1. Comments to Prakash Sethi “Self-regulation as a way to implement CSR at a global level” Alessandro Vercelli Department of Economic Policy, Finance and Development University of Siena

2. keeping in mind: Prakash Sethi, 2003, Setting Global Standards, Wiley, Hoboken, N.J. Basic questions: -Which is the best way to enforce CSR standards? -Should we rely on CSR self-regulation or institutional regulation? regulation by law -Which is the optimal relationship between { ? self-regulation by corporations

3. The answer depends on a preliminary question: do we really need CSR regulation? 3 basic answers: Neoliberal point of view: No regulation because any interference with the market should be avoided (Friedman, Hayeck, Lucas, and so on) however market-led self-regulation is sometimes admitted as a lesser evil Updated liberalism: No self-regulation because regulation by law must be restricted to externalities and monopolistic practices while max. of shareholders value takes care in the best possible way of the interests of all the stakeholders (Jenssen) Theory of stakeholders: Yes to self-regulation because it is the only way to avoid market distributive distortions induced by the market and max of shareholder value

4. Attitude towards CSR self-regulation Max shareholder value Max stakeholder value No regulation No CSR self-regulation Regulation when justified No CSR self-regulation Yes CSR self-regulation

5. CSR self-regulation has shaky economic foundations A)Perfect competition model: distribution of income regulation necessary {structurally unstable → oligopolist practices max utility ≠ max happiness B) Real markets ≠ perfect competition market: incompleteness externalities further sources of market failures {and so on transaction costs bounded rationality

6. The role of regulation by law and CSR Regulation by law to enforce CSR standards of economic agents subject to many limitations: -minimal standards only -enforcement slow and inefficient -increasing time lag with the evolution of the economy and society

7. The role of firms and CSR self-regulation In a perfect competition market firms, by definition, do not have discretionary power → CSR self-regulation meaningless This explains why in a neoliberal perspective that assumes perfect competition CSR self-regulation is excluded In real markets firms have a discretionary power and act strategically to preserve and increase such a power → here emerges the problem of the objective function of the firm: to bridge information gaps between management and stakeholders → CSR self regulation { to find an equilibrium between conflicting interests

8. Global markets Further problems: ↑ asymmetry of information Different local regulations {between different stakeholders ↑ asymmetry of power harmonization of local regulation We need { transnational authorities to enforce in the meantime this enlarges the scope of CSR self-regulation

9. CSR INITIATIVES AND STAKEHOLDERS FEEDBACK ETHICAL CODE SMS CERTIFICATION REPORTING BOARDMANAGEMENTSTAKEHOLDERS Green arrow: implementation & information flow Red arrow: behavioral and dialectic influence Black arrow: influence through shareholders meetings Blue arrow: strategic and managerial influence

10. CSR initiatives: conditions of effectiveness These initiatives may have an effective and durable influence on CSR iff stakeholders react actively to the additional information flow The closure of the feed-back by the stakeholders should be not only active but pro-active soliciting new information and CSR initiatives → the firm is pressed to direct its strategic and managerial choices: -increasing stakeholders satisfaction towards { -corroborating sustainability → virtuous circle

11. Ethics and CSR initiatives Since CSR depends also on the behavior of the stakeholders the latter (and their representatives) share with managers and directors (and control authorities) the ethical responsibility for insufficient CSR Business ethics rapidly evolving: all the subjects involved should evaluate the consequences of their actions which may change with the rapid evolution of the system The CSR initiatives can only aim to reduce the gap between individual behaviors and acceptable ethical standards by stimulating a constructive dialogue between firms and their stakeholders to solicit: –Awareness of the ethical consequences of alternative decisions –Convergence towards common values and respect for different values –A process of learning by all the subjects involved towards a sort of fair “social contract” between the firm representatives and its stakeholders

12. Synergy non substitution between regulation and self regulation - CSR self-regulation is not devoid of an enforcement mechanisms provided that there is an active participation of the stakeholders - the legal system guarantees at best only a minimal standard → synergy between legal regulation and CSR self-regulation: -progressive awareness of stakeholders virtuous circle between { -effectiveness of legal norms -upgrading of ethical standards

13. Regulation by law of CSR self-regulation? Yes: of course not in the contents but in the procedures: code of conduct The adoption of { could become compulsory periodical ethical report statute Analogy with { balance sheets and budgets code of conduct Requirement of consistency between {actual behaviours ethical report Consistency should be enforced (analogy with misleading publicity) even if the CSR initiatives are not-compulsory

14. Concluding remarks CSR self-regulation and legal regulation must be both strengthened at the same time in a synergic way in order to defend and possibly improve ethical standards In this perspective CSR self-regulation may play an important role in checking the deterioration of ethical standards in business, triggering a virtuous circle between expanding CSR initiatives and increasing ethical awareness and activism of the stakeholders This is true in particular for global markets and MNC. A requirement of consistency between CSR claims and actual behavior in all the countries where the MNC operates may help avoiding sweatshops and other abuses in developing countries