133-34). Action-driven processes: Action-driven processes of sensemaking start with actions and then try to find about the meaning of these actions. Since action already happened the question of action-driven sensemaking is more one of how to explain my doing (‘saying’) retrospectively with regard to the specific context and without losing my self-esteem. One possible way is committing. Committing involves sensemaking activities that focus on binding actions; Weick (1995a) thereby describes ‘public’, ‘irrevocable’ and ‘volitional’ actions as binding (pp. 156-57). To find out about action-driven sensemaking processes within an organization, one might for example look at a company’s theories of action. These comprise a set of causal if-then relationships that mirrors how organizational members so far have justified their behaviour (ibid., pp. 121-22). Another action-driven process of sensemaking is manipulating. Manipulation involves “stabilizing an otherwise unstable set of events so that it

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is easier to explain them” (ibid., p. 135). A manipulative sensemaking process for example was the joint effort of a coalition of US shopkeepers to lobby Congress to extend the daylight saving time in the US. The extra hours of evening daylight stimulated people’s buying behaviour and thus provided the shopkeepers with increasing profits. Thus, an environment was created that allowed people to feel safer at night and visiting convenience stores more often (ibid., p. 165).66 We conclude that there are at least four ways of generating or enlarging sense in which people use frames to filter ecological changes or to link them with cues to derive at a plausible story. Sensemaking is thus a reciprocal process of relating beliefs with actions. Whatever element is less clear is linked to what is clearer or stronger in the interest of meaning: “Sensemaking is an effort to tie beliefs and actions more closely together as when arguments lead to consensus on action, clarified expectations pave the way for confirming actions, committed actions uncover acceptable justifications for their occurrence, or bold actions simplify the world and make it clearer what is going on and what it means” (Weick, 1995a, p. 135; see figure 17 for an illustration).

Arguing

Growing meaning by connecting the contradictory

Expecting

Growing meaning by connecting the similar

Committing

Creating meaning to justify actions high in publicity, irrevocability, and volition

Manipulating

Creating meaning to legimitate actions taken to invent the environment

Beliefs

Actions

Fig. 17: Making sense through tying beliefs and actions.

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The central position of action in the processes of committing and manipulating has important implications for our study of corporate control. We need to be aware that “[c]ontrol is not a cause of action … Control is an effect of action. Actions create relationships that then become binding or releasing” (Weick, 1995a, p. 167).

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3.3.2 Double Interact The unit of analysis for describing an organizing process is the double interact: “Processes contain individual behaviors that are interlocked among two or more people. The behaviors of one person are contingent on the behaviors of another person(s) … The unit of analysis in organizing is contingent response patterns, patterns in which an action by actor A evokes a specific response in actor B (so far this is an interact), which is then responded to by actor A (this complete sequence is a double interact)” (Weick, 1979, p. 89; see figure 18 for an illustration). Since influence, control, and authority play a role in organizing as indicated above double interacts can consequently be used for describing interpersonal influence (see Hollander and Willis, 1967).

act interact

A

B

double interact

organizing

Fig. 18: The double interact.

A central implication for the study of influence or control of actor A over actor B is that influence depends on ‘contingent response patterns’ rather than the authority of actor A alone. Organizing and sensemaking are “collective, social phenomena between people, not isolated individual phenomena inside a single head” (Weick, 2003, p. 186). In this context Barnard (1938) maintains: “If a directive communication is accepted by one to whom it is addressed, its authority for him is confirmed or established. It is admitted as the basis of action. Disobedience of such a communication is a denial of its authority for him. Therefore, under this definition the decision as to whether an order has authority or not lies with the persons to whom it is addressed, and does not reside in ‘persons of authority’ or those who issue orders” (pp. 163-65, cited in Weick, 1979, p. 16).

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The concept of double interacts also reflects the process-oriented view on organizations inherent to sensemaking. A central idea to the concept is that double interacts are assembled into processes and that these processes between people constitute the organization (Weick, 1979). In line with Barnard’s (1938) conceptualization of organizations composed of processes of communication (see also Luhmann’s theory of social systems, 1984) Weick (2003) reminds us that it is essential “to read that organizations emerge in communication and are shaped momentarily by the nature of the relationship and the forms of in the language that are realized when organizing is talked and acted into existence” (pp. 189-90). Drawing predominantly upon Allport’s (1962) work on collective structure Weick (1979) further argues that people share means rather than ends; people “share space, time, and energy, but they need not share visions, aspirations, or intentions” (p. 91). To influence the formation of organizational realities it is thus essential to assemble double interacts into the process of selection as primary site where equivocal inputs are transformed into information. Since organizing and sensemaking are collective phenomena, numerous interlocked behaviour cycles form during the assembly of double interacts (Weick, 1979, p. 114). Assuming that order is in flux and people continually live in flows of ongoing events, a cycle would for example start with person A bracketing some portion out of the flow of events, followed by person B responding to person A by either accepting, rejecting or modifying this choice, and closed by person A readjusting her choice by either abandoning, revising or maintaining the chosen portion. The following figure illustrates a hypothetical description of six interlocking behaviour cycles that Weick considers as appropriate for the assembly of double interacts into the process of selection. In short, Weick (1979) holds that each cycle follows the basic influence sequence brought forward by Hollander and Willis (1967): action of person A – response by person B - readjustment by person A (see figure 19). Weick further argues that the higher the degree of equivocality perceived, the greater the number of cycles to be necessary to transform equivocal inputs into sensible information. Coming back to the work of Allport (1962), a stable collective structure exists if “behaviors that person A emits … are valuable to person B, and which in turn lead B to produce behav-

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iors that benefit A” (Weick, 1979, p. 118). This again emphasizes Weick’s argument on control: “the important point is not that one person rules; the important point is the fact that this control is made possible by the pattern of alliances that exists in the group. It is the pattern of relationships, not the fact that a ‘great man’ sits on top of the heap, that makes it possible for influence to be concentrated” (ibid., pp. 16-17).

Interlocking Behaviour Cycles Act Action by person 1. Isolates a portion of the input for closer examination 2. Selects interpretation for application to input 3. Constructs new interpretation 4. Differentiates an existing interpretation, bringing out a new component 5. Assembles a set of nouns for application to input 6. Assesses reasonableness of interpretation applied

Interact Response by other person

Double Interact Readjustment by first person

Accepts, rejects, or modifies choice Accepts, rejects, or modifies interpretation Accepts, rejects, or modifies construction Accepts, rejects, or modifies differentiation

Abandons, revises, or maintains the chosen portion Abandons, revises, or maintains interpretation Abandons, revises, or maintains construction Abandons, revises, or maintains differentiation

Accepts, rejects, or modifies assemblage Accepts, rejects, or modifies assessment

Abandons, revises, or maintains assemblage Accepts or rejects the acceptance or rejection

Fig. 19: Interlocking behaviour cycles in selection process according to Weick (adapted from Weick, 1979, p. 115).

But how can one arrive at the desired pattern of relationship? Admittedly, Weick’s conceptualization of the double interact as unit of analysis within sensemaking remains largely elusive especially with regard to the study of inter-organizational alliances or any other sort of principal-agent relationships. A more pragmatic and potentially useful extension of the idea of double interacting would be to look at the concept of relating as proposed by Ancona and colleagues (2005). ‘Relating’ is defined as developing key relationships within and across organizations. It is thus a fruitful contribution to a better understanding of Weick’s ‘double interact’ in an interorganizational context. The process of relating concentrates around three areas: inquiry, advocacy and connecting. The terms inquiry and advocacy are borrowed from the organizational learning theorists Argyris and Schön (1996) and Senge (2006). In the light of sensemaking inquiry is the attempt to understand how the other person

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has transformed equivocal input to sensible information, i.e. how he has organized equivocality. Advocacy is defined as taking a stand and consists in one person telling another what to do (Pfeffer, 1992). It is thus a typical one-way communication effort (Senge, 2006). Connecting is the ability to establish collaborative relationships through the processes of advocacy and inquiry; in a Weickian sense it is the ability to build alliances in a way that influence can be concentrated and change accelerated (Weick, 1979). Inquiry, advocacy, and connecting can be summarized under the term reciprocal inquiry proposed by Senge (2006). Senge argued that people in an organization learn by connecting with each other via the process of balancing advocacy and inquiry. The balance between advocacy and inquiry suggests that people need to commit to their actions (see action-driven processes of sensemaking) but also they must question the other person’s stand and debate their different viewpoints (see belief-driven processes). According to Gerzon (2006) balancing advocacy and inquiry thus allows a two-way communication between organizational members and reflects the idea of contingent response patterns as proposed by Weick (1979). The concept of reciprocal inquiry thus teaches us that sensemaking within and across organizations is also a process of balancing advocacy and inquiry in the interest of constructive communication. Often, organizational members possessing some formal authority push their views too strongly, not allowing for discussion and debate (Senge, 1990). Having outlined that the double interact is best positioned to describe interpersonal influence we would thus propose that the broader term reciprocal inquiry is best positioned to describe inter-organizational influence. Only if ideas are clearly communicated and if there is enough room for debating those ideas, can organizations influence each other’s sensemaking. The idea of integrating the social dynamics in inter-organizational relationships into the research on sensemaking can also be found in the concept of sensegiving as brought forward by Gioia and Chittipeddi (1991). They describe a “process of attempting to influence the sensemaking and meaning construction of others toward a preferred redefinition of organizational reality” (p. 442). Hence, Gioia and Chittipeddi’s (1991) study was crucial in showing how sensegiving activities can play a

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major role in effecting organizational change. In line with other studies their work however was primarily applied to questions of intra-organizational phenomena such as organizational leadership (Bartunek et al., 1999; Corley and Gioia, 2004; Dunford and Jones, 2000; Gioia and Chittipeddi, 1991; Snell, 2000). However, an increasing set of studies analyzing the importance of sensegiving by organizational stakeholders has recently emerged (Balogun, 2003; Maitlis, 2005; Maitlis and Lawrence, 2007; McNulty and Pettigrew, 1999). Although not explicitly mentioned by the authors, the idea of sensegiving mirrors Weick’s concept of a double interact, because the sensemaking and meaning construction of an organization depends on the sensegiving activities of stakeholders and management alike (Maitlis, 2005). As such, sensegiving is what stakeholders and organizations do, i.e. their actions, as shown by the arrows in figure 18. In his critical appraisal of sensegiving Weick and his colleagues (2005) argue that “sensegiving corresponds to the saying … However, notice that … sensegiving may affect the sensemaker as well as the target” (p. 416). This is also confirmed by Maitlis and Lawrence (2007) who state that “[a]lthough sensegiving concerns influencing the sensemaking of others, we often observed that a person’s sensegiving also seemed to affect his or her own sensemaking around an issue. In fact, this seems nearly inevitable, since the ways in which people speak will always inform their understandings of their own beliefs and positions” (p. 63). The reciprocal relationship between sensegiving and sensemaking is further clarified by Maitlis and Lawrence’s (2007) findings that sensegiving also depends on sensemaking. Stakeholders, for example, engage in sensegiving activities if they perceive an issue as important enough to discuss it with corporate management. Corporate management engages in sensegiving activities to influence the meaning construction of their stakeholders if the stakeholders’ demands do not (yet) make sense to them because they are too ambiguous. The distinction between the activity of sensegiving and sensemaking however remains elusive. We agree with Weick and his colleagues (2005) that sensegiving is best considered as a part of sensemaking corresponding to the saying. Hence, acting, interacting, and double interacting, or framed differently, advocating and inquiring, all mirror some sort of sensegiving activities that Gioia and Chittipeddi (1991) were thinking of when coining the term. However, we like to add that ‘giving’ might be mis-

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leading as it rather assumes a one-way communication that a mutual process of balancing advocacy and inquiry. For the present, we will thus stay cautious with using the term sensegiving.

3.3.3 Continuous Change If we assume that people live within streams of ongoing situations from which they continually have to notice, bracket, interpret some portion which is then memorized, sensemaking necessarily becomes an ongoing activity: “Sensemaking never starts. The reason it never starts is that pure duration never stops” (Weick, 1995a, p. 43). In a study of manufacturing companies in Scotland, Porac and colleagues (1989) clearly show that flow, continuity, and dynamic change constitute an organization rather than stability. A further implication of ongoing retrospective sensemaking, as outlined by Mintzberg and McHugh (1985), are emergent strategies that were not intended and differ from deliberate strategies. They suggest that learning rather than rational decision making is thus the foundation of any organization (see previous section). That change is indispensably linked to sensemaking is also illustrated by Gioia and Chittipeddi (1991) who find that change in a major US university is an iterative process of meaning construction (sensemaking) and efforts to influence this construction. If change is the rule in any organization the question is how to frame it for further research. In this context Weick and Quinn (1999) present an extensive work on organizational change and development. They argue that, next to mode of change and unit of change as important parts of the change literature as proposed by Van de Ven and Poole (1995), a third part tempo of change is essential to study organizational change (see also George and Jones, 2000, for an appreciation of time in theory building). The tempo of change, defined as ‘rhythm’ or ‘pattern’ of an activity, reveals two distinct forms of organizational change: episodic and continuous change (Weick and Quinn, 1999, p. 365). Episodic change is typically described as “infrequent, discontinuous, and intentional” while continuous change equals “ongoing, evolving, and cumulative” (Pettigrew et al., 2001, p. 704). Both forms are valid approaches to organizational change; their contrast mirrors a different perspective of the observer (Weick and Quinn, 1999, p. 362). While “occasional episodes of revolutionary

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change” are often observed from a more distanced level, a closer look at micro-level processes within an organization reveals “ongoing adaptation and adjustment” (ibid.). In the light of our research interest to understand the micro-processes involved in responsible investing we thus take, in line with Weick (2001, 1995a, 1979), a view from closer in and consider organizational realities as continuous change processes. Drawing upon Dunphy’s (1996) work on what constitutes a comprehensive theory of change Weick and Quinn (1999) elaborate on the contrast between episodic and continuous change by comparing the following five properties: (a) basic metaphor of the nature of organization, (b) analytical framework to understand the organizational change process, (c) ideal model of an effectively functioning organization, (d) intervention theory, and (e) role of change agent. A central difference between episodic and continuous change can be found in first property. Episodic change for example is presumed to occur only as necessary step if an organization is moving away from its equilibrium conditions (see section 3.1.2). However, Weick’s (1979) endeavour to replace the noun ‘organization’ with the verb ‘organizing’ has told us that order is not stable, but in flux; framed differently we are situated in a constant disequilibrium that requires continuous adaptation and adjustment. A detailed overview of the comparison between episodic and continuous change based on all five properties is given is figure 20. The following paragraphs however concentrate primarily on continuous change as it is one of the three prevalent concepts in the light of sensemaking that will guide through our further analysis. We introduce continuous change as constitutive element of the overarching idea of sensemaking because, according to Orlikowski (1996), continuous change is characterized by “accommodations to and experiments with the everyday contingencies, breakdowns, exceptions, opportunities, and unintended consequences” (p. 65) which “are repeated, shared, amplified, and sustained” (p. 89, cited in Weick and Quinn, 1999, p. 375). The central assumption is that these small adjustments and accommodations sum up to innovation and substantial change. The basic metaphor of the nature of organization is thus one of ‘organizing for continuous change’ (Weick and

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Quinn, 1999, p. 375) consisting of (double) interactions and relationships between change agents and recipients (Ford et al., 2008; Ford and Ford, 1995).

Episodic Change

Continuous Change

Metaphor of organization

Organizations are inertial and change is infrequent, discontinuous, intentional.

Organizations are emergent and self-organizing, and change is constant, evolving, cumulative.

Analytic framework

Change is an occasional interruption or divergence from equilibrium. It tends to be dramatic and it is driven externally. It is seen as a failure of the organization to adapt its deep structure to a changing environment Perspective: macro, distant, global. Emphasis: short-run adaptation. Key concepts: inertia, deep structure of interrelated parts, triggering, replacement and substitution, discontinuity, revolution.

Change is a pattern of endless modifications in work processes and social practice. It is driven by organizational instability and alert reactions to daily contingencies. Numerous small accomoda-tions cumulate and amplify. Perspective: micro, close, local. Emphasis: long-run adaptability. Key concepts: recurrent interactions, shifting task authority, response repertoires, emergent patterns, improvisation, translation, learning.

Ideal organization

The ideal organization is capable of continuous adaptation.

The ideal organization is capable of continuous adaptation.

Intervention theory

The necessary change is created by intention. Change is Lewinian: inertial, linear, progressive, goal seeking, motivated by disequilibrium, and requires outsider intervention: 1. Unfreeze: disconfirmation of expectations, learning anxiety, provision of psychological safety. 2. Transition: cognitive restructuring, semantic redefintion, conceptual enlargement, new standards of jugdement. 3. Refreeze: create supportive social norms, make change congruent with personality

The change is a redirection of what is already under way. Change is Confucian: cyclical, processional, without an end state, equilibrium seeking, eternal: 1. Freeze: make sequences visible and show patterns through maps, schemas, and stories. 2. Rebalance: reinterpret, relabel, resequence the patterns to reduce blocks. Use logic of attraction. 3. Unfreeze: resume improvisation, translation, and learning in ways that are more mindful.

Role of change agent

Role: prime mover who creates change. Process: focuses on inertia and seeks points of central leverage. Changes meanings systems: speaks differently, communicates alternative schema, reinterprets revolutionary triggers, influences punctuation, builds coordination & commitment

Role: Sense maker who redirects change. Process: recognizes, makes salient, and reframes current patterns. Shows how intentional change can made at the margins. Alters meaning by new language, enriched dialogue, and new identity. Unblocks improvisation, translation & learning

Fig. 20: Weick and Quinn’s comparison of episodic and continuous change (adapted from Weick and Quinn, 1999, p. 366).

The analytic framework that we will also use throughout our subsequent analysis to understand change is ‘the continuous change process’ (Weick and Quinn, 1999, p. 377). Processes thereby involve “change through ongoing variations in practice, cumulation of variations, continuity in place of dramatic discontinuity, continuous disequilibrium as variations beget variations, and no beginning or end point … less prominent in this description are key properties of episodic change, such as inertia, triggers and replacement” (ibid.). Hence, while episodic or planned change efforts often take place to overcome organizational inertia “continuous change is driven by alertness and the inability of organizations to remain stable” (ibid., p. 379).

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The ideal model of an organization specifies the values that determine the success of a change intervention. A central value here is flexibility and the ability of an organization to adapt continuously in the context of failures. It should be said that this is also true for episodic change (ibid.). The last two properties, intervention theory and role of the change agent, however reveal vast differences between episodic and continuous change processes and will thus be looked at in more detail. The best known intervention theory is Lewin’s (1951) change model that suggests viewing change intervention as a sequence of unfreeze, transition, refreeze. This might be true if we assume inertia to be a driver of organizational change; however given continuously changing organizations it will be difficult to unfreeze something which is already unstable and in flux. Also, the closing act of refreezing appears questionable if continuous adaptation and adjustment is desired. If people are thrown in the middle of ongoing equivocal situations, “it becomes difficult for any one person to make sense of what is happening and to anticipate what will happen unless that person is able to freeze, break up, or recycle portions of this flow” (Weick, 1979, p. 117). The intervention theory as proposed by Weick and Quinn (1999, p. 379) thus suggests a change sequence of freeze, rebalance, unfreeze (see figure 21). Freezing aims at making taken-for-granted beliefs visible, uncovering cause maps, capturing stories (see for example Bartunek, 1993; Boje, 1991; Fiol and Huff, 1992). Rebalancing involves questioning existing frames such as ideologies or theories of action and looking for alternatives; i.e. “to rebalance is to reinterpret, relabel, and resequence the patterns … [for example] to reframe issues as opportunities” (Weick and Quinn, 1999, p. 380). To unfreeze, finally, is to resume continuous change processes such as improvising, translating, and learning that allow for more mindful67, resilient, and flexible way of making sense (see Weick et al., 1999).

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The term ‘collective mindfulness’ was introduced by Weick and his colleagues to describe an organizational culture that is strong in making collectively sense of highly equivocal crises (Weick et al., 1999; Weick and Roberts, 1993).

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FREEZE Ecological change

Enactment

Selection

REBALANCE Retention

Ecological change

Enactment

Selection

UNFREEZE Retention

Ecological change

Enactment

Selection

Retention

Fig. 21: Intervention theory in continuous change processes.

The intervention theory has important implications for the role of the change agent. In the case of episodic change, the change agent is a “prime mover” and actively triggers change; he has to communicate in new, different ways and has to improve “coordination and commitment” (Weick and Quinn, 1999, p. 366) of the people involved in the change process. In the case of continuous change, change agents do not create but redirect the change being already under way by making sense of those change dynamics. Their task is to freeze and to rebalance existing frames that determine how organizational members enact their world. The central influence mechanisms here, as outlined in our previous section on double interacts, is communication. Thus, change agent’s role becomes one of “managing language, dialogue, and identity” (ibid., p. 381). To summarize, sensemaking is about transforming equivocal input into sensible information. The equivocal input thereby triggers a process of organizing which is shaped by the beliefs and actions of the people involved. The unit of analysis are interlocked behaviours of two or more people trying to draw causal maps and stabilize meanings for equivocal displays. These relationships among people and the language they use build the foundation of all forms of organizing efforts, but they are fluid and mutating (Weick, 1979, p. 13). As a result, social structures such as influence or power are not given a priori as a constant quality of a social group but emerge through double interacts and the endeavour to collectively make sense (i.e. to balance advocacy and inquiry). They are thus an effect of actions and always subject to change (Bakken and Hernes, 2006, p. 1605). The flow and continuity inherent in organizations finally implies that if one organization tries to change another organ-

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ization it has to redirect the existing processes which form the organizational reality. To redirect these processes ‘change agents’ need to bracket one portion of the flow that is relevant for change, make controlling beliefs and actions visible, rebalance them and finally resume continuous change (Weick and Quinn, 1999). The following figure 22 summarizes the underlying assumptions of the sensemaking concept as presented in our study.

Underlying Assumptions of Sensemaking ƒ ƒ

ENACTMENT

ƒ ƒ ƒ

DOUBLE INTERACT

ƒ ƒ ƒ ƒ

CONTINUOUS CHANGE

ƒ ƒ

Human beings enact their environment while making sense of it Sensemaking processes are not carried out by organizations but constitute them Sensemaking is understood as an intraorganizational evolution assuming an ongoing process of organizing Sensemaking is a reciprocal process of relating beliefs with actions The substance of sensemaking are interlocked behaviours framed as double interacts to describe interpersonal influence Influence depends on contingent response patterns and is an effect of a three-way communication effort (action - response - readjustment) The pattern of relationship controls collective sensemaking Sensemaking is a process of balancing advocacy and inquiry

A

B

Sensemaking is an ongoing activity Flow, continuity, and dynamic changes constitute an organization To redirect what is already under way one need to freeze, rebalance, and unfreeze a bracketed portion of the flow

Fig. 22: Underlying assumptions of sensemaking.

3.4

Interim Conclusion I: A Framework to Analyze Responsible Investment as a Driver of Corporate Social Responsibility

The central message underlying Weick’s thoughts on enactment, double interact, and continuous change is that processes involved in sensemaking are actions that form organizational realities. In the light of our guiding research question of how institutional investors may shape the reality of CSR in publicly listed companies it therefore follows that the sensemaking processes involved in the interaction between institutional investors and corporations are the means to the end. Simply looking at the end is not enough. Instead our study focuses at how people notice, on an individual as well as collective basis. How they make sense, both internally and in interaction

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with other stakeholders, is what determines their behaviour in the end and, on an aggregated basis, which forms their organizational reality. Hence, we account for the fact that an organizational character including (socially) responsible activities is an outcome of the ongoing sensemaking processes within and across organizations and always subject to change (as opposed to the assumption of stasis as proposed by agency theorists). Drawing upon Weick’s (1979) argument that people rather share means than ends it thus also follows that institutional investors can only exert influence on corporate behaviour first, if they know about their own way of meaning construction and second, if their influence is directed towards the way how the targeted corporation constructs meaning but not towards the meaning itself. Weick (2003) states: “… to change an organization is not simply to change what people notice, but how they notice. Active noticing leaves traces. Those enacted traces are drawn up into systems as problems for others. Thus any attempt to increase effectiveness will fail if all it tries to affect is what people notice, and not what they do as well” (p. 188, emphasis in the original).68 ‘Sharing means’ in this context also implies, as outlined above, that influence is not a pre-given social structure but depends on contingent response patterns: Influence emerges, in a retrospective sense, out of the reciprocal process of how both parties involved, the investor and the corporation, make sense of the actions that have been performed by the counterpart. As indicated above, this involves sensemaking processes that balance advocacy and inquiry. This new view on influence or power brings into play what Schelling (1960) has called the credibility of enforcement mechanisms. Only if an enforcement mechanism such as filing shareholder resolutions etc. is credible, or framed differently, makes sense both internally and externally for the targeted corporation, it succeeds in provoking the desired change in behaviour. Drawing upon sensemaking as underlying theory of our study we thus propose to first look at how institutional investors perform their sense of responsibility, i.e. how responsible investment is enacted. Second, we will look at how corporations enact 68

This again underscores the inability of existing governance structures to increase organizational effectiveness especially with regard to CSR as they only serve to economize upon costs of information-gathering but ignore the ‘costs’ involved when interpreting these information.

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their sense of responsibility. This is especially important as divergent notions of what constitutes responsible business conduct trigger a collective sensemaking effort in the first place (Maitlis and Lawrence, 2007). Since organizational sensemaking is a reciprocal process of tying beliefs and actions we will analyze how institutional investors and corporations argue, expect, commit and manipulate to make sense. This approach enables us not only to reveal real differences among institutional investors and corporations about how they enact their sense of responsibility, but also to account for the true heterogeneity of institutional investors in the field of responsible investment that has been claimed by several authors (e.g., Ryan and Schneider, 2002) as well as for the diverging notions of what constitutes CSR (see our critics of agency theory in section 3.2.1). Since CSR has recently been analyzed as deriving from sensemaking processes by Basu and Palazzo (2008), our focus will be on the investor’s side. Afterwards, we will investigate the basic communication processes that allow members of organisations collectively to make sense of responsibility. We thereby assume inter-organizational influence as the effect of collective sensemaking. Assuming that collective sensemaking in inter-organizational relations is a process of balancing advocacy and inquiry we are particularly interested in how institutional investors advocate their sense of responsibility and how they inquire into that of their counterpart, the corporation. We will also investigate how different degrees of advocacy and inquiry may lead to different sensemaking outcomes. Here we will draw upon the work of Maitlis (2005). This approach advances the agency model in that it looks at managerial discretion and active ownership as both necessary for transforming equivocal data into sensible information. We are no longer predominantly confronted with the problem of information asymmetry that has to be reduced via governance structures that align the interests of passive (and powerless) investors with those of active (and powerful) managers. Rather we face the problem that when information asymmetry exists, participants tend to perceive different cues and attach different meanings to their observations (Vlaar et al., 2006). We are thus confronted with an information plurality resulting from the different ways of how participants make sense of equivocal data which has to be reduced via collective sensemaking among both parties involved.

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After having elaborated on the ways through which influence can evolve the last part of our analysis concerns the explicit claim of institutional investors that they will change corporations. Corporate change with regard to CSR thus implies, in a Weickian sense, a change in how people make sense of responsibility. Given the assumption that sensemaking is ongoing and change is always ‘under way’ the current understanding of the claim of corporate change has thus to be fundamentally rethought. The role of institutional investors, if understood as change agents, is no longer one of triggering change but one of redirecting it. Often, within the SRI industry, investors regard themselves as prime movers that are able to initiate corporate change for the good. However, assuming CSR to be a continuous change process we argue that they should rather view themselves as sensemakers (or sensegivers, see previous section) who lead change by making existing patterns of how to make sense of responsibility visible, rebalance those patterns, and finally resume for further learning and improvisation. This new conceptualization of intervention, as proposed by Weick and Quinn (1999) enables us to offer a potentially richer investigation of which influence tactics such as issue-selling (Dutton and Ashford, 1993; Dutton et al., 1997) institutional investors should use to provoke a change in corporate behaviour of the counterpart. As opposed to existing literature that has focused on how to change content such as carbon gas emissions, our approach focuses on how to change process such as how to change the causal map underlying any decision concerning environment protection. We follow thereby Weick’s (1995a) call that scholars “need to be especially mindful that they not simply assume that people internalize and adopt whatever is handed to them” (pp. 112-13). The overall research question of how institutional investors may drive the social responsibility of corporations thus involves four sub-questions (see also figure 23): 1a) How do institutional investors enact their sense of responsibility? 1b) How do corporations enact their sense of responsibility? 2)

How do institutional investors and corporations (double) interact?

3)

How can institutional investors change a corporation’s sense of responsibility?

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Research Questions in the Light of Sensemaking Studies 1a) How do institutional investors enact their sense of responsibility? Enactment

1b) How do corporations enact their sense of responsibility? Assumption: Responsible investment and CSR are the outcomes of organizational sensemaking processes.

2) How do institutional investors and corporations (double) interact? Double Interact

Continuous Change

Assumption: The double interact is the basic mechanism to describe an institutional investor‘s influence potential on corporate management.

3) How can institutional investors change a corporation’s sense of responsibility? Assumption: CSR is a continuous change process that can only be redirected through managing language, identity, and dialogue.

Fig. 23: Research questions in the light of sensemaking studies.

Taken together, the four research questions discussed above can be integrated into a preliminary framework that allocates the phenomenon of corporate control on the process level and serves our analysis of how responsible investment may become a driver of CSR (see figure 24).

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Institutional Investor

?

Responsibility

Corporation

Responsibility

2 1b

1a

act

Enacted RI

interact

Enacted CSR

double interact

3

Sensemaking as underlying theory

Fig. 24: A framework to analyze responsible investment as a driver of CSR.

4

Making Sense of Responsible Investment as A Driver of Corporate Social Responsibility Control is not a cause of action … Control is an effect of action. Actions create relationships that then become binding or releasing. (Karl E. Weick)

Sensemaking is about relating. It is about finding the connections between verbs and nouns, between cues and frames, between beliefs and actions. The fundamental concern of sensemaking is the process by which meaning is created (Weick 1995a, 1979). The focus of this chapter is thus an analysis of (1) enactment processes through which institutional investors and corporations69 construct their sense of responsibility, (2) interaction processes through which they may influence each other, and (3) intervention processes through which one party may change the process of organizing responsibility of another party such as through issue-selling (Dutton and Ashford, 1993) and impression management (Goffman, 1959). With our approach we follow Weick’s (1995a) reminder that it should not belong to a researcher’s tasks to list the various ideologies an organization may have but to find out how “people select from the vast pool of ideological substance that smaller portion that matters” (p. 112).

4.1

How Institutional Investors and Corporations Enact Their Sense of Responsibility

Weick (1995a) argues that sensemaking depends to a large extent on our ability to construct an understanding of events. In line with Orbuch (1997) we have further emphasized that our ability to construct accounts of our actions is a necessary prerequisite for influencing other parties (see double interact). Hence, the objective of this section is to reveal the underlying processes involved when institutional investors and corporations, both taken individually, enact their sense of responsibility. It is 69

Please note that for reasons of simplicity we speak of ‘institutional investors’ and ‘corporations’ when referring to the institutional investor’s members and the corporation’s members.

E. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7_4, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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especially important with regard to Maitlis and Lawrence’s (2007) finding that a perceived or anticipated gap between stakeholders’ and organizational leaders’ sensemaking triggers interaction in the first place.

4.1.1 Preliminary Remarks We will start this section by shortly outlining why we think that responsible investment or CSR should be analyzed as organizational sensemaking processes. Thereafter we will investigate a possible set of sensemaking processes such as identity defense mechanisms or the various ways an organization justifies its actions. The analysis includes practical examples known from both, responsible investment and CSR. Some examples relating to a corporation’s enactment of responsibility are thereby drawn from Basu and Palazzo (2008). However, Basu and Palazzo’s (2008) analysis of the action- and belief-driven processes of sensemaking involved in enacting CSR is, admittedly, more general than the set of specific dispositions included in Weick’s understanding of enactment.

4.1.1.1

Enacted Responsible Investment

We argue that responsible investment is nothing else than the product of how institutional investors make sense of responsibility. Hence, the interactions between institutional investors and the market should not be analyzed as investors’ ‘market reactions’ but rather as ‘market enactments’ which later impose on them (Weick, 2001). Weick (ibid., p. 180) cites the case of the Polaroid Corporation during 1972 as example. In 1972, Polaroid sold for 149 USD per share reflecting the agreement among institutional investors that Polaroid had growth prospects and potential for high future earnings. However, fund managers started to worry about the huge blocks they held in Polaroid stocks. Suddenly, their doubts translated into large sell-offs of Polaroid shares and the price fell by almost 50 percent. The fund managers’ initial doubt that Polaroid was less attractive was thereby validated through their own actions. For the case of responsible investment this implies that the perceived responsibility of a company very much depends on how the investor himself makes sense of responsibility and enacts this sense of responsibility back into the world. The result is what we call enacted responsible investment which we define as the process by

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which institutional investors think about their relationships and roles towards environment and society and by which they integrate ESG related issues into their investment and ownership practices. Our subsequent analysis thus looks at the processes involved when institutional investors tie beliefs and actions in order to transform equivocal input on what constitutes (social) responsibility into meaningful information.

4.1.1.2

Enacted Corporate Social Responsibility

As mentioned in our preceding chapter CSR is considered as an enacted organizational reality that informs how corporations (as opposed to institutional investors) make sense of their responsibility. Godfrey and Hatch (2007) remind us that in an increasingly global and pluralistic world it is essential to research on the micro-level processes that underlie corporate management’s decision making with regard to the allocation of resources toward CSR initiatives. Also, Jones (1980) maintains that CSR should be viewed “as a process” rather than a “set of outcomes” (p. 65). In line with our argument, he further states that the company’s behaviour should be evaluated by the process by which decisions are achieved, identifying CSR “as a means, not as a set of ends” (ibid.). In this context Behnam and Rasche (2009) have recently provided a process perspective on ethical reflection and illustrate that ethical reflections substantially overlap with the process of strategizing. This further emphasizes that CSR (as well as strategy making) represents an organizing effort to reduce equivocality and to come up with ideas of what to do next. This is particularly true considering the fact that stakeholders place a number of varying demands upon corporations (Gilbert and Rasche, 2008) that need to be filtered and made sensible. The result of this process is what we call enacted corporate social responsibility. For our subsequent analysis of the belief- and action-driven processes of sensemaking that underlie an enacted CSR we follow Basu and Palazzo (2008) and define CSR “as the process by which managers within an organization think about and discuss relationships with stakeholders as well as their roles in relation to the common good, along with their behavioral disposition with respect to the fulfilment and achievement of these roles and relationships” (p. 124, emphasis in the original).

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4.1.2 Belief-driven Processes of Sensemaking Collective meaning (here on an intra-organizational level) is generated either through belief-driven or action-driven processes of sensemaking. The general assumption underlying belief-driven processes is that cognition70 leads action, which in turn leads cognition due to the circularity of sensemaking (see figure 25 for an illustration).

Enactment

Arguing

Selection

Retention

Beliefs

Expecting

Actions

Fig. 25: Belief-driven processes of sensemaking.

The analysis of existing belief structures in organizations such as cause maps on the business case of CSR is important for us in order to find out why institutional investors and corporations behave the way they do: “The cause-effect relationships that exist in organizations are dense and often circular … It is the network of these causal relationships that impose many of the controls in organizations and that stabilize or disrupt the organization. It is the patterns of these causal links that account for much of what happens in organizations. Though not directly visible, these causal patterns account for more of what happens in organizations than do some of the more visible elements such as machinery, time clocks, and pollution equipment” (Weick, 1979, p. 7).

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Please note that we use cognition interchangeably with beliefs.

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4.1.2.1

107

Arguing

We have said so far that in case of contradictory beliefs such as different ideologies meaning may grow through the process of arguing. Arguing is thus a process that among others is characterized by “an inferential leap from existing beliefs to the adoption of a new belief or the reinforcement of an old one” and “a perceived rationale to justify that leap” (Brockriede, 1974, p. 166). The task of our following sections is thus first to look at which beliefs are best positioned to inform about organizational responsibility (level of cognition) and second to investigate on how these beliefs are argued (level of action) to arrive at a consensus on action.

4.1.2.1.1

Level of Cognition: Identity Orientation

Weick (1995a, p. 112) holds that beliefs are embedded in frames such as ideologies which can take various forms such as occupational ideologies, industry ideologies or cultural ideologies. The distinct role of ideologies in sensemaking is clarified by Trice and Beyer (1993) who define ideologies as “shared, relatively coherent interrelated sets of emotionally charged beliefs, values and norms that bind people together and help them to make sense of their world” (p. 33). Hence, by informing about cause-effect relationships, preferences for outcomes and expectations of adequate behaviour ideologies are an important resource for organizational sensemaking because they provide an apparently stable device that people use to filter and collectively make sense of equivocal input: “To believe is to notice selectively” (Weick, 1995a, p. 133).71 The total of how organizational members think about cause-effect relationships, how they think to behave appropriately, and which preferences for outcomes they have is believed to sum up in an organization’s identity (Albert and Whetten, 1985). An organization’s identity represents the “collective understandings of the features presumed to be central and relatively permanent, and that distinguish the organization from other configurations” (Gioia et al., 2000, p. 64). Identities, however “are consti71

This in turn has effects on organizational structure as shown by Perrow (1986) who argues for example that (informal) ideologies in the form of premises, i.e. taken-for-granted assumptions and definitions about how organizations function, control organizational behaviour in the same enduring way as would formal structures do.

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tuted [only] out of the process of interaction” (Weick, 1995a, p. 20) as any process of sensemaking, belief- or action-driven, is inherently social. First, people project their self-conceptions into their environment (i.e. their beliefs control what and how they notice) and then, they learn from observing the consequences (a sequence that resembles a double interact). In this context Ring and Van de Ven (1989) argue that by “projecting itself onto its environment, an organization develops a self-referential appreciation of its own identity, which in turn permits the organization to act in relation to its environment” (p. 180). Thus, if we want to find out about how organizations enact their environment, the idea of self-reference suggests “that self, rather than the environment, may be the text in need of interpretation” (Weick, 1995a, p. 23). A prominent feature of organizational identity that is believed to have a significant impact on how organizations make sense of their responsibility is the relation to their constituencies (Basu and Palazzo, 2008, p. 125). This is especially important considering the fact that the way people argue their beliefs often depends on how they interact with other entities (Weick, 1995a). To better understand the link between organizational identity and how organizations relate to their environment Brickson (2007; 2005) introduced the construct of identity orientation. Brickson (2007) argues that identity orientation “is perfectly positioned to inform how businesses relate to stakeholders and why they relate to them as they do” (p. 865). She reveals three types of identity orientation – individualistic, relational, and collectivistic – each of them based on deeply rooted motivational and cognitive assumptions of organizations on what constitutes responsible business conduct. These motivational and cognitive assumptions will now be analyzed for corporations and for institutional investors as they shape their behaviour toward others as well as their emergent relationship patterns (Brickson, 2005). Our distinct aim is thereby to show that organizational motivation of both investors and corporations does not necessarily rest upon the neoclassical assumption of self-interest as presented (and also criticized) in our earlier chapter. An individualistic identity orientation emphasizes self-interest and “refers to an organizational self-conception as a sole entity atomized and distinct from others”

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(Brickson, 2007, p. 865). With regard to CSR Basu and Palazzo (2008) find that an individualistic corporation would engage in CSR activities in a competitive manner always striving to be the best and the winner but not so much concentrating on the actual content of the social norms and values it represents. A relational organization rather sees itself “as a dyadic interentity relationship partner possessing particularized bonds with specific stakeholders” (Brickson, 2007, p. 865). Basu and Palazzo (2008) argue that relational corporations would thus rather orient their CSR activities towards building strong relationships with their stakeholders such as customers and employees. A collectivistic organization views itself as part of a larger group and strives for universal good such as reducing poverty (Brickson, 2007). A collectivistic identity orientation with regard to CSR would typically result in corporations going beyond considering simply the stakeholders most relevant for their running business and choosing to voluntarily engage in global social and environmental issues such as fighting climate change (Basu and Palazzo, 2008, p. 126). This information has important implications for institutional investors attempting to influence the CSR character of a firm. An individualistic corporation would for example be motivated to engage more in CSR related activities if being rewarded by an inclusion in a best-in-class portfolio (see best-in-class screening, section 2.2.1). A relational corporation would prefer to engage in dialogue and build strong ties with its shareholders (see engagement, section 2.2.2). Ethical funds should target especially collectivistic oriented corporations as both, investors and corporations share the same motivation of protecting the welfare of society as large and would thus provide a good starting point for collective sensemaking. These examples clearly underscore that shareholder influence should not be solely viewed as a function of power either derived from access to resources (Frooman, 1999) or resulting from a central network position (Rowley, 1997). Rather, the question “who counts is largely a function of the identity orientation of the organization doing the counting” (Brickson, 2007, p. 869). Transferring Brickson’s (2007; 2005) work to our understanding of an enacted responsible investment the resulting question for institutional investors is how they relate to their constituencies which among others include their clients whose money

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is managed, and the portfolio companies in which they invest. This approach enables us to account for the real differences among institutional investors as claimed by Ryan and Schneider (2003; 2002) and to provide first insights into how investors make sense of responsible investment. Drawing upon traditional finance theory and literature on responsible investment it becomes clear that the motivational and cognitive assumptions underlying responsible investment may vary substantially (Beal et al., 2005; Hudson and Wehrell, 2005; Kinder et al., 1992; Lewis and Mackenzie, 2000; Schueth, 2003). However, an understanding of the link between these motivations and the identity orientation of an investor is missing. We believe that it is crucial to fill this gap because, as Brickson (2007) argues, the way institutional investors consider themselves – as individualistic, relational, or collectivistic – may largely affect the type of interaction they choose to pursue with the targeted corporation, thus, determining their preferred responsible investment practice.72 Individualistic investors, for example, are driven by self-interest and the opportunity to outperform their peers. Hence, their primary goal is likely to achieve superior financial returns from their responsible investments because they enable them to outperform a benchmark. Typical self-descriptions are “the stated aim of the funds is to achieve significant outperformance of the benchmark” (Hermes, 2008). This also may imply that individualistic investors rather think in short than in long timeperiods as they constantly need to compare their performance with that of their peers. Also, considering the fact that individualistic investors are presumed to see themselves as an entity ‘atomized’ from others, we argue that collaborative shareholder initiatives or intensive engagement with both their clients and the targeted corporations are unlikely to happen. This is line with Haigh’s (2006) finding based on an interview-based case study that the majority of social fund managers do not discuss their portfolio selection methodology with clients and corporations. In general, it is argued that superior financial returns rely on the identification and pricing of externalities (Abelson, 2002). However, we like to remind that so far, existing research has not come to consistent findings whether responsible investors do actually outper-

72

By interaction we thereby refer to the four responsible investment approaches as introduced in chapter two. Interaction thus includes all sorts of relations between an investor and a corporation and does not necessarily have to be face-to-face.

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form their conventional peers (Haigh and Hazelton, 2004; see also section 1.2); the plausibility of that argument is thus questionable. In contrast to individualistic investors, institutional investors pursuing a relational identity orientation could aim at building close relationships with both their clients and their targeted portfolio companies. Their sense of responsibility thereby primarily involves the notion of partnership, trust, and collaboration and is symbolized by self-descriptions like the statement by a leading US investment manager whose company name – Relational Investors – is well-defined: “We see ourselves as stewards of our clients' shareholdings. Proper stewardship requires active engagement of corporate leadership to spur improved performance” (Relational Investors, 2008). Investors with a relational identity orientation are thus likely to pursue a strong shareholder engagement philosophy that is characterized by mutual dialogue and understanding. Since their self-conception corresponds to the idea of being partners their interests cannot be reduced to superior financial gain only but predominantly rest on advancing corporate change towards a more sustainable business which in the long run provides stable returns. This is in line with O’Rourke’s (2003) observation that most engagement activities are still very costly and do not pay off in the short run. With regard to the collectivistic identity orientation we argue that most ethical funds like churches are typical collectivistic investors because their decision making corresponds to some broader goals such as reducing poverty and restoring peace. They are not so much interested in building strong ties with particular companies but rather they see themselves “as member of a larger group with generalized ties to other stakeholders in that group” (Brickson, 2007, p. 865). Because they are rather driven by absolutistic norms such as ‘no war’, or ‘no poverty’, we believe that collectivistic investors will engage predominantly in negative screening to exclude all companies that in their view harm society and environment. This is in line with Sparkes and Cowton’s (2004) observation that most ethical funds in the US still use strict negative screening methods to exclude all companies being somehow involved in the weapon, tobacco, animal testing, or pornography industries from their investment universe. Their cognitive and motivational assumptions thereby centre on the notion of integrity or, as Simon and his colleagues (1972) have called it, on “moral purity”

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(p. 26). In Schueth’s (2003) words, “[t]his group is … focused on what their money can do to catalyze positive change in society” (p. 190). A different perspective which can also be subordinated under a collectivistic identity orientation, but rather stemming from an economic than from a moral stance, is the concept of universal ownership as brought forward by Hawley and Williams (2000, see also section 3.1.1). Since most institutional investors hold cross-sections of the economy Hawley and Williams (2000) argue that they should rather view themselves as being part of the economy as a whole than an ‘atomized’ entity distinct from the rest of the economy. Investors adopting a universal ownership perspective are thus motivated by the fact that any action devoted to increase the social responsibility of one of their portfolio companies will, in the long run, create positive externalities that benefit their whole portfolio due to the interdependencies and tight linkages within the economy. In contrast to ethical funds, institutional investors conceiving themselves as universal owners are thus likely to opt for shareholder engagement and activism strategies; however, as opposed to relational investors they are assumed to be indifferent about the specific partnership pattern. Based on these insights we can conclude this section drawing upon Brickson (2007) with two propositions: Proposition 1a: Whether institutional investors view themselves as individualistic, relational, or collectivistic is likely to influence the kind of relationship they prefer to perform with clients and corporations. Proposition 1b: Whether corporations view themselves as individualistic, relational, or collectivistic is likely to influence the kind of relationship they prefer to perform73 with their stakeholders, including their shareholders. However, as we have argued earlier, our analysis should not stop with outlining the various identity orientations of both institutional investors and corporations. Drawing upon hermeneutics understanding also involves an ‘applicative’ moment (Thachank-

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We deliberately chose the term ‘to perform’ to stress that relating is an activity rather than a stable pattern. Also, Goffman (1959) reminds us that a performance is always situated and involves a sequence of actions, gestures, and postures that can be seen by others.

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ary, 1992). We thus have to turn to the level of action as this is where cognitions are supplemented with actions to derive meaning and changes in meaning (Tenkasi and Boland, 1993; see also Giddens, 1979, for an appreciation of the role of organizational action in defining meaning structure). With regard to our research question, we thus have to look at how these ideologies are socially defended since “the establishment and maintenance of identity is a core preoccupation in sensemaking” (Weick, 1995a, p. 20). It is the process by which institutional investors and corporations behaviourally complement their cognitive positions, i.e. how they enact their identity, which in turn influences the way they make sense of their responsibility. Taking into account that institutional investors may only alter the way corporations enact their ideologies (and vice versa) with identity being part of that ideology, but not the ideology itself, the necessary next step of our analysis involves an investigation of the mechanisms by which people defend their identity.

4.1.2.1.2

Level of Action: Identity Defense Mechanisms

Drawing upon the work of Erez and Earley (1993), Weick (1995a) argues that the “processes that develop and maintain a person’s changing sense of the self are posited to operate in the service of three self-derived needs” (p. 20). These needs consist of self-enhancement implying “a positive cognitive and affective state about the self”, self-efficacy implying the feeling of being “competent and efficacious”, and self-consistency referring to the desire of experiencing “coherence and continuity” (Erez and Earley, 1993, p. 28). Any threat to one of the three self-representations is assumed to provoke “ego defenses that, in contexts where change is desired, exert a dysfunctional influence” (Brown and Starkey, 2000, p. 102).74 With regard to the problem under study, it is thus essential for an institutional investor to learn about the various processes corporations may choose to defend their organizational identity when responding to shareholder actions as these processes represent the means by which corporations make sense of their responsibility. Thus, they provide the cue for shareholders where to start when change in corporate behaviour is desired. In this context Brown and Starkey (2000) remind us that it is important to recognize “that, 74

We are aware that we are mixing the levels of individual ego-defense with that of organizational ego-defense. However, Brown and Starkey (2000) show convincing theoretical evidence that organizational ego-defense can be treated analogous to individual ego-defense (p. 103).

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in a sense, self-concepts of individuals and organizations derive from their egodefenses, and that it is an alteration in the relative dominance and combinations of these defenses that is implied by the very idea of identity change” (p. 109). However, taking into account that shareholder influence also involves a critical reflection of one’s own action in relation to the counterpart (i.e. the double interact) a consideration of institutional investors’ ego defenses is an equally important part of our subsequent analysis. Within the scope of this study we will introduce three prominent identity defense mechanisms as presented by Brown and Starkey (2000): denial, rationalization, and symbolization. Drawing upon the work of Laughlin (1970) and Freud (1949) Brown and Starkey (2000) argue that organization may engage in ego defenses “in order to avoid psychic pain and discomfort, allay or prevent anxiety, resolve conflicts, and generally support and increase self-esteem” (p. 104). Argyris and Schön (1996) call these processes “defensive routines” corresponding to “actions and policies, enacted within an organizational setting, that are intended to protect individuals from experiencing embarrassment or threat, while at the same time preventing individuals, or the organization as a whole, from identifying the causes of the embarrassment or threat in order to correct the relevant problems” (pp. 99-100). Denial refers to the process of negating or disowning something (Brown and Starkey, 2000, p. 105). With regard to Weick’s conceptualization of organizations as a process of organizing it refers to the reciprocal relationship between ecological change and enactment. In a retrospective sense, denial informs about which portions of the stream of equivocal data have been filtered out and have not been bracketed for further information processing. Denial of possible threats to the organizational self is thus a “primitive” (Laughlin, 1970, p. 57) form of boosting confidence and vigorousness as problems and threats are simply ‘overlooked’. Individual beliefs thereby impede managers from seeing potential risks and thus, compromise organizational effectiveness. A similar picture can be found with regard to corporations and their involvement in environmentally risky or socially condemnable activities. In a case-study of management responses to letters from their shareholders raising concern about their exist-

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ing CSR practices and policies Vandekerckhove and his colleagues (2007) find that almost three quarter of their sample denied the allegations or at least denied to take the responsibility of those actions – a response that prompted Vandekerckhove and his colleagues to title their article ‘That’s not what happened and it’s not my fault anyway’ (p. 403). These findings clearly show that organizational awareness about risks involved with ESG issues is rather poor. Also it shows that concerns about ESG related issues are perceived rather as significant threats to a collective self-esteem than as opportunities a company may take to improve its organizational performance, and thus its image vis-à-vis its stakeholders. An analysis of denial with regard to institutional investors is more difficult as existing empirical literature has solely focused on management’s reactions to shareholder action as determinant of a shareholder’s influence potential so far. As noted earlier, the processes underlying a (social) responsibility of the institutional investor are largely ignored as potential determinant of shareholder influence (see our remarks in section 2.3.2). From our perspective, the most obvious process of denial with regard to an institutional investor’s effort to make sense of responsibility concerns the yet prevailing non-integration of ESG related measures into the risk and return analysis. We argue that the fact that only a minority of large institutional investors opts for an enhanced analysis approach (EAI, 2008; see also section 2.2.1.2), i.e. the majority of institutional investors denies the materiality of ESG related issues, very well documents our assumption that including ESG factors into fundamental investment analysis still represents a potential threat the collective self-conception of most institutional investors. From our perspective, particularly the need of self-efficacy is threatened because ‘competence’ is traditionally measured by short term financial performance indicators rather than derived by long term oriented ESG considerations. Rationalization “is an attempt to justify impulses, needs, feelings, behaviors, and motives that one finds unacceptable so that they become both plausible and consciously tolerable” (Brown and Starkey, 2000, p. 106). Put differently, rationalizing is about reframing meaning so that other members in a community will accept it as legitimate (Ashforth and Anand, 2003). Within the process of organizing, rationalization affects the process of selection where the bracketed material (resulting from the

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enactment process) is made sensible drawing upon experience and expectations. In this context Boland and Tenkasi (1995) introduce Bruner’s (1990) concept of narration as an attempt to maintain an organizational self-conception by rationalizing it. ‘Arguing’ is thereby replaced by the term ‘narrativizing’ (Tenkasi and Boland, 1993) because as Boland and Tenkasi (1995) hold “an argument is judged to be good if it is logical, coherent, consistent, and noncontradictory, a narrative is judged to be good if it is interesting, plausible, and believable” (p. 353). Identity orientation on the cognitive level thus comes into existence only when actively narrativizing it which again emphasizes Weick’s idea of the reciprocity between cognitions and actions. The different ways how corporations narrativize their identity orientation towards its stakeholders are well documented by the ongoing debate in the academic community about whether corporations should use an instrumental or an ethical approach to rationalize CSR (Aguilera et al., 2007; Joyner and Payne, 2002; Matten et al., 2003). The link between an organizational self-conception and the respective approach to ethics is thereby well presented by Driver (2006) trying to allocate a corporation’s identity on a continuum between self-interest and a “post-egoic selfunderstanding” (p. 339). An individualistic identity orientation is for example believed to become plausible by predominantly relying on Friedman’s (1962) reasoning that the social responsibility of corporations is solely to maximize shareholder wealth (Hill et al., 2003). Rationalizations include the large body of literature that focuses on the materiality or ‘business case’ of CSR related activities which is commonly summarized under the term “instrumental” ethics trying to find a relationship between CSR related activities and a corporation’s financial performance (see e.g. Jones, 1995, for an instrumental approach to stakeholder theory). In contrast, the ethical approach to CSR can be understood as an attempt to rationalize collectivistic identity orientations as scholars advocating this position argue that CSR engagement stems from the responsibility a corporations holds for the larger community in which it operates going beyond economic performance (Gioia, 2003; Carroll, 1999; see also section 2.3.1). An exemplary rationalization would include Gilbert and Rasche’s (2008) statement “global power of MNCs always correlates with global responsibility” (p. 755). CSR in this context could be rather framed as a “duty” or “accountability” (Sillince and Mueller, 2007, p. 155). In general, we can hold that whether or not engaging in CSR

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for e.g. financial reasons reveals the underlying beliefs that a company holds to maintain a stable self-conception. A change in the identity orientation is thus only likely if organizational members can draw on alternatives modes of rationalization as presented, for example, by their shareholders, that allow them preserving their selfesteem. With regard to institutional investors a similar picture can be found. However, the instrumental position to rationalize any engagement in CSR as profitable undertaking is much stronger compared to the corporate sector. In an extensive study of possible reasons for pension fund activism for better governance in the US Guercio and Hawkins (1999) for example find no evidence to support rationalizations other than the possibility of fund value maximization. The plausibility of this narrative is thereby derived from economic theory. As indicated earlier, Abelson (2002, p. 387) argues that market exchanges have positive (beneficial) or negative (harmful) effects called externalities on companies and individuals that did not participate in that exchange. Any investment in those companies that are believed to have positive, but not yet priced, externalities of production would thus result, in the long run, in superior financial returns once pricing occurs. However, while some investors think that this is a plausible reasoning (see e.g. Sullivan and Mackenzie, 2006) others in contrast maintain that an exploitation of unpriced externalities is not possible due to the (strong) efficiency of capital markets. Here, it makes sense to come back to the distinction between argument and narration. Looking at Abelson’s (2002) reasoning as an argument we have to admit that academic literature has failed to come up with consistent and accurate findings on whether this argument is true or not (see our literature review of the share price argument, section 1.2). However, framing it as a narration focuses our attention rather on what people think is plausible and might explain why many pension funds have accepted Abelson’s (2002) reasoning (see Sullivan and Mackenzie, 2006). Other rationalizations for pension fund engagement with CSR include the need to stay and lobby for change due to fund size as brought forward by Sethi (2005). As indicated in section 3.2.1, pension funds may not be able to sell their shares without substantial losses due to the large size of their stakes they hold in corporations. Inter-

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estingly, when comparing academic with practitioner literature we found that this rationalization is prevalent in academic journals but is rarely used in public statements by pension funds or other institutional investors. Although it appears plausible it however points to a potential weakness of pension funds (in the sense ‘not being able to sell’). This observation re-emphasizes our argument that sensemaking in the form of rationalizations aims at defending organizational self-esteem rather than weaken it. Our last example of rationalizations is probably the best known and most heavily disputed rationalization in both academic and practitioner literature. To find about how institutional investors make sense of their responsibility a fruitful way is to look at their proclaimed investment horizon. While pension funds for example need to manage large sums of capital over a long period of time, also called “long-run investors”, mutual funds, known as “short-run investors” (Cox et al., 2004) have shorter investment horizons due to higher liquidity requirements (Ryan and Schneider, 2003; 2002). In this regard mutual funds such as unit trusts are rarely found to engage in CSR related activities which, they assume, only materialize over a longer period of time because it simply would not appear to be ‘plausible’ considering their shorttime investment horizon. Hence, the investment horizon is used here as a rationale to preserve the fund’s self-conception as ‘outperformer’ or ‘money-maker’, corresponding to an individualistic identity orientation. In this context Juravle and Lewis (2008), in line with Guyatt (2006), claim that ‘short-termism’ defined as the “excessive focus of some corporate leaders, investors, and analysts on short-term, quarterly earnings and a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation” (Krehmeyer et al., 2006, p. 3) is nowadays one of the most severe impediments to mainstreaming responsible investment. Symbolization corresponds to the process “through which an external object becomes the disguised outward representation for another internal and hidden object, idea, person, or complex” (Laughlin, 1970, p. 414). In the realm of an ego defense Brown and Starkey (2000) suggest viewing symbols “as the unconscious means of allaying anxiety and maintaining self-esteem through the distortion and concealment of unconscious thoughts, impulses, and desires ... Symbols, then, place restrictions on our

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capacity to perceive and process information” (p. 107). Through symbols, for example, a management is able to legitimate his decision making by directing his organizational members’ and other stakeholders’ perceptions (Pfeffer, 1981). Symbols, thus, “not only constitute a medium for sensemaking, but for a medium for influence as well” (Gioia et al., 1994, p. 365). With regard to the latter, Gioia and his colleagues (1994) for example show how symbols such as the appointment of a special task force dedicated to lead an organizational change process influenced the collective self-conception of a major US university. With regard to the former, Gioia and his colleagues (2000) reveal, in line with Brown and Starkey’s (2000) proposition, that “the seeming durability of identity is actually contained in the stability of the labels used by organizational members to express who or what they believe the organization to be” (Gioia et al., 2000, p. 64).75 Symbols may take various forms. Brown and Starkey (2000) propose to look at hierarchy in organizations “as evidence of symbolization, which reduces uncertainty regarding reporting relationships and decision-making powers, allocates responsibilities, and provides a sense of coherence and meaning for participants” (p. 108). This is in line with Cole and Bruch (2006) who argue that hierarchical levels are used “as a social category to differentiate ingroup and outgroup members” (p. 591).76 A closely related symbolization effort of institutional investors could involve their decisions regarding where to locate their fund managers. Ryan and Schneider (2002) point to fact that pension funds for example vary whether they have internally and externally management funds. In this context Brammer and his colleagues (2003) find that internally managed funds show a stronger preference for integrating ESG issues into their investment decision making whereas externally managed funds typically measured against their benchmarks on a quarterly basis less often engage in responsible investment. This would for example imply that an institutional investor’s organizational identity orientation is maintained and stabilized through the location of fund management. Or framed differently, the identity orientation of an institu75 76

The terms ‘label’ and ‘symbol’ are used here interchangeably. Please note that the relationship between hierarchy as a behavioural position and identity as cognitive position is not one-way in the sense that first there is identity and than it has to be defended through symbolization. Corley (2004) for example finds evidence that different hierarchical levels also affect organizational identity perception. This again shows that cognitions and actions are reciprocally linked (Weick, 1995a, 1979).

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tional investor is likely to change if symbolization in the form of internally or externally managed funds changes. Symbols may also come in the form of language that is used to make hidden identity claims salient (see Fiol, 2002 for an analysis of ‘linguistic identity markers’). Examples include articulations such as a company name like “Relational Investors” (see examples in the previous section). With regard to corporations, Schouten and Remmé (2006) for example illustrate how Royal Dutch Shell, after plans to dispose of their Brent Spar oil storage buoy in the Atlantic sea collapsed, created their own labels and resulting language to stabilize their collective self-conception as a performancedriven but also socially responsible company. The role of language as transmission channel of identity is especially important considering Weick’s (1995a) statement that an organizational self-conception largely relies on how members think others view their organization. Hence, symbols do not only have the function of defending an organizational identity within an organization but also conveying cognitive identity claims to an organization’s external stakeholders (Smircich, 1983). In an extensive study of symbolic management in German corporations Fiss and Zajac (2006) for example find that the majority of firms do employ language frames to articulate their shareholder value orientation to their stockholders. However, they also reveal a surprising disconnect between framing and the actions claimed by those frames. They propose, in line with Westphal and Zajac (2001, 1998), that symbolic management is an important tool to legitimate organizational strategy making but “compliance with external expectations may be merely symbolic rather than substantial, leaving the original relations within an organization largely unchanged” (Fiss and Zajac, 2006, p. 1175), thus pointing to a dysfunctional use of symbols. In summary we can hold that organizations may activate various defense mechanisms to preserve individual and collective self-esteem and a feeling of stability. Drawing upon the retrospective character of sensemaking this implies that an identity orientation “is the outcome of the struggle to generate and maintain self-esteem” (Brown and Starkey, 2000, p. 108). And in a negative sense, this may result in the suppression of other viewpoints (Morrison and Milliken, 2000). A change in identity orientation is thus only possible when (re-)activating other viewpoints by changing

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the ‘relative dominances and combinations’ of how an organization denies, rationalizes, or symbolizes. It follows: Proposition 2a: An alteration of the relative dominances and combinations in ego defenses such as denial, rationalization, and symbolization is likely to affect a change in the kind of relationship institutional investors prefer to perform with clients and corporations. Proposition 2b: An alteration of the relative dominances and combinations in ego defenses such as denial, rationalization, and symbolization is likely to affect a change in the kind of relationship corporations prefer to perform with their stakeholders, including their shareholders.

4.1.2.2

Expecting

The second belief-driven process as introduced in the preceding chapter is sensemaking as expecting. Weick (1995a) holds that in case of similar beliefs meaning (understood as the outcome of relating beliefs and actions) becomes stronger when expectations are confirmed in the form of self-fulfilling prophecies. The task of our following sections is thus first to look at which expectations exist to inform about an organization’s responsibility (level of cognition) and second to investigate on how they are behaviourally confirmed (level of action).

4.1.2.2.1

Level of Cognition: Role Expectations

According to Weick (1995a) beliefs as embedded in expectations are a key resource of sensemaking. Drawing upon the work of Brunsson (1982) Weick (1995a) further argues that expectations, in contrast to arguments, “resemble the singular, strongly felt, unqualified beliefs of action rationality” and, thus, are more “directive” causing people “to filter input more severely” (p. 145) than do arguments. Put in an organizational context, managers’ expectations for example, as defined by Weick and Sutcliffe (2001), are “assumptions that managers hold and that guide their behavioral choices. They act as planning functions that suggest the likely course of events. As such they direct the attention of managers toward certain directions, certain type of

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information that are consistent with the expectations. They affect what managers notice and treat” (p.33). The importance of expectations with regard to an organization’s enactment of responsibility is clarified by Sonenshein (2007) and his sensemaking intuition model of how organizational members respond to ethical issues. Drawing upon social psychological literature Sonenshein (2007) thereby argues that very ethical issue need to be constructed first to develop meaning and thus guide corporate behaviour. Expectations thereby significantly affect the process by which individuals vary in their way of how to construct ethical issues: “Expectations, often encapsulated in scripts, place limitations on what individuals perceive … This challenges their ability to consider all relevant information when making [ethical] decisions” (p. 1026). As sensemaking is inherently social, expectations are formed and made congruent in social interaction. According to Ring and Van de Ven (1994) congruent expectations thereby “include areas such as common agreement on norms (e.g., the sharing of proprietary information with suppliers), work roles (supervisor, subordinate), the nature of the work itself, social relationships, or security needs” (p. 100). In close connection to our previous analysis of identity orientation as a construct that informs how organizations relate to their environment, we will thus continue our investigation with taking a closer look at how role expectations will affect an organization’s engagement with its constituencies. We thereby account for the fact that the relevance of role expectations in social interactions is a widely acknowledged topic in organization theory (see Cooke and Rousseau, 1988; Hales and Tamangani, 1996; Weaver, 2006). The difference between role expectations and the actual performance of (inter-) organizational relationships is clarified by Gabarro (1987) who argues that “roles and role expectations are part of the context of all social interaction, but they are even more persuasive and are more explicitly defined in working relationships, particularly when they occur within or across organizational hierarchies. Most working relationships develop between people by virtue of their roles. In this respect, people begin [an] institutionalized role relationship, often before they have begun to develop an actual [personal] relationship … The operational question for such a dyad is not whether to get ‘married’, but rather how to make the marriage work” (p. 180, cited in

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Ring and Van de Ven, 1994). A role is thereby defined as “the set of behaviors that others expect of individuals in a certain context” (Floyd and Lane, 2000, p. 157, see also Katz & Kahn, 1978). In general, role expectations may be overtly stated or covertly held in the form of norms and beliefs. In line with Weick’s (1995a) idea of a self-fulfilling prophecy Floyd and Lane (2000) hold that “the more clearly expectations are articulated, the more likely the individuals performing a role will conform to those expectations” (p. 158). Hence, role expectations may “limit us to familiar ways of thinking and acting” (Senge, 2006, p. 163) and constrain our flexibility of generating new sense in situ – with regard to the context we see ourselves in. Over the last two centuries, we have witnessed a set of different expectation on the role of managers. Fayol (1949) for example viewed top executives as administrators whose major tasks were to plan, organize, and co-ordinate. Later, a different perspective was proposed by Simon (1947) and March and Simon (1958). They emphasize the role of managers as decision-makers who ratify, direct, and recognize (Floyd and Lane, 2000). Around the 1980s a third approach emerged viewing managers as leaders who protect and promote values (see e.g., Peters and Waterman, 1982). With regard to institutional investors Preda’s (2005) essay on ‘The Investor as a Cultural Figure of Global Capitalism’ reveals that in the eighteenth century, the investor was largely viewed as a gambler engaged in speculative transactions. Financial markets were negatively associated with destroying “social order by attracting people from other professions into investments” (Preda, 2005, p. 150). During the first globalization wave however expectations about the role of an investor totally changed. Industrialization and the increased need for mathematical models to price the value for e.g. railway companies led to a reconfiguration of the financial markets from being governed by emotions and intrigues, towards ruled by objective laws derived from the vocabulary of natural science. Financial behaviour was redefined as “dispassionate, calm, grounded in permanent observation of market events and in problem solving” (ibid., p. 151). The “right to invest” became “embedded into the normative model of market efficiency” (ibid., pp. 156-57) and increasingly, financial investments was viewed as an economic activity with the investor as being scientist, planner, and economic man. An important implication of this view was what has been earlier introduced as ‘passive ownership’ (see Davis and Thomson, 1994) accounting for the

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fact that in times of separation of ownership and control, efficiency rather than active ownership, would govern the market and, thus control management behaviour. The differentiation between active and passive ownership brings us back our problem under study. In the following paragraph we will not go into detail with the ‘classical’ roles of managers and investors as identified above but concentrate on the mutual role expectations of corporations and institutional investors with regard to their engagement in CSR related activities. Questions to be answered involve how chief executive officers (CEOs) may vary in their expectations about the role of institutional investors and vice versa. In reference to Biddle’s (1979) differentiation between ‘expectations for self’ and ‘expectations for others’ we thereby focus on expectations for others.77 Expectations for others are particularly interesting with regard to the question how institutional investors and corporations interact since the process of relational identification (see Sluss and Ashforth, 2007), here understood as the process of collective sensemaking, can be fundamentally influenced by the different expectations actors hold about their counterparts. A typical example can be drawn from Kahn’s (1998) analysis of interaction in a social service agency. He finds that the director and social workers constructed negative expectations of each other’s roles and, subsequently, following the logic of a self-fulfilling prophecy, confirmed their expectations behaviourally by withdrawing from each other. The first role expectation we are going to describe is how managers think about the role of institutional investors with regard to CSR. As Ryan and Schneider (2003) have pointed out most managers still question the moral standing of their shareholders in relation to the corporation. This generalization of shareholders’ interest can be traced back to the economic model of principal-agent theory where it is assumed that investors as principals are solely focused on maximizing the return on their investments but do not share broader societal goals (Davis et al., 1997; see also section 3.1). Ryan and Schneider (2003) introduce a variety of investor types that break with this generalization along with the recent increase of socially screened funds and shareholder activism for CSR, however, this work remains an exception to existing 77

However we like to stress that given the social nature of sensemaking this differentiation is to be handled with care as our expectations for others is grounded in the enactment of our expectations for self (Weick, 1995a).

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academic literature on the role of investors. The dichotomy between shareholders and stakeholders’ interests becomes even more transparent considering the advice by stakeholder theorists for managers “to take advantage of their discretion to advance the interests of nonshareholder constituencies” (ibid., p. 411). This tendency however is not surprising considering the fact that still the majority of research analysts do not ask corporation for ESG information (Juravle and Lewis, 2008). The result is that the majority of corporations do have regular meetings with their investors in which they provide forward-looking information on how to build shareholder value but hardly address any non-financial issues (see Marston, 2006). Referring to Weick’s (1995a) statement that expectations filter more severely than do arguments within the process of organizing we therefore argue that corporations most likely do not see their shareholders when it comes to ethical decision making as well as to the communication of CSR; responsible investors and their needs may simply be overlooked as a result of an information scanning process driven by expectation. A different setting can be imagined considering the case that responsible investors have publicly articulated their claims at an AGM. Here, managers may indeed notice these claims, however as these claims do not ‘make sense’ with regard to a manager’s predefined role expectation of an amoral investors, managers often abandon or deny them (Logsdon and van Buren, 2008; see also previous section on denial). A wonderful example is again the case study by Vandekerckhove and his colleagues (2008) where the following statement by an investor relations officer is cited actually questioning the status and existence of the respective investor sending out the letter: “Forgive my ignorance but I have never had the opportunity to meet P21 [name of the investor] before. I do from time to time visit institutional investors and wonder whether there are any P21 investors on our share register” (p.411). Another aspect of the role expectation of investors as principals and managers of agents concerns the strong assumption of self-serving and opportunistic actors whose interests collide and may only be aligned through financial incentive schemes or governance structures. As we have pointed out earlier, drawing upon Ghoshal (2005), one need not be surprised if our long held expectations about opportunism and self-interest prove real in practice. Scandals such as Enron or the recent financial

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fraud by ex-NASDAQ boss Bernard Madoff who misused his power as trustee and according to recent estimates, caused a loss as big as 50 billion USD (Chung et al., 2008) are just a few examples to name. The important result however with regard to the problem under study is the mutual mistrust of managers and investors resulting from these negative expectations. Their relationship is thus rather considered adversarial. Managers for example expect investors rather to control or monitor them than to engage in ‘friendly’ dialogue. Shareholder activism has thus become a rather negatively connoted term as an expression for formal, coercive power that aims at limiting managerial discretion, thus also threatening identity (in contrast to ‘engagement’ as the ‘soft’ version of active ownership, see section 2.2.2). As a result, the threatening effect of shareholder activism resulting from managers’ negative expectations on the role of investors may have a dysfunctional influence on a manager’s willingness to listen to his shareholders even when the shareholders’ intentions are good and directed at advancing CSR. A withdrawal, similar to Kahn’s (1998) social agency example (see above) is likely to happen. This is in line with David and his colleagues’ (2007) empirical findings that more shareholder activism does not necessarily lead to an improved social performance of companies. Rather they find that aggressive shareholder activism lead to an increase in symbolic management efforts trying to ‘tranquilize’ noisy shareholders; substantial action on improving CSP however is lacking.78 The whole irony inherent to a P-A view on responsible investment is looming when we turn to the expectations investor have on managers and the behavioural consequences. Although we just argued that activism might have a substantial dysfunctional influence on a company’s social performance, we also have to admit that given that investors expect self-serving and opportunistic behaviour on the managerial level the only plausible way to go is to use their formal authority and exercise their ownership rights in the most aggressive manner to be able to control management; thus, the “arms race” (Senge, 2006, p. 183) can begin.79 Since we have already out-

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An interesting continuation of this study would be to investigate whether there are differences in corporate behaviour if the investor had opted for an engagement approach. Senge (2006) refers here to the “snowball effect of reinforcing advocacy” (p. 184) that evolves when each party driven by self-interest and opportunism is trying to defend his own standpoint but does not inquire into the counterpart’s view. We will come back to this later in section 4.2.

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lined the theoretical deficits of the P-A paradigm in the context of broader societal interests in our previous chapter we will not go into any further detail at this point of the study. However, we think that it is worthwhile to mention another paradigm that has come up with an alternative role model of managers – a stewardship theory of management, brought forward by Donaldson and Davis (1991) and refined by Davis and his colleagues (1997). Stewardship theory in contrast to agency theory draws upon psychology and sociology and assumes that managers derive a higher utility from collective and pro-organizational than from self-serving behaviour. An important implication for the study of relationships between managers and their shareholders is that “even where the interests of the steward and the principal are not aligned, the steward places higher value on cooperation than defection” (Davis et al., 1997, p. 24, emphasis added). Davis and his colleagues thereby account for the fact that managers often face multiple demands from a different set of stakeholders that they need to fulfil. However, in contrast to the role model of managers as agents, managers perceived as stewards do not have to sacrifice on stakeholder demands while adhering to the maximization of shareholder wealth, but “are motivated to make decisions that they perceive are in the best interests of the group” (ibid., p. 25). As Davis and his colleagues further argue, this new view on managers implies that governance structures should concentrate on empowering managers instead of controlling them. Rather, in line with our previous argumentation, control may prove counterproductive in aligning the interests of principals and stewards as “it undermines the proorganizational behaviour of the steward, by lowering his or her motivation” (ibid., see also Argyris, 1964). Institutional investors who expect managers to act like stewards would thus rather engage in dialogue to collectively find a solution that is agreed by all parties involved, the manager, the investor and other affected stakeholders. The appropriate responsible investment strategy would thus be engagement rather than activism, where the investor sensitizes the manager of potential risks and opportunities with regard to the corporation’s ESG exposure. Here, the investor’s objective would be to extend the manager’s autonomy and not to blame him for his and the corporation’s lack of responsibility. We have showed that the expectation that an investor holds about the role of the manager has a significant influence on which responsible investment strategy he

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chooses. However, we like to add that any active intervention by the investors is only likely to happen if the investor does not believe in strong efficient markets. If he ‘expects’ efficient markets, any responsible investment strategy such as screening or activism would imply losses (due to the constraint on portfolio diversification or excessive monitoring costs), thus, rather causing an investor to stay passive. In summary, we propose that the way investors and managers interact when it comes to ESG related issues largely depends on how they enact their expectations about the role of the counterpart. Thus, we need to translate the question of which expectations e.g. financial markets impose on managers (see Tengblad, 2004, for analysis how CEOs become aligned by external expectations from their shareholders) into one of which expectations managers actually have of financial markets which then later impose on them. Based on these insights the following two propositions can be derived: Proposition 3a: Whether institutional investors expect managers to be agents or stewards is likely to influence the kind of ownership practice they perform with regard to ESG related concerns. Proposition 3b: Whether managers expect institutional investors to have a moral or amoral80 standing towards their company, is likely to influence the kind of response pattern they perform with regard to ESG related demands.

4.1.2.2.2

Level of Action: Behavioural Confirmation

From Tenkasi and Boland (1993) we have learned that meaning as well as alterations in the meaning structures is found in organizational action. The behavioural confirmation of institutional investor’s expectations is thus how managers operate on a daily basis when submitted to a constant flow of information and events. In this context Starbuck and Hedberg (1977) talk about ‘heuristic programs’ for dealing with an equivocal stream of data; Stubbart (1989) speaks in a similar sense of ‘programmed responses’ to environmental demands. The challenge underlying these established

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‘Amoral’ here refers to the economic view of institutional investors as principals being solely focused on the maximization of their invested capital.

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‘programs’ is thereby that “programs remain in use after the situation they fit has faded away” (Stubbart, 1989, p. 250). This lack of “situational awareness” (Weick, 2002, p. 9) may explain why organizations that were the most successful in the past can become the most vulnerable to failure in the future (Whetten, 1980). Behavioural confirmation of expectations in the form of programs thus emphasizes relatively stable response patterns that are better known as organizational routines (Feldman, 1989; Feldman and Pentland, 2003; Levitt and March, 1988). Routines are considered a fundamental element in organizations and used to “transform variable inputs into less variable outputs through a standardized sequence of operations” (Weick, 1991, p. 117). Typical examples include budgeting, hiring, and educating (Feldman, 2000). Considering the high amount of equivocality concerned with ethical issues routines thus play a major role when it comes to the enactment of organizational responsibility. We have argued so far that organizational members may behave unethically because their expectations or ‘schemata’ (Walsh, 1995) out of which they act do not include an ethical dimension (see also Nielsen and Bartunek, 1996). Drawing upon neurological research Sonenshein (2007) also finds that deliberate information processing is used predominantly to confirm intuitions about ethical issues, rather than to question those issues or make active judgments on them (see Reynolds, 2006): “[i]ndividuals routinely develop intuitions about social stimuli … In fact, research has shown that individuals infrequently change their minds from their initial responses to moral issues, even when presented with new evidence and after engaging in careful reasoning” (Sonenshein, 2007, p. 1031). To understand how organizational members respond to ethical questions and why, and to find the possible starting points from where to alter long held expectations, we thus have to concentrate on the different ways of how individuals routinely confirm their expectations. Assuming that for example an institutional investor’s demand for more social responsibility is an ‘unintended outcome’ (Balogun and Johnson, 2005) with regard to a manager’s expectation of amoral investors the relevant question to answer is how the manager behaviourally confirms (or disconfirms) this expectations. We propose to distinguish between two possible actions: pragmatic ignorance and situational awareness. Referring to our findings from the previous section most

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examples given in this section include how institutional investors and corporations behaviourally confirm their expectations of the counterpart’s role. Pragmatic ignorance: Harvey and his colleagues (2001) describe pragmatic ignorance as the operating mode in which individuals resort to defensive routines when they have to make a decision. Harvey and his colleagues (2001) further argue that pragmatic ignorance mostly occurs in situations where certain knowledge cannot be obtained on time and managers need to sacrifice on the quality of decisions by relying on their routinized schemata. Hence, they solely rely on previous experience about cause-effect relationships that they have translated into their expectations, and they simply ignore situational factors that do not fit into their expectations. Pragmatic ignorance is thus the most obvious way of how prophecies become self-fulfilling. As such, it provides high stability and comfort in times where equivocality and uncertainty is high and standardized response patterns are needed for individuals to be able to make sense of the situation. A closely related concept brought forward by Feldman (2000) is repairing. In an empirical analysis of how students deal with unintended (‘unexpected’) outcomes of their actions Feldman (2000) introduces repairing as a process by which individuals deliberately adjust their actions so that the initially intended and expected outcome would come true. Here, contextual factors such as a change in the regulatory environment are also ignored. Situational awareness: In contrast to pragmatic ignorance Weick (2002) calls for an operating mode which “encourages updating through improved situational awareness and closer attention to what is actually happening” (p. 9, emphasis in the original). He thereby focuses our attention to the contextual factors that occur when confirming our expectations. In this context Feldman and Pentland (2003) have introduced the term “performative routines” which they characterize as “inherently improvisational” (p. 102). They argue that “[e]ven routines that have been engaged in by the same people many times need to be adjusted to changing contexts” (ibid.). Examples of performative routines include expanding and striving as two possible ways of how people respond to unintended outcomes. Although individuals are still concerned with confirming their existing expectations by expanding and striving their routines they remain open to exploit new opportunities and to improve their

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current course of action due to new situational factors. Routines thus are not anymore considered as rigid and inflexible but subject to continuous change. Weick and Roberts (1993) analysis of organizational routines at flight decks is just one example that routines can be more improvisatory and variable as previously assumed by scholars such as Cyert and March (1963). In this context Weick and Sutcliffe (2006) have come up with another differentiation between “schemata-driven” and “stimulusdriven” cognitive processing (p. 520). While schemata-driven information processing rather refers to what we have introduced as pragmatic ignorance, bottom-up stimulus-driven information processing occurs “through active, hands-on exploration” (ibid.). With regard to our research question we will now have a closer look at how institutional investors and corporations routinely confirm – pragmatically ignorant or situational aware – their expectations. We will begin by looking at how corporations behaviourally confirm their role expectation of investors. In general, we hold that a typical organizational routine that tries to confirm managerial expectation is found in the way managers allocate responsibilities within their firm. A first example is derived from Weaver’s (2006) analysis of how managers behaviourally confirm their expectations about amoral role identities of their members. Weaver (2006) argues that “[i]n case of amoral role identities for their [an organization’s] members, pockets of virtue will more likely be found in decoupled … or marginalized units, rather than in central organizational units which have deep and frequent interaction with others who embody the organization’s typical schemas” (p. 353). Since moral issues are marginalized and schemata about amoral role identities are rather narrowed than opened, we face here a pragmatic ignorant way of confirming expectations. Transferring Weaver’s (2006) analysis to our question of how managers behaviourally confirm their expectations about the role identities of their shareholders, this would imply that – in the prevalent case of amoral role expectations – CSR related issues (‘pockets of virtue’) are typically not found in the investor relations department which is considered as the central unit for communicating with investors. One might even argue that as long as these expectations persist, it is also most unlikely that managers at all have installed respective roles and responsibilities within the corporations that are in charge of answering ethical demands by investors. This is in line

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with Vandekerckhove and his colleagues (2007) who prove empirical evidence that the choice of department being in charge of answering investor letters varies substantially across organizations. A regular pattern was not discovered. Whereas little response came by the CEO directly indicating the willingness of cooperating and signalling interest, the majority of returned letters were answered by departments other than investor relations (IR) such as communication or CSR. Here, it is well documented that the expectations about the dichotomy of shareholders and society becomes behaviourally confirmed by having two distinct departments such as CSR and IR that have little in common. With regard to the expectations investors hold about managers it is interesting to add that Vandekerckhove and his colleagues (2007) claim that it has been proved most efficient to raise ethical concern when sending out a letter to the CEO or the CEO’s secretary instead of sending it to the IR department. What does this behaviour tell us? In fact, it shows that investors expect a top executive to be sensitive to ethical concerns, thus they rather expect him to be a steward than an agent. However, they obviously do not expect that this stewardish character has diffused throughout the organization and reached the IR department. We argue that this behaviour rather indicates situational awareness than pragmatic ignorance for the following reason. In general, it is reasonable to assume that investor letters should be sent to the IR department. However, as institutional investors became aware of the fact that over the last years CSR climbed to the top of the socio-political agenda of senior executives around the globe (Oppenheim et al., 2007) they changed their routinized behaviour (i.e. talking to the IR department) and adjusted it to the new situation in which CEOs are more likely to respond to ethical concerns than are IR officers. Also, they account for the fact that the more time an investor spends with the CEO the more likely the CEO will adjust his identity based on the investor’s expectation considering the fact that identities are socially formed (see section 4.1.2.1.1). However, we like to emphasize that situational awareness does not always appear to be the case with institutional investors. So far we have concentrated on the investor’s expectations about the role of the manager as this is the prevalent interaction that we look at within the scope of this study. However, an equally important issue is the

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expectation an investor holds about CSR in general and the role of his beneficiaries with regard to CSR. In the light of the recent developments in the finance industry we think it is worthwhile to point to some of the latest budgeting decisions of Citigroup and JP Morgan given that budgeting is one of the most prominent organizational routines (Feldman, 2000) and thus, is best positioned to inform us about underlying expectations. According to the press two of the leading ESG teams have recently been disbanded by their employers Citigroup and JP Morgan (Wheelan, 2008). Although Citigroup’s ESG team just won the award of being the best European SRI broker firm in a SRI survey by Thomson Reuters and UK SIF (UK SIF, 2008) they were disbanded as a result of staffing cuts. What does this imply? Looking at JP Morgan and Citigroup here purely as asset managers their budgeting decisions reveal that they apparently do not expect ESG teams to be profitable within the next future, which ‘as a matter of fact’, has caused them to cut these positions. This also implies, assuming that they act in the best interests of their beneficiaries, neither JP Morgan nor Citigroup expect their beneficiaries, i.e. the owners of the capital, to be substantially interested in ESG related issues. Whether this is an example of pragmatic ignorance or situational awareness is best answered by citing Rory Sullivan, head of responsible investment at Insight Investment, who said: “Given the emphasis that has been placed by the investment community on integrating ESG issues into investment processes and the increasing appetite for this type of research, it is both surprising and disappointing that two of the leading ESG teams appear to have been disbanded” (Wheelan, 2008). In summary we can hold that organizations may have different operating modes of how to behaviourally confirm their expectations. They may engage in routines that are rigid and ignore contextual factors such as changing beliefs by CEOs or asset owners as shown in our examples, i.e. they are dysfunctional to change; or they engage in performative routines that allow for small, but constant adjustments to new situations, which in turn, may lead to an alteration of expectations. A change in role expectations and thus in the way investors and managers interact with regard to ESG

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related issues thus depends on the form of organizational routine that dominates within an organization. From there it follows:81 Proposition 4a: An alteration of the relative dominances of organizational routines such as pragmatic ignorance or situational awareness is likely to affect a change in the kind of investment and ownership practices institutional investors perform with regard to ESG related concerns. Proposition 4b: An alteration of the relative dominances of organizational routines such as pragmatic ignorance or situational awareness is likely to affect a change in the kind of response pattern corporations perform with regard to ESG related demands from institutional investors. Figure 26 summarizes the findings of section 4.1.2. Please note that for reasons of consistency with regard to the mutual role expectations of investors and managers we propose a general distinction between the roles agent and steward that an investor holds about management and vice versa. We thereby account for the fact that although an institutional investor is still considered the principal of management, he however is also the agent or steward of his beneficiaries. A manager who expects an amoral standing of the investor is thus assumed to expect the investor act like a selfinterested agent rather than a collectivistic oriented steward (and vice versa).

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Please note that – in line with our propositions in the previous chapter – we will only refer to the expectations managers hold about their investors and vice versa. The expectations that investors hold about their beneficiaries are ignored for reasons of simplicity.

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individual Identity Orientation

relational collectivistic

ARGUING Identity Defense

denial rationalization symbolization agent

Role Expectation

steward

EXPECTING Behavioural Confirmation

pragmatic ignorance

situational awareness

Fig. 26: Belief-driven processes in making sense of responsibility.

After having described a possible set of belief-driven processes of sensemaking that occur when enacting CSR and responsible investment the next section is concerned with analyzing how sensemaking occurs through actions.

4.1.3 Action-driven Processes of Sensemaking Weick’s work on action-driven processes of sensemaking goes back to his earlier studies of the effect of cognitive dissonance on performance (see Weick, 1964) where he accidentally finds that not only cognition has an effect on action but also action affects cognition. Action thus becomes an independent variable with cognition in the form of justification as dependent variable (Weick, 2001, pp. 6-7). The dominant role of actions from which people deduce what is happening thereby mirrors the central idea of retrospective sensemaking. This section looks at two action-driven processes of sensemaking, committing and manipulating, and relates them to the field of responsible investment and CSR. Figure 27 highlights the focus of this section.

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Beliefs

Enactment

Selection

Committing

Retention

Manipulating

Actions

Fig. 27: Action-driven processes of sensemaking.

4.1.3.1

Committing

Committing begins with actions as reference points from which the sensemaking process starts. In general, action-driven sensemaking processes investigate “how actions pave the way cognitively to their own continuation” (Weick, 1005a, p. 156). Here, the level of cognition involves the analysis of how actions are explained retrospectively. The task of our following subsections is thus first to look at how institutional investors behaviourally commit themselves when enacting responsibility (level of action) and second to investigate on how they justify their actions (level of cognition).

4.1.3.1.1

Level of Action: Behavioural Commitment

Behavioural commitment is defined as “a state of being in which an individual becomes bound by his actions and through these actions to beliefs that sustain the activities and his own involvement”; it is “ubiquitous, so common that we are often unaware of its constraining effects and its subtle control over our behavior” (Salancik, 1977, p. 62). As Weick (1995a) argues, the idea of commitment is “that people try hardest to build meaning around those actions to which their commitment is strongest. Commitment, in other words, focuses sensemaking on binding actions” (p. 156). With regard to organizational responsibility, behavioural commitment is central because it refers to the actions for which organizations are responsible, and also held

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accountable by their stakeholders. In this regard Weick (1995a) explicitly stresses the fact that it is our actions for which we will be held accountable and not the consequences of our actions as claimed by Staw (1982). This is because “consequences are often delayed, confounded, and negotiated, all of which means that they are not easily connected with specific actions and therefore are relatively weak sources of commitment” (Weick, 1995a, p. 157). In this context Weick (1995a; 1988) mentions three variables that bind organizations to their actions, and thus increase the responsibility for their actions: publicity, irrevocability, and volition (i.e. choice). A public act thereby occurs when people saw the act take place; an act is irrevocable when it cannot be undone; a volitional act occurs when a person deliberately chose to do it, with few external demands and potentially with considerable effort (Weick, 1995a, p. 157). Weick (1988) further argues: “Normally, when people act, their reasons for doing things are either selfevident or uninteresting, especially when the actions themselves can be undone, minimized, or disowned. Actions that are neither visible nor permanent can be explained with casual, transient explanations. As those actions become more public and irrevocable, however, they become harder to undo; and when those same actions are also volitional, they become harder to disown. When action is irrevocable, public and volitional, the search for explanations becomes less casual because more is at stake.” Publicity, irrevocability, and choice are thus important variables to look at when trying to find out about an organization’s responsibility. With regard to our first research question of how institutional investors and corporations enact their sense of responsibility the next step in this section is therefore to describe the different ways of how institutional investors and corporations may behaviourally commit themselves to increase its social and environmental responsibility. We thereby argue that public acts involve all activities that are officially stated on an organization’s webpage, in reports, in press releases, or which became certified through certified management standards (CMS) (Terlaak, 2007). With regard to corporations an act that increases a corporation’s social and environmental responsibility would for example include an overtly declared vision such as Shell’s public statement about their involvement in sustainable development: “For us contributing

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to sustainable development … means helping meet the world’s growing need for energy in economically, socially and environmentally responsible ways. It is the right thing to do, and it is good for our business” (Shell, 2008). Shell has further codified what in their view constitutes socially responsible conduct by introducing the “Shell General Business Principles”. Here, they argue: “We are judged by how we act - our reputation is upheld by how we live up to our core values honesty, integrity and respect for people. Our eight Business Principles are based on these core values and indicate how we promote trust, openness, teamwork and professionalism, and pride in what we do” (ibid.). A codification of behaviour is thereby assumed to focus collective sensemaking on binding actions because it makes organizational members’ rules explicit (Terlaak, 2007). Terlaak (2007) thereby draws upon research on the Delphi method and argues that “by forcing agents to spell out their own rules, codification can enable iterative rounds of benchmarking that foster consensus on various issues” (p. 973). Another way of publicly displaying a corporation’s action is via certification. Certification by the ISO 14001 environmental management standard or the SA 8000 labor management standard for example indicates a certain level of social and environmental responsibility and binds a corporation to fulfill the standards’ requirements. In this context Terlaak (2007) holds that “certification makes transparent a firm’s behavior in conditions where such behavior could not otherwise be inferred … At a minimum, certification indicates to transacting parties that the firm has implemented the practices outlined in the CMS” (p. 974). Committed sensemaking thus focus an organization’s attention to particular issues (while ignoring others) and is thus “a source of order and value” (Weick, 1995a, p. 159) – a social order that does not necessarily have to be enforced by law (Terlaak, 2007). Institutional investors may also us their websites to promote their beliefs and values (as shown in our section about arguing) however they remain rather silent when it comes to publicly disclosing the activities of their fund managers with regard to the integration of ESG issues into investment analysis and decision making (Henningsson, 2008). Except from some traditional SRI investors who take every chance to publicly declare their strict negative screening strategies, the majority of institutional investors still seem to be uncertain about how to price a company’s exposure to environmental, social and governance risks (ibid.). As a result, we can witness a very

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weak behavioural commitment to include ESG aspects which also implies that many ESG related concerns rather remain unnoticed. However, we also witnessed an increasing interest of institutional investors in becoming signatories of the PRI or the EAI82, which already had been introduced at an earlier stage of this study. The PRI for example is solely focused on an investor’s activities and requires a consistent incorporation of ESG issues throughout the whole investment value chain. PRI also requires an annual report from each signatory indicating how he progressed with the integration of ESG issues into investment analysis and ownership practices. These reports are then aggregated and published on the PRI webpage (see PRI 2008 for the Report on Progress 2008). Hence, by adhering to the PRI institutional investors’ activities become public and explicit which in turn increases an investor’s level of behavioural commitment to environmental and social responsibility. The tendency towards a stronger commitment to responsible investment is well documented by the recent announcement of the PRI that signatories more than doubled in 2008, representing now USD 14 trillion in AUM. An irrevocable act in an organizational context typically refers to the spending of resources (Weick, 1995a, p. 160). A possible figure to look at is thus the amount of personnel dedicated to the management of CSR. Due to the increasing need of coordinating and managing a corporation’s involvement in CSR related activities most large corporations to date have established a distinct CSR or sustainability department. Further cost positions that one might have in mind include marketing expenditures, community involvement, and donations. The interesting question however here is certainly how many resources are spent with regard to communicating a sense of responsibility and how much is actually spent with regard to ‘real’ responsible conduct such as environmentally friendly car manufacturing? The reluctance of most German car manufacturer to adjust their production to newest environmental standards is just one example of low behavioural commitment. We are not saying that communicating is not an act – at this point Weick and his colleagues (2005) clearly remind us that “you do not really know what you think until you do say it” (p. 416) – but we have to admit that a behavioural commitment that predominantly rests on 82

Please note that according to press releases the PRI and EAI have announced to merge in recent future (PRI, 2008).

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communicating CSR values but is not followed up by an integration of these values into a corporation’s core competencies (see Prahalad and Hamel, 1990) such as car manufacturing in the automotive industry, is rather weak. Here, Ciulla’s (2005) notion of not walking the talk comes into play referring to the fact that most corporations do talk about responsibility but do not act accordingly. Coming back to the recent lay-offs of ESG teams at Citigroup and JP Morgan, one might argue that we actually see a very strong behavioural commitment – however not in favour but clearly against the integration of ESG aspects into investment analysis. However we also have to acknowledge that this is not the case with most long run investors. Most pension funds spend a considerable amount of resources into ESG research as well as engagement teams (Ryan and Schneider, 2003, 2002). Hermes, for example, the asset manager of British Telecommunications’ Pension Scheme (BTPS) employs a team of 38 people (Hermes, 2008) who run the Hermes Equity Ownership Services (EOS) representing a comprehensive advisory service on their client’s equity investments regardless of where they are managed. This relatively high amount of personnel thus illustrate a context of high irrevocability (at least if we assume that no lay-offs are planned) which generates strong commitments to responsible investment. A further example of how irrevocability can lead to stronger commitment can be found in Brammer and his colleagues’ (2003) work on the differences between internally and externally managed funds from pension schemes. Brammer and his colleagues (2003) for example find that those funds managed internally show a higher behavioural commitment to responsible investing than do externally managed funds. Brammer and his colleagues explain this among others by referring to the compensation scheme and length of mandate. They argue that external fund managers usually work under a three-year mandate and are predominantly compensated with shortterm bonuses. Internal fund managers in contrast have the status of paid employees, work under longer mandates and receive a higher percentage of fixed salaries. A resource spending in the form of long-run mandates and stable compensation schemes has thus produced an environment where a stronger commitment to responsible investment is more likely, i.e. makes more sense to the organizational members.

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A volitional act refers to what an organization voluntarily chooses to do. In the context of CSR and responsible investment we therefore argue that a typical volitional act can be found in an organization’s adherence to voluntary standards. Voluntary standards have gained enormous attention in academic literature and have often been challenged due to the lack of enforcement mechanisms such as sanctions for noncompliance (see e.g., Cavanagh, 2004; Gilbert and Rasche, 2007; Krumsiek, 2004; Sethi, 1999; Williams, 2004). A well-known example of a voluntary standard for the corporate sector is the UN Global Compact which is designed to advance social change by enlisting corporations to follow ten aspirational principles concerning human rights, labour, the environment, and corruption (Kell, 2005). By choosing to adhere the Global Compact a corporation agrees to include the progress that it is making on implementing the Principles within its operations in the annual company report or any other public document (here we would have an overlap with publicity). The volitional character of a subscription to the Global Compact is thereby best summarized by quoting Kofi Annan, the former secretary-general of the UN: “Let us choose to unite the power of markets with the authority of universal ideals. Let us choose to reconcile the creative forces of private entrepreneurship with the needs of the disadvantaged and the requirements of future generations” (cited in Williams, 2004, p. 757). In close relation to the UN Global Compact are the PRI which represent an equivalent standard for the financial market. The PRI, as mentioned earlier, enlist institutional investors to follow six aspirational principles on how to incorporate ESG related issues into investment decision making and ownership practices. We will not go into detail with this standard however we like to point to the voluntary character of PRI and resulting increase in an institutional investor’s committed sensemaking with regard to responsible investment when signing the Principles. In this context Weick (1995a) reminds us that “[c]hoosing to act changes what a person knows … Choice imposes value on information” (p. 159). We can thus hold that a stronger commitment also leads to richer justifications of why to engage in responsible investment which in turn allow organizational members to be “in a better position to produce wise action” (Weick and Sutcliffe, 2006, p. 515). For an illustration, we refer to the quotation of Sergio Rosa, the President of the Brazilian state pension scheme PREVI,

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cited from the PRI website: “Previ is committed to its members and beneficiaries on a long term basis. Therefore, making sustainable investments that support the environment we live in, is more than an obligation, it is an act of wisdom” (PRI, 2008). In general, Weick (1995a) holds that the degree to which an organization behaviourally commits itself through public, irrevocable, and volitional acts is likely to influence the defining character of “what it [i.e. the organization] is and what it can do”; (p. 159). This implies that a strong behavioural commitment to pursuing a socially responsible business conduct focuses organizational members’ attention to ESG related concerns, “transforms underorganized perceptions into a more orderly pattern” (ibid.), and thus, strengthens the collective formation and persistence of meaning around (social) responsibility. Based on these insights we can derive the following propositions: Proposition 5a: Whether and to what degree institutional investors are behaviourally committed to responsible investment in the form of public, irrevocable, and volitional acts is likely to influence the kind of value they impose on ESG related concerns. Proposition 5b: Whether and to what degree corporations are behaviourally committed to CSR in the form of public, irrevocable, and volitional acts is likely to influence the kind of value they impose on ESG related concerns.

4.1.3.1.2

Level of Cognition: Justification

A necessary supplement to behavioural commitment is how people justify their publicly, irrevocably, or volitionally performed actions.83 Their justifications thereby reveal the dominant logic of what these people think is a plausible and socially acceptable explanation for their doings. Justifications are “the result of focused attention that reveals new properties of a situation that unfocused attention missed” (Weick, 1995a, p. 158). Hence, the way an organization justifies its actions, tells us about how this organization observed a situation and how it ‘transformed underorganized perceptions into orderly pattern’. 83

Justification is sometimes used interchangeably with ‘rationalization’; however, in contrast to section 4.1.2.1.2 rationalization here means the defense of individuals’ actions (Giddens, 1979, p. 57).

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A closer look at the various forms of justifications that might come from corporations and institutional investors to explain their actions and non-actions with regard to responsible business conduct thus enables us to differentiate among these organizations based on their dominant modes of justifications and also to find out more about what motivates them to act they way they do. In line with Basu and Palazzo (2008) we propose to distinguish between legal, scientific, economic, and ethical justifications.84 The first three dimensions, legal, scientific, and economic are drawn upon Ashforth and Gibbs’s (1990) work on prevailing language games “that characterizes an organization in terms of how it filters perceptions of the external world, interprets conflict, and formulates reactions to demands” (Basu and Palazzo, 2008, p. 127). The fourth dimension, ethical justification, was added by Basu and Palazzo (2008) in response to Swanson (1999) who argued that an organizational linguistic repertoire should not solely rest on legal, scientific, and economic vocabulary but should also include a moral standpoint. Legal justification: When an organization engages in legal justification it “provides officially permitted arguments in support of its actions in response to accusations by its critics … calling into play its own lexicon of constructs, such as obligations, rights, compliance, sanction, penalty, code of conduct, confidentiality, settlement, and so forth” (Basu and Palazzo, 2008, p. 127). Institutional investors for example explain their reluctance to engage in responsible investment often by pointing to their fiduciary duty which is to maximize the wealth of their beneficiaries. They argue that screening based on moral considerations for instance may lower the return of the fund due to the constraint on portfolio diversification (assuming efficient markets) and thus, is incompatible with an institutional investor’s fiduciary duty (Waygood and Wehrmeyer, 2003, p. 379). Since European law does not address the relationship between fiduciary duty and ESG integration, institutional investors consequently see no necessity in incorporation ESG issues into their investment policy. Corporations often point to their compliance with national law when they receive critics for example with regard to poor environmental management or poor labour conditions (Basu and Palazzo, 2008, p. 127). As we have said earlier the interesting pattern

84

Again, please note, that these dimensions are not be understood as mutually exclusive.

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about justification is that it reveals the motivational assumptions of organizations. Here, in case of legal justification we can thus conclude that an organization predominantly makes sense of responsibility by focusing its attention rather to compliance with laws and regulations than to integrity-driven voluntary ethics initiatives. Behavioural commitment to CSR and responsible investment is thus more likely to occur when it is enforced by law. In general, one might argue that law is a credible enforcement mechanism. However, with regard to ethical issues, Crane and Matten (2004) remind us that business ethics is largely subject to a grey area that is not covered by law. Scientific justification: When an organizations adopts scientific justification for its action it typically relies on expert knowledge when responding to criticism. A very well known example in the field of CSR is Shell and the Brent Spar conflict (Basu and Palazzo, 2008). During the Brent Spar episode Shell was considerably criticized by Greenpeace for the intended disposal of its oil storage platform into the Atlantic sea (den Hond and de Bakker, 2007, p. 902). When defending their plans, Shell’s management referred to the advice given by environmental specialists that a disposal would result in minimal environmental damage (Tullberg, 2005). However, this justification was too weak to compete against Greenpeace’ mass media campaign and finally, Shell agreed not to sink the oil platform (Palazzo and Scherer, 2006).85 The most prominent scientific justification of institutional investors for not engaging in responsible investment clearly stems from the many empirical studies that see a negative correlation between social and financial performance, at least, in the short run. In linguistic terms, institutional investors need to see the academic proof of the ‘business case of CSR’ first before they start to invest in CSR. However, we also found a scientific justification for actions in favour of responsible investment. Hermes, for example, emphasizes the years of relevant field experience of their EOS team members on their webpage. Their strong commitment to active ownership is thus justified by their internal expertise in this area. Also, Hermes pursued a change in their linguistic repertoire by referring to Donaldson and Davis’ (1991) essay on 85

We like to add that the alternative solution, which was dragging the platform into a Norwegian fjord for storage actually caused more environmental damage than would have a disposal in the Atlantic. However, according to Tullberg (2005, p. 266), the environmental damage as well as an apology by Greenpeace did not attract much media attention and therefore is often overlooked in existing studies about the Brent Spar affair.

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stewardship (see previous section). In contrast to the established term ‘assets under management’ they now speak of ‘assets under stewardship’ indicating their (behavioural) commitment to act like collectivistic oriented stewards of their beneficiaries (Hermes, 2008). Economic justifications: To engage in economic justification of its actions means “highlighting tangible contributions to stakeholders (e.g. jobs created, taxes paid, charities supported) in defense of its actions” (Basu and Palazzo, 2008, p. 127, emphasis added). For the case of CSR, Basu and Palazzo (2008) cite Kolk (2005) and his example of Kraft, a leading buyer of coffee beans. Kolk (2005) focuses on the role of multinational corporations in the coffee sector after the collapse of the international coffee agreement in 1989. He thereby shows that Kraft defines responsibility rather in terms of raising the worldwide consumption of coffee than in paying higher wages to coffee farmers, thus reducing their poverty. An economic justification for engaging in responsible investment would be the potential exploitation of externalities as outlined earlier. In general one can hold that economic justifications of responsible conduct for both institutional investors and corporations are very common and often summarized under the ‘business case’, also known as ‘proof of concept’, argument of CSR (‘does it pay to be good?’). Its content, but also its existence, are discussed very controversially in the academic community however its overarching dominance in academia is uncontested. Coming back to Weick’s remarks that the justification of an action mirrors how we observe, filter, and notice we can thus conclude that the prevalence of the business case argument in both research and practice strongly indicates that our sensemaking around responsibility is (too) largely dominated by economic logics and less by for example ethical logics. Ethical justification: An ethical justification resembles to the characteristics of what we have outlined earlier as collectivistic. An organization engaging in ethical justification “explains the reasons for its actions as derived from … ‘higher order interests’ … Such a justification is directed not toward assuaging stakeholder expectations but toward achieving universal goals of human welfare” (Basu and Palazzo, 2008, p. 127). An example of institutional investors engaging in ethical justification are most US SRI funds who defend their negative screening strategies by referring to their

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religious roots and motivations. Here, ethical considerations overweigh the economic aspect that screening strategies may lower portfolio diversification, and thus may result in smaller returns. For corporations we consider the Body Shop as an adequate example as they take a firm stand against animal testing on cosmetic products and ingredients for moral reasons. In general, Weick (1995a) holds that the language of justification often resembles the language of organizational goals. As such, one may argue that organizational goals represent a narrativized ex post justification of what the organization already did. As these narratives represent the dominant patterns of how an organization notices and how it imposes value on information they in turn affect our actions due to the reciprocity of tying beliefs and actions in sensemaking. An alteration in how an organization makes sense of responsibility is thus likely to occur if we change the relative dominances of existing narratives by providing alternative ‘stories’ (Boje, 1991; Clark, 1972) or narratives that enrich an organization’s repertoire of justifications and thus, also strengthens the ability of an organization to collectively make sense of responsibility. This enrichment is especially important considering Weick’s (1988) alert that behavioural commitment and justification focuses our attention to particular aspects but also, it leaves others unnoticed: “The dark side of commitment is that it produces blind spots. Once a person becomes committed to an action, and then builds an explanation that justifies that action, the explanation tends to persist and become transformed into an assumption that is taken for granted” (p. 310). Weick (1988) cites the case of Bhopal as an example. In 1984, a subsidiary pesticide plant of Union Carbide released 42 tonnes of the toxic gas methyl isocyanate (MIC) in the atmosphere causing the immediate death of more than 3,000 people (and many more followed). The irrevocable act Weick (1988) refers to was to keep the process of MIC production secret. This commitment to secrecy was (economically) justified in terms of having a competitive advantage and thus, securing job places. As workers did not want to compromise on the competitive advantage of their company, they did not turn on the warning siren until gas actually leaked into the atmosphere; the “commitment to secrecy induced a blind spot toward a partial solution, necessary alarm” (ibid.).

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The Bhopal example clearly shows why it is important to have a rich repertoire on justifications; the richer the repertoire the more aspects will be seen and the less remain unnoticed. Based on the insights given in this section the following propositions can be derived: Proposition 6a: An enrichment of institutional investors’ repertoire of justifications for their actions by altering the relative dominances and combinations of existing dimensions such as legal, scientific, economic, or ethical, is likely to effect a change of how institutional investors notice and impose value of ESG related concerns. Proposition 6b: An enrichment of corporations’ repertoire of justifications for their actions by altering the relative dominances and combinations of existing dimensions such as legal, scientific, economic, or ethical, is likely to effect a change of how corporations notice and impose value of ESG related concerns.

4.1.3.2

Manipulating

The second action-driven process as introduced in the preceding chapter is sensemaking as manipulating. Starbuck (1976) reminds us that organizations play an active role in inventing their environment. The process of manipulating therefore starts with invention in the very sense of leaving one’s mark upon the world and continues with the various ways of how to legitimize those inventions. The task of our following sections is thus first to look at how institutional investors invent their environment (level of action) and second to investigate on how they legitimize their behaviour (level of cognition).

4.1.3.2.1

Level of Action: Invention

As Weick (1995a) argues sensemaking is “less about discovery than it is about invention” (p. 13). It is “to construct, filter, frame, [and] create facticity” (p. 14). In contrast to realist approaches that view individuals rather as ‘puzzlers’ over what is given, sensemaking thus views individuals as ‘inventors’: “… if one thinks like a constructivist, and sees sensemaking as a problem of invention, then the inventor has to do something more than ponder what is there … The inventor has to put something there, or consolidate what is there, or poke around to see what might be there,

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or orchestrate some kind of agreement about what is there. All of this placing, consolidating, poking, and recruiting is action in the world. This action affects what the organization then sees” (ibid., p. 163). This is why invention is at the core of manipulation. To emphasize the close relation between invention and manipulation in organizational context, Weick (1995a) cites Huber and Glick (1993): “Finally, top managers are manipulators of the organization’s environment, at least to a degree. Top managers advertise, lobby, and educate to make environments hospitable for their organization. By influencing the organization’s environment, top managers affect the flow of environmental demands and resources” (p. 9, emphasis in the original). Manipulation thus starts with invention to which beliefs then accommodate. The difference between commitment and manipulation is thereby clarified by Weick (1995a) by saying: “In commitment, the focus is on the action itself and sense is made when beliefs justify taking that irrevocable action. In manipulation, the focus is on the meaningful consequences of the action, represented by stabilities such as daylight saving time … Manipulation is about making things happen, so that a person can then pounce on those created things and try to explain them as a way to get a better sense of what is happening” (p. 168). With regard to our first research question we argue that a useful categorization of the ways organizations make sense of responsibility by manipulation is to look at how they internally invent their environment, and how they externally invent their environment. Internal invention focuses among others on how organizational members are educated, and trained while external invention is about forming coalitions with other organizations or engaging in policy dialogue. Both dimensions will be exemplified with regard to how corporations and institutional investors manipulate to make sense of responsibility in the following paragraphs. Internally oriented invention: We define internal invention as those manipulative processes that happen inside an organization when making sense of responsibility. The relevance of internal activity for the study of sensemaking is clarified by Clark and Wilson (1961): “The internal activity of organizations affects their purposes and the tactics they employ to attain those purposes. Organizational purposes and tactics, in turn, have clear influences upon social, economic, and political processes” (p.

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129). Drawing upon existing literature on management theory and business ethics in general, and the work of Hedberg and his colleagues (1976) on manipulative processes in particular, we will concentrate in the following paragraphs on the internal activities that centre on incentive schemes, and education and training. The role of formal and informal incentive schemes in shaping organizational behaviour has been widely acknowledged by management theorists (Ancona et al., 2005; Clark and Wilson, 1961; Pfeffer, 1990). According to Clark and Wilson (1961), “all viable organizations must provide tangible or intangible incentives to individuals in exchange for contributions of individual activity to the organizations … Analysis of the several kinds of incentive systems can provide … the rudiments of a predictive theory of organizational behaviour” (p. 130). However, we like to emphasize that organizational behaviour cannot be directly enforced by incentives in the sense of prescriptive guidelines of ‘what should be done’ but rather we want to point to the fact that incentive schemes are embedded in social processes as they present frames of references that individuals use to make sense of their actions: “Organizations stay tied together by means of controls in the form of incentives and measures. This suggests that incentives for reporting anomalies, or penalties for nonreporting, should affect sensemaking” (Weick, 1995a, p. 3). In this context Kaplan and Henderson (2005) provide an alternative view on incentive schemes by showing “how incentives and cognition, while being analytically distinct concepts, are phenomenologically deeply intertwined”; they further hold that “incentives and cognitions coevolve so that organizational competencies and routines are as much about building knowledge of ‘what should be rewarded’ as they are about ‘what should be done’” (p. 509). The impact of incentive systems on organizational competencies and routines has also been investigated within the field of business ethics. The majority of scholars thereby find that incentive programs play a significant role in encouraging or discouraging corporate ethical behaviour (James, 2000; Jansen and von Glinow, 1985; Metzger et al., 1993; Trevino and Nelson, 1995). In general, it is thereby argued that strictly monetary reward system would lead to relatively unethical behaviour while incentives that are basically intangible such as the sense of group membership, congeniality, or fun (which Clark and Wilson, 1961, call “solidary” in contrast to “mate-

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rial” incentives) are positively correlated with ethical behaviour. From a sensemaking perspective this is not very surprising as material incentive schemes mostly rely on short-term financial results which are unlikely to achieve when concentrating on sustainable, long-term oriented business. Also, as Clark and Wilson (1961) point out material incentives depends on a corporation’s ends, i.e. maximization of profit, while solidary incentives rather focus on process and are “independent from the precise ends of the association” (p. 135). As such, solidary incentives are more likely to stimulate collective sensemaking on ESG related issues by opening narrowed schemata about what ‘should be done’. In contrast, material incentives place a severe filtering function on what corporate members think ‘should be rewarded’. A similar picture is true for institutional investors. Here, the high degree of variable bonus payments is even assumed to have a stronger impact on firm behaviour (Brammer et al., 2003). An institutional investor that for example measures its fund managers’ performance against their benchmarks on a quarterly basis is likely to create an environment where short-term results matter, competitive thinking is at core, and economic justifications are taken-for-granted. A long-winded and costly engagement process with investee companies is unlikely to happen even when this was in the interest of the beneficiary. As a result, fund managers make sense of equivocal data according to narrowed schemata such as short-termism, performance relative to their peers, and materiality of ESG issues – all of them identified by Juravle and Lewis (2008) as major impediments to mainstreaming responsible investment (see also Guyatt, 2006). In contrast, a pension fund who has its fund managed internally and publicly declares its environmental and social responsibility creates an environment where the fund managers are considered a stable part of the organization; thus, a sense of group membership is created that enables the fund managers to be more sensitive to the pension fund’s long-term goals such as promoting corporate change through shareholder engagement. The role of education and training in shaping ethical decision making is another widely discussed topic derived from business ethicists (Bowen, 2004; Knouse and Giacolone, 1996; Kulik, 2005; Weaver and Trevino, 1999; Weaver et al., 1999a, 1999b). Within the field of business ethics, scholars have argued that to promote

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ethical conduct, ethical objectives need to specified and communicated through training and the enactment of respective codes of conduct (Metzger et al., 1993). Thus, in the light of business scandals such as Enron “corporations are actively seeking vehicles for both enhancing and publicizing integrity in their dealing with internal and external stakeholders” (Weber, 2006, p. 61). Ethics training and education thereby represent a widely acknowledged tool that is increasingly used by corporations to advance ethical behaviour of their organizational members (Weaver and Trevino, 1999). The positive correlation between training and ethical behaviour was proved by Ferrell and his colleagues (2002), as well as by Weaver and his colleagues (1999a, 1999b). Kulik (2005) also finds evidence that Enron’s downfall could be explained by the lack of ethical expertise and a strong agency culture that promoted rather self-interest than moral consciousness. Kulik’s example clearly shows the impact of education and training on firm behaviour however an even more interesting question is how exactly corporations can manipulate their environment by education and training? In a comprehensive study of different ethics training methods Weber (2006) combines insights from learning theory with aspects from educational psychology and in doing so, identifies main components of an ethics training initiative. He thereby reveals that most ethics trainings in corporations “tend to rely on sequential, verbal presentations, combined with private readings and writing activities” that limit organization learning. Rather, he suggests that if ethical behaviour is intended to be advanced then corporations should rather engage in techniques that allow for ongoing and open organizational learning such as group discussion, inductive learning methods, encouragement of active participation, feedback, and the focus on real life examples. The latter, for instance, is an important source of sensemaking because it enriches organizational members’ repertoire of experience (although not personally lived), thus might change their expectations and beliefs which in turn affect their behaviour (Weick, 1995a). Ethics training in financial markets, in contrast, is a very under-researched and also under-estimated topic. Fund managers often claim that they do not have enough training that educates them on how to integrate ESG aspects into investment decision making. This is why the PRI for example has planned to start a global campaign to

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encourage and facilitate training and education of ESG integration for their signatories (PRI, 2008). Institutional investors who do not actively train their organizational members on how to value ESG concerns should not be surprised if ESG concerns are ‘filtered out’ by their fund managers from the stream of equivocal data surrounding them. Or framed differently, they have enacted an environment where active filtering caused by ESG related concerns via screening or enhanced analysis is unlikely to happen. This is in line with O’Loughlin and Thamotheram’s (2006) finding that there is a gap between those factors analysts have researched and those that fund managers integrate into their investment analysis. We therefore argue that, if long-term investment is desired, institutional investors should rather create an organizational environment that pushes for ESG related individual expertise and organizational learning (see also Zadek et al., 2005). Externally oriented invention: Externally oriented inventions refer to manipulative processes that an organization engages in when interacting with other entities such as forming coalitions or engaging in policy dialogue. Within stakeholder theory one prominent theme is how corporations get involved in long-term coalitions with their stakeholders to exchange information, build transparency, and thus, identify dilemma situations early enough to prevent conflicts (Andriof et al., 2002; Elkington and Fennell, 1998; Holzer, 2008; Lawrence, 2002; Payne and Calton, 2002). The relevance for studying organizational behaviour is thereby emphasized by Cyert and March (1963) who argue that coalition building and other forms of political processes have a significant impact on organizational decisions. They mostly occur when the environment is perceived as not being analyzable and “[f]actors cannot be rationalized to the point of using rational decision models … extensive discussion and coalition building are required to agree on a single interpretation and course of action” (Daft and Weick, 1984, p. 292). The interesting aspect here is that coming from a sensemaking perspective we need to be aware that corporations’ efforts in ‘extensive discussion and coalition building’ are not to be considered as a passive response to environmental demands, but rather they should be understood as an (active) enactment of the environment with important consequences that later imposes on them. Coalition building for example in-

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volves a clear choice of which party to get involved with. Hence, the identification of coalition partners (see e.g., Mitchell et al., 1997, for an analysis how to identify relevant stakeholders based on their salience) can be viewed as an invention that ‘a person can then pounce on’ to make sense of her environment (Weick, 1995a). The way corporations form coalitions with their stakeholders thus is likely to influence the way they make sense of responsibility. Here, it is important to note that ‘stakeholder engagement’ alone is not enough to constitute a responsible practice (Greenwood, 2007). Rather, the social processes underlying the engagement process will be distinctive in shaping a corporation’s sense of responsibility. Shell for example chose to engage with a particular group of environmental specialists before they announced the disposal of Brent Spar. The advice given by those specialists, i.e. to sink the oil storage platform, then translated into a set of expectations that caused Shell to filter equivocal data in such a way that their expectations could be confirmed. Greenpeace and other human rights groups were consequently ignored. With regard to institutional investors coalition building is often used interchangeably with shareholder collaboration or collaborative shareholder engagement (Dresner, 2002; Gifford, 2004; Higgs, 2005; McLaren, 2004, 2002; O’Rourke, 2003). The relevance of coalition building in responsible investment is thereby emphasized by Eurosif (2008) where it is stated that most institutional investors in the field of responsible investment collaborate and pool their resources (see also Higgs, 2005). It is argued that collaboration among institutional investors increases their effectiveness in changing corporate practices by raising leverage, reducing free-rider costs and diffusing best practices (Dresner, 2002; McLaren, 2002). Collaboration might take the form of joint meetings, joint letters, or even collaborative voting (which is subject to the constraints given by national law to prevent hostile take-overs). However, according to McLaren’s (2002) findings most collaborative efforts are on research and discussing best practices only. The most progressive institutional investors in coalition building are pension funds and NGOs where collaboration is especially sought to overcome tough-minded management. The WWF for example led an extensive campaign on BP Amoco’s climate change policy in a joint effort with large groups of shareholders from the NGO and institutional investment community (O’Rourke, 2003).

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The interesting question again is, when viewing shareholder collaboration as externally oriented invention, which consequences these joint shareholder efforts have. We argue that collaborative shareholder engagement can be seen as a manipulative process because it enriches each participant’s repertoire of images, schemata or other forms of cause-effect relations that later impose on the investor’s decision making. This is because best practices are shared and discussed, and different justifications for actions are brought forward. Here again, the identification of collaboration partners plays an important roles because the choice of which investor to cooperate with has significant impact on final decisions regarding which corporations are targeted, which responsible investment strategy is preferred and so on; each decision depending on the relative dominances of the experiences that institutional investors have made. Also, coalition building may change a corporate management’s impression of its shareholder groups to the increased size in shareholdings; this change in impression may then translate in a different response to ESG related concerns raised by their shareholders. However, it should be noted that coalition building has long been under heavy legal scrutiny in order to protect corporations from hostile take-overs. In the US for example it became possible only after the amendments to the ‘proxy rules’ in 1992 that relaxed existing law on coalition building among institutional investors and allowed for more collaboration. Institutional investors thereby represented the major driving force of these amendments (Black and Coffee, 1994). The second externally oriented invention we will thus look at is how organizations can enact their legal environment by engaging in policy dialogue. Building upon Berger and Luckmann’s (1966) social constructivism Cook and Barry (1995) for example show how small US firms and government “are trying to ‘construct’ one another, to build socially negotiated understandings of the other” (p. 318). Processes of sensemaking are thereby triggered due to the “enormous schema differences between small firm owners and policy makers … [such as] divergent languages, goal systems, behavioral routines, and educational histories” (ibid., p. 326). To illustrate how a manipulated sensemaking process by institutional investors may look like our next paragraph outlines Hermes Pensions Management’s engagement with the German Federal Ministry of Finance, Peer

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Steinbrück, on the recently launched Risk Limitation Act86 and its regulation on coalition building among institutional investors, also known as ‘acting in concert’ (see Hermes, 2007). In October 2007, Hermes wrote an open letter to the Federal Minister of Finance expressing their concerns about the recently published draft bill of the Risk Limitation Act. The objective of the Risk Limitation Act was thereby to create a legal framework which hinders or even avoids economically ‘undesirable’ activities of financial investors without at the same time affecting financial and corporate transactions that have an efficiency-enhancing impact. However, as Hermes pointed out, the proposed new regulation on Acting in Concert would also impose significant barriers to joint shareholder collaboration on ESG related issues, and thus hinder them to promote sustainable business models. As a manager of large pension funds, Hermes stressed that they share the German government’s concern regarding risks associated with short-term oriented investors. But the solutions proposed by the draft bill, they argued, also affect long-term oriented investors as they make it considerably difficult to engage in constructive dialogue with companies. In January 2008, Hermes wrote another letter to the Finance Committee of the German Parliament, and issued a position paper together with several other institutional investors (Fidelity International Limited from UK, ABP, and PFZW, both from NL), outlining their major concerns and alternative solutions concerning the Risk Limitation Act. This collaborative action was coordinated by the European Group of Investor Protection (see egip, 2008). As a result, as a response to the letters, the position paper and several in-person meeting with the Federal Ministry of Finance, the German coalition agreed on a revised version of the Risk Limitation Act in March 2008. Hermes thereby achieved several relaxations of the regulation on coalition building and thus manipulated the legal environment which then imposes on them in the form of laws and regulations. Two exemplary amendments taken from the new version of the Risk Limitation Act that came into force in August 2008 are:

86

See § 22 para. 2 WpHG-E and § 30 para. 2 WpÜG-E.

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ƒ

Investors will only be accused for acting in concert if they interact in a way that is conducive to permanently and considerably influencing the issuer’s strategic focus.

ƒ

If neither a permanent nor a considerable influence exist, it will be possible for every investor to engage in constructive dialogue with other investors and the company even prior to the Annual General Meeting.

Hence, the new amendments to the Act aim at facilitating constructive dialogue between investors and companies and allow for information exchange between investors as long as they do not want to take over control of the company. As such, Hermes’ engagement in policy dialogue clearly outlines the potential of institutional investors to invent the environment in which they and other institutional investors operate by focusing the government’s attention to the need of dialogue with respect to e.g. ESG related issues. Based on these insights we can conclude this section with two propositions: Proposition 7a: Whether and how institutional investors invent their internal and external environment with regard to ESG related aspects is likely to constrain what they see, and thus, likely to influence their understanding and enactment of responsible conduct. Proposition 7b: Whether and how corporations invent their internal and external environment with regard to ESG related aspects is likely to constrain what they see, and thus, likely to influence their understanding and enactment of responsible conduct.

4.1.3.2.2

Level of Cognition: Legitimacy

By outlining the various reasons for Hermes to engage with the German Federal Ministry of Finance on the Risk Limitation Act we already touched upon the question of how manipulative processes such as policy dialogue may be legitimized. The legitimacy of an action is thereby accomplished by an alteration of beliefs “to create a sensible explanation for the … outcome” that sensemaking driven by manipulation

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has started with (Weick, 1995a, p. 168). Hence, if we want to find out about the cognitive processes that underlie manipulation we need to look at how people think that they can achieve legitimacy for an outcome, i.e. how they explain the invented outcome. What people thereby perceive as legitimate points to what they think makes sense, what they think is accepted in society, and what leads them to think that “things are under control” (ibid., p. 170). These cognitive processes in turn affect how they manipulate which would bring us back to the previous section. Thus, a closer examination of the various approaches peoples take to achieve legitimacy reveals differences among them based on existing schemata and motivations of why they think it is plausible to engage in manipulative processes. Following Weick (1995a) one can argue that the richer an organization’s repertoire on legitimizing their actions, the more it has engaged in manipulative processes to invent its internal and external environment. This implies that if, for example, an increase in manipulative processes aimed at strengthening the ethical behaviour of organizational members is desired, the way forward would be to enrich an organization’s repertoire on possible reasons of why these manipulations can be considered as legitimate. An alteration of existing manipulative processes such as a change in how employees are incentivized would thus require an irritation of an organization’s existing perception of what constitute a legitimate action and second the generation of an alternative way of how to achieve legitimacy. In general it follows that the stronger the perceived legitimacy of an action the more organizational members are able to make sense of this action. In organizational and inter-organizational contexts where the legitimacy of the outcome of manipulative processes is however questioned either the way of legitimizing or the manipulative act itself are in need of change. For a closer examination of the possible approaches to achieving legitimacy we rely on Basu and Palazzo’s (2008) investigation of legitimacy in the context of CSR. Drawing upon the work of Suchman (1995) Basu and Palazzo (2008) distinguish between pragmatic, cognitive, moral legitimacy. To achieve pragmatic legitimacy “hinges on an organization’s ability to convince stakeholders of the usefulness of its decisions, products, or processes” (Basu and Palazzo, 2008, p. 126). Here, the underlying assumption is that an organization is able to control its environment. Cognitive

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legitimacy is achieved by aligning an organization’s actions in congruence with perceived societal norms and expectations. Here, the environment is assumed to control the organization (Suchman, 1995). To achieve moral legitimacy an organization engages in “cocreating acceptable norms of behaviour with relevant stakeholders” (Basu and Palazzo, 2008, p. 126). Suchman (1995) thereby accounts for the fact that in times of high uncertainty organizations face a multitude of different stakeholder demands that makes it difficult for organizations to ‘pragmatically’ legitimize their actions as different stakeholders may have diverging notions of what is ‘useful’. In summary we hold that a pragmatic approach can be translated to ‘we are doing it because it is the best way to do it’, a cognitive approach refers to ‘we are doing it because it is the way you prefer it’, and a moral approach can be decoded as ‘we are doing it because we have both agreed upon it’. The following paragraphs give examples from the domains CSR and responsible investment. In the context of CSR Basu and Palazzo (2008, p. 127) provide various examples for the different legitimacy approaches. They argue that a typical pragmatic approach of corporations to achieve legitimacy might involve a large-scale advertising campaign to publicly demonstrate past achievements and their congruence with social norms and values. A cognitive approach to legitimacy, in the sense of ‘we are doing it because it is the way you prefer it’, might involve the introduction and permanent adjustment of a corporate code of conduct that aligns organizational behaviour with perceived societal expectations at that time (see previous section and our analysis of internally oriented invention). Corporations attempting to achieve moral legitimacy might engage in collaborative stakeholder engagement and public consultation allowing them to collectively generate norms which then impose on them (see previous section and our analysis of coalition building). Although Basu and Palazzo’s examples are helpful in understanding the various approaches a corporation may engage in when striving for legitimacy, we like to mention that the cause-effect relations presumed here have to be handled with caution. Greenwood (2007) has clearly demonstrated that not every stakeholder engagement is intended to increase the moral legitimacy of a corporation. There are valid reasons to believe that stakeholder engagement may also be used in a dysfunctional way such as ‘politicking’ when trying to achieve pragmatic legitimacy.

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In the context of institutional investors we have thus decided to provide an alternative way of exemplifying the various approaches to legitimacy. Instead of allocating various examples to the three different categories of legitimacy, we use one example, namely the process of coalition building among institutional investors, and try to figure out how this manipulative process can be differently legitimized. We argue that a pragmatic approach to achieve legitimacy in the context of collaborative shareholder engagement might involve a strong focus on increasing the size of shareholdings to gain leverage and to reduce free-rider problems. Drawing upon resource dependence theory Frooman (1999) for example argues that the more a corporation is dependent on their stakeholders the greater the likelihood that their stakeholders are able to engage in a direct strategy to influence the firm. Institutional investors opting for a pragmatic approach to achieve legitimacy are thus likely to explain their collaboration with other investors as a useful way of raising leverage and thus, shareholder salience. In contrast, institutional investors being oriented towards a cognitive approach to legitimize their actions are assumed to engage in collaborative shareholder initiatives because they want to align their interests with what they perceive is socially accepted. Typically, this is the case when institutional investors engage in collaborations with NGOs such as Greenpeace or the WWF in order to challenge ethical misbehaviour of corporations. This is in line with Guay and his colleagues’ (2004) finding that (socially) responsible investors are increasingly cooperating with NGOs when urging companies to adopt more socially and environmentally friendly business conduct. Institutional investors striving for a cognitive approach to achieve legitimacy are thus likely to frame their collaboration with other investors as a necessary step forward to align their activities with societal expectations. Finally, institutional investors opting for a moral approach to achieve legitimacy, according to Suchman’s (1995) definition, would be motivated to form coalitions with other investors because it allows them discussing different responsible investment strategies from a variety of perspectives and coming up with norms that are consensually agreed by a large group of shareholders. Typically these investors would include company and other stakeholder representatives in their meetings and

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discussions to cover a wide range of diverging view points and thus, to increase the legitimacy of their actions (see e.g., Habermas, 1990, and his work on discourse ethics). Institutional investors striving for a moral approach to legitimize their actions are thus likely to explain collaboration with other investors as an opportunity to punctuate responsible investment strategies as deriving from norms that were consensually agreed by a wide range of affected stakeholders. In summary we can hold that the relative dominances and combinations of the various approaches organizations take to legitimize their actions are likely to influence the kind of manipulative process they engage in when inventing their environment such as the introduction of a corporate code of conduct, as well as the meaning that organizational members generate through this manipulative process. Based on these insights it follows: Proposition 8a: An alteration in the relative dominances and combinations of institutional investors’ repertoire of approaches to achieve legitimacy for their actions such as pragmatic, cognitive, and moral, is likely to affect a change in how they understand and enact responsible conduct. Proposition 8b: An alteration in the relative dominances and combinations of corporations’ repertoire of approaches to achieve legitimacy for their actions such as pragmatic, cognitive, and moral, is likely to affect a change in how they understand and enact responsible conduct. Figure 28 summarizes the findings of section 4.1.3.

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legal scientific Justification

economic ethical

COMMITTING Behavioural Commitment

publicity irrevocability choice pragmatic

Legitimacy

cognitive moral

MANIPULATING internally oriented Invention externally oriented

Fig. 28: Action-driven processes in making sense of responsibility.

4.2

How Institutional Investors and Corporations Interact

4.2.1 Preliminary Remarks After having described a possible set of sensemaking processes that reveal how institutional investors and corporations enact their sense of responsibility our next section is concerned with the question of how institutional investors and corporations as two distinct entities may collectively make sense of responsibility. In chapter three, we introduced interlocking behaviour, or the ‘double interact’, as the basic unit of analysis for organizational sensemaking. Also, drawing upon Hollander and Willis (1967) we argued that the double interact can be used to describe interpersonal influence: sensemaking is about “the pattern of alliances, causal loops, and norms that exist between people that accomplish or defeat efforts at control” (Weick, 1979, p. 8). To be able to extend the ideas of the double interact to an inter-organizational level we combined insights from organizational learning theory and leadership theory and introduced the term ‘reciprocal inquiry’ brought forward by Senge (2006) as an adequate construct to describe inter-organizational influence. We thereby follow the recent call of scholars such as de Bakker and den Hond (2008) to adopt a process

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view on influence activities among various organizations. Our study on how institutional investors may influence responsible conduct in the corporate sector thus builds upon contemporary research that defines the “influence of stakeholders over firms [as] the temporary outcome of processes of action, reaction, and interaction among various parties” (de Bakker and den Hond, 2008, p. 8).

4.2.1.1

Influence as Outcome of Collective Sensemaking

If we assume CSR to be an organizational sensemaking process that is controlled by an organization’s beliefs and actions we necessarily have to admit that the way a corporation makes sense of its responsibility may not be aligned with the way in which its investors make sense of it. As Weick et al. (2005) maintain sensemaking “is not about truth and getting it right. Instead it is about continued redrafting of an emerging story so that is becomes more comprehensive, incorporates more of the observed data, and is more resilient in the face of criticism … Furthermore what is plausible for one group, such as managers, often proves implausible for another group, such as employees.” (p. 415). In this context, Bronn and Bronn (2003) investigate different mental models of stakeholder groups and find that these differences in making sense of reality can be sources of conflict between these groups. With regard to the problem under study we thus need to address how institutional investors and corporations interact to arrive at a mutual plausible story of how to make sense of social responsibility. Drawing upon Weick’s argument that human behaviours are interlocked and depend on each other we thus hold that institutional investors may only be able to participate in and influence corporate management’s sensemaking through actions rather than structures that connect both parties involved; the higher the connectivity the higher the influence (see e.g., Weick, 1993, for an analysis of how actions and interpretations of how to act may propagate among group members in the context of fire fighters). Collective sensemaking is thereby facilitated through the balance of advocating one’s own sensemaking efforts and inquiring into those of the other party involved.

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4.2.1.2

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Collective Sensemaking through Reciprocal Inquiry

The balance of advocacy and inquiry has been introduced as reciprocal inquiry (Senge, 2006) that we use here in our study as a construct to facilitate collaborative sensemaking across organizations.87 By ‘reciprocal inquiry’ Senge (2006) means “that everyone makes his or her thinking explicit and subject to public examination … when inquiry and advocacy are balanced, I would not only be inquiring into the reasoning behind others’ views but would be stating my views in such a way as to reveal my own assumptions and reasoning and to invite others to inquire into them” (pp. 184-85). Illustrating this point, Ross and Roberts (1994, p. 253) state that most managers in Western corporations have been educated to be ‘advocates’ or ‘problem-solvers’. This has led to an “advocacy surplus and an inquiry deficit” (Gerzon, 2006, p. 121, emphasis in the original). Managers do know how to argue for their views but often forget how to inquire into those of their discussion partners such as employees or other stakeholders. However, when dealing with complex and interdependent issues as, for instance, what constitutes a socially responsible corporation effective strategic decision making rather depends on a group’s ability “to identify, extract, and use its members’ potential contributions” (Schweiger et al., 1989, p. 745). This is not always an easy undertaking as it involves laying out “our reasoning and thinking, and then [to] encourage others to challenge us” (Ross and Roberts, 1994, p. 253). It also involves the willingness to question one’s own mental model of a situation: “… practicing inquiry and advocacy means being willing to expose the limitations in your own thinking – the willingness to be wrong” (Senge, 2006, p. 187). Senge (2006) also points to the risk of “escalation” that he also frames as an “arms race” (p. 183) when people are too obsessed with advocating their views. In such a case, Senge (2006) argues that there is little room for learning: “As each side reasonably and calmly advocates his viewpoint just a bit more strongly, positions become more and more rigid. Advocacy without inquiry begets more advocacy. … Managers often find

87

In the original sense, reciprocal inquiry was introduced by Senge (2006) “to promote collaborative learning” (p. 183).

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escalations so grueling that, thereafter, they avoid stating any differences publicly” (pp. 183-84). The only way to stop this “snowball effect of reinforcing advocacy” is to start asking questions such as, “What is it that leads you to that position?” (Senge, 2006, p. 184). According to Snell (2002), learning, or collective sensemaking, can only emerge if organizations “entertain multiple stories and perspectives …, house conversation and debate, and aim for creative problem solving, rather than a passive acceptance of solutions” (p. 551). Snell (2002) gives the example for a qualitative case study of organizational development in a Hong-Kong based utility company. Here, he identified an ‘imbalance between advocacy and inquiry’ as major impediment to organizational change. He states: “Until the outcry, however, less attention had been paid to the need for critical inquiry and double-loop learning regarding the human systems domain … Cooperation had been taken for granted, threats to felt security overlooked. Over-emphasis on advocacy and a relative neglect of inquiry … had diverted attention from the relationship between managers and the managed” (p. 562). With our conceptualization of influence as emerging from collective sensemaking based on reciprocal inquiry we thus propose to consider the exercise of influence as reciprocal social interaction: “The ‘exercise of influence’ is neither a singular act nor an individual decision but part of a concerted social interaction … The form it takes, whether the claim is accepted or opposed, and whether agents interpret and label a specific act as ‘influence activity’ at all, is the outcome of negotiation processes that take place within structured social arenas” (Lueger et al., 2005, p. 1147). So far, this view has not been taken up within research in the field of responsible investment; conversely, the existing literature has focused on unilateral influence activities by shareholders and argued that the influence potential of institutional investors on corporate behaviour predominantly depends on the size of their stake in the company. This is in line with the work of resource dependence theorists such as Pfeffer and Salancik (1978) or exchange theorists such as Cook (1977) who have argued that organizations use their resource dependencies to control each other. In this context Frooman (1999) for example developed an array of different strategies

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stakeholders might use to influence a corporation based on their mutual resource dependencies. However, in contrast to the work of Frooman (1999), our study is concerned with identifying possible strategies institutional investors might use to influence corporate behaviour based on how they communicate and negotiate to produce particular outcomes. We thereby account for the fact that organizational members as agents construct their work environments and that in an inter-organizational context they need to communicate and negotiate their diverging point of views. Hence, any relationship between investors and managers is inherently interactive. There exists a need “for reciprocal engagement and new dialogic forms of collective cognition or ‘learning together’” (Payne and Calton, 2002, p. 121). Research on the influence potential of institutional investors on responsible business conduct thus should not solely focus on what the investors advocate as being ‘responsible’. Rather it should concentrate on the processes needed to generate a collective view together with corporate management on what constitutes responsible business conduct: “Control is not one-way since it involves negotiation between different groups to produce particular outcomes” (Balogun and Johnson, 2005, p. 1574). The exercise of influence is consequently based on mutual responsibility and dialogue between investors and corporate management (see also Waddock, 2001, for an investigation of stakeholder engagement). In our subsequent analysis we will follow Ross and Roberts’ (1994) categorization of four overarching processes that are involved in balancing advocacy and inquiry: observing, asking, telling, and generating (see figure 29). Ross and Roberts (1994) used them to describe a possible (but not exhaustive) set of roles that people can play in direct conversations. We will in part come back to these sub-processes in our following chapter when analyzing the nature of existing responsible investment approaches with regard to advocacy and inquiry. However, please note that our analysis will not focus on face-to-face interaction only as proposed by Ross and Roberts (1994). Rather, drawing upon Weick’s (1995a) argument that sensemaking is inherently social, we consider any process that institutional investors engage in when making sense of their role as responsible investors as inevitably interactive. We thereby take

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into account that “the fundamentally dialogic nature of meaning-making is in fact implicit in every act of communication whether it is explicitly recognized or not” (Crane and Livesey, 2003, p. 46).

Advocacy

high

Telling

Generating

• Testing: “Here is what I say. What do you think of it” • Dictating: “Here is what I say, and never mind why” (dysfunctional) • Asserting: “Here is what I say, and here is why I say it” • Explaining: “Here is how the world works and why I can see it that way”

• Skillful discussion: Balancing advocacy and inquiry, genuinely curious, makes reasoning explicit, asks others about assumptions without being critical or accusing • Dialogue: Suspending all assumptions, creating a “container” in which collective thinking can emerge • Politicking: Giving the expression of balancing inquiry and advocacy while being close-minded (dysfunctional)

Observing

Asking

• Bystanding: Making comments which pertain to the group process, but not to content • Sensing: Watching the conversation flow without saying much, but keenly aware of all that transpires • Withdrawing: Mentally checking out of the room, and not paying attention (dysfunctional)

• Clarifying “What is the question we are trying to answer?” • Interrogating: “Why can’t you see that your point of view is wrong?” (dysfunctional) • Interviewing: Exploring others’ point of views and the reasoning behind them

low low

Inquiry

high

Fig. 29: Processes of advocacy and inquiry according to Ross and Roberts (adapted from Ross and Roberts, 1994, p. 254).

4.2.2 Processes and Outcomes of Reciprocal Inquiry Based on Senge’s (2006) construct of reciprocal inquiry we will now investigate how the various communication and negotiation processes known from responsible investment fit into Ross and Roberts’ (1994) categorization of the processes involved when balancing advocacy and inquiry. As mentioned before, our underlying assumptions are (i) that collective sensemaking among institutional investors and corporations is necessary if joint and consensual accounts of responsibility are desired; (ii) collective meaning unfolds when the institutional investor and corporate management engage in reciprocal inquiry; and (iii) the processes by which collective meaning is generated represent the core of any influence activity among institutional investors and corporations. The aim of this section is thus to find out how influential

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responsible investment strategies may be in changing corporate policies and practices.88 Drawing in part upon the work of Maitlis (2005), we will show how the different processes institutional investors engage in when interacting with corporations, i.e. the different ways they choose to arrive at collective meaning, may lead to different outcomes of how corporations interpret their environment in and through interactions with their shareholders, i.e. how both parties collectively make sense. Following Maitlis (2005) we thereby distinguish between minimal, fragmented, restricted, and enhanced collective sensemaking.89

4.2.2.1

Collective Sensemaking through Observing

4.2.2.1.1

Observing

According to Ross and Roberts (1994) observing describes the process by which both advocacy and inquiry are low. In the narrow sense of conversations, this may include ‘bystanding’ defined as “making comments which pertain to the group process but not to content”, ‘sensing’ which is “watching the conversation flow without saying much, but keenly aware of all that transpires”, and ‘withdrawing’ defined as “mentally checking out of the room, and not paying attention” (p. 254). The latter is viewed as dysfunctional as people who withdraw from a conversation are assumed to

88

89

We will concentrate only on the processes by which institutional investors balance advocacy and inquiry. We thus set the focus on the institutional investor as initiator of a collective sensemaking effort since our study is primarily concerned with the question of how institutional investors may change corporate policies and practices and not vice versa. However, it would be an interesting field for future research to analyze inasmuch corporations may initiate a collective sensemaking effort and how they may actually influence the organizational behaviour of institutional investors. This, however, goes beyond the objective of this study. Please note that Maitlis’ (2005) conceptualization of collective sensemaking rests upon Gioia and Chittipeddi’s (1991) notion of sensegiving (see section 3.3.2). She argues that collective sensemaking can be defined as interplay between the sensegiving efforts of organizational leaders and those of their stakeholders. Sensegiving by organizational leaders and their stakeholders is thereby distinguished between those activities that are meant to ‘control’ collective sensemaking, and those that are assumed to ‘animate’ collective sensemaking. Drawing upon Weick’s (2003) argument that sensegiving should be understood as the linguistic part of organizational sensemaking we further suggest that control and animation can also be interpreted as distinct ways of communication. Control is thereby oriented towards telling people what to do, and is based on existing beliefs and expectations; in contrast, animation is more future-oriented, and often rests upon finding out what to do next (Maitlis, 2005). Control and animation thus show strong similarities to the constructs of advocacy and inquiry which is why we considered Maitlis’ (2005) distinction between four different forms of sensemaking based on animation and control as equally useful for our analysis of collective sensemaking based on advocacy and inquiry.

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ignore “the opportunity to learn [from their conversation partners] through observation” (ibid.). In the broader sense of interaction between two organizations we define ‘observing’ as the process by which members of organization A engage in collective sensemaking by gathering information about organization B without directly getting in touch with each other. In the context of institutional investment this would include the process by which the research analysts hired by an institutional investor collect the information they perceive as relevant for evaluating and recommending companies based on publicly available data. This information collection may occur before the actual investment in order to find out about investment opportunities as well as after the investment to get informed about how well the company manages the funds received from its investors. For corporations, we suggest that ‘observing’ describes the process by which corporate management gets informed about funding opportunities based on publicly available data. Also, in the light of increased active ownership, we argue that ‘observing’ should include the process by which the corporate IR department gathers information and ‘sense’ what a corporation’s shareholders want, i.e. what their priorities are. A deeper analysis of the observing behaviour of institutional investors in the context of responsible investment thus aims at answering the question of how institutional investors use publicly available information on the ESG performance of companies to make sense of responsibility in their respective work environment. The possibility of making sense of responsibility through observation thus depends on (i) the extent to which a corporation at all discloses ESG information and which channel it uses for disclosure and (ii) how this information is bracketed and filtered by the research analysts who in the end provide the fund management of institutional investors with recommendation for buying or selling shares. With regard to the former, Juravle and Lewis (2008) list a number of regulatory changes in the past that has made ESG reporting mandatory for all listed companies such as the French “New Economic Regulation” law passed in 2001. However, according to Solomon and Solomon (2006), the degree to which institutional investors consider ESG information as relevant for their portfolio investment decisions is still negligible. The reason for this

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lack of ESG integration into investment decision making can be traced back to what we have earlier introduced as ‘short-termism’, i.e. the dominance of short-term oriented valuation models that analysts use when making recommendations. Hence, their observing behaviour is restricted by their prevailing mental models that filter equivocal data of corporation according to potential drivers of short-term performance and market valuations as it is the case in most mainstream financial institutions. This behaviour is not surprising considering the fact that, similar to fund managers, their individual sensemaking is largely driven by organizational factors such as shortterm oriented incentive schemes and quarterly based performance reviews (Guyatt, 2006; Juravle and Lewis, 2008). The pattern of observing is thus likely to determine how institutional investors make sense of responsibility. If, for example, research analysts leave ESG data unnoticed from the stream of equivocal data surrounding them, and thus, do not forward this information to an institutional investor’s fund management, it is unlikely that this investor’s sense of responsibility goes beyond its duty to monitor a firm on its financial performance and to maximize portfolio returns. Here, it is important to distinguish between those institutions that employ external research analysts and those that have internal analysts. External analysts are assumed to be poorly incentivized to integrate ESG information into their buying and selling recommendations and suffer from a lack of ESG training and education. However, if a responsible investment strategy is desired, the collection of ESG information is inevitable. This is why a large part of institutional investors such as pension funds and insurance companies have started to establish internal research departments or hire independent SRI research teams that are incentivized to adopt a long-term orientation based on ESG considerations and provide the buy-side with the respective information (Juravle and Lewis, 2008). Also, institutional investors increasingly use the service of investment consultants such as Mercer to educate and train their analysts and fund management on how to integrate ESG information into the investment value chain (see Mercer Investment Consulting, 2008). A typical responsible investment approach well known from social mutual funds based on observation is screening where ESG criteria are used as a filter to identify prospective investment opportunities (see section 2.2.1.1). Moreover, the process of observing has an impact on which information

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fund managers use to integrate them in their risk and return analysis if they are pursuing an enhanced analysis strategy (see section 2.2.1.2). Observing might also be used to identify under-performing companies within a portfolio that need to be lobbied for change (see sections 2.2.2.1 and 2.2.2.2 on engagement and activism). Rehbein and colleagues (2004) for example find that institutional investors most likely target large and visible companies since they are the easiest ones to get information from. However, the decision whether to include or exclude a company from a portfolio or which company to engage with or formally lobby for change see solely depends on how the fund manager makes sense of the information he received from the research analysts and what he thinks is a plausible way of integrating ESG factors into investment analysis and ownership practices.

4.2.2.1.2

Minimal Collective Sensemaking

We thus conclude that collective sensemaking where the institutional investor interacts with the corporation based on observation does not go beyond the process of information gathering (either done by external or internal research analysts). Hence, ‘observing’, in the language of sensemaking, means that the institutional investor adds data of the targeted company to its ‘raw material’ of equivocal input based on the perceived relevance of this data. The process by which the fund manager makes this raw material sensible, i.e. how he translates the ESG data into visible and consequential action (‘selection’, see section 3.3.1) however stays inside the organization. Here, the corporate party is not involved (see figure 30 for an illustration of the sensemaking processes involved in observing). Also, collective sensemaking based on ‘silent’ observation does not include a further inquiry of why the corporation has decided to pursue which specific CSR strategy that goes beyond publicly available data. Nor, does it include an explicit advocacy by the investor of his underlying motivations to engage in responsible investment. This lack of advocacy thus makes it especially difficult for the corporation to respond to the investor’s actions and to understand and learn about his underlying motivations.

4 Making Sense of Responsible Investment as A Driver of Corporate Social Responsibility

Institutional Investor

Enactment

Selection

Retention

Corporate Management

Enactment

Selection

Retention

Initial flow of equivocal input

New pattern of meaning is created

Sensemaking processes affected by interaction

Old pattern of meaning is preserved

171

Fig. 30: Collective sensemaking through observing.

Since any further reciprocal interaction is impeded unless one party starts asking questions or informs the other party about his point of view, the generation of collective meaning among institutional investors and corporations is assumed to be minimal if based on observation only. A similar picture has been portrayed by Maitlis (2005) who investigated the social processes of collective sensemaking among organizational leaders and their stakeholders based on a longitudinal study of three British symphony orchestras. Maitlis (2005) thereby finds that minimal collective sensemaking occurs if interacting partners do not discuss their issues of interest properly and make “little attempt to shape understandings” or “to influence how others saw” the respective issue (p. 42). The lack of discussion and the missing attempt to drive collective sensemaking through either ‘putting forward one’s own interpretations’ (ibid.) or inquiring into those of the counterpart is thereby very similar to what we have described as pattern of ‘observing’. Based on her observation Maitlis (2005) further argues that this minimal form of collective sensemaking was only able to generate “nominal accounts of issues” (ibid.) that did not go beyond a symbolic character and only served as “very weak foundations of action” (ibid., p. 43). They were “lacking richness and failing to incorporate multiple perspectives” (ibid.); two characteristics that we have earlier defined as important factors that organizational members need to rely on when making sense of their actions in an unstable and continuously changing work environment (see e.g., section 4.1.2.3.2 on

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‘justification’). In this context, Maitlis (2005) further holds, that minimal sensemaking is likely to produce a decision “that was acceptable for the time being but did not provide a workable long-term solution” (p. 44) – a decision-making pattern that Snell (2002) calls ‘passive acceptance of solutions’ and that Maitlis (2005) describes ‘one-time, and compromise action’. Translating Maitlis’ (2005) work into the context of responsible investment we can thus propose that collective sensemaking based on observation is likely to produce nominal accounts of what constitutes responsible business conduct in the respective work environment. This is because the institutional investor neither advocates nor explains his notion of responsibility vis-à-vis corporate management or the corporation’s IR department, nor does he encourage the corporation to expose its reasoning behind certain ESG figures. Imagine for example a company that has a relatively poor environmental management which translates into poor environmental figures in the financial report. However, this company has just begun to improve its environmental policy to attract responsible investors but the little progress it has made since the beginning of the fiscal year has not yet materialized. An institutional investor who solely relies upon ‘observation’ is likely to draw the conclusion that this company is not worth being invested in. However, an institutional investor who makes the effort and engages with the company to find out about why the environmental figures are (still) poor, would find out about the ongoing improvements; the decision to invest in that company may then become more plausible for him than the decision not to invest because of, for example, expected future profits. Based on these insights we suggest the following: Proposition 9a: Institutional investors who observe the ESG performance of corporations based on publicly available data do not advocate their notion of responsibility to the corporation or inquire extensively into the corporation’s sense of responsibility. Thereby they tend to facilitate a minimal collective sensemaking process. Proposition 9b: Institutional investors who engage in minimal collective sensemaking with corporations are likely to produce nominal accounts of what constitutes

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responsible business conduct in the respective work environment, thereby leading to one-time, and compromise action.

4.2.2.2

Collective Sensemaking through Asking

4.2.2.2.1

Asking

Asking, according to Ross and Roberts (1994) describes the process by which advocacy is low and inquiry is high. In the narrow sense of conversations, this may include ‘clarifying’ the question that has to be answered, ‘interviewing’ defined as “exploring others’ points of views, and the reason behind them”, and ‘interrogating’ which comes in question such as “Why can’t you see that your point of view is wrong?” (p. 254). The latter is viewed as dysfunctional to collective sensemaking as people who interrogate others do actually ask however they do not care about the other’s point of view. In the broader context of inter-organizational relationships we define ‘asking’ as the process by which members of organization A engage in collective sensemaking by inquiring information about organization B that goes beyond the data that is already publicly provided by members of organization B. In the context of institutional investment this would include for example the process which the research analysts hired by an investor send out questionnaires asking for information they perceive as relevant for making their buying and selling recommendations. Asking may also occur in meetings, and roundtables. However, since meetings and roundtables are also often characterized by a high degree of advocacy we will come back to this form of reciprocal inquiry in the section on ‘generating’ (i.e. high advocacy and high inquiry). For corporations, we suggest that ‘asking’ describes the process by which IR officers or corporate managers engage with sell-side analysts to clarify which information is actually needed by the analysts and why. Also, it would include getting in touch with the fund management of an institutional investor to find out why certain investment decisions such as in- or exclusion from a portfolio were taken. Another interesting field as claimed by some academics would be to ask the investor for their analysts’ performance histories as this is not (yet) subject to public disclosure. This

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would enable corporate management to understand the underlying reasoning behind those decisions and to better align their interests with those of the investor. In the context of responsible investment, the practice of sending out questionnaires to the CEO or the IR department of a company with regard to the company’s ESG performance is very common. The reason behind is that ESG disclosure still lacks a standardized format and corporations often vary a lot with regard to which information they perceive as relevant to disclose (Dillenburg et al., 2003). This again reinforces the point that collective sensemaking among institutional investors and corporations based on observation is unlikely to produce rich accounts of collective meaning. Although the majority of corporations nowadays publish a so-called CSR or sustainability report, these reports have often been criticized to be glamourized selfdisplays that do not go beyond a prosaic style of giving vague descriptions of why this particular company should be considered socially responsible (Morsing, 2006). Corporations may for example set different accentuations in their reports. Some provide a substantial amount of environmental figures but very little information on their social practices while others concentrate on diversity, part-time job opportunities for expectant parents and so forth, while remaining silent when it comes to their environmental policy. In summary, due to this lack of transparency and comparability with regard to ESG information institutional investors being in the responsible investment industry have started to get in touch with corporations and ask for more information on corporate policies and practices that go beyond publicly available reports. The process of asking is thereby often outsourced to external research and rating agencies such as the German oekom Research AG. oekom Research was founded in 1993 and since then has become one of the world’s leading partners for institutional investors and financial service providers in rating share and bond issuers according to their ESG performance. oekom Research inquires into a company’s ESG performance by sending out questionnaires and then rate it according to its peers (oekom,

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2008).90 Some institutional investors such as SAM however have developed their own questionnaires for asking companies on their ESG performance. The internal development of questionnaires is thereby assumed to better mirror the firm’s overall notion of responsibility. In cooperation with the DJSI SAM comes up with three dimensions reflecting the three pillars of CSR as introduced in section 2.3.1: economic, social, and environmental. The economic section of the questionnaire includes for example questions on corporate governance, risk and crisis management and customer relationship management. Questions on the social dimension of corporate responsibility centre amongst others on human capital development, talent attraction and retention, and social reporting. The environmental section focuses on the environmental reporting of companies and their eco-efficiency (for a sample questionnaire, see SAM Research, 2008). SAM thereby adjusts their questionnaires with regard to each of the DJSI sectors and sends them to the corporate executives and heads of IR of all the companies in the DJSI investment universe. The completed company questionnaires then used as source of information to identify the ‘qualified’ investment universe (see figure 4, p. 40). We can thus conclude that research analysts and agencies do ask about the current status quo of the economic, social, and environmental performance of a company; however, a closer look at the questionnaires reveals that they are still somewhat reluctant to integrate a longer time horizon or to ask why a company has engaged in a specific CSR activity. This could be part of meetings between analysts and corporate executives or IR officers. However, as Sullivan and Mackenzie (2006) find, most corporate executives have stated that they are hardly ever asked about ESG factors in one-to-one meetings with analysts. In summary, we argue that institutional investors engaging in high inquiry and low advocacy are willing to learn about the ESG related actions of their targeted companies. This learning thereby goes beyond the information that companies publicly advocate. The additional date the investors receive is then used to add to their knowledge repertoire which is subsequently used to make equivocal data sensible. As such,

90

The content of the questionnaires thereby represents the outcome of another collective sensemaking effort; i.e. the collective sensemaking process among leading academics in the field of corporate responsibility, and representatives from stakeholder groups. This sensemaking process is however not part of this study.

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collective sensemaking through asking goes beyond the pure bracketing function as we argued in case of observation, and includes the counterpart in the selection phase.

4.2.2.2.2

Fragmented Collective Sensemaking

Since the market for SRI research and rating agencies has not yet consolidated and some asset management firms have also started to use their own questionnaires corporate executives however have increasingly pointed to the lack of consistency and transparency of the questionnaires provided by research analysts and agencies (Arthur D. Little, 2003). As Dillenburg and his colleagues (2003) have argued corporations “are given mixed messages about what is being measured” (p. 169). The problem however is, coming from a sensemaking perspective, that ‘the message’ Dillenburg and his colleagues refer to, is ‘self-made’, i.e. it is the outcome of how corporations themselves make sense of these questionnaires. As long as institutional investors, or their research agency partners, do not advocate what they are really after and why certain issues being part of their questionnaires are important for them, corporations are left alone with interpreting the questions asked by institutional investors. Hence, when institutional investors ask corporations about their ESG performance, they may integrate the counterpart’s reasoning into the process of selecting a plausible story of how to enact responsibility; however, the collective sensemaking process remains a little one-sided as corporation are not able to integrate the investor’s reasoning into their selection process. In other words, the questions coming from institutional investors may irritate corporations regarding what they notice, however they provide no further guidance on how corporations should notice. The result is that corporations will rather stick to their ‘stored’ causal maps when making sense of institutional investors’ questions (see figure 31 for an illustration of the sensemaking processes involved in asking).

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Institutional Investor

Enactment

Selection

Retention

Corporate Management

Enactment

Selection

Retention

Initial flow of equivocal input

New pattern of meaning is created

Sensemaking processes affected by interaction

Old pattern of meaning is preserved

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Fig. 31: Collective sensemaking through asking.

In this context, Maitlis (2005) has introduced the notion of fragmented sensemaking. In her study of organizational sensemaking among organizational leaders and their stakeholders she observed that questions from stakeholders did actually animate collective sensemaking due “the discursive production of a variety of stakeholder perspectives”; however, since these accounts could not be controlled by organizational leaders (which we presume as resulting from a lack of stakeholders’ advocacy of reasoning), the stakeholders’ perspectives “were rarely integrated or reconciled” (Maitlis, 2005, p. 38). Maitlis (2005) further argues that the variety in stakeholder perspectives produced a multitude of new accounts among corporate members “each of which tended to be quite narrow, representing the construction of a single, individual group” (p. 39). The existence of these multiple, diverging accounts then in turn translated into a series of “inconsistent” and sometimes “contradictory” corporate actions (ibid.). A similar picture can be portrayed for the context of responsible investment. The questions asked by institutional investors may indeed animate corporate management or IR officers to rethink their actual enactment of responsibility. They may for example take the questions asked by SAM on ‘talent attraction and retention’ or ‘corporate citizenship and philanthropy’ as cues to make sense of the social dimension of their corporate responsibility. However, SAM’s accentuations of the social responsi-

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bility dimension may differ from other questionnaires. The lack of advocacy of why institutional investors are interested in certain issues may lead to different accounts of what constitute a ‘social’ responsibility among corporate managers, IR officers, or representatives of the CSR department since each group may interpret things differently. Hence, instead of reducing the equivocality of certain ethical issues, questionnaires may also result in producing more equivocal data. If a reduction of equivocality is however desired – coming back to Weick’s notion of the ‘double interact’ – corporations and institutional investors would need to engage in a considerably high number of interlocking behaviour cycles in order to refine what the institutional investor actually wants.91 As long as these additional cycles do not occur, corporate members will rather stick to their individually established routines of how to make sense of responsibility. A break with their routines is only likely to happen, if the investor provides them with an alternative reasoning that may enrich their linguistic repertoire in defending their identity or justifying their activities (see section 4.1 on how corporations enact their sense of responsibility). In summary, we propose that the process of asking indeed is able to irritate an organization’s sensemaking process but results in some form of fragmented collective sensemaking as it does not translate into new collective patterns of meaning. Rather, it results in an accumulation of individual accounts over time that may lead to inconsistent and sometimes even contradictory actions among organizational members when making sense of the questions asked. Drawing upon Maitlis (2005) and our previous argumentation, the following propositions can be derived: Proposition 10a: Institutional investors who inquire into the processes by which corporations enact their sense of responsibility through sending out questionnaires without advocating their own notion of responsibility tend to facilitate a fragmented collective sensemaking process. Proposition 10b: Institutional investors who engage in fragmented collective sensemaking with corporations are likely to produce multiple accounts of what constitutes 91

This would be part of the process of ‘generating’ and will be explained in the section after next.

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responsible business conduct in the respective work environment, thereby leading to an emergent series of inconsistent actions.

4.2.2.3

Collective Sensemaking through Telling

4.2.2.3.1

Telling

Telling is defined as the process by which organizational members highly advocate their views but scarcely inquire into the views of their counterpart. On the level of conversation, Ross and Roberts (1994) distinguish between ‘testing’ (“Here’s what I say. What do you think of it”), ‘asserting’ (“Here’s what I say and here’s why I say it”), ‘explaining’ (“Here’s how the world works and why I can see it that way”) and ‘dictating’ (“Here’s what I say, and never mind why”) (p. 254). The latter is dysfunctional because people who dictate their views are assumed to refuse making their reasoning visible. With regard to the interactive level between organizations, we define ‘telling’ as the process by which members of organization A engage in collective sensemaking by advocating their reasoning of how to make sense of the environment to members of organization B with little inquiry into organization’s B sensemaking. In the context of institutional investment ‘telling’ may include all processes that investors use to express their concerns with regard to the way a corporation is run by its managers without further asking why corporate managers run the firm the way they do. With regard to investment analysis this may involve screening decisions, i.e. the in- or exclusion of a company from a portfolio as long as these decisions are communicated to corporate management or translate into variations in share price. Here, ‘telling’ is similar to what Lewis and Mackenzie (2000) has referred to as ‘market signalling’: to tell the market that company X is worth being invested it or that it should better be avoided. With regard to ownership practices ‘telling’ may take the forms of ‘exit’ and ‘voice’ as brought forward by Hirschman (1970). It is thus primarily concerned with shareholder activism and partly engagement strategies (see section 2.2.2). For corporations, we suggest that ‘telling’ describes the process by which corporate management or IR officers inform their shareholders about their operational performance. This may take the form of the investor relation section of a corporate website, or the

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way a company advertises itself on investor road-shows. In its simplest form, telling comes as financial report. In agency theoretical words, one might argue that corporate telling includes all processes that corporate managers as agents engage in when reporting to their principals. In the context of responsible investment analysis, ‘telling’ would include for example an in- or exclusion from the FTSE4Good Index or DJSI index (Curran and Moran, 2007). The inclusion in and the deletion from such an index is thereby taken as an explicit cue for corporations to make sense of institutional investors’ buying and selling recommendations. However, although corporations are provided with additional data on institutional investors’ decision-making, this form of telling resembles more the style of ‘dictating’ as introduced by Ross and Roberts (1994). We thus argue that this ‘passive’ form of telling can rather be considered as dysfunctional to collective sensemaking since corporate managers are indeed told what institutional investors ‘have said’ (in the Weickian sense of ‘having done’) but they are not told why. Rather, they are confronted with the fact that their company has been listed or delisted from the index, without getting the chance to understand it. Also, Lewis and Mackenzie (2000) have argued that screening decisions are unlikely to advance corporate and social change as “the companies most in need of persuasion to reform their practices are the companies which ethical funds exclude from their portfolios” (p. 217) in the first place. In the context of responsible ownership telling comes in many different forms. As outlined in section 2.2.2.2 institutional investors may engage in filing shareholder resolutions, voting, public campaigning, or in divestment. Rehbein and colleagues (2004) for example find that institutional investors have extensively engaged in expressing their concerns via shareholder resolutions with regard to a company’s compliance with ILO conventions and employee rights. The main objective of filing shareholder resolutions has thereby been identified as to signal companies that their shareholders are paying attention to how the firm is managed (Black, 1992), and to provide them with a new agenda of ESG issues that management should concentrate on (Proffitt and Spicer, 2006). In general, filing shareholder resolutions and, in case they are not withdrawn by management, the subsequent voting through proxy state-

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ments at the AGM, resemble to what Ross and Roberts (1994) have referred as ‘asserting’. In both cases, institutional investors state their views and give reasons why it should make sense for management to accept this view. However, in contrast to voting and filing shareholder resolutions, institutional investors have also engaged in divestment to express their concerns vis-à-vis corporate management (Lewis and Mackenzie, 2000; Palmiter, 2002). This form of telling has similar patterns of a dictatorship as we found in screening decisions. It can be considered as dysfunctional to collective sensemaking for at least two reasons. First, divestment cuts off the opportunity for any further collective sensemaking processes, and second, it is based on ‘threat’ and ‘punishment’ which rather leads corporate managers to defend their existing actions (see section 4.1.2.1 on identity defense) than does it encourage them to rethink their current routines and to take ‘good’ actions based on the advice given from their shareholders (Admati and Pfleiderer, 2007). Also, the engagement practice of writing letters can be viewed as a form of telling as long as institutional investors express their concerns but do not further inquire into the underlying reasoning of corporate management for certain CSR (non-) activities. For an example we take the letter of Aviva Investors (asset manager of the insurance group Aviva plc, formerly Morley Fund Management) that we received from the PRI database on joint shareholder initiatives. Together with other like-minded institutional investors Aviva Investors sent out a letter to portfolio corporations having signed the UN Global Compact and informed those companies on their actual compliance with the Principles based on the Global Compact database. The underlying motif for this joint initiative was to encourage companies to improve their CSR management by sticking to the Global Compact Principles The investor group both complimented those companies on being in full engagement with the Global Compact, and raised severe concern vis-à-vis those companies designated as being ‘inactive’ according to the database. While expressing their concerns, the group of investors was thereby very keen to explain why they perceive compliance with the Global Compact as an important part of CSR management. For an illustration, the following excerpt is taken from the letter: “We recognise that reporting on the Global Compact principles can be time consuming. Nevertheless, a company’s ability to manage and mitigate exposure to social and environmental risk, and capture opportunities linked

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to these issues, is increasingly relevant to long-term financial success. The Compact provides a framework for companies to act on commitments to upholding human rights, promoting labour standards, protecting the environment and eliminating corruption. In so doing, it helps companies to maintain their licence to operate and protect shareholder value” (see appendix A). Thus, in contrast to other formal approaches of shareholder activism, the practice of writing letters should rather be seen as a weak form of telling that includes the investor’s willingness to ‘explain’ one’s reasoning of ‘how the world works’ (Ross and Roberts, 1994, p. 254). Also, letters are not restricted by a word count as it is the case with shareholder resolutions. In the US, for example, resolutions are restricted to 500 words (Logsdon and van Buren, 2008a, p. 2). In the next section we will address how these different forms of ‘telling’ may affect collective sensemaking.

4.2.2.3.2

Restricted Collective Sensemaking

In general, one may argue that a pure ‘telling’ approach in the context of shareholder activism and engagement strategies represents more of a one-way communication between institutional investors and corporate management. In fact, institutional investors try to influence the meaning making process of corporations by telling them how corporate policies and practices can be improved. Thus, they engage in ‘sensegiving’ by providing corporate management with alternative views of how to make sense of the world (see Gioia et al., 1994; see also section 3.3.2). However, the accounts that are produced with regard to what constitutes a responsible business conduct only mirror the narrow outcome of the sensemaking process of the investor. This implies several limitations for the production of collective meaning. First, assuming a world with no resistance, corporate managers as ‘recipients’ of institutional investors change efforts “would completely accept the advocacy of all messages received, including those detrimental to the organization” (Ford et al., 2008, p. 370). This is also confirmed by Snell (2002) who argues that a strict topdown sensegiving can lead to a “psychic imprisonment” of how organizational members make sense of certain issues. Dating back to 1965, Poggi reminded us that “a way of seeing is also a way of not seeing” (p. 284). This implies that in case institutional investors push corporate management too hard towards their predefined notion

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of responsible business conduct, corporate management might get ‘imprisoned’ by this view and do not question it with regard to their sector-specific context. This may also result in a lack of openness towards alternative views as coming from for example other groups of stakeholders. A potential outcome would be a one-time action or a planned set of actions by corporate management in response to shareholder concerns that however cannot be sustained once it collides with the concerns of other stakeholders (Maitlis, 2005). Balogun and Johnson (2004) for example emphasize the role of middle managers in implementing top-down instructions by senior management. Balogun (2005) thereby finds that plans made by senior executives have often resulted in unintended and unwanted outcomes once they have been enacted by middle management. ‘Accommodative’ responses from corporate management to shareholder demands (see Logsdon and van Buren, 2008a, p. 3; see also section 2.2.2) should thus be handled with more care because the actual implementation of these demands cannot be guaranteed. Second, assuming that corporations do not passively accept what institutional investors have told them, a pure advocacy approach may also lead to an “arms race” of advocacy (Senge, 2006, p. 183). Senge (2006) for example found that in organizational context, strong advocacy without inquiry is often responded back with strong advocacy (see figure 32).

Threat to B‘s position A‘s vehemence

B‘s vehemence Threat to A‘s position

Fig. 32: Senge’s snowball effect of reinforcing advocacy (adapted from Senge, 2006, p. 184).

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Framed differently, corporations feeling pressured by their shareholders might engage in a strong ego defense of how they make sense of the world without being willing to learn from the counterpart. Especially in the US, corporations spend a considerable amount of time and resource to explain to the SEC why the form and content of a resolution might not correspond to legal requirements and should therefore be omitted from the firm’s proxy statement (Logsdon and van Buren, 2008a). As we have outlined in section 2.2.2.2, institutional investors are for example not allowed to address ‘ordinary’ business concerns. However, since most ethical issues are closely linked with a firm’s strategy making (see Behnam and Rasche, 2009), it will be difficult for institutional investors to raise an ethical concern (e.g., with regard to quality management) via a resolution without having the resolution omitted by the SEC. Most shareholder resolutions have thus concentrated on demanding better reporting or the introduction of a new policy (Logsdon and van Buren, 2008a, p. 3). If the resolution is then going to be presented at the AGM the snowball effect of reinforcing advocacy however is likely to continue. Logsdon and van Buren (2008a) for example argue institutional investors who do not engage in dialogue with corporate management before the AGM (in this case we have an inquiry deficit) are likely to loose the vote at the AGM ‘overwhelmingly’ because the corporation holds proxies for the majority of shares outstanding – a phenomenon the authors frame as “showdown and defeat” (p. 2). A collective sensemaking process in the sense of creating consensual accounts of ethical issues is thus unlikely to happen. Hence, we suggest that corporate activities will likely continue to rest upon a firm’s ‘old’ account of responsible conduct. This is in line with David and colleagues’ (2007) finding that confrontational pressure in the form of filing resolutions and other shareholder activist behaviour is unlikely to result in an actual improvement of a company’s social performance. Third, and lastly, a major risk of pursuing a pure telling strategy is that the party who advocates but does not inquire restricts its sensemaking efforts to its own accounts of meaning in a self-referential manner. Simply speaking, without inquiring into other’s sensemaking efforts, institutional investors are not able to learn (see Argyris and Schön, 1996, for an analysis of the interface between organizational inquiry and organizational learning). In case of pure advocacy, their point of view with regard to

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what is environmentally friendly or socially responsible may not get updated or accommodated to a corporation’s specific context. Without inquiry it may get imprisoned by long-held expectations, and prevailing routines that may fit into the investor’s respective work environment but not necessarily into that of the company. A potential result would be that the demands that investors impose on corporations are too narrow to be implemented within the specific context of the corporation. In summary, we can argue that collective sensemaking based on telling is restricted by the lack of inquiry. When shareholder activists engage in telling but do not animate a collective sensemaking through questions that show real interest in the sensemaking process of the target corporation, narrow accounts of what constitutes responsible business conduct are likely to come out on both sides: The investor, who is not willing to hear the corporation’s point of view is likely to end with the same account of responsibility as he had before entering in the collective sensemaking process; the corporation, who is challenged with another point of view of how to make sense of responsibility may either compromise on that narrow account or may refuse the account for reasons of identity defense. Both scenarios may lead to ‘onetime’ action or a planned set of actions (e.g. the omission of a resolution). In general, one can argue that as long as the investor does not engage in irritating the company through asking for its underlying reasoning for certain activities (i.e. making explicit something which was before taken-for-granted), the company is more likely to defend its ego according to prevailing patterns of sensemaking than to break with old routines and adopt the investor’s point of view (see figure 33 for an illustration).

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Institutional Investor

Enactment

Selection

Retention

Corporate Management

Enactment

Selection

Retention

Initial flow of equivocal input

New pattern of meaning is created

Sensemaking processes affected by interaction

Old pattern of meaning is preserved

Fig. 33: Collective sensemaking through telling.

Hence, since institutional investors and corporations were not able to generate new collective patterns of meanings we can speak here of a restricted collective sensemaking process following Maitlis’ (2005) categorization of sensemaking processes. Although Maitlis (2005) takes the opposite perspective and analyzes how collective sensemaking occurs if organizational leaders strongly advocate their views to their stakeholders without allowing enough room for discussion, her results show strong similarities to what we have suggested for the case of shareholder activism. Maitlis (2005) for example observed that advocating one’s account of a specific issue (here the generation of more revenue) without asking those people being affected by this decision for their opinion did not animate a collective sensemaking process at all. Rather, not asking people for their opinion was likely to lead to disinterest and the personal decision that this issue was unimportant. Based on her findings Maitlis (2005) argues that the result is the dominance of a single interpretation of an issue. However, “this dominance resulted not from leaders working to integrate and synthesize multiple perspectives, but from there being a lack of alternatives to leaders’ constructions. Thus … the accounts emerging from restricted processes were relatively narrow, incorporating only the leaders’ perspectives” (p. 41). As we have outlined earlier, narrow accounts are however not very suitable in organizational context they do not allow organizational members to improvise and adjust these accounts to local

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context and with regard to other stakeholders’ interests (Weick, 1993): “The narrowness of the accounts produced in restricted sensemaking processes meant that they provided highly specific foundations for action: much like a play written around a linear plot that can lead to only one conclusion, an account produced by restricted sensemaking processes does not provide the discursive resources necessary for organization members to engage in any significant improvisation or extension” (Maitlis, 2005, p. 42). Based on these insights we suggest the following: Proposition 11a: Institutional investors who advocate their sense of responsibility in the form of letters, filed shareholder resolutions, votes, public campaigns, or divestment, but do not inquire into the corporation’s understanding of responsibility tend to facilitate a restricted collective sensemaking process. Proposition 11b: Institutional investors who engage in restricted collective sensemaking with corporations are likely to produce narrow accounts of what constitutes responsible business conduct in the respective work environment, thereby leading to one-time action or a planned set of consistent actions that compromise on improvisation.

4.2.2.4

Collective Sensemaking through Generating

4.2.2.4.1

Generating

Generating is defined as the process by which organizational members highly advocate their views but also balance their views by extensively inquiring into those of their counterpart. On the level of conversation, Ross and Roberts (1994) distinguish between ‘skilful discussion’, ‘dialogue’, and ‘politicking’ (dysfunctional). In a ‘skilful discussion’ interacting partners engage in “[b]alancing advocacy and inquiry”, are “genuinely curious”, make their “reasoning explicit”, and ask the counterpart “about assumptions without being critical or accusing” (p. 254). ‘Dialogue’ is thereby described as the process of “creating a container in which collective thinking can emerge” (ibid.). ‘Politicking’ is considered one of “the most destructive conversa-

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tional forms”. Ross and Roberts (1994) describe it as “a relentless refusal to learn while giving the impression of balancing advocacy and inquiry” (ibid.). In the context of inter-organizational interaction we define ‘generating’ as the process by which members of organization A engage in collective sensemaking with members of organization B by advocating their reasoning of how to make sense of the environment as well as exposing their reasoning to alternative views and inquiring into the way members of organization B make sense of the environment. ‘Generating’ thus represents a two-way communication effort that aims at the continuous refinement of prevailing accounts of meaning based on balancing advocacy and inquiry. In contrast to pure advocacy, the goal of combining advocacy and inquiry “is no longer ‘to win the argument’ but to find the best argument” (Senge, 2006, p. 185). In the context of institutional investment ‘generating’ includes all processes by which investors engage in a reciprocal interaction with corporations to voice their concerns with regard to the way a corporation is run by its managers as well as to listen to corporate managers’ reasoning why they run the firm the way they do. In the narrower sense of responsible investment ‘generating’ may occur when institutional investors and corporations “mutually agree to engage in ongoing communications to deal with a serious social issue” (Logsdon and van Buren, 2008a, p. 2). ‘Generating’ is thus most likely to occur in shareholder engagement strategies as outlined in section 2.2.2.1 that come in the form of one-to-one meetings or other forms of dialogue (see Logsdon and van Buren, 2008a, on ‘Dialogue’, and Vandekerckhove et al., 2007, on ‘engagement-SRI’). For corporate members ‘generating’ in the context of responsible investment is likewise the process that allows them to articulate their current way of responding to ESG issues as well as to better understand what their shareholders actually want. This is reflected in recent changes in the function of a firm’s IR officer. Hockerts and Moir (2004) find that IR officers increasingly see their role in moving “from one-way broadcasting towards two-way relationship management” (p. 92). As we have outlined in our chapter two, engagement strategies are likely to become the preferred communication strategy by institutional investors (Clark and Hebb, 2004; McLaren, 2004; Sparkes and Cowton, 2004; Vandekerckhove et al., 2008).

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However, whether investors pursue an activism or engagement strategy still seems to depend on the cultural context of the investor. While most investors in the US still tend to prefer an activism approach, European institutional investors have traditionally been more involved in engagement (Sparkes and Cowton, 2004; Vandekerckhove et al., 2008). In an analysis of the Canadian market, Dhir (2006) finds that the relationship between corporations and investors has been “oriented more towards consultation, and less towards the adversarial expression of individual rights” (p. 391). He further argues that there has traditionally been a “culture of collaboration, in which institutional shareholders raise issues directly with corporate officers and corporate boards, rather than utilizing the proxy and proposal provisions in corporation statutes” (ibid.). In contrast to activism strategies, engagement strategies based on dialogue thus enable institutional investors to meet with management, discuss ESG issues in person and to find the best argument that fits into both work environments. Often, these dialogues occur “behind closed doors” (Friedman and Miles, 2001, p. 536) and thus, prevent the company from being publicly accused and embarrassed (Logsdon and van Buren, 2008b, p. 7). This reduces the risk of a ‘snowball effect of reinforcing advocacy’ (Senge, 2006) as corporate managers may feel less pressured by their shareholders. In an “atmosphere of genuine vulnerability” (ibid., p. 184) corporate managers may thus not engage in ‘polarizing’ or even ‘terminating’ discussions but rather, they would be encouraged to listen and learn from their discussion partner (Burchell and Cook, 2006). An important advantage of combining skills of advocacy and inquiry is thus that it engenders continuous interaction and provides the necessary foundation for building trust vis-à-vis the discussion partner. Senge (2006) notes that by creating an ‘atmosphere of genuine vulnerability’ “[n]o one is hiding the evidence or reasoning behind his views – advancing them without making them open to scrutiny … when inquiry and advocacy are balanced, I would not only be inquiring into the reasoning behind others’ views but would be stating my views in such a way as to reveal my own assumptions and reasoning and to invite others to inquire into them. I might say, ‘Here is my view and here is how I have arrived at it. How does it sound to you?’” (pp. 184-85). This is line with Logsdon and van Buren (2008a) who argue that “[r]espectful listening and a proper tone for criticism are important elements of

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[shareholder] activists’ success with regard to Dialogue” (p. 10). This view on engagement is crucial as it implies a stronger emphasis on an institutional investor’s skills to inquire into the reasoning behind management’s thinking. So far, engagement strategies have been primarily seen as a “signaling – response process” (Vandekerckhove et al., 2008, p 82). Especially in the case of writing letters, Vandekerckhove and his colleagues (2008) for example find that ethical concerns about corporate behaviour have been signalled to management by making two statements: “‘it is being said that your company is doing this’” and “‘… if true, we think that is wrong’ (p. 82). The authors conclude that “engagement is a process of signaling concerns to management and management responding to that signaling” (ibid.). However, we think that engagement should entail far more than proposed by Vandekerckhove and his colleagues. Rather, the case they presented does not go beyond what we have referred to as (a weak form of) ‘telling’ as it does not involve the inquiry into corporate management’s underlying reasoning behind certain activities. We think instead that engagement should go beyond ‘making statements’ and include more questions of how corporate management has arrived at a certain view point which in turn influenced their activities. In this context, Morsing and Schultz (2006) distinguish between symmetric and asymmetric two-way communication. According to Morsing and Schultz, a communication effort that is characterized by one group responding to the ‘sensegiving’ efforts of another but without necessarily internalizing it is called ‘asymmetric’. This resembles the signalling-response model of engagement as proposed by Vandekerckhove and his colleagues (2008). A communication effort that builds on an iterative process of sensemaking and sensegiving between both groups however is called ‘symmetric’ and implies that an organization is able to establish “an ongoing and systematic interaction” (Morsing and Schultz, 2006, p. 328) with its stakeholders, as proposed in our model of engagement based on ‘generating’. It is important to note that we do not want to undermine the rightness of investors’ concerns. However, we believe that for example asking corporate management why they have broken with ILO conventions (as in the case example of Vandekerckhove et al., 2008) makes explicit corporate management’s underlying attitudes and beliefs in that respective area, and, in a second step, allows the investor to discuss with man-

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agement whether these assumptions are still adequate in the long-run. Institutional investors may then for example point to the long-term consequences of noncompliance with ILO conventions, thus provide management with an alternative cause map of the firm’s current activities. Of course, such an undertaking takes time and is more likely to occur in face-to-face interactions; however, questions can also be asked in letters. As last comment is devoted to what Ross and Roberts (1994) have referred to as ‘politicking’. As we said before, ‘politicking’ is assumed to be one of ‘the most destructive conversational forms’ and thus considered dysfunctional to collective sensemaking. Drawing upon Ross and Roberts’ (1994) definition of ‘politicking’ as “a relentless refusal to learn while giving the impression of balancing advocacy and inquiry” (p. 254) it thus occurs whenever both institutional investors and corporations pretend an interest in the counterpart’s way of thinking but in the end, stick to their old patterns of behaviour without being open to changing them. An example of this form of conversation was brought forward by Westphal and Zajac (1994) when analyzing the symbolic management of CEOs vis-à-vis their shareholders. Westphal and Zajac (1994) found that CEOs often responded to external pressures for managerial accountability from their shareholders by engaging into dialogue and working out long-term incentive plans for top managers. However, they rarely implemented these plans and used them only for symbolic reasons to appease their investors. Thus, the plans got ‘decoupled’ from practice so, one might argue, an organizational sensemaking process characterized by tying beliefs with actions did not occur – which however is a necessary pre-requisite for making collective sensemaking work. This is line with Logsdon and van Buren (2008a) who remind us that “[l]ong-term success in Dialogues between corporations and their shareholder critics requires that both parties tone down their public rhetoric and instead exchange views in ways that bring about common ground – even if doing so seems to take a long period of time” (p. 10).

4.2.2.4.2

Enhanced Collective Sensemaking

Combing advocacy and inquiry in a functional way thus enables institutional investors and corporations to advocate and to question their sensemaking processes in a

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mutual and simultaneous way, leading to a continuous enrichment and refinement of existing accounts of meaning such as stored causal maps. ‘Generating’ thus represents an ‘interactive two-way process’ of engaging into dialogue (Lawrence, 2002) that enhances collective sensemaking. Through generating joint accounts of how to make sense of responsibility, members of both organizations are more likely to act upon these accounts than in case of a pure advocacy approach; an incorporation of CSR into the organizational context is thus more likely to happen. The crucial difference between generating and the other three forms of interaction therefore is that the actual process of sensemaking, i.e. sense-‘generating’ is pursued collectively and not by one organization alone (see figure 34 for an illustration of the sensemaking processes involved in generating).

Institutional Investor

Enactment

Selection

Retention

Corporate Management

Enactment

Selection

Retention

Initial flow of equivocal input

New pattern of meaning is created

Sensemaking processes affected by interaction

Old pattern of meaning is preserved

Fig. 34: Collective sensemaking through generating.

Pure advocacy approaches for example have two meaning making processes that run parallel to each other but do not connect: (i) the meaning making process of the investor who tells the outcome to the corporate manager, and (ii) the meaning making process of the corporate manager who tries to make sense of what the investor has told him. As they do not connect, we have argued that institutional investors and corporate management are unlikely to arrive at a joint collective pattern of meaning. In a dialogue however that is characterized by high advocacy and high inquiry participants may “learn from each other the different ways that a shared messy problem can

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be defined. In the struggle to gain a cognitive grip on the mess, preconceived relationships between self and others changes as new learning occurs” (Payne and Calton, 2002, p. 133). The outcome of combining advocacy with inquiry is thus likely to come in the form of rich and unitary accounts that build upon the numerous and varied views of the members involved in the interaction. This is line with Maitlis (2005) who found that collective sensemaking processes among organizational leaders and their stakeholders that were animated through questions but also controlled by advocating one’s own point of view led to “new accounts … [that] tended to be cumulative and dense, as leaders built upon, rather than tore down, the accounts and partial accounts generated by stakeholders along the way” (p. 35); Maitlis (2005) further observed that the “presence of multiple perspectives created accounts that offered a rich and enduring resource for the embryonic emergence of a series of actions over time, while their unitary nature ensured a consistency in the actions that emerged” (ibid.). This in line with our assumption that the production of joint accounts in collective sensemaking processes facilitates action on the part of those involved in the interaction. Drawing upon Maitlis’ (2005) findings and based on our previous argumentation, the following propositions can be derived: Proposition 12a: Institutional investors who pursue an engagement strategy characterized by a combination of advocating one’s own sense of responsibility and inquiring into that of the corporation tend to facilitate an enhanced collective sensemaking process. Proposition 12b: Institutional investors who engage in enhanced collective sensemaking with corporations are likely to produce unitary and rich accounts of what constitutes responsible business conduct in the respective work environment, thereby leading to an emergent series of consistent actions. Figure 35 summarizes the findings of section 4.2 (partly adopted from Maitlis, 2005).

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high

Restricted Collective Sensemaking Process characteristics • Low inquiry • High advocacy

Shareholder activism

Advocacy

Possible outcomes • Narrow accounts • One-time action, or a planned set of actions that compromise on improvisation

Minimal Collective Sensemaking Process characteristics •Low inquiry •Low advocacy

low

Screening

Possible outcomes •Nominal accounts •One-time action

low

Enhanced Collective Sensemaking Process characteristics •High inquiry •High advocacy

Shareholder engagement

Possible outcomes •Rich, and unitary accounts •Emergent series of consistent actions

Fragmented Collective Sensemaking Process characteristics •High inquiry •Low advocacy

Questionnaires

Possible outcomes •Multiple accounts •Emergent series of inconsistent actions

Inquiry

high

Fig. 35: Processes and outcomes of reciprocal inquiry in responsible investment.

4.3

How Institutional Investors May Change a Corporation’s Sense of Responsibility

So far, we have outlined possible ways of how institutional investors and corporations, both taken separately, make sense of their organizational responsibility. Also, we have shown how institutional investors may interact with corporate management to facilitate collective sensemaking of ESG related issues. We argued that the ‘exercise of influence’ is the effect of how institutional investors and corporate managers collectively make sense. We thereby identified variations in collective sensemaking depending on how strong an investor advocates his sense of responsibility to corporate management and how strong he inquires his counterpart’s notion of responsibility. By focusing on the processes by which organizational members make sense and interact we thereby accounted for Weick and Robert’s (1993) observation that the ‘locus’ of meaning is to be found in “connections between behaviors, rather than

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people” (p. 359).92 However, these behaviours may change over time as people live within streams of ongoing situations from which they continually have to notice, bracket, interpret some portion which is then memorized. Sensemaking, and thus the process of generating accounts of responsibility, becomes necessarily an ongoing activity. In the last part of our analysis we will therefore apply a dynamic perspective to the problem under study and explicitly address the question of how institutional investors may alter something which is already in motion. We thereby follow the call of recent scholars such as Painter-Morland (2006) to account for the dynamic nature of an organization’s notion of responsibility – a perspective that has been neglected so far in the discussion of institutional investors’ claim of corporate change.

4.3.1 Preliminary Remarks Before we will start our analysis two preliminary remarks are made. First, we will explain why we consider CSR a continuous change process. Second, drawing upon Weick and Quinn’s (1999) work on organizational change we will outline possible intervention processes that institutional investors may engage in if they desire a change in CSR.

4.3.1.1

Corporate Social Responsibility as Continuous Change Process

To answer the question of how institutional investors may change the way a corporation makes sense of responsibility we draw upon the construct of continuous change and argue that CSR as an ongoing sensemaking process is changing over time (Jones, 1980, p. 66). As Isabella (1990) points out, frames of reference such as norms and values evolve as organizational change unfolds. Hence, if institutional investors claim to advance CSR they need to be aware that they aim at changing something which is already ‘under way’.

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Weick and Roberts (1993) thereby draw upon Sandelands and Stablein’s (1987) observation that the organization of neurons in the brain parallels the organization of organizational activities. They come up with the idea that intelligence is located in patterns of behaviour and rather not in individual knowledge.

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The image of an organization underlying the idea of CSR as continuous change process is one which argues that organizations are continuously being constructed and ‘enacted’ through interaction between organizational members: The “sensemaking perspective casts social reality as an ongoing construction elaborated through interactions, a fragile and temporary order that people continuously define and redefine through their actions and experiences” (Allard-Poesi, 2005, p. 174). CSR understood as organizational reality thus becomes the ‘fragile and temporary order’ that continuously defines and redefines a corporation’s roles and relationships with regard to environment and society (see section 4.1). It is thus the continuous search for a plausible answer to questions such as ‘What stakeholders should we deal with?’ or ‘How should we engage with the stakeholder?’ (see e.g., Carroll and Buchholtz, 2006). Or, as Weick (2003) has framed it: “What’s the story?” and “Now what?” (p. 186, see section 3.3.1). The character of CSR can thus be described as dynamic and continuous (Basu and Palazzo, 2008; Cramer et al., 2006; Miles et al., 2006; Nijhof and Jeurissen, 2006; Painter-Morland, 2006; Roberts, 2003; Sethi 2003; Zwetsloot, 2003). Miles and colleagues (2006) speak of CSR as ‘dynamic, emergent strategy making’; Nijhof and Jeurissen (2006) describe CSR as “an evolutionary process where may different agents act and react upon each other” (p. 316); Cramer and colleagues (2006, p. 382) argue that the implementation of CSR in a specific organizational setting requires a process of ‘iterative interpretation and confirmation’. As we have argued in section 4.1, the actual sense that organizational members make of CSR is thus impossible to define a priori but becomes subject to the way people translate their prevailing values and expectations into action. Even though some scholars are right in their claim that corporations should have universal responsibilities for preventing child labour or pollution the way organizational members implement these responsibilities still varies according to their local context (Maclagan, 1999). Empirical evidence can be found in Schouten and Remmé (2006) who show that the way organizational members internalize CSR as social institution depends on their own language efforts with which they continuously define and refine their understanding of CSR. In this context, Graafland and colleagues (2006) for example find that organizational language may vary according to deeply rooted religious beliefs.

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Hence, the meaning of what constitutes corporate responsibility cannot be considered as universal, stable, or easy to prescribe top-down. Rather, it is ambiguous and largely depends on local circumstances. As a consequence, as Allard-Poesi (2005) points out, “meanings people develop and attach to their experience are fundamentally fluid, unstable and idiosyncratic, and that there is no such thing as a common, unified or shared representation in organizations: individual histories are too diverse … and influence processes to complex and multiple … to produce similarity” (p. 172). Corporate manager’s efforts trying to transform organizations by implementing best practices such as total quality management (TQM) often fail because their change efforts stay at the surface but do not affect their organizational members’ underlying beliefs and values (Liedtka, 1998, p. 258; see also Gioia, 1986). In Weick’s words, their change efforts thus only addressed ‘what people notice’ (but this is nothing that can be shared) and not ‘how’.93 If however change in corporate behaviour is desired (and TQM surely affects corporate behaviour), a change effort has to be directed at how organizational members collectively make sense of an issue (e.g., TQM) through communication and interaction: “… if people in organizations share anything, what they share are actions, activities, moments of conversations, and joint tasks, each of which they then make sense of using categories that are more idiosyncratic” (Weick, 1995a, p. 188). Change then unfolds over time as result of “endless modifications in work processes and social practice … Numerous small accommodations cumulate and amplify” (Weick and Quinn, 1999, p. 366). Our description of CSR thus accommodates several distinguishing features of an ongoing sensemaking process such as: “… its genesis in disruptive ambiguity [CSR is difficult to grasp], its beginning in acts of noticing and bracketing [organizational members use their own language to create meaning around CSR], its mixture of retrospect and prospect [organizational members attach meanings of what constitutes responsibility to their experience and derive meanings from their expectations], [and]

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To illustrate the different outcomes of change efforts that are directed at ‘what’ and ‘how’ people notice social psychologists distinguish between ‘public compliance’, private acceptance’ and ‘internalization’ (see Kelman, 1956). ‘Public compliance’ thereby refers to “a surface change in behavior-expressed attitudes … [that] does not reflect internal change, … [and] usually persists only while behavior is under surveillance”; in contrast, ‘private acceptance’ is based on “the subjective validity of norms” while ‘internalization’ describes the “subjective acceptance and conversion … that produces true internal change” (Munduate and Bennebroek Gravenhorst, 2003, p. 6).

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its culmination in articulation that shades into acting [CSR unfolds as result of social practice]” (Weick et al., 2005, p. 413). A conceptualization of CSR as continuous change process thus enables us to generate new perspectives for institutional investors on how they may influence CSR.

4.3.1.2

The Logic of Intervention in Continuous Change

Given the assumption that CSR is ongoing and change is always ‘under way’ the current understanding of the claim of corporate change has to be fundamentally rethought. As we have outlined in chapter three the role of institutional investors, if understood as change agents, is no longer one of triggering change but one of redirecting it. We argued that institutional investors, who have emphasized their role in advancing CSR, tend to regard themselves as ‘prime movers’ that are able to initiate corporate change for the good. However, assuming CSR to be a continuous change, process, the character of the ‘change agent’ becomes more one of a ‘transformational leader’ (Bass, 1995; Munduate and Bennebroek Gravenhorst, 2003), or ‘senseorchestrator’ (Dutton et al., 2001) who redirects a current way of corporate members’ thinking and acting. Redirection, from an investor’s perspective, thereby involves the attempt to transform current modes of cognition and action that enables a corporation “to take advantage of important opportunities or to cope with consequential environmental threats” (Gioia and Chittipeddi, 1991, p. 433). It involves the process of interrupting an ongoing sensemaking process, making visible existing patterns of how to make sense of responsibility, rebalancing those patterns, and finally resuming for further learning and improvisation: “Experience is a continuous flow, and it becomes an event only when efforts are made to put boundaries around some portion of the flow, or when interruption occurs” (Weick, 1999/2001, p. 462). The underlying change sequence as proposed by Weick and Quinn (1999, p. 379) thus suggest an intervention process based on freezing, rebalancing, and unfreezing (see section 3.3.3). Our next sections will consequently investigate how institutional investors can freeze, rebalance, and unfreeze an ongoing sensemaking process of CSR. Based on sections 4.1 and 4.2, the underlying question is thus how an institutional investor

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may proceed during a collective sensemaking effort if he wants to alter a corporation’s beliefs and actions around CSR. We thereby draw upon the concepts of issueselling (Dutton and Ashford, 1993; Dutton et al., 2001; Dutton et al., 1997) and impression management going back to Goffman (1959) as these ‘tactics’ are not simply directed towards ‘what’ people notice but present distinct efforts that are “attentive to process” (Weick, 1995a, p. 112) and focus on an alteration of ‘how’ people notice: “As people become more aware of the workings of the mind and accept those workings as the resources for collective action, they are in a better position to produce wise action” (Weick and Sutcliffe, 2006, p. 515).94 Moreover, issue-selling and impression management add to current research on sensemaking in inter-organizational relationships as they provide organizational actors with distinct techniques of how to focus attention and maintain interaction beyond organizational boundaries (see Vlaar et al., 2006). Drawing upon the recent work of Dutton and colleagues, issue-selling thereby refers to “the process by which individuals affect others’ attention to and understanding of the events, developments, and trends that implications for organizational performance … Because no issue is inherently important or strategic, individuals’ claims about what matters (that is, their issue selling) determine, in part, which change initiative get activated” (Dutton et al., 2001, p. 716). Issue-selling thus portrays “an organization as a pluralistic marketplace of ideas in which issues are ‘sold’ via the persuasive efforts of managers [in our case: of the investor] and ‘bought’ by top managers who set the firm’s strategic direction” (ibid.). An analysis of the underlying influence tactics that institutional investors may use to persuade top management of ‘what matters’ thus significantly affects the process by which individuals defend their activities, how they set their priorities, and, in part, which underlying beliefsstructures dominate their decision-making. Issue-selling thus predominantly affects the process by which individuals make sense of a situation based on how they argue.

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Drawing upon issue-selling and impression management our last part of analysis thus underscores the role that institutional investors may play in a collective meaning making process. However, it should be noted that issue-selling and impression management are not ‘exclusive rights’ for investors. Rather, we have to bear in mind that every manager from senior to lower level and every stakeholder be it internal or external is able to influence the sensemaking process of others by selling issues or managing impressions; as such, our analysis clearly simplifies on the complex and interdependent nature of intra- and inter organizational relationships.

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This is in line with Brockriede’s (1974) definition of arguing as a process characterized by “an inferential leap from existing beliefs to the adoption of a new belief or the reinforcement of an old one” and “a perceived rationale to justify that leap” (p. 166, see section 4.1.2.1). Impression management is concerned “with the behaviors people direct towards others to create and maintain desired perceptions of themselves” (Gardner and Martinko, 1988, p. 321). It goes back to Goffman’s (1959) dramaturgical analysis of social interactions in his classic book titled ‘The Presentation of Self in Everyday Life’ and later publications such as ‘The Interaction Order’ (Goffman, 1983). Goffman’s (1959) fundamental idea was to view individuals as ‘actors’ who ‘perform’ in specific ‘settings’ in front of an ‘audience’. Meaning thereby unfolds depending on how the actor presents himself towards the audience and vice versa. The meaning that is derived from their interaction in turn guides their behaviour (Gardner and Martinko, 1988, p. 322; see Weick and Roberts, 1993, on the ‘locus’ of meaning). Thus, transferring Goffman’s thoughts to the study of institutional investors’ claim of corporate change, it follows that the way institutional investors (the actors) present themselves in front of corporate managers (the audience) can significantly affect the meaning that corporate managers may attach to this interaction; thus, affecting the decision whether a change initiative gets activated. Impression management thus particularly impacts on sensemaking processes that are driven by the role expectation managers have of their financial stakeholders and vice versa (see section 4.1.2.2). In section 4.1.2.2.1 we thereby distinguished categorically between agents and stewards. A role, however, can also be specified by personal ‘appearance’, or the ‘tone of voice’ being formal and informal: “The characterization that one individual can make of another by virtue of being able … to observe and hear that other is organized around two fundamental forms of identification: the categoric kind of involving placing that other in the one or more social categories, and the individual kind, whereby the subject under observation is locked to a uniquely distinguishing identity through appearance, tone of voice, mention of name or other person-differentiating device” (Goffman, 1983, p. 3, emphasis in the original).

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We like to note that impression management is often considered part of the issueselling perspective as proposed by Dutton and Ashford (1983) and other colleagues (Dutton et al., 2001). However, we have introduced them separately to make clear that they can affect two different sensemaking processes (arguing and expecting). By focusing on arguing and expecting, our subsequent analysis thus concentrates on the effect of influence tactics on belief-driven processes of sensemaking. 95

4.3.2 Processes of Intervention How people argue and what they expect inside an organization are important indicators for explaining patterns of organizational change (Dutton et al., 2001; Weick, 2001, 1995a; Weick and Quinn, 1999). Issue-selling and impression management are thus promising mechanisms to impact on corporate change by redirecting (or ‘transforming’) the way organizational members make sense of responsibility. Both perspectives focus our attention “to often unnoticed acts” of organizational members as ‘sensemakers’ and thereby help “to rewrite change as a more emergent and pluralistic process than it is typically assumed to be in more traditional ‘upper echelons’ perspectives” (Dutton et al., 2001, p. 717). The following sections will allocate selected aspects known from issue-selling and impression management to the three stages of an intervention as proposed by Weick and Quinn (1999).

4.3.2.1

Freeze

Freezing aims at capturing taken-for-granted sequences of how individuals make sense by means of e.g. cognitive maps (Fiol and Huff, 1992), scripts (Gioia and Manz, 1985), schemas (Harris, 1994; Tenkasi and Boland, 1993), and stories (Boje, 1991). Cognitive maps have been defined as “graphic representations that locate people in relation to their environments”; they are “of potential interest to managers because they are a means of displaying graphically the firm’s current strategic posi-

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In order to stay focused we will only concentrate on belief-driven processes of sensemaking. Influence tactics that for example affect a sensemaking process based on manipulation include processes that have an effect on corporate managers’ perception of legitimacy; thus, they rely more on normative thinking. Processes that may be useful in advancing the legitimacy of actions can for example be found in discourse ethics as proposed by Habermas (2001, 1990), or work relating to procedural justice (Folger, 1977).

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tion … many of the maps are in the form of ingrained and taken-for-granted assumptions, and thus are hidden even from those who use them” (Fiol and Huff, 1992, pp. 267-68). Scripts are similar and involve “a hypothesized cognitive structure that provides a guide to appropriate behaviour sequences in a given context (Gioia and Manz, 1985, p. 528). Schemas are closely related to cognitive scripts and “refer to the cognitive structures in which an individual’s knowledge is retained and organized ... In addition to being knowledge repositories, schemas also direct information acquisition and processing” (Harris, 1994, p. 309). Stories are to the organizational system “what precedent cases are to the judicial system … Bits and pieces of organization experience are recounted socially throughout the firm to formulate recognizable, cogent, defensible, and seemingly rational collective accounts that will serve as precedent for individual assumption, decision, and action” (Boje, 1991, p. 106). Overall, these different means can be referred to as a “frame of reference” (Weick, 1995a), or “currency” (Boje, 1991, p. 106), that individuals use to enact their environment. Cognitive maps, schemas, and stories thereby focus individuals’ attention and “trigger memory” (Fiol and Huff, 1992, p. 275). To understand and redirect others’ sensemaking it is thus essential to be sensitive to the ways in which people use these currencies to “chop moments out of continuous flows and extract cues from those moments” (Weick, 1995a, p. 43). Some examples of sensemaking currencies in the context of responsibility have been introduced in section 4.1. The identity orientation of an organization for example belongs to what Fiol and Huff (1992) have called ‘identity submaps’, or what Prahalad and Bettis (1986) named ‘dominant logic’ of the organization. The role expectation that managers have in mind when they interact with their shareholders may be referred to as ‘categorization submap’ (Fiol and Huff, 1992) as they categorize between moral and amoral behaviour. Other typical categorization submaps can be found in strategic planning such as the SWOT analysis (ibid.; see Jackson and Dutton, 1988). For example, whether organizational members view stakeholder demands as ‘threat’ or as ‘opportunity’ can lead to crucial differences in their behaviour. However, we should not forget about the recursive nature of sensemaking. It is important to note that each submap guides corporate behaviour but is also derived from it (see section 3.3.1). Role expectations, for example, are significantly shaped

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by the history of the relationship between an actor and its audience (Goffman, 1959). Submaps relating to organizational members’ identity are found to vary according to members’ functional and technical background (Dutton and Dukerich, 1991). For the context of responsible investment, freezing thus implies the attempt of institutional investors to uncover underlying sensemaking patterns such as an organization’s underlying identity orientation or prevailing role expectation of its stakeholders. The institutional investor should try to punctuate the ongoing flow of actions and words in his target company; but also, he must freeze his own sensemaking efforts as they have affected his perceptions and willingness to undertake action in the first place. As we have argued in section 4.1.2 these sensemaking patterns can be captured by looking at how individuals narrativize their CSR activities and nonactivities, i.e. which rationale they prefer for defending their CSR engagement (instrumental or ethical). Also, we showed that the position of CSR officers or fund managers inside an organization can be an important indicator of how the organization makes sense of CSR. A closer look at the relationship history between an investor and the corporation might reveal prevailing role expectations. From an operational perspective, freezing might come in the form of placing an issue on top management’s agenda, writing a letter, or calling a meeting on a particular issue. Those ‘punctuated events’ “focus and crystallize meanings in organizations. These events also serve as focal points for the different streams of ongoing activity in the organization … they serve as moments to take stock of ongoing actions, to spin new stories, to set in motion future actions, to formally announce beginnings, milestones, and ends, to trigger a change of course, or just to touch base and reaffirm individual and organizational identities” (Eccles and Nohria, 1992, p. 48). Investor letters on particular ethical issues such as a corporation’s break with ILO conventions as presented by Vandekerckhove and colleagues (2008) or on Global Compact (non-) compliance as cited from Aviva Investors are thus good candidates to initiate a change effort. However, they should be followed by ‘generative’ meetings that we have considered in section 4.2 as the most adequate form for facilitating collective sensemaking. Meetings allow both parties to capture the counterpart’s prevailing sensemaking processes while combining their skills in advocacy and inquiry. Hence,

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in the language of storytelling, they allow the study of “behavioral interactions that constituted [a] storytelling event” (Boje, 1991, p. 109). Asking, or pure observing, may uncover “the textual content” but not “the storytelling event” (ibid.). In summary, we argue that whenever an institutional investors aims at changing corporate behaviour he should thus start his change effort with reflection (see also Pater and van Lierop, 2006). Reflecting is thereby a necessary pre-requisite for institutional investors to know which influence tactics may be useful in altering the way a corporation makes sense of responsibility. Hence, the first phase in a continuous change effort being characterized by looking back at passed events emphasizes again the retrospective nature of sensemaking. It also provides an interesting alternative to more traditional research on organizational change where reflection often comes last. Proposition 13: The more an institutional investor reflects on how a corporation makes sense of responsibility as well as on his own sensemaking, the greater his success in rebalancing existing sensemaking patterns.

4.3.2.2

Rebalance

Rebalancing involves questioning existing sensemaking patterns such as frames of references or mental models and looking for alternatives (see e.g., McNulty and Pettigrew, 1999): To “rebalance is to reinterpret, relabel, and resequence the patterns … [for example] to reframe issues as opportunities” (Weick and Quinn, 1999, p. 380). The latter for example addresses the question of how institutional investors sell an ethical issue which may alter the way corporate management will argue to make sense of the issue. Institutional investors may also engage in re-labelling their organizational self-description. This may then affect a change in the image that corporate management has of the investor, and thus may alter the way management will expect to make sense of the role that the investor plays in ethical decision making. In our following analysis we will concentrate on issue-framing as an issue-selling tactics that Dutton and colleagues (2001) identified as particular successful in focusing top management’s attention to a seller’s issue. Also we have selected various impression management techniques such as an organization’s self-description, tone of voice, appearance, and authenticity that were primarily drawn from the work of Goffman

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(1959) and Schlenker (1980). Some of them also appear in Dutton and Ashford’s (1993) theoretical work on issue-selling and have been integrated in their later empirical work (Dutton et al., 2001). We thereby concentrated particular on those techniques that were considered as crucial in maintaining or enhancing the seller’s credibility vis-à-vis corporate management, thus affecting corporate management’s role expectation of their shareholders. Issue-framing Institutional investors may alter the way corporate managers argue to make sense of responsibility by choosing about how they linguistically frame an issue of concern (Dutton and Ashford, 1993). We argue that in case of issue-framing96 institutional investors are able to advance CSR by providing corporate managers with alternative explanations of how to make sense of an ethical issue. More concrete, issue-framing may provide corporate managers with an alternative tool kit that they can use to defend their self-esteem while at the same time focusing their attention on a new issue (see defense mechanisms, see section 4.1.2.1.2). The logic that underlies issueframing is thereby one of ‘attraction’ (Weick and Quinn, 1999). Drawing upon Kotter’s (1996) work Weick and Quinn (1999) argue that influence tactics directed at triggering episodic change are those which “tell people what to do (logic of replacement)”; influence tactics that aim at redirecting continuous change however are those which “show people how to be (logic of attraction)” (p. 380). An issue’s framing can affect the way corporate managers pay attention to an issue through a variety of paths. Drawing in large upon insights from Dutton and Ashford (1993), Dutton and her colleagues’ (2001) empirical study of issue-framing tactics in hospitals, and insights from Sillince and Mueller’s (2007) work on how to frame accounts of responsibility, we chose the following two tactics as relevant for closer examination in the context of responsible investment: ‘use logic of a business plan’, and ‘frame issue as incremental’.

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The term framing can be traced back to Goffman’s (1974) book ‘Frame Analysis’. Goffman thereby argued that differences in individual behaviour stem from the various frames that people use to make sense of generalized interpretive schemes.

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Use logic of a business plan: In their initial work on issue-selling, Dutton and Ashford (1993) claim that supporting facts and empirical evidence are important indicators for the selling success of an issue. Coming from a sensemaking perspective one might also argue that the ‘richer’ an issue is supported by previously made experience, defined roles and responsibilities, tested in various local contexts, the easier it will be for top management to derive a plausible story from the given facts and ‘narrativize’ the issue in their respective work environment (Weick, 2007). In testing this hypothesis, Dutton and colleagues (2001) thereby find indeed that “using lots of numbers and charts, conveying a logical and coherent structure, and emphasizing bottom-line impacts” (p. 721) was assumed positively correlated with the selling success of an issue. They summarized this tactic as ‘use logic of a business plan’. The business plan logic however was also found to be sensitive to the individual background of top managers. Managers coming from a financial background for example are more likely to focus their attention to the ‘bottom-line impacts’; a business plan in this case should therefore incorporate financial aspects to ‘attract’ the audience’ in the first place. This is line with our proposition in the previous section that a detailed reflection on individuals’ prevailing sensemaking processes is a necessary pre-requisite for any intervention process to start with. For the context of responsible investment, this implies that institutional investors may be better able to sell an ESG related issue to corporate management if they provide enough supporting facts and evidence of that issue’s ability to advance a corporation’s overall ESG performance. For an example we take Aviva Investors’ Global Compact initiative (see section 4.2.2.3). In their letter, Aviva provided the companies with broadly defined reasons of why compliance with the Global Compact Principles benefits a corporation’s financial performance. Hence, they provided corporate management with an instrumental rationalization of their proposed issue, i.e. compliance with Global Compact Principles. They also gave an ethical rationalization thereby pointing to the role of the UN in protecting human rights, fighting corruption, and safeguarding the environment. However, given the recent scepticism against the credibility of the Global Compact97, the dominance of their ethical argument might be questionable. Addi-

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The Global Compact has recently been attacked by over 80 civil society organizations from 25 countries, for still including PetroChina as a GC participant. According to the civil society organi-

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tional supportive arguments such as pointing to successful case studies of how the Global Compact has assisted other companies in advancing their ESG performance could be a promising way of raising the level of corporate management’s attention devoted to complying with the Global Compact Principles. Frame issue as incremental: Framing an issue as incremental was found by Dutton and colleagues (2001) as another important indicator for a seller’s success in attracting top management’s attention. It refers to the actual size of the change implied by an issue (ibid., p. 722). This observation thereby supports Weick and Quinn’s (1999) call for a stronger focus on the small micro-processes of organizing as source of organizational change (see also Weick, 1984). Moreover, Plowman and colleagues (2007) just recently provided a case study in favour of Weick and his colleague’s argument and showed how small changes in organizational behaviour amplify and lead to ‘continuous radical change’. We imagine at least two aspects that may explain the selling success of issues framed as incremental. First, issues that imply small organizational changes may appear easier to grasp, better to understand, and thus also less difficult to resolve than issues that imply full-scale, organization-wide changes. Once top managers feel capable of resolving an issue in terms of e.g. authority, resources, and access, their perceived responsibility for an issue is likely to increase because others might call them into account as being in control of that issue (Sillince and Mueller, 2007). Second, issues that imply small organizational changes are less perceived as ‘threats’ to individual and collective self-esteem. Rather, organizational members may feel comfortable in handling those issues and are thus more tempted to interpret incremental issues as ‘opportunities’ to receive positive work credits and advance their career. Issues that were negatively associated with ‘threat‘, or ‘weakness’ can suddenly become positive sources of organizational change (Weick, 1993b/2001). In the context of responsible investment we believe that this framing tactic is of central importance. Responsible business behaviour is nothing that one can build overnight or ‘from scratch’; the number of alternative viewpoints of what is moral and amoral is countless and collective sensemaking a long and timeconsuming process. An incremental approach that focuses on small steps can thus be

zations, PetroChina has financial links to Sudan’s regime which is ‘perpetuating’ the current humanitarian crisis in Darfur which many consider being genocide (Wheelan, 2009).

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essential if a richer understanding of corporate responsibility is desired. Unfortunately, most investor activities refer to large-scale organizational issues such as a corporation’s compliance with the Global Compact Principles (see Aviva’s letter) or a corporation’s compliance with ILO conventions (see Vandekerckhove et al., 2007). It appears rather unlikely that corporate managers will feel very comfortable in handling ‘compliance with Global Compact Principles’ or ‘compliance with ILO conventions’. Also, these issues are too broad to define clear roles and responsibilities so that in the end no body feels responsible for it. Although Aviva received a high number of responses from corporate managers indicating that they will take Aviva’s concerns seriously and strive towards a better compliance with the Global Compact Principles, it remains thus unclear if an actual change in corporate behaviour is going to follow. In summary, it follows: Proposition 14a: The more an institutional investor frames an issue by using the logic of a business plan, the greater the level of corporate management’s attention invested in the issue. Proposition 14b: The more an institutional investor frames an issue as incremental, the greater the level of corporate management’s attention invested in the issue. Impression management Institutional investors may alter the way corporate managers expect to make sense of responsibility by choosing about how they behaviourally present themselves vis-à-vis corporate management (Goffman, 1959; Schlenker, 1980). We argue that by using impression management techniques institutional investors are able to advance CSR by providing corporate managers with alternative images of how to make sense of the role institutional investors may play in ethical decision making. Impression management techniques may thereby help to raise corporate managers’ situational awareness and their willingness to question or maintain long-held expectations (see section 4.1.2.2.2). Hence, the logic underlying impression management is equally one of ‘attraction’.

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Impression management techniques can affect the image that corporate managers have in mind when dealing with their shareholders in a number of ways. Their objective, as stated earlier, is thereby to increase the investor’s credibility vis-à-vis corporate management so to ensure a productive (or ‘generative’) joint collective sensemaking. Drawing in large upon insights from Goffman (1959), Schlenker (1980), and in part also from Dutton and Ashford (1993), we chose the following three tactics as relevant for closer examination in the context of responsible investment: ‘organization’s self-description’, ‘individual versus team performance’, and ‘authenticity’. Organization’s self-description: The most obvious form of self-presentation is stated in an organization’s verbal self-description. Organization’s self-descriptions are “descriptive statements made by an actor that describe various aspects of an organization to which he or she belongs” (Gardner and Martinko, 1988, p. 332). Gardner and Martinko (1988) thereby clarify the link between the individual and the organizational level as follows: “… the descriptions that members provide of their organizations reflect upon themselves and are thus important self-representational behaviors” (p. 331). As we have argued in section 4.1.2.2 a main problem in the context of responsible investment is that corporate managers often view their shareholders as purely financially oriented and thus, do not incorporate them into the decision making process that affects CSR. To make the claim of corporate change effective thus implies that institutional investors have to provide corporate managers with an alternative image that stresses their role in CSR related decision making. Most institutional investors active in the responsible investment industry mention on their mission statements their concern for environmental and social issues. As such, they provide corporate managers with ‘textual content’ about their prevailing values. However, less clear is the picture of how they integrate ESG concerns into their own operational activities. This however would be essential as it provides corporate managers with a clearer idea of an investor’s own exposure to responsible business conduct. It would also help to clarify why institutional investors think they have a legitimate stake to be included in ethical decision making. A good example is here again Hermes’ public self-description that clearly advocates Hermes’ role as steward of their beneficiaries’ wealth. By speaking of assets under ‘stewardship’ instead of

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assets under ‘management’ they take a stand and present themselves as collectively oriented institutional investor. As such they intentionally relabelled their activities as fund managers to signal to corporate managers that they are not only interested in advancing a corporation’s attention to CSR but also they tie responsible thinking with inner actions. The new label can thereby be considered as a self-fulfilling prophecy that organizational members of the fund will use to make sense of their activities (Weick, 1985/2001, p. 49). But also, it can serve as ‘tool’ to create a vision that corporate managers use as a new source of order that will change their previously held role expectation of Hermes; and thus, it may increase their willingness to listen to Hermes’ advice on how to improve CSR management: “The key event in a self-fulfilling prophecy involves an expectation that causes an envisioned situation to materialize. Prophecies, therefore become tools of design” (Weick, 1993b/2001, p. 67). Individual versus team performance: An observation taken from impression management literature is that organizational actors choose to perform individually or in teams. Goffman (1959) for examples finds that actors often bundle their selfpresentations into team performances. In a similar argumentation, Dutton and Ashford (1993) argue that issue-sellers engage in “selling solo or with others” (p. 417). They thereby propose that forming a coalition to promote an issue is positively linked with an issuer’s selling success. Especially support from ‘outsiders’ is considered to have a positive influence on the selling success (Dutton et al., 2001). Issuesellers should thereby concentrate on “articulate, persuasive sponsors who can make the case” (Burgelman and Sayles, 1986, p. 89, cited in Dutton and Ashford, 1993) if they wish to increase the perceived importance of an issue. This is line with Weick’s (2007) article on the ‘Generative Properties of Richness’ in which he argues that the more people can draw plausible stories from an issue, i.e. the richer it is, the more likely they will be able to make sense of it. Also, coming from an impression management perspective, team performance symbols more acceptance of an issue. In this regard, Dutton and Ashford (1993) point to the risk that an issue seller is likely be seen as a ‘deviant’ (p. 418) by top management if being the sole voice for an issue. Dutton and Ashford (1993) however emphasize that involving others when selling an issue might also pose a risk on a seller’s credibility vis-à-vis corporate management.

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If, for example, one team member is not perceived as trustworthy this negative image is likely to shadow on the other team members. In the context of responsible investment the choice whether to engage in individual versus team performance may differ according to the preferred responsible investment strategy. When screening, for example, SRI investors tend to engage in individual performances because each screening approach can be considered as a selfpresentation technique that aims at distinguishing oneself from other SRI investors. While some investors may choose to concentrate on environmental issues, others such as the Pax World Fund may screen companies primarily after their engagement in the weapon industry (see chapter two). In the context of engagement and activism however, institutional investors are likely to perform in teams. We have touched upon this topic already in section 4.1.2.4.1 in which we argued that institutional investors often invent their environment (or their ‘theatre’) by engaging in coalition building. They come together in so-called collaborative shareholder engagement initiatives and e.g., write joint letters to corporate managers. A platform that organizes these initiatives can be found at PRI. A couple of years ago, PRI launched its ‘engagement clearinghouse’, a web-based portal designed to coordinate shareholder collaboration. This platform provides shareholders with a ‘meeting point’ where they can raise issues of concern and discuss possible engagement strategies with other like-minded investors. Institutional investors are thus given the opportunity to enrich an issue with multiple viewpoints, and to share experience with colleagues on past engagements. Hence, the PRI is a great platform for institutional investors to bundle their self-presentations in a way that enriches the nature of an issue, makes the issue more legitimate, and thus might affect corporate management’s way of seeing their shareholders. Authenticity: Authenticity is the last impression management technique that we discuss in our study and refers to “the degree to which the performance is consistent with the actor’s self-concept” (Gardner and Martinko, 1988, p. 333). Authenticity as success factor for gaining positive credits from the audience may appear obvious at first glance. However, Schlenker (1980) finds several cases in which actors misrepresented themselves. Goffman (1959) thereby emphasizes that especially in situations

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that are characterized by high equivocality and a lack of social order actors feel safe deviating from their self-concepts. As such, their performance before the audience differs from their self-description. In the realm of CSR Ciulla (2005) has likewise noted that often corporation ‘do not walk their talk’. Corporations would use their self-descriptions (their talk) purely as ‘window-dressing’. However, the question is what comes first. Taking into account that sensemaking is inherently retrospective Weick (1995a) argues that instead of ‘walking the talk’ people should be more concerned with ‘talking the walk’. Assuming that people are always ‘thrown in the middle of things’ the more reasonable way of deriving authenticity would be “to search for words that make sense of current walking that is adaptive for reasons that are not yet clear” (p. 183). What does this imply for the context of responsible investment? It implies that institutional investors should be foremost concerned with their walk and then search for words that make sense of their actions in front of corporate management. An institutional investor who does not integrate ESG metrics into his own core business, i.e. investment analysis, is unlikely to derive authenticity from telling corporate managers to integrate ESG considerations into their core businesses. Rather, such behaviour will reinforce the image of an amoral investor as the ethical claim is not taken as credible. In such a case, any shareholder engagement for CSR could be considered as an ‘inconsistent talk of this walk’, and thus may destroy an actor’s authenticity. Here again it becomes essential for the institutional investor to reflect at first instance what exactly he is doing to make sense of responsibility before he approaches others with ethical claims. In particular we believe that the integration of ESG issues into the investment analysis, i.e. following an enhanced analysis strategy (see section 2.2.1.2) is essential for developing mutual trust in the relationship between corporate managers and investors in the context of responsible investment. It can be considered a necessary condition for any further engagement and activism strategy if institutional investors want to appear authentic in front of corporate management. In summary, the following propositions can be derived: Proposition 15a: The more an institutional investor’s self-description is aligned with an issue, the greater the level of credibility that he gains when selling an issue in

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front of corporate management, and thus the greater the level of corporate management’s attention to the issue. Proposition 15b: The more an institutional investor collaborates with other investors to sell an issue, the greater the level of credibility that he gains when selling an issue in front of corporate management, and thus the greater the level of corporate management’s attention to the issue. Proposition 15c: The more an institutional investor’s performance on an issue is consistent with his self-concept, the greater the level of credibility that he gains when selling an issue in front of corporate management, and thus the greater the level of corporate management’s attention to the issue.

4.3.2.3

Unfreeze

To unfreeze is to resume continuous change processes such as improvising, translating, and learning that allow for more mindful, resilient, and flexible way of making sense (see Weick et al., 1999). In a sense, unfreezing can be described as ‘triggering’ further activity on a revised issue such as by “providing dynamic foci that demand continued attention” (Weber and Glynn, 2006, p. 1653).98 Thus, it concerns the process by which institutional investors ‘invite action’ on an issue (Dutton et al., 2001) after having focused corporate management’s attention to an issue. It is also the process by which institutional investors allow their issues of concern to mature in the local context of the organization. Or, as Czarniawska and Joerges (1996) call it, it is the process by which one “plants ideas into a group” (p. 30) without hitting the group with predefined ideas upfront. In this context, Brown and Eisenhardt (1997) have come with the term ‘semi-structures’. The use of semi-structures would for example imply that institutional investors fix some contextual aspects such as responsibilities or project priorities but leave room for local adaptation. We argue that an open clause to any issue that institutional investors perceive as relevant for advancing a corporation’s sensemaking of responsibility can be identified as the type of room that has to

98

Weber and Glynn’s (2006) notion of ‘triggering’ as the last step in institutionalizing an idea well documents the reverse nature of intervention processes in continuous change in contrast to episodic change (see e.g., Lewin, 1951) where triggering comes first, and reflection last.

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be left for companies to act on behalf of local particularities. Decision making then would be partly regulated but also partly “without regulation” (Derrida, 1990, p. 961). Moreover, an open clause would allow every company to “reinvent [the issue] in each case” (ibid.) to react to new conditions, obstacles, and technologies which are constantly emerging in a fast-growing economy. It further liberates companies from the sometimes impossible undertaking of finding a consensus between all stakeholders (Ortmann, 2003, pp. 134-35). The balancing act between coordination and freedom to act99 is thus the distinguishing feature of the process of unfreezing: In organizational contexts, “there are always more possible meanings for [organizational members’] actions than the group can ever use, so their problem is to agree on a sufficient number of meanings to make coordinated action possible. But agreements are held to a minimum so that people retain the capability to make individual adjustments to local irregularities” (Weick, 1993b/2001, p. 58). Fiol and Huff (1992) similarly argue that the way organizational actors make sense in terms of their cognitive maps should be balanced in terms of focus, memory, closure, and agreement. In times of high equivocality, cognitive maps should highlight priorities to “provide closure when managers are plagued by ‘analysis paralysis’” (p. 276, see also Grimm, 1996). However, they should not be too closed to avoid inflexibility. Cognitive maps should likewise invite self-reflective questions in order to improve the understanding of an issue. In the context of responsible investment, institutional investors should therefore stay open for corporate management’s (sometimes) critical questions. However, as we indicated in section 4.2 too much of inquiry can also lead to fragmentation, thus, a balance has to be found between coordination in terms of advocacy and questions in terms of inquiry. In summary, the important message for institutional investors in a change effort is “that the functions of cognitive maps are not clearly prescriptive. We cannot say ‘take this mapping technology and incorporate it into your decision-making routine for positive results’” (Fiol and Huff, 1992, p. 276).

99

The balancing act between coordination and the freedom to act is what Weick (1995a) refers to as tension between the ‘generic subjectivity’ of organizational routines and the ‘intersubjectivity’ of individual innovation.

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Rather, organizational members need to unfreeze this mapping technology and make sense of it. Once it is accepted, corporate management will legitimize it by officially incorporate into decision making (see Czarniawska and Joerges, 1996, on the legitimizing role of decisions). An interesting approach to advance this process of unfreezing would be to involve diverse individuals and groups in shareholder engagement strategies in order to foster collective sensemaking across different organizational levels. Instead of talking to corporate managers only, institutional investors could for example ask for including other corporate members from different hierarchical levels into meetings. Also, institutional investors themselves should come with a research analyst and a fund manager to the meeting. The discussion of an issue from alternative viewpoints might thereby reveal other potential resources of meaning that have been overlooked before, as well encourages a better diffusion of an issue throughout a corporation (Sutcliffe et al., 1994; Weick, 1998). The role of the institutional investor would thus become more one of a ‘bricoleur’ than a pure advocate of a particular issue who competes with the way corporate management makes sense of the world: “The concept of bricolage implies that resources are not as scarce, nor are they distributed as unevenly, as Pfeffer and Salancik suggest. The discussion of bricolage sensitized us to the possibility that there are many more potential resources, in many more places in organizations, than we usually assume” (Weick, 1993b/2001, p. 66). If an institutional investor however manages to connect these resources he will also be able to increase the level of comprehension of a particular issue; particularly if he combines young and old organizational members: “… comprehension can be increased if more levels of experience are connected, as when newcomers who take nothing for granted interrelate more often with old-timers who think they have seen it all” (Weick and Roberts, 1993, p. 366). To conclude, an institutional investor’s ability to present an issue before corporate management that provides coordination but also animates further local accommodations and adjustments is likely to strengthen the success of an investor in transforming corporate behaviour.

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Proposition 16: The more an institutional investor balances coordination and animation while he is selling an issue to corporate management, the greater his success in transforming corporate behaviour. Please note that the three steps that we have presented, freeze, rebalance, and unfreeze are recursive, implying that whatever is unfrozen can be subject to further freezing, rebalancing, and unfreezing if necessary. For the context of responsible investment this implies that institutional investors should understand the claim of corporate change as continuous with no particular start and no end. Also, we argue that the claim of corporate change should more be understood as a claim of ‘transformational leadership’. We thereby re-emphasize our proposition that institutional investors should approach corporate management with incremental changes, rather than with ‘big picture’ changes. We encourage them to think in small, iterative cycles of freezing, rebalancing, and unfreezing, that over time, may form a big picture that reflects both, the institutional investors’ and corporate management’s sense of responsibility.

4.4

Interim Conclusion II: A Process Model of Responsible Investment as a Driver of Corporate Social Responsibility

This chapter’s objective was to answer the question of how institutional investors may drive CSR in publicly listed companies for which we looked at the sensemaking processes involved in the interaction among institutional investors and corporations. Chapter four was thereby structured along the following research questions, drawing upon the conceptualizations of enactment, the double interact, and continuous change: 1a) How do institutional investors enact their sense of responsibility? 1b) How do corporations enact their sense of responsibility? 2)

How do institutional investors and corporations (double) interact?

3)

How may institutional investors change a corporation’s sense of responsibility?

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The reasoning behind our approach was our finding that existing literature in the field of responsible investment lacks a sound conceptual basis that describes and explains the complexity inherent to institutional investors’ claim of corporate change. Our intention was thus to enrich current research by providing an alternative perspective on the claim of corporate change that stems from interpretive research. Sections 4.1, 4.2, and 4.3 thereby revealed that a change in corporate behaviour as proclaimed by institutional investors involves a specific set of skills and resources that practitioners and researchers have largely overlooked so far. While current research has focused on the use of economic-based governance structures to change corporate behaviour towards more CSR, with economic efficiency as primacy, we presented an alternative perspective with a focus on the social processes that activate organizational actors’ ‘attentional resources’ to be able to make sense of CSR (Weick and Sutcliffe, 2006, p. 516). Based on the framework we developed in chapter three, we thereby identified the following four social processes to play a role when institutional investors aim at driving CSR in publicly listed companies: investor responsibility, corporate social responsibility, reciprocal inquiry, and transformational leadership. The following definitions thus summarize our findings in chapter four. For a summary of propositions underlying each construct, see appendix B. Investor responsibility We refer to investor responsibility as the process by which organizational members of an institutional investor argue, expect, behaviourally commit, and manipulate in the interest of responsible business conduct. Corporate Social Responsibility We refer to CSR as the process by which organizational members of a corporation argue, expect, behaviourally commit, and manipulate in the interest of responsible business conduct.

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Reciprocal inquiry We refer to reciprocal inquiry as the process by which members of an institutional investor and members of the corporation collectively make sense. The exercise of influence is thereby considered the outcome of collective sensemaking. Transformational leadership We refer to transformational leadership as the iterative process by which members of the institutional investor freeze existing sensemaking patterns of the corporation as well as their own, rebalance them by means of influence tactics such as issue-selling and impression management, and unfreeze them to resume continuous change. We thus conclude that the claim of corporate change in responsible investment is a combination of at least the four sensemaking processes that we presented in our analysis. The success of a claim of corporate change is thus precisely the effect of (1) how the institutional investor makes sense of responsibility, (2) how the corporation makes sense of responsibility, (3) how the institutional investor animates and controls collective sensemaking with corporations based on inquiry and advocacy, and (4) how the institutional investor triggers attention (through issue-selling) and establishes credibility and respect with corporations (through impression management). Whether “people become animated because of ‘new economic rules’, or total quality, or learning organization, or transformation, or teachable points of view, or action learning, or culture change or whatever, they are more or less likely to survive depending on whether their programme engages or blocks these components of sensemaking. It is the thrust of this argument, that there is nothing special about the content of change programmes per se, that explains their success or failure. What matters is the extent to which the programme triggers sustained animation, direction, attention and respectful interaction. It is these four activities that make it easier or harder for people to make sense collectively of what they currently face, and to deal with it” (Weick, 2002, pp. 9-10, emphasis added).

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The following figure 36 depicts the claim of corporate change as resulting from the four sensemaking processes that we presented in our study. It thereby shows how responsible investment may act as a driver of CSR.

Investor Responsibility

Reciprocal Inquiry

Claim of Corporate Change

Transformational Leadership

Corporate Social Responsibility

Fig. 36: A process model of responsible investment as a driver of CSR.

5

Implications for Practitioners and Researchers "The future is not completely beyond our control. It is the work of our own hands." (Robert F. Kennedy)

After having elaborated on the claim of corporate change as resulting from a set of various sensemaking processes this chapter summarizes how our understanding of the claim of corporate change, with its different stance toward what is meaningful may enrich and extend the theory and practice of responsible investment. Our distinct objective is thereby to encourage institutional investors and scholars in the field of responsible investment to question their underlying, and often taken-for-granted assumptions which dominate their activities and to focus their attention on novel aspects that may have been overlooked so far.

5.1

Implications for Institutional Investors

5.1.1 Tie Your Beliefs and Actions: Investor Responsibility Matters The first aspect we would like to raise with regard to the claim of corporate change is that investor responsibility matters. What does that mean in the light of our study? Drawing upon our review of various scholarly and practitioner literature we argue that early definitions of responsible investment primarily referred to the practice of investing in socially responsible companies. The responsibility of institutional investors, implied by the term ‘responsible investment’, was thus defined in terms of whether or not institutional investors aligned their investments with the various dimensions known from mainstream research on CSR. A second wave of research was initiated by Davis and Thompson’s essay on corporate control in the 1990s where the authors acknowledged the increase in concentrated ownership and institutional investor’s growing role of active owners. In the following decade practitioners and scholars in the field of responsible investment extended their definition of an investor’s responsibility and argued that institutional investors should become actively involved in lobbying irresponsible corporations to become socially responsible.

E. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7_5, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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What strikes us is that these narratives of an investor’s responsibility seem to define responsibility as independent from an investor’s understanding of responsibility. That is, an investor is considered responsible when he invests in responsible companies. Or he is viewed as responsible when he lobbies a corporation for becoming responsible. However, ‘being responsible’ is not as easy as these narratives pretend. What is missing is the fact that institutional investors need to make sense of responsibility first to be able to know where they are going to invest or which company to lobby for. Put simply, we should ask ourselves: Can institutional investors invest in something which they do not understand? Or, can they lobby for change if they do not have a clue about what is changing? As we have showed in chapter four, responsibility is not a ‘given’ that can easily be observed. Rather, responsibility is an ongoing process evolving over time which is continuously shaped and modified by the way organizational members make sense of it. Drawing upon sensemaking studies, we thus propose an idea of investor responsibility as “a mindset to focus on process” (Weick, 1995a, p. 13). It is the concern to concentrate on what institutional investors are doing, how they enact their environment and it is less about how they interpret what the environment is demanding from them: “Sensemaking … is less about discovery than it is about invention. To engage in sensemaking is to construct, filter, frame, create facticity … and render the subjective into something more tangible” (ibid., pp. 13-14). Investor responsibility is thus inventive; it changes the role of an institutional investor from being an observer of responsible behaviour into one of becoming an ‘enactor’ of responsibility. What does this imply for institutional investors? As we have argued in section 4.1 responsible investment is the activity of how institutional investors generate clear roles and relationships with regard to environment and society which later impose on them. Investor responsibility thus refers to the process by which organizational members link their thinking and acting to construct their organization-specific sense of responsibility. It is important to understand at this point that investor responsibility is nothing that can be described in absolute terms. Rather, it depends on each investor’s unique sensemaking patterns (e.g., mutual funds differ from pension funds when enacting responsibility). Why is investor responsibility important then? The

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answer is that investor responsibility, far from being arbitrary, informs about institutional investors’ prevailing routines and competencies, and their underlying assumptions and values. It helps in explaining why some investors prefer a screening approach and others engagement. And thus, it offers interesting departure points from where to start an analysis of an institutional investor’s ability to drive CSR. Hence, investor responsibility implies that institutional investors should become aware of their doings. So far, the process by which institutional investors make sense of responsibility is largely under-researched and overly taken-for-granted. This has led to a gap between what investors think makes them responsible and what they actually do to become responsible. Westwood and Clegg (2003) remind us that “[w]hat [people] think they know informs what they think they do, but they could be mistaken, and often are” (p. 183). In chapter four we introduced a variety of sensemaking processes that informs us what institutional investors do. We thereby specifically focused on the recursive relationship between institutional investors’ beliefs and actions. For example, we showed that the identity orientation of institutional investors may largely affect the type of interaction they choose to pursue with target companies. To find out about an institutional investor’s identity orientation we thereby argued that it is important to look at an investor’s prevailing identity defense mechanisms such as denial, rationalization, and symbolization. For example, a short term investment horizon can be understood as rationale for defending an individualistic identity orientation. It may thus serve as a proxy to explain why this investor is more interested in outperforming its peers than in building a strong relationship with its portfolio companies. In summary, our analysis of investor responsibility as resulting from sensemaking processes revealed that some institutional investors still seem to believe that thinking about responsibility is independent from implementing it. The idea of responsibility may be present on an institutional investor’s website. However, it does not diffuse throughout the organization. Fund managers are incentivized in a way that makes it very hard for them to justify an integration of ESG issues into their investment analysis and/or ownership practices. Reporting on responsible investment practice is very poor so it becomes difficult for organizational members to feel committed to the

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integration of ESG related concerns into their decision making. Hence, drawing upon Weick’s formula, one might ask: how should institutional investors know what their responsibility is before they see what they do? To fill investor responsibility with meaning thus implies that institutional investors need to enrich their sense of responsibility by broadening the range of resources and actions they have available for integrating ESG related concerns into their daily decision-making (‘learning by doing’). This may begin with integrating ESG issues into risk and return analysis in order to legitimize the investor belief that CSR pays in the long run. It may include a long-term oriented incentive structure that organizational members use as a frame of what they should be doing. It also concerns a greater base of employees being in charge of ESG related issues. And, it may involve regular discussions with academia and other practitioners (e.g., via the PRI Clearinghouse) about ESG issues that investors may use to enrich their linguistic repertoire of how responsible investment behaviour can be justified.

5.1.2 Balance Advocacy and Inquiry: Engagement is the Way Forward The second aspect we like to raise is a stronger focus on shareholder engagement strategies if institutional investors want to advance CSR. Understanding responsible investment and CSR as two distinct sensemaking processes we argued that investor influence is the outcome of an institutional investor’s ability to generate consensual accounts of responsibility in interaction with the corporation. While most practitioners and scholarly literature defined investor influence as something stable and predictable that primarily comes in terms of an investor’s stake in a company, we thus presented an alternative definition of influence as resulting from collective sensemaking. The focus of our analysis was thereby on four different communication strategies that institutional investors may engage in when collectively making sense with corporations. Based on our findings we identified shareholder engagement as the most promising responsible investment strategy for collective sensemaking among institutional investors and corporations. We argued that in contrast to screening approaches,

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engagement allows for a reciprocal inquiry into each party’s underlying sensemaking patterns and thus animates collective action and understanding. Activism strategies, for example, are too much focused on telling a corporation what to do. In this case, collective sensemaking is restricted because institutional investors miss the opportunity to learn about a corporation’s underlying reasoning behind existing CSR activities and non-activities, and corporations are more likely to engage in defending their own understanding of responsibility than to break with old routines and adopt the investor’s point of view. The interesting news of our analysis is thus that influence does not (solely) depend on positional criteria such as an institutional investor’s stake in a company or the total funds size. Rather, investor influence depends to a large extent on an investor’s ability to develop strong skills in both advocacy and inquiry. It depends for example on how often and intensely institutional investors engage in dialogue and meet with corporations. It then depends on how well institutional investors are able to explain their reasoning behind a certain point of view (which makes it necessary that they are clear about their own sense of responsibility). And, it depends how well they are listening to the corporation’s reasoning. This does not sound like an easy understanding, and we are well aware of the fact that engagement is time-consuming and costly. However, we think that our findings help to encourage institutional investors who may not possess a substantial stake in a company to continue their efforts in active ownership and lobbyism for social change. This is especially important considering the fact that most “SRI funds have very little, if any, bargaining leverage to influence corporate behaviour based on its equity holdings” (Schepers and Sethi, 2003, p. 26).

5.1.3 Focus Attention: The Logic of Attraction The last point we like to emphasize concerns the way institutional investors present an issue of concern to corporations. We argue that it is fundamental for institutional investors to understand that an investor’s role in advancing CSR is not one of telling corporations what to do (logic of replacement, see section 4.3), but one of telling them how to be (logic of attraction). So far, most change initiatives by institutional

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investors have been primarily concerned with some kind of advice regarding what corporations should and should not do. For example, institutional investors would tell companies to improve their environmental policies. Hence, these initiatives predominantly focus on CSR as an inventory of activities (see Basu and Palazzo, 2008). A corporation’s ‘attentional resources’ such as underlying values and beliefs that triggered these CSR activities in the first place however remain unaffected. In our analysis we introduced two comprehensive techniques that we considered as adequate for focusing a corporation’s attention to CSR related issues: issue-selling and impression management. We thereby argued that the way an institutional investor packages an ethical concern is likely to affect how corporations will notice it. Also, we showed that the way institutional investors present themselves will affect their attractiveness as a trustworthy partner in corporate decision making. At this point, we like to enlarge on two of the identified tactics of issue-selling and impression management: ‘package your issue as incremental’ and ‘be authentic’. To package an issue as incremental is essential when institutional investors want to advance CSR because it reduces the complexity of a phenomenon called CSR to a manageable unit. When institutional investors are interested in changing corporate behaviour they need to acknowledge first that their counterpart must recognize its own role and responsibility in becoming part of this change. Hence, when talking to corporate management, institutional investors need to activate a corporate manager’s attention to an issue, and his willingness and curiosity in becoming the first in implementing it. According to Weick (1979) “[r]epeated failure of organizations to solve their problems are partially explained by their failures to understand their own prominence in their environments. Problems that never get solved, never get solved because managers keep tinkering with everything but what they do” (p. 152, emphasis in the original). Authenticity refers, as argued in section 4.3, to the process of aligning an individual’s performance with his self-concept. To become authentic thus implies that an institutional investor should engage in an ongoing critical reflection on what we have introduced as ‘investor responsibility’, i.e. how he ties his beliefs and actions. We argued that institutional investors still seem to separate their thinking of responsibil-

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ity and their acting upon it. As such, it would not be surprising if corporations were still rather reluctant to incorporate their investors into ethical decision making. For institutional investors to be able to reflect on their own notion of responsibility it would thus be useful to engage with external bodies such as Mercer Investment Consulting that may provide the investor with a different perspective of how they think the investor’s self-concept is aligned with its performance. Also, it would be helpful for institutional investors to use the PRI portal not only for pursuing collaborative shareholder engagement initiatives, but also to build communities where they can share and reflect upon their respective responsible investment practices.

5.2

Implications for Researchers

5.2.1 Exploring the Plurality of Organizational Phenomena from Multiple Perspectives In chapter three we outlined that most research on responsible investment and the claim of corporate change is geared to the P-A relation of investors and managers. Scholars have predominantly argued via the postulate of minimizing agency costs, and have focused their research on economic-based governance structures such as efficient markets or formal monitoring devices to explain an institutional investor’s ability to change corporate policies and practices. While this research has come up with interesting findings, we however found that the richness of these findings was largely restricted by the reductionist nature of agency theorists’ underlying assumptions (see also Scherer and Dowling, 1995). For example, our assessment of agency theorists’ assumptions with regard to institutional investors’ claim of changing CSR revealed that questions of which factors may actually drive the process of institutionalizing social responsibility in corporations were overlooked. In particular, we identified a lack of research concerning the social processes that are involved in the specific field of responsible investment and its attempt to drive CSR. Our study of responsible investment and the claim of corporate change from a sensemaking lens thus enabled us to offer a valuable departure point for future research on responsible investment that supplements (but does not de-legitimizes) current

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research with a new, and potentially richer conceptualization of the relation between investors and corporations. Our understanding of responsible investment and CSR as sensemaking processes thereby allowed for a comprehensive understanding of the processes by which institutional investors and corporations enact their sense of responsibility and which consequences their enactment may have upon their relationship. The findings of our study thereby clearly indicate that the practice of responsible investment involves a conglomerate of social processes that were not yet addressed by existing research; our findings have also showed that the claim of corporate change offers a variety of new research opportunities that one would not have expected in the light of agency theory (and plenty more that we ourselves might not have seen). Hence, what does that imply for future research? It implies that organizational phenomena such as responsible investment are far too complex to be studied from one lens only. Rather, the ‘multidimensional ontology’ that we are facing makes multiple epistemological and methodological perspectives a must if we want to understand the multifaceted nature of organizational reality (Gioia and Pitre, 1990; Reed, 1997; Scherer, 2006). Researchers in the field of responsible investment should thus become more creative and explore phenomena such as investor responsibility or investor influence from multiple perspectives. Especially with regard to investor influence future research may concentrate on existing theories that deal with power aspects such as social or political power to analyze the interaction between managers and investors. Here, a deeper analysis of the work of Michel Foucault or Anthony Giddens may offer a rich contribution to our findings. Another dimension that we did not explicitly address would for example include the question of how emotions may affect an institutional investor’s ability to foster CSR. In summary, research should thus not be about ‘winning a language game’ where “competing or potential narratives must be silenced” (Calton and Payne, 2003, p. 22). Rather, we encourage researchers to read each single paradigm as a narrative that rests upon a researcher’s own sensemaking patterns of how to arrive at a plausible story. Kelly (2002) and Calton and Payne (2003) for example argue that “the financial agency theory of a firm … which frames the fiduciary duties of man-

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agers in terms of their unitary obligation to serve the principal ownership interest, should be read in terms of how the narrative reinforces or undermines the power of different, contending stakeholder interests, rather than as an impartial scientific account” (p. 22). Research, coming from a sensemaking perspective, is thus less about accuracy than it is about “plausibility, pragmatics, coherence, reasonableness, creation, invention, and instrumentality” (Weick, 1995a, p. 57).

5.2.2 Continuing Research on the Claim of Corporate Change as Resulting from Sensemaking Processes Drawing in large upon Weick’s (1995a, 1979) sensemaking studies, our analysis of institutional investors’ claim of corporate change revealed a combination of four overarching social processes to play a role when institutional investors aim at driving CSR in publicly listed companies: investor responsibility, corporate social responsibility, reciprocal inquiry, and transformational leadership. In particular, we argued that the success of the claim of corporate change in terms of a ‘realized’ change in corporate responsible behaviour is thus the effect of how the institutional investor makes sense of responsibility, how the corporation makes sense of responsibility, how the institutional investor animates and controls collective sensemaking with corporations based on inquiry and advocacy, and how the institutional investor triggers attention and establishes credibility and respect with corporations. Our approach thus opens the door for a variety of new ideas on how the practice of responsible investment understood as organizational sensemaking process can be linked to observed patterns of CSR outcome. At this point we do not want to go into detail with the various sensemaking patterns we identified in chapter four, but focus on how our research can be extended in future. First, we argued that investor responsibility, referred to as the process by which organizational members of an institutional investor argue, expect, behaviourally commit, and manipulate in the interest of responsible business conduct, is likely to have an effect on an institutional investor’s ability to drive CSR. This finding, first of all, implies that future research should overcome its prevailing ‘routine’ to strictly separate between shareholders and stakeholders and to concentrate more on patterns

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that link these groups. Second, it implies that future research should focus more on the distinct activities that organizational members of an institutional investor such as fund managers and research analysts engage in when making sense of responsibility. As we argued before, the process by which investors make sense of responsibility is strikingly under-researched and deserves much more attention than is has got right now. We have presented a variety of ideas from where to start a deeper analysis such as the link between institutional investors’ identity orientations and their prevailing identity defense mechanisms, the link between investors’ role expectations of corporate managers and their behavioural confirmation of these expectations, or the link between institutional investors’ level of behavioural commitment to integrate ESG related concerns into their core business and the ways they justify their commitment retrospectively. However, this list should not be understood as comprehensive. Rather, we invite researchers to reflect on our ideas and eventually come up with alternative sensemaking patterns that we did not address in this study. For example, researchers may be interested in finding out more about how institutional investors’ beliefs concerning the role of their beneficiaries may affect their sensemaking of responsibility. Another field of future research may involve a comparison of different groups of institutional investors such as pension funds and mutual funds on the basis of their distinct sensemaking patterns, and to link these findings with varieties in CSR outcomes. Second, we identified CSR, referred to as the process by which organizational members of a corporation argue, expect, behaviourally commit, and manipulate in the interest of responsible business conduct, to play a role in an institutional investor’s ability to influence corporate behaviour. This sounds a bit awkward at first glance, however, it is important for researchers to understand that CSR is the process by which corporations enact their relationships with regard to environment and society. As such, an important dimension of CSR is how corporations think and act upon their understanding of an investor’s role in becoming involved in ethical decision making. A deeper analysis of corporate managers’ attitudes towards their shareholders could thus be a promising undertaking to extend our research.

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Third, we identified reciprocal inquiry, referred to as the process by which members of an institutional investor and members of the corporation collectively make sense as crucial for understanding how institutional investors may drive CSR. Explaining influence as resulting from collective sensemaking efforts thereby opens the door to link research on responsible investment with the massive amount of research on communications skills. So far, existing literature has remained surprisingly silent with regard to an analysis of institutional investors’ communication skills (with exception of Vandekerckhove et al., 2008). We would thus encourage scholars to concentrate their research efforts on prevailing communication patterns of institutional investors (this could for example involve an analysis of language games in investor letters) as well as on finding out about ways how institutional investors may develop strong skills in advocacy and inquiry. Lastly, we identified transformational leadership as the iterative process by which members of the institutional investor freeze existing sensemaking patterns of the corporation as well as their own, rebalance them by means of influence tactics such as issue-selling and impression management, and unfreeze them to resume continuous change. Our conceptualization of institutional investors as transformational leaders thereby sheds a new light on the role of institutional investors in driving CSR. Scholars may for example be interested in deepening the link between research on responsible investment and organizational change literature; or, in finding out more about how the different roles of institutional investors (viewed as change agents) are linked to varieties in CSR outcomes. As we presented only selected aspects of issueselling and impression management, scholars may also be interested in analyzing alternative issue-selling techniques such as ‘issue bundling’ (see Dutton and Ashford, 1993) or further impression management techniques such as ‘tone of voice’ (see Schlenker, 1980). Also, we concentrated our analysis on an institutional investor’s role in altering corporations’ belief-driven processes of sensemaking. As we argued before, our research may for example be extended by focusing on questions of how institutional investors may increase a corporation’s behavioural commitment to CSR. In summary, our approach offers a variety of interesting research questions. Please note that although we listed the four processes separately, this does not mean that

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they can only be analyzed separately. In fact, an interesting field for future research would also be to investigate how these four social processes are mutually dependent in their impact on observed patterns of CSR outcome. Some last comments will be devoted to the specific requirements that our research poses on empirical research. In general, we like to emphasize that our research approach did not intend to derive universally valid statements nor will it do in future. Drawing upon Gadamer (1975) Weick’s theory of sensemaking has clearly showed that meaning can only be historical. Thus, general statements in the form of predictions “are projections of historical meaning in the future, with the hope that the world will stand still for a while, and are successful only in so far as it does” (Czarniawska, 2003, p. 137). Any empirical study that sacrifices on the complexity of organizational phenomena like CSR in order to derive universal statements (in the form of e.g., do and don’ts for institutional investors) is therefore not considered to be an adequate point of departure in this context. Rather, we would encourage researchers to explore responsible investment and the claim of corporate change via qualitative empirical studies, such as fieldwork or narrative analysis as proposed by Czarniawska (1998), or, more broadly defined, case study research as proposed by Yin (2003). As we have argued at the beginning of our study, our distinct objective was to find out about how an institutional investor may drive CSR. Hence, case study research presents a valuable starting point for empirical work in the context of this thesis as it the “preferred strategy when ‘how’ and ‘why’ questions are being posed, [and] when the investigator has little control over events” (Yin, 2003, p. 1). Instead of being concerned with reducing behavioural events to generalizable units, “case study method allows investigators to retain the holistic and meaningful characteristics of real-life events – such as individual life cycles, organizational and managerial processes, neighborhood change, international relations, and the maturing of industries” (ibid., p. 2).

6

Concluding Remarks "If we do not change our direction, we are likely to end up where we are headed." (Chinese Proverb)

We conclude this thesis with some final reflections on how the Weickian sensemaking perspective has informed our course of investigation. We will thereby first outline how the sensemaking perspective has controlled our research. Second, we will show how it has animated our research thereby pointing to some of our major findings. To begin with we like to point to Weick’s (1993a/2001) note that the “task of sensemaking resembles more closely the activity of cartography. There is some terrain that mapmakers want to represent, and they use various modes of projection to make this representation. What they map, however, depends on where they look, how they look, what they want to represent, and their tools for representation … It is the job of the sensemaker to convert a world of experience into an intelligible world. That person’s job is not to look for the one true picture that corresponds to a pre-existing, preformed reality … The important points implied by the idea of sensemaking as cartography are the indefinite number of plausible maps that can be constructed” (p. 9, emphasis added). What does this imply for the study at hand? First, it implies that the way we have ‘mapped’ responsible investment and the claim of corporate change should always be seen in context with our beliefs and actions that have guided our writings. Our findings thus depend on the experience that we collected in this field of research; also, they depend on our selection of articles that we perceived as valuable for our research question. It is thus important to understand that, when coming from a sensemaking perspective, the findings we derived, i.e. the way we ‘represent’ responsible investment and the claim of corporate change, have a normative character in the sense that they are necessarily controlled by our own sensemaking patterns such as E. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7_6, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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our choice of underlying paradigmatic assumptions. Hence, in Weickian terminology, our research reflects the enacted environment of what we found out to be a plausible story for narrativizing responsible investment as a driver of CSR. It is thus no fixed or final interpretation, but a process for the search of meaning (Gadamer, 1975). Second, Weick’s conceptualization of sensemaking as an activity of cartography implies that research in general and on responsible investment in particular necessarily becomes an ongoing sensemaking activity of various scholars thereby leading to an indefinite number of plausible research paradigms. It thus should animate scholars to reflect upon how their prevailing routines have controlled their research, and encourage them to continuously modify and accommodate their research in order to come up with novel ideas of how to make organizational phenomena ‘intelligible’. However, as we have argued in chapter three, a critical reflection upon the plausibility of dominant research paradigms in the field of responsible investment still seems to be lacking. Rather, the majority of scholars seem to be ‘imprisoned’ by their endeavour to behaviourally confirm long held expectations about the role of institutional investors as principals and corporate managers as self-interested and opportunistic agents. The great amount of empirical papers on share price sensitivity and ownership rights thereby clearly indicate that most scholars are still concerned with finding an accurate picture that explains and predicts how responsible investment works. However, as we have noted earlier sensemaking is less about accuracy than it is about “plausibility, pragmatics, coherence, reasonableness, creation, invention, and instrumentality” (Weick, 1995a, p. 57). Motivated by Weick’s ideas on sensemaking our distinct research endeavour at the beginning of this study was thus to create an account of responsible investment that attracts practitioners’ and scholars’ attention to a variety of (seemingly) novel aspects that had been marginalized until then. We intended to reorient research on responsible investment away from the search for accuracy towards a quest for a deeper understanding of the underlying processes and drivers of whether and when institutional investors may influence corporations in their CSR behaviour. Hence, assuming research to be an ongoing sensemaking process our intention was to redirect something being in motion. Drawing upon Weick

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and Quinn’s (1999) work on intervention theory in continuous change the following paragraphs will therefore outline how the concept of freeze-rebalance-unfreeze has not only informed us about institutional investors’ abilities to drive CSR, but also, in a retrospective sense (is there any other sense?), it provided a plausible framework for our own analysis. Freeze Assuming that order is in flux and people continually live in flows of ongoing events, the first step of our analysis involved bracketing some portion out of the flow of events and formulate a distinct research problem which we identified as relevant for further study. It concerned the following question: How may institutional investors drive corporate social responsibility? After having identified a research question the next step of our analysis was a reflection upon our own paradigmatic assumptions that informed the reader on how we were going to notice and find out about continuing questions that from our perspective matter in the context of our research problem. The identification of three research objectives thereby reduced the number of possible meanings inherent to our research problems and served, in Weickian terms, as the order that we enacted into flux: 1. Our first research objective was to develop a theoretical framework for understanding and organizing the processes that often are taken-forgranted in the practice of responsible investing and that of CSR. 2. Our second objective, based on Weick’s conceptualization of organizational realities as enacted environments, was to derive a process model of responsible investment that illustrates how the internal sensemaking processes of both institutional investors and corporations interrelate and correspond to provoke corporate change towards a stronger orientation of CSR. 3. Our third research objective was to inform future empirical research and practice by proposing an array of actions that might be taken in order to advance the role of institutional investors in fostering the practice of CSR.

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The next step involved the enactment of the context that we considered as relevant for answering our research question: the practice of responsible investment. Chapter two thus provided the reader with contextual cues that we focused our analysis on such as the four different responsible investment approaches, screening, enhanced analysis, engagement, and activism, as well as the claim of corporate change. After we outlined the practice of responsible investment with a particular focus on the claim of corporate change as cue the next step was thus concerned with freezing the dominant frames that researchers and practitioners have been using so far to make sense of the cues. We thereby found that classic economic models rooted in agency theory such as the P-A relation were considered the most plausible frame to make sense of an institutional investor’s claim of corporate change. Hence, we looked at practitioners’ and researchers’ organizing process of selection. To understand how somebody selects, however, one need to know how “the combination of retrospective attention, mental models, and articulation perform a narrative reduction of the bracketed material, and generate a locally plausible story” (Weick et al., 2003, p. 414). Therefore, in our last part of the ‘freezing’ phase, we engaged with detecting the assumptions that underlie the P-A paradigm. Rebalance The second part of chapter three presented the turning point of our analysis. Here, drawing upon our inquiry into agency theorists’ assumptions we began to question the ability of these assumptions to account for the magnitude of social processes that constitute the practice of responsible investment and the claim of corporate change. Our primary objective thereby was to irritate the reader with well directed questions of whether e.g., ‘amoral’ assumptions can be considered an adequate point of departure for studying ‘responsible’ investment. In addition, we intended to enrich the reader’s knowledge on actual trends in the responsible investment market that apparently break with major assumptions underlying the P-A paradigm. While questioning agency theorists’ assumptions, we simultaneously began with planting selected terminologies such as ‘enactment’ into our analysis so that the reader got slowly familiar with the various terms known from sensemaking studies.

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After our comprehensive assessment of agency theorists’ assumptions it was then time to introduce a set of new frames (enactment, double interact, and continuous change). These frames aimed at enabling the reader to see cues from different perspectives – perspectives that he considered as irrelevant beforehand – thereby leading to new patterns of meaning. At this point, we like to reinforce that it was important not to simply tell the reader how to use the frames (‘what to do’). Rather, it was necessary to lay out the underlying assumptions of sensemaking first so that the reader could recognize by himself the plausibility of sensemaking as a frame in the context of responsible investment. After a long period of irritating the reader on his taken-for-granted assumptions, animating him to reflect and question their plausibility, and ‘getting him on the boat’, the next step in our analysis was to increase again the level of control. Hence, we provided the reader with four subquestions that we derived from our ‘meta-frame’ sensemaking in order to guide our sensemaking of responsible investment as driver of CSR: How do institutional investors enact their sense of responsibility? How do corporations enact their sense of responsibility? How do institutional investors and corporations interact? How may institutional investors change a corporation’s sense of responsibility? The following chapter four was devoted to narrativize responsible investment and the claim of corporate change in the light of these four questions. We thereby adopted several issue-selling and impression management techniques. For example, we explained our issues of concerns by means of scholarly research and practical examples so to enrich the readers’ imagination and understanding and to increase the legitimacy of our claims. References to scholarly research and practical examples also increased our credibility as researchers and thus served as an impression management technique, too. The overall goal of this chapter was thereby to derive a plausible story of how institutional investors may drive CSR.

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For example, we argued that institutional investor’s ability to drive may depend on its own behavioural commitment to implement ESG related concerns into its key businesses because, as Weick and colleagues (2005) name it, “you do not really know what you think until you say it” (p. 416). Our analysis thereby revealed that institutional investors seem to know very little about responsibility when taking their behavioural commitment as indicator. As Henningson (2008) for example found institutional investors remain very silent when it comes to publicly disclosing their fund managers’ ‘responsible’ investment activities. Also, their resource spending in terms of the number of people employed to deal with ESG integration is rather poor. We concluded that institutional investors seem to be much better in justifying their non-actions with regard to ESG related concerns than their actions. In summary, our analysis rebalanced current thinking on the claim of corporate change from a strong focus on structures towards an alternative view on the claim of corporate change as resulting from a combination of at least four sensemaking processes: investor responsibility, corporate social responsibility, reciprocal inquiry, and transformational leadership. We thereby symbolized our findings in form of a process model of responsible investment as driver of CSR. Unfreeze The last part of our analysis was finally devoted to resume for continuous change, i.e. to resume for further research and practice building upon our argument. First of all, we translated our comprehensive findings into ‘manageable’ idea units. Second, we encouraged learning by giving insights about how institutional investors may for example reflect upon their investor responsibility; or, by providing researchers with ideas on how our research can be extended. Since we enriched our analysis in chapter four with a variety of examples we also generated a fictive pool of available memory for practitioners and researchers that they might use (implicitly or explicitly) to foster improvisation and a ‘learning by doing’ culture. To conclude, we believe that our analysis is promising in becoming a plausible story of responsible investment as a driver of CSR that will be “used as a source of guidance for further action and interpretation” (Weick et al., 2003, p. 414).

Appendix

Appendix A: Aviva’s letter to Global Compact participants………………........ 240

Appendix B: Summary of propositions……..…………………………………… 242

E. M. Zarbafi, Responsible Investment and the Claim of Corporate Change, DOI 10.1007/978-3-8349-6202-7, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

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Final Letter to Global Compact Participants Dear <<>>, Re: Global Compact Signatory Status As signatories to the UN Principles of Responsible Investment (PRI), we have been examining the companies that have signed up to the UN Global Compact - one of the PRI’s founding institutions. Many of us make explicit reference to the Global Compact in our investment policies. We believe that the Global Compact has improved the quality of the debate surrounding corporate impacts on human rights, labour standards, and the environment. We consider these issues to be potentially significant for business performance. As a result, we see a corporate commitment to adhering to the Global Compact as a positive public statement, and believe that it deserves our support. As existing or potential investors in your company, … [[[Then one of the five following paragraphs.]]] [[[1. To companies that have submitted exemplary COPs:]]] … we would like to take this opportunity to congratulate on being selected by the Global Compact as having submitted a notable Communication on Progress (COP). We welcome this accolade, which demonstrates a serious commitment to responsible corporate practices. [[[or 2. To group companies that have become ‘non-communicating’:]]] … we note from the Global Compact database that may no longer be in full engagement with the Compact. The database shows that you have been designated as a ‘non-communicating’ member. We urge you to re-engage with the Global Compact as soon as possible to avoid further measures that may ultimately result in expulsion. [[[or 3. To parent companies where subsidiaries have become ‘noncommunicating’:]]] … we note from the Global Compact database that may no

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longer be in full engagement with the Compact. The database shows that your subsidiary has been designated as a ‘non-communicating’ member. We urge you to ask your subsidiary to re-engage with the Global Compact as soon as possible, in order to avoid further measures that may ultimately result in expulsion. We would also request that you consider signing the Global Compact on behalf of the company group. [[[or 4. To group companies that have become ‘inactive’:]]] … we note from the Global Compact database that may no longer be in full engagement with the Compact. The database shows that you have been designated as an ‘inactive’ member. We urge you to submit a Communication on Progress as soon as possible to avoid losing participant status. [[[or 5. To parent companies where subsidiaries have become ‘inactive’:]]] … we note from the Global Compact database that may no longer be in full engagement with the Compact. The database shows that your subsidiary has been designated as ‘inactive’. We urge you to ask your subsidiary tosubmit a Communication on Progress as soon as possible in order to avoid losing participant status. We would also request that you consider signing the Global Compact on behalf of the company group. [[[Letter continues…]]] We recognise that reporting on the Global Compact principles can be time consuming. Nevertheless, a company’s ability to manage and mitigate exposure to social and environmental risk, and capture opportunities linked to these issues, is increasingly relevant to long-term financial success. The Compact provides a framework for companies to act on commitments to upholding human rights, promoting labour standards, protecting the environment and eliminating corruption. In so doing, it helps companies to maintain their licence to operate and protect shareholder value. Yours sincerely, Morley Fund Management, et al… (Note: Morley is now Aviva Investors)

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• Proposition 1: Whether institutional investors view themselves as individualistic, relational, or collectivistic is likely to influence the kind of relationship they prefer to perform with clients and corporations. • Proposition 2: An alteration of the relative dominances and combinations in ego defenses such as denial, rationalization, and symbolization is likely to affect a change in the kind of relationship institutional investors prefer to perform with clients and corporations. • Proposition 3: Whether institutional investors expect managers to be agents or stewards is likely to influence the kind of ownership practice they perform with regard to ESG related concerns. • Proposition 4: An alteration of the relative dominances of organizational routines such as pragmatic ignorance or situational awareness is likely to affect a change in the kind of investment and ownership practices institutional investors perform with regard to ESG related concerns. • Proposition 5: Whether and to what degree institutional investors are behaviourally committed to responsible investment in the form of public, irrevocable, and volitional acts is likely to influence the kind of value they impose on ESG related concerns. • Proposition 6: An enrichment of institutional investors’ repertoire of justifications for their actions by altering the relative dominances and combinations of existing dimensions such as legal, scientific, economic, or ethical, is likely to effect a change of how institutional investors notice and impose value of ESG related concerns. • Proposition 7: Whether and how institutional investors invent their internal and external environment with regard to ESG related aspects is likely to constrain what they see, and thus, likely to influence their understanding and enactment of responsible conduct. • Proposition 8: An alteration in the relative dominances and combinations of institutional investors’ repertoire of approaches to achieve legitimacy for their actions such as pragmatic, cognitive, and moral, is likely to affect a change in how they understand and enact responsible conduct.

Fig. 37: Propositions for investor responsibility.

• Proposition 1: Whether corporations view themselves as individualistic, relational, or collectivistic is likely to influence the kind of relationship they prefer to perform with their stakeholders, including their shareholders. • Proposition 2: An alteration of the relative dominances and combinations in ego defenses such as denial, rationalization, and symbolization is likely to affect a change in the kind of relationship corporations prefer to perform with their stakeholders, including their shareholders. • Proposition 3: Whether managers expect institutional investors to have a moral or amoral standing towards their company, is likely to influence the kind of response pattern they perform with regard to ESG related demands. • Proposition 4: An alteration of the relative dominances of organizational routines such as pragmatic ignorance or situational awareness is likely to affect a change in the kind of response pattern corporations perform with regard to ESG related demands from institutional investors. • Proposition 5: Whether and to what degree corporations are behaviourally committed to CSR in the form of public, irrevocable, and volitional acts is likely to influence the kind of value they impose on ESG related concerns. • Proposition 6: An enrichment of corporations’ repertoire of justifications for their actions by altering the relative dominances and combinations of existing dimensions such as legal, scientific, economic, or ethical, is likely to effect a change of how corporations notice and impose value of ESG related concerns. • Proposition 7: Whether and how corporations invent their internal and external environment with regard to ESG related aspects is likely to constrain what they see, and thus, likely to influence their understanding and enactment of responsible conduct. • Proposition 8: An alteration in the relative dominances and combinations of corporations’ repertoire of approaches to achieve legitimacy for their actions such as pragmatic, cognitive, and moral, is likely to affect a change in how they understand and enact responsible conduct.

Fig. 38: Propositions for CSR.

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• Proposition 9a: Institutional investors who observe the ESG performance of corporations based on publicly available data do not advocate their notion of responsibility to the corporation or inquire extensively into the corporation’s sense of responsibility. Thereby they tend to facilitate a minimal collective sensemaking process. • Proposition 9b: Institutional investors who engage in minimal collective sensemaking with corporations are likely to produce nominal accounts of what constitutes responsible business conduct in the respective work environment, thereby leading to one-time, and compromise action. • Proposition 10a: Institutional investors who inquire into the processes by which corporations enact their sense of responsibility through sending out questionnaires without advocating their own notion of responsibility tend to facilitate a fragmented collective sensemaking process. • Proposition 10b: Institutional investors who engage in fragmented collective sensemaking with corporations are likely to produce multiple accounts of what constitutes responsible business conduct in the respective work environment, thereby leading to an emergent series of inconsistent actions. • Proposition 11a: Institutional investors who advocate their sense of responsibility in the form of letters, filed shareholder resolutions, votes, public campaigns, or divestment, but do not inquire into the corporation’s understanding of responsibility tend to facilitate a restricted collective sensemaking process. • Proposition 11b: Institutional investors who engage in restricted collective sensemaking with corporations are likely to produce narrow accounts of what constitutes responsible business conduct in the respective work environment, thereby leading to one-time action or a planned set of consistent actions that compromise on improvisation. • Proposition 12a: Institutional investors who pursue an engagement strategy characterized by a combination of advocating one’s own sense of responsibility and inquiring into that of the corporation tend to facilitate an enhanced collective sensemaking process. • Proposition 12b: Institutional investors who engage in enhanced collective sensemaking with corporations are likely to produce unitary and rich accounts of what constitutes responsible business conduct in the respective work environment, thereby leading to an emergent series of consistent actions.

Fig. 39: Propositions for reciprocal inquiry.

• Proposition 13: The more an institutional investor reflects on how a corporation makes sense of responsibility as well as on his own sensemaking, the greater his success in rebalancing existing sensemaking patterns. • Proposition 14a: The more an institutional investor frames an issue by using the logic of a business plan, the greater the level of corporate management’s attention invested in the issue. • Proposition 14b: The more an institutional investor frames an issue as incremental, the greater the level of corporate management’s attention invested in the issue. • Proposition 15a: The more an institutional investor’s self-description is aligned with an issue, the greater the level of credibility that he gains when selling an issue in front of corporate management, and thus the greater the level of corporate management’s attention to the issue. • Proposition 15b: The more an institutional investor collaborates with other investors to sell an issue, the greater the level of credibility that he gains when selling an issue in front of corporate management, and thus the greater the level of corporate management’s attention to the issue. • Proposition 15c: The more an institutional investor’s performance on an issue is consistent with his self-concept, the greater the level of credibility that he gains when selling an issue in front of corporate management, and thus the greater the level of corporate management’s attention to the issue. • Proposition 16: The more an institutional investor balances coordination and animation while he is selling an issue to corporate management, the greater his success in changing corporate behaviour.

Fig. 40: Propositions for transformational leadership.

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