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Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al., Nova

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

GLOBALISATION, GOVERNANCE AND ETHICS

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

NEW MANAGERIAL AND ECONOMIC INSIGHTS

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Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

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Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

GLOBALISATION, GOVERNANCE AND ETHICS

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

NEW MANAGERIAL AND ECONOMIC INSIGHTS JACQUES-MARIE AURIFEILLE CHRISTOPHER J. MEDLIN CLEM TISDELL JAIME GIL LAFUENTE AND

JAIME GIL ALUJA EDITORS

New York Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Copyright © 2012 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

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Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. Additional color graphics may be available in the e-book version of this book. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Globalisation, governance and ethics : new managerial and economic insights / editors, Jacques-Marie Aurifeille ... [et al.]. p. cm. Includes index. ISBN:  (eBook) 1. Globalization--Economic aspects. 2. Corporate governance. 3. Globalization--Moral and ethical aspects. I. Aurifeille, Jacques-Marie. HF1365.G56 2011 174--dc22 2011002544

Published by Nova Science Publishers, Inc. † New York Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

CONTENTS Preface Chapter 1

ix Globalisation, Governance and Ethics: The Main Issues Jacques-Marie Aurifeille, Christopher J. Medlin Clem Tisdell, Jaime Gil Lafuente and Jaime Gil Aluja

1

Part I Sustainability Chapter 2

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Chapter 3

Chapter 4

Reflections on the Future of Corporate Sustainability in a Globalising World Anna María Gil Lafuente and Luciano Barcellos de Paula

15

Environmental Governance, Globalisation and Economic Performance Clement Tisdell

25

The Challenges of Globalisation and Governance in Complex Times Mario Aguer Hortal

41

Part II Power and Countervailing Power Chapter 5

Chapter 6

Chapter 7

The Challenges of Legal Pluralism in the South Pacific in the Context of the Globalisation of Trade Anthony Angelo and Yves-Louis Sage

53

The Contribution of the Non-profit Sector to a Globalized Post-crisis Governance Patrick Valéau and Frédéric Annette

67

Dissociated Governance Jérôme-Benjamin Gardody

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vi

Contents

Part III Partnerships Chapter 8

Inter-firm Governance and Relationship Performance: A Study of Market, Hierarchy and Relational Coordination Mechanisms Jacques-Marie Aurifeille and Christopher J. Medlin

Chapter 9

Governance and Subsidiarity in Firms Antonio Argandoña and Lena Strandberg

Chapter 10

Hierarchical Network Governance: An Examination of Keiretsu Networks Takao Ito and Christopher J. Medlin

99 113

125

Part IV Glocal Governance Chapter 11

The Effects of Governance on the Perception of Partner Brands Sinove Marde

Chapter 12

Interactions between Globalisation and Retail Productivity: Some Governance Issues Gérard Cliquet, and Steve Burt

163

Trust as a Substitute to Legal Governance in International Transactions Magali Debat

181

Chapter 13

145

Part V Modelling

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Chapter 14

Chapter 15

Chapter 16

The Unpredictability of Financial Crises in a Globalised World: Implications for Public Governance Arturo Rodríguez Castellanos and Nerea San Martín Albizuri The Effects of Firms' Corporate Governance and Level of Globalisation on Financial Performance in the Context of World Economic Crisis Jacques-Marie Aurifeille, Jaime Gil Lafuente, and Christian Dave A New Model to Value Employee Stock Options (ESO) and the Effects of ESO Plan on ESO Holders, Stockholders and Bondholders Robert Trommsdorff

199

219

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Part VI Ethical and Social Issues Chapter 17

Ethics and Globalisation Lorenzo Gascón

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Chapter 18

Chapter 19

Contents

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Implications for Organization Governance of Advances in Neuroscience and Biology Bernard Roullet, Olivier Droulers, and Marie-Pierre Pinto

263

Perspectives on Globalisation, Governance and Ethics: Viewpoints Presented in a Forum of the Royal Spanish Academy Jaime Gil Lafuente, Ricardo Díez Hochleitner, Maya Simionescu, Evanghelos A. Moutsopoulpos, Alessandro Bianchi, and Eugen Simion

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Index

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293

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PREFACE This book was developed following the Fourth Annual Workshop of the FACIREM (Franco-Australian Centre for International Research in Economics and Management) on “Globalisation, Governance and Ethics”. The two-day workshop was held in November 2009 at the Royal Academy of Economic and Financial Sciences, Spain. The organising committee included Professor Jacques-Marie Aurifeille, Director of the FACIREM; Dr Christopher J. Medlin of the University of Adelaide; Professor Clem Tisdell of the University of Queensland; Professor Gérard Cliquet of the University of Rennes; Professor Olivier Droulers of the University of South Brittany; Professor Ana Maria GilLafuente of the University of Barcelona; Professor Jaime Gil-Lafuente of the University of Barcelona; and Professor Marie-Pierre Pinto of the University of Limoges. Following the third workshop of the FACIREM on “Trust, Globalisation and Market Expansion” (Aurifeille, Medlin and Tisdell, 2009, Nova Science Publishers), the fourth workshop focused on the role of governance, a construct which underpins the interactions of institutions, firms and consumers in a globalising world. These two books follow a continuing theme, with the first and second FACIREM workshops also leading to two Nova Science publications: “Leading Economic and Managerial Issues Involving Globalisation” (Aurifeille, Svizzero and Tisdell 2006) and “Globalisation and Partnership: Features of Business Alliances and International Cooperation” (Aurifeille, Svizzero and Tisdell 2007). The fourth workshop brought together researchers from the Economics, Management, Marketing and Law sciences to present and discuss theoretical and empirical papers across a range of institutional and global contexts. As with past FACIREM workshops, this diverse group of academics brought a variety of theoretical frameworks to the issue of the current book: developing and elaborating governance and the structures of governance and their role in world crises. As a result, the workshop was comprised of interesting debates and discussions that illuminated the complex nature of governance in a globalising world. These papers have been thoroughly revised for the book and reflect the discussion and debate from the many approaches presented at the FACIREM workshop. The book will be of considerable interest to academic researchers, business people, public administrators and politicians interested in the role of governance in local and multi-national businesses and in local, national and international political forums and organisations. As is apparent from the present Global Financial Crisis the importance of sound governance structures and their evolution is a challenging issue. The globalisation of commerce and

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science means that new structures of governance are required to handle new and novel situations, such as across state and institutional boundaries. Sound governance, including elements that encourage foresight, is an important ingredient of managing global and local crisis situations. These crises are ever more apparent as a result of interdependence between consumer, firms and states across the world, especially with the ever increasing advent of instantaneous and low cost communication. We thank all those who helped in making this book possible.

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 1

GLOBALISATION, GOVERNANCE AND ETHICS: THE MAIN ISSUES Jacques-Marie Aurifeille1, Christopher J. Medlin2, Clem Tisdell3, Jaime Gil Lafuente4 and Jaime Gil Aluja5 1

Professor, University of French Polynesia, France Senior Lecturer, Business School, University of Adelaide, Australia 3 Professor Emeritus, School of Economics, The University of Queensland, Brisbane, Australia 4 Professor, University of Barcelona, Spain 5 President of the Royal Academy of Economic and Financial Sciences, Spain

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2

1. INTRODUCTION Governance is the process of directing human organisations. The dictionary definition of governance is the “direction and control of the activities, affairs, policies and functions of an organisation” (Wilkes & Krebs, 1985). Thus, governance is concerned with directing present day activities, so as to arrive at organisational goals. However, the nature of the goals varies according to the purpose of the organisation. In addition, the attributes and characteristics of governance rules necessarily vary according to the resources, human capital and culture of the organisation. Human organisations take many forms; from firms and business relationships seeking profit to quasi-government and non-government organisations pursuing some common societal or community goal; from small local entities, such as city governments, to large organisational structures that govern nations or international community organisations, such as the European Union and the United Nations. All of these organisations have different levels and complexity of governance. However, in all organisations, there are individuals or groups of owners or managers, or elected representatives, who are responsible for the thoughts and acts of governance.

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The effectiveness of governance arises from the understanding and knowledge of the managers or elected representatives who direct the affairs, policies and functions of an organisation. Similarly, the individual participants of an organisation play an important role in the effectiveness of governance, as only through people can an organisation achieve outcomes. Thus, governance requires leadership based on insight and an understanding of the consequences of present action. Organisations are formed and coordinated around sets of common goals, which are also continuously contested. There are necessarily issues in sharing the benefits of coordinated action, with exploitation between co-operators being as difficult to control as the conflict over goals (Ackoff & Emery, 1972, p.206). Governance is effective when the benefit sharing continues to allow achievement of the common goals over time. Necessarily effective governance must meet ethical standards for sharing the effort and benefits of coordinated action. The globalisation of the world economy continues to accelerate, regardless of human and financial crises. Innovative technologies provide new ways to compete and resource interdependencies lead to multifaceted connections all over the world between firms, organisations, nations and people (Aurifeille, Medlin, & Tisdell, 2009). In this increasingly complex environment, where disruptions pass from one side of the globe to the other in a matter of moments or a few years, the understanding of the root causes of change and the factors that determine risk become more difficult to discern. In this environment, where sound governance is required more than in the past, the role of governance has become more difficult. In this book, we present conceptual and empirical research chapters that broaden our understanding of the role of governance in a globalising world. The chapters provide converging points of view on governance, so that generalisations concerning governance are possible in new situations. The contributions are organised into six parts. The chapters in Part I discuss the roles of governance in creating a long-term optimal environment for human endeavour. The perspective is global and the chapters focus on the roles of corporate, national and international governance in creating a sustainable world of natural and economic systems. How does this long-term goal transcend and shape the goal of immediate corporate profit? How can firm owners and managers achieve their governance role of immediate profit and affect a common goal of a sustainable economic system? These are large questions deserving close attention by all thinking managers and elected representatives. In Part II the authors focus on another aspect of long-term viability. Organisations are based on human cooperation for self-interest (Medlin, 2006), and so there is an issue with sharing the benefits and costs. For example, in a firm, shareholders, managers, employees and other stakeholders compete for benefits, and unequally share the costs. Governance is required to limit conflict and so achieve global welfare. As a result in Part II there is a focus on the role of power and countervailing power within organisations comprised of a number of entities. Governance is concerned with leading and following, that is governing and being governed. However, the role of followers is not that of simply tagging along. The governed play an active role in the undertakings of their organisation. Governance requires the active participation of the less powerful. Improvements in governance are most often first highlighted by those with only countervailing power.

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Globalisation, Governance and Ethics: The Main Issues

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Further, when one considers the nature of a globalised world, in which organisations exist within the domain of others, as subsets of complex and hierarchically organised systems, the role of follower is often as important as the role of governing. Thus, power and countervailing power operate within and between governance systems. In a complex environment, the governors are also the governed within their hierarchically constituted organisation; and at the same time the powerful within the organisation are also governed by external governance frameworks. For example, firm managers are required to meet the requirements of their board of directors, but also follow their national corporate laws. In Part III the focus is on different kinds of partnerships that operate between organisations. Cooperation between organisations allows achievement of greater goals than those possible with the resources of one organisation. Governance of partnerships creates a new organisation seeking joint goals, greater than the individual goals of the joining parties. However, in partnerships there is a double hierarchy of intentions and purposes. For example, coordination between organisations must address both the goals of the combined entity as well as the goals of each organisation. In partnerships, effective governance is concerned with generating new ventures through an optimal sharing of the benefits. Thus, the hierarchy of purposes shapes the nature of effective governance structure between the parties. The next part of the book, section IV, addresses governance issues around organisations acting locally and globally. The global geographic spread of many organisations means that local consumption is influenced by the distant economic activity of the producing firm and vice versa. This global-local linkage requires individuals responsible for organisational governance to consider goals and outcomes at local and global levels. Managing the effects of governance on global and local regions requires new understanding and concepts. The authors in part IV put forward a number of new constructs and insights into governing globally and locally. In Part V, several different ways of modelling the linkages between governance and organisational action are considered. The chapters in this part consider the difficulty of governance in a global environment, where crises and unpredictable events are the norm. This global environment means that governance of business corporations cannot be left only to the firms and so a global public governance framework is required. This global system is required in the interests of the private corporations. Local and international firms cannot continue to govern their sphere of influence unless they are shown to perform in an efficient sustainable manner. Only a global framework offers measurement mechanisms to provide private corporations with the evidence to support their own security. The very idea of governance presupposes ethical considerations. The ethical issues around governance are considered in Part VI. Ethics and governance are constructs completely bound in each other – governance matters have ethical outcomes and ethical considerations will influence acceptable governance processes. The introductory chapter of Part VI addresses governance and ethical issues, where production and consumption are geographically separated. The remaining chapters examine ethical governance issues under unusual social cases, so as to elucidate the important role of ethics within governance processes. The final part of the book integrates the business focus of earlier sections with a humanist perspective. A contributing panel of top international decision makers and experts on the psycho-sociological determinants of human behavior present their ideas in a round table discussion of the role of governance after the Global Financial Crisis (GFC) of 2008-9. Each

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individual brings many years of experience and a unique perspective within the global economic system to bear on the issues around creating sound governance of organisations.

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2. AN OVERVIEW OF PART I: SUSTAINABILITY Sustainability speaks to a dynamic relationship between the wider environment and all systems within that environment. Environments are sustainable when interactions with their internal systems are balanced in such a way that internal systems and environment move forward symbiotically into the future (Capra, 1996). As economic and technological systems globalise, the national governments and corporations responsible for propagating and disseminating this technological way of living, and also the individuals who accept and adopt this technical and interdependent lifestyle, face the problem of a limited environment. There has never been a sustainable balance between the industrialised social-economic systems of the Western world and the environment. Governance of human systems has not generally been developed to include the sustainable interactions of that organisation with the wider natural environment. Governance processes always stop at system boundaries, beyond which the ability to direct, control and influence is lost. The human answer to this problem is to continually place new governance systems around and between older systems. In Part I, there are three contributions, which in different ways examine the issues of governance for large systems, given boundary issues. In Chapter 2, Reflections on the Future of Corporate Sustainability in a Globalising World, Ana Maria Gil Lafuente and Luciano Barcellos Paula, both of the University of Barcelona, emphasise the many summits and instruments set up to improve the sustainability of economic development. They next discuss the eventuality of a common referent system and the Club of Rome tentative system, along with some of the issues requiring resolution. In Chapter 3, Environmental Governance, Globalisation and Economic Performance, Clem Tisdell of the University of Queensland, Australia, examines the role of economic systems of governance, which are mainly conceptualised as market and corporate hierarchies, operating in an environment of national governments and international agreements. Tisdell argues strongly the reasons why these governance systems have limited power to direct and influence global corporations, which act across legal borders and cultural boundaries. The limits to governance are shown to exist in: (i) the interests of the governing nation compared to other nations, (ii) the self-interests of the corporation, (iii) the operations of corporations within a competitive system that rewards only those that perform well in the short term, and (iv) the reduction of “felt moral responsibility” by individuals, which follows from people being embedded inside corporate hierarchies and economic systems that distance consumption from production. In Chapter 4, The Challenges of Globalisation and Governance in Complex Times, Mario Aguer Hortal of the Royal Academy of Economic Science and Finance, Barcelona, Spain, examines global developments (political and otherwise, as well as changes in technology, such as the advent of the internet) that have impacted on governance worldwide. Aguer focuses particularly on developments since World War II. In his view, these changes have complicated governance, have generated new forms of management and have resulted in

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strong demands for new forms of governance that ensure that the ethical concerns of communities are met. Existing governance structures have allowed business political and community leaders to engage in unethical behaviour. This, for example, helped to precipitate the Global Financial Crisis, which began in 2008.

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3. AN OVERVIEW OF PART II: POWER AND COUNTERVAILING POWER In this part of the book, we present chapters that consider power and countervailing power. Governance is achieved either by influence, which is less secure and rests on common agreement between parties, or by the application of a source of power to control and direct activities and procedures. In either case the role of power, defined as the perceived ability to provide or withhold reward or the ability to penalise, now or in the future, is important in any governance process. The concepts of power and countervailing power have a considerable history in academic writing (Blau, 1964; Dahl, 1957; Emerson, 1962; French & Raven, 1959). However, power is always relative, always shifting, and always relative to other parties who hold other sources of power (Kim & Fragale, 2005; Zucker, 1987). The application of power brings into play countervailing power (Etgar, 1976), which relies on the need of the powerful to have a party to act in conjunction with or act partly against. Without another party to act through and so partly against there is no source of power. The complex discussions of power sources, power use and the less clear application of power through indirect means are explored in Chapter 5, The Challenges of Legal Pluralism in the South Pacific in the Context of the Globalisation of the Trade in Goods and Ideas, by Tony Angeloa of the Victoria University of Wellington in New Zealand and Yves-Louis Sage of the University of French Polynesia. Their discussion analyses the juxtaposition of monist centralist law imposed (still or initially) by colonial powers in the South Pacific with customary pluralistic law: the product of local communal social processes. These dualistic sets of laws often are a source of social tension in South Pacific countries. Angelo and Sage argue that several different manifestations of the processes of globalisation are weakening customary law in small Pacific island states and strengthening central statute law. For example, aid donors and colonial powers increasingly try to foist their values on these small island countries and consequently, demand changes in communal laws at variance with these values. As a consequence, the governance of these nations alters. There is always a risk, however, that such externally imposed alterations will add to social instability in these nations. In Chapter 6, The Contribution of the Non Profit Sector to a Globalised Post-Crisis Ethical Governance, Patrick Valéau, of the University of La Réunion, examines the role of the not-for-profit third sector in dealing with international relief efforts after natural disasters. Governance within this context follows the “social entrepreneurship paradigm”, a new means for efficiency and independence but also, through its global perspective, a new threat for the smaller non-profit organisations. The issue is illustrated with a variety of examples that illuminate the “side effects” that result from the co-existence of several governance systems. In Chapter 7, Dissociated Governance: A Global Ethical Model, Jérôme Gardody, of the University of La Réunion addresses the question of the optimal balance between shareholders

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and stakeholders. An efficient and broadly applicable system of corporate governance is sought, by examining the advantages and disadvantages of separating the functions of chairman of the board and the chief executive officer. A critical analysis of the distinction between corporate governance and operational governance results, enabling the proposition of a double agency relationship between the chairman and the CEO.

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4. AN OVERVIEW OF PART III: PARTNERSHIPS The contributions in Part III address issues relating to governance within organisations formed by a number of partially independent entities. When a number of entities combine together: either firms forming business relationships, business units forming hierarchically organised firms, or many firms joining to form a network, the goals of the independent entities are joined in a complementary manner to a greater combined set of goals. This double set of goals creates interesting governance issues. In Chapter 8, Inter-firm Governance and Relationship Performance: A Study of Market, Hierarchy and Relational Coordination Mechanisms, Jacques-Marie Aurifeille and Christopher John Medlin consider ideal governance forms and business relationship performance. The governance issue is conceptualised as two independent entities joining together to seek a common goal of relationship performance (Medlin, Aurifeille, & Quester, 2005). The ideal forms of governance are conceptualised as three different inter-firm coordination mechanisms: (i) market or short-term coordination, (ii) hierarchical or authority based coordination, and (iii) relational or joint coordination (Bonoma, 1976; Bradach & Eccles, 1989). In an empirical examination of 162 business relationships within the computer software industry they find relational governance to be the main determinant of relationship performance, with hierarchical and market based coordination also playing a part. While this chapter highlights the importance of joined outcomes as a factor in sound governance, the results also complement earlier findings by Aurifeille and Medlin (2009) related to the role of benevolence in determining trust formation. Relational governance, based on joined activity, requires good levels of trust development, and trust is more determined by benevolence of action. In Chapter 9, Corporate Governance and Subsidiarity, Antonio Argandoňa and Lena Strandberg consider the role of subsidiarity within an organisation, which results in a complex hierarchy of goals. A parallel is made between political subsidiarity, as illustrated by the European Union treaty, and the global firms dealing with multiple subsidiaries in different countries and activity domains. This multiple criteria analysis enables a new approach to corporate governance to be proposed. The final chapter of this part examines the case of networks, composed of many firms. In Hierarchical Network Governance: An Examination of Keiretsu Networks, Takao Ito and Christopher John Medlin examine share cross-ownership and profitability in the Japanese Keiretsu networks of Toyota and Mazda. Both of these networks are composed of firms that supply automotive parts to the production plants of each respective producer (Ito, Medlin, Passerini, & Sakamoto, 2009). By examining share cross-holdings, the governance issue for the network is stylised along the lines of bi-directional communication versus control. Using graph theory, cross shareholdings are examined, as in-degree and out-degree, conceptually

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distinguishing between two-way communications and a uni-direction control perspective. The results of the study show that greater ownership of supplier firm shares, across multiple tiers, explains firm profitability. In other words, ownership of shares in a linked series of firms explains profitability more than does two-directional communication. This suggests that network governance of the Toyota and Mazda Keiretsu networks is hierarchical in nature. Whether the governance of these networks is a cultural feature or not remains a moot point. However, the results display the importance of lesser entity governance, inside a greater organisation, and points to the role of hierarchical goals within complex governance structures.

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5. AN OVERVIEW OF PART IV: GLOCAL GOVERNANCE The governance rules of globalised firms have an impact on the consumers of the many countries. Thus, when firms are concerned with governance issues they must think both globally and locally. In Chapter 11, The Effects of Governance on the Perceptions of Partner Brands, Sinove Marde of the University of Caen Basse-Normandie in France, analyses how consumers perceive the alliances of globalising firms. To what extent are these alliances perceived as a consistent entity, with a common governance framework and a global concern, or a composite of local powers? In the latter case, the perceived asymmetry of power and so the differentiated governance of the allied firms plays a major role in their commercial performance. The resulting implications for the governance framework and the communication strategy of the allied firms are elaborated. In Chapter 12, Interactions between Globalisation and Retail Productivity: Some Governance Issues, Gérard Cliquet of the University of Rennes 1 in France, and Steve Burt of the University of Stirling in Scotland, examine the interactions between retail productivity and globalisation, along with some issues relating to the implications of the governance modes of market entry and expansion for local organisations as well as for the retailer’s headquarters. The analysis is made in a dynamic perspective, with the positive effects that the global firms entering the markets may have on the domestic firms and the impact of the local laws on the retailers' engagement with globalisation. As illustrated by the many failures of global retailers, expansion is not a panacea. At the headquarters' level, they raise specific governance issues, which are analysed in conjunction with the information overload syndrome and the danger of hostile takeovers. Finally in this part, in Chapter 13, Trust as a Substitute to Legal Governance in International Transactions, Magali Debat of the University of La Réunion in France, focuses on internet trading and the increasing diversity of laws that firms face within and across countries. Specifically what strategy does a firm follow when the legal governance of the Internet is weak within a country and so consumers distrust electronic trade? In his context, consumer's perceived proximity of the vendor appears to be a significant way to generate trust. Empirical analysis of this perception shows that geographical proximity is inefficient, while cultural proximity is important. The chapter is completed by a discussion of global strategy for Internet dependent firms.

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6. AN OVERVIEW OF PART V: MODELLING The richness and diversity of the theoretical reflections on governance and globalisation can only benefit from empirical validations. There are three benefits to empirical validation: (1) defining precisely the two latent variables so that they can be quantified for inclusion into falsifiable models, (2) testing the robustness of theories against their tentative falsifications, (3) proposing extensions of the existing concepts and processes. In Chapter 14, the authors present initial work towards achieving empirical validation. In Chapter 14, The Unpredictability of Financial Crises in a Globalised World: Implications for Public Governance, Arturo Rodríguez Castellanos and Nera San Martín Albizuri both of the University of the Basque Country in Spain, focus on the forecasting issues concerning globalisation and governance. More specifically, they analyse the predictability of the financial crises in a global economic system. They demonstrate that the connected nature of the financial systems is a major cause for unpredictability, and propose a generalised and public governance system for smoothing the resonance affects of crisis within a global financial system. In Chapter 15, The Effects of Firms’ Corporate Governance and Level of Globalisation on their Financial Performance in the Context of World Economic Crises, Jacques-Marie Aurifeille, FACIREM, GDI University of French Polynesia, Jaime Gil Lafuente, FACIREM, University of Barcelona Spain and Christian Dave, FACIREM, University of La Réunion France, address the question of the measurement of globalisation and corporate governance. While globalisation has been subject to many measurement scales at the macro and the micro levels, corporate governance is still a concept with multiple meanings. The measurement issues raised by the scoring of firms on their corporate governance are discussed from a shareholder's perspective: ambiguity, ambivalence, non-linearity and variance heterogeneity of the indicators. Next a predictive measure is sought, with financial performance as the goal variable of corporate governance. Globalisation is included as a co-factor of governance. Results confirm the existence of a single dimension for corporate governance and its positive effect on both the financial security and the profitability of the firm. In Chapter 16, A New Model to Value Employee Stock Options (ESO) and the Effect of ESO Plans on ESO Holders, Stockholders and Bondholders, Robert Trommsdorff, FACIREM, University of La Réunion France, addresses the question of bonus and remuneration. The remuneration of the top managers is essential in the theoretical conception of corporate governance. However, the World Economic crisis has emphasised the matter and there are calls for public regulation of the manager's bonuses. After analysing the background and empirical research on the matter, Trommsdorff extends the scope by proposing a new model of valuation of the employee stock options (ESO) plans and by highlighting their effects on ESO holders, stockholders and bondholders.

7. AN OVERVIEW OF PART VI: ETHICAL AND SOCIAL ISSUES Governance mechanisms constrain and provide emergent direction to organisations and public entities, and so affect the well being of individuals, nations and cultures. Every organisational action carries with it benefits and costs for some individuals or group and these

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benefits and costs are rarely equally shared. Governance and the setting up of governance systems necessarily entail ethical decisions. In Chapter 17, Ethics and Globalisation, Lorenzo Gascón, Vice President of the Royal Academy of Science, Economics and Finance, of Barcelona, exposes the common roots of ethics and governance and the reasons for their divorce. The ethical and political criticisms pronounced against the governance of the largest firms by prominent economic and intellectual representatives are analysed and an agenda is proposed to reconcile the humanist and the economic perspectives. In a different way in Chapter 18, Implications for Organisation Governance of Advances in Neuroscience and Biology, Bernard Roullet and Olivier Droulers, of the University of South Brittany, and Marie-Pierre Pinto, from the University of Limoges, also in France, discuss and consider the ethical dilemmas that will arise as biology and neuroscience progress understanding of consumer behaviour. This article highlights the important role of governance structures in enabling benefits from scientific and global progress, while also constraining the uneven distribution of private and social costs that arise from scientific progress. Chapter 19, “Perspectives on Globalisation, Governance and Ethics” presents an edited summary by Jaime Gil Lafuente (University of Barcelona, Spain) of the ideas discussed at a forum held on at the Royal Spanish Academy of Economic and Financial Sciences in November 2009. The session was chaired by Ricardo Díez Hochleitner, Honorary President of the Club of Rome, Spain. The participants were individuals who have held significant roles in national governments, international committees and forums, and in multinational corporations. These individuals have played, and are playing, important roles in governance structures and their experiences provide invaluable insights into the practical workings of governance.

CONCLUSION It is evident from the contributions to this book that growing globalisation (which has many dimensions) alters the effectiveness of existing systems of governance whether they are market-based, hierarchical, local, national or global in their coverage. Growing globalisation creates new challenges for good governance because it increases the scope for business and public bodies to engage in unethical practices, which reduce human welfare and which can have negative worldwide consequences, as underlined by the business practices that helped to trigger the Global Financial Crisis, which began in 2008. For these reasons, issues involving growing globalisation, systems of governance, and ethical behaviours are closely linked and raise new managerial considerations. This is made clear in Part I of this book where it is shown that some existing governance structures are becoming unsustainable or of diminished value as globalisation becomes more pervasive. Globalisation also alters the relative power of existing organisations, such as those that are locally based or nationally based, as new global bodies come into existence. This is a source of increased competition and tension between organisations, as is shown in Part II. Furthermore, existing laws and rules governing behaviour at the local or national level often face global pressures for change, for example, legal pluralism is increasingly difficult to

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Jacques-Marie Aurifeille, Christopher J. Medli, Clem Tisdell et al.

sustain, even when there may be a solid political and ethical case for its maintenance. In addition, globalisation (for example, the development of multinational companies with significant bodies of shareholders in different countries) can change the balance of power between shareholders and stakeholders (for example, managers) in public companies and exacerbate agency problems. The gap between managers and shareholders is likely to increase and consequently, the scope for unethical and imprudent financial behaviour on the part of business managers increases. Globalisation makes it easier for the managers of large international corporations to avoid economic surveillance by governments, and it can reduce their accountability to shareholders. As a result, there is increased scope for the adoption of unethical business practices. Organisations (businesses, NGOs, government bodies and so on) can adjust to the challenges and opportunities stemming from increased globalisation by forming partnerships, that is by entering into cooperative arrangements for governance. Partnerships raise social management and governance issues, which are examined in Part III. Although economic and other forms of globalisation have occurred rapidly and on a large scale (see for example, Tisdell and Sen, 2004) the world is not yet completely globalised. For example, some significant variations exist between regions and nations in the preferences and perceptions of consumers, and also in laws and regulations that must be complied with by businesses as well as in socially acceptable business practices. Although the momentum of globalisation tends to make for greater uniformity of such phenomena, multinational businesses and those trading or doing business internationally still need to take these differences into account in managing their companies and in assessing the social acceptability of their behaviour. In other words, global activities and governance have to be adjusted to comply with local conditions. As explained and illustrated in Part IV, glocal governance is important. The term ‘glocal’ has been coined to portray the need, in some circumstances, to adjust global strategies to local circumstances. Globalisation (for example, the international expansion of markets and the growth of transitional organisations) has many consequences for the modelling of economic and managerial behaviours. New models are introduced in Part V to capture several theoretical consequences of growing globalisation. The coverage includes problems of predicting financial crises in a globalised world and their implications for public governance; the consequences of the issue of employee (for example, managerial) stock options; and empirical analysis of relationships between the nature of a corporation’s governance, the extent of its globalisation and its financial performance. This is assessed in the context of the Global Economic Crisis, which commenced in 2008. Although all contributors in Part VI stress ethical and social concerns raised for good governance by globalisation (particularly as brought to the fore by the GFC starting in 2008), some differences of emphasis and in opinions are evident. For example, some contributors (for example, Roullet, Droulers Pinto and Simionescu) stress the potential role of rationalism, especially advances in the natural sciences, as a means of improving governance in a globalising world; whereas Gascón stresses the limitations of rationalism as a means of providing acceptable ethical solutions to problems that are being posed by increased globalisation. Moutsopoulpos adopts an intermediate position – he recognises the value of education and science in improving governance but these need, in his view, to evolve in accordance with ethical precepts, which he identifies by drawing on classical Greek philosophies.

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Globalisation, Governance and Ethics: The Main Issues

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These different perspectives highlight the human issues involved in people and societies living on a single globe (a limited environment), with ultimately restricted resources. No one solution exists for the multiple issues that arise from conflict of goals and the resulting competition for resources. Rather humans can only cooperate in social groups, economic organisations, nations and global institutions to move forward, but these paths also necessarily involve conflict and exploitation amongst the co-operators. Concerning economic globalisation and the role of sound governance, the way forward is global sets of governance structures focused on sound local and global ethical bases.

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REFERENCES Ackoff, R.L., & Emery, F.E. (1972). On Purposeful Systems, London: Tavistock Publications. Aurifeille J.M. (2008). Coordination. In International Encyclopaedia of Organisation Studies, S.R. Clegg & J.R. Bailey (Eds.), London: SAGE, 281-283 Aurifeille, J.-M., & Medlin, C.J. (2009). The Dimensions of Trust: Benevolence and Credibility. In J.-M. Aurifeille, C.J. Medlin & C.A. Tisdell (Eds.), Trust, Globalisation and Market Expansion (pp. 9-22). New York: Nova Science. Aurifeille, J.-M., Medlin, C.J., & Tisdell, C. (2009). Trust and Globalisation: An Overview. In J.-M. Aurifeille, C.J. Medlin, & C.A. Tisdell (Eds.), Trust, Globalisation and Market Expansion (pp. 1-6). New York: Nova Science. Blau, P.M. (1964). Exchange and Power in Social Life. New York: Wiley. Bonoma, T. (1976). Conflict, Cooperation and Trust in Three Power Systems. Behavioral Science, 21 (November), 499-514. Bradach, J.L., & Eccles, R.G. (1989). Price, Authority, and Trust: From Ideal Types to Plural Forms. Annual Review of Sociology, 15, 97-118. Capra, F. (1996). The Web of Life : A New Synthesis of Mind and Matter. London: HarperCollins. Dahl, R.A. (1957). The Concept of Power. Behavioral Science, 2 (1957), 201-215. Emerson, R.M. (1962). Power Dependence Relations. American Sociological Review, 27 3141. Etgar, M. (1976). Channel Domination and Countervailing Power in Distributive Channels. Journal of Marketing Research, 13 (August), 254-262. French, J.R.P., & Raven, B. (1959). The Bases of Social Power. In D. Cartwright (Ed.), Studies in Social Power (pp. 150-167): Ann Arbor: University of Michigan Press. Ito, T., Medlin, C.J., Passerini, K., & Sakamoto, M. (2009). Influence, Trust and Trade in the Keiretsu of Toyota: A Centrality Analysis. In J.-M. Aurifeille, C.J. Medlin, & C.A. Tisdell (Eds.), Trust, Globalisation and Market Extension (pp. 101-118). New York: Nova Science. Kim, P., & Fragale, A. (2005). Choosing the Path to Bargaining Power: An Empirical Comparison of BATNAs and Contributions in Negotiation. Journal of Applied Psychology, 90 (2), 373-381. Medlin, C.J. (2006). Self and Collective Interest in Business Relationships. Journal of Business Research, 59 (7), 858-865.

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Medlin, C.J., Aurifeille, J.-M., & Quester, P.G. (2005). A Collaborative Interest Model of Relational Coordination and Empirical Results. Journal of Business Research, 58 (2), 214-222. Tisdell, C.A. (ed) (2005). Globalisation and World Economic Policies, New Delhi: Serials Publications. Tisdell, C.A. & Sen, R.K. (2004). Economic Globalisation: Social Conflicts, Labour and Environmental Policy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Wilkes, G.A., & Krebs, W.A. (Eds.). (1985). Collins Concise English Dictionary. Sydney: Collins. Zucker, L. (1987). Institutional Theories of Organisation. Annual Review of Sociology, 13 (1), 443-464.

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PART I

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SUSTAINABILITY

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Chapter 2

REFLECTIONS ON THE FUTURE OF CORPORATE SUSTAINABILITY IN A GLOBALISING WORLD Anna María Gil Lafuente and Luciano Barcellos de Paula University of Barcelona, Spain

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ABSTRACT In recent decades, we have witnessed various economic, political, social and environmental conditions worldwide that directly or indirectly affect the business environment and thus individual companies. Further into the 21st century, the globalisation of markets and the interdependence of the world’s economies, which are increasingly susceptible to crisis, also generate a greater degree of uncertainty. Additionally, issues such as sustainable development, climate change, sustainability and corporate responsibility, among others, now demand attention, which increases the range of the responsibility of businesses to their stakeholders. The need to promote sustainable economic development is a challenge for private companies, and government institutions in recent decades have sought solutions to these issues through the construction of protocols, conventions and agreements in various summits. At the same time, the creation of new guidelines, standards, certification systems, codes of conduct and ethical principles have led companies into a broad debate about the management tools that are used to ensure sustainable development planning. In this context, our focus is on thinking about the future of corporate sustainability through all of these instruments and management policies applied by companies to pursue sustainable development.

1. INTRODUCTION The concept of sustainable development was outlined in the Brundtland report (WCED 1987); it is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. For Elkington (1994), a company contributes to sustainable development by simultaneously providing economic, social and

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Anna María Gil Lafuente and Luciano Barcellos de Paula

environmental benefits - the so-called triple bottom line. This commitment to sustainable development is in agreement with the Green Paper (Commission of the European Communities, 2001), in which corporate responsibility is defined as “the voluntary integration, by enterprises, social and environmental concerns in their business operations and their relationships with their stakeholders”. The need to promote sustainable economic development is a challenge for private companies and government institutions, which in recent decades have sought solutions in this regard by constructing protocols, conventions and agreements in several international summits. At the same time, the creation of guidelines, standards, certification systems, codes of conduct and ethical principles lead businesses into a wide debate about the management tools that are used to ensure sustainable development planning. In this context, our aim is to consider the future of corporate sustainability through all of these instruments and management policies implemented by companies in pursuit of sustainable development as well as proposing model-based approaches that enable the rediscovery of new ways of managing not only the companies but also their aims, strategies and policies to make the prosperity of companies compatible with a high quality of life at the global level.

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2. INTERNATIONAL EVENTS In the last decades, private companies and government institutions have sought solutions to stimulate the economic development in a sustainable manner. For this purpose, there have been several international summits, which have produced protocols, conventions and agreements aiming to promote sustainability. We outline the principal events below. In 1972, Stockholm hosted the first World Conference on the Human Environment, which was important in framing the debates on development and the environment and that represents the beginning of the search for solutions for the mitigation of the effects of climate change. In 1976, a wide political commitment was made among the member countries of the OECD to promote investment; this is known as the Guidelines for Multinational Companies. The Guidelines describe voluntary standards and recommendations for responsible business conduct in a wide range of social and environmental arenas such as human rights, disclosure, labour and the environment. The Guidelines are intended to ensure that the lines of the activities of these enterprises are in harmony with government policies to strengthen the foundations of mutual trust between companies and societies in which they conduct operations. These policies are intended to help improve the climate for foreign investment and support multinational companies’ drive for sustainable development. However, the issue of sustainability became more visible during the 90s with the realization of the United Nations Conference on Environment and Development (UNCED), held in Rio de Janeiro in June 1992, which produced the resolution to promote and recommend policies for sustainable development. The 1997 adoption of the Kyoto Protocol had as its aim to promote sustainable development through the implementation of commitments to limit and reduce CO2 emissions into the atmosphere. In 1999, the Global Compact of the United Nations was signed; this is composed of 10 principles of corporate citizenship that are based on internationally agreed conventions and treaties on human rights, labour relations, environmental protection and the

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Reflections on the Future of Corporate Sustainability in a Globalising World

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fight against corruption. A major advantage of the Global Compact is its universal character; it provides a common framework for companies in different countries. At the same time, the initiative is voluntary and flexible so that it is possible to adapt it to the particular needs of each situation and each company. The Global Compact's operational phase was launched in July 2000 at the United Nations Headquarters in New York; the first companies soon joined the initiative. The creation of the Green Paper in 2001 for the Commission of the European Communities reinforces the importance of the issue of sustainability to promote a European framework for corporate social responsibility. In 2007 the Fourth Assessment Report of the Intergovernmental Panel Climate Change (IPCC) confirms that the planet is undergoing a process of anthropogenic global warming and notes that despite all the initiatives of recent years made by governments, businesses and society, we still need to find other mechanisms that can contribute to sustainable development. Finally, it is necessary to highlight the summit of the G-20 held in London in April 2009. In agreement with the chiefs' summit of State and Government, the political leaders of the G-20, a group that represents 85% of the world economy and two thirds of the world population, agreed to a reform of the financial global system. It should be noted that this summit issued the proposal of a fiscal expansion that represents "unprecedented and concerted action" and which amounts to 5 billion dollars until 2010 to create millions of new jobs, to raise the world GDP by 4% and to make the transition into a "green economy". The aim is to reduce our dependence on fossil fuels, such as oil, and increase the distribution of safe energy with a greater use of alternative, non-carbon sources. Future international energy policies will employ a combination of energy sources: solar, wind, nuclear, clean coal and other clean energy technologies. The summits have provided a platform to incorporate the idea of sustainability into local, regional and global plans of action; policy makers at all these levels have acted to expand the study, application and discussion of the main themes of sustainability (Cano, Cruz & Canadell, 2009). Figure 1 shows a summary of major international events that were designed to create a governance framework to provide more harmonious development between all levels (environmental, economic, social and institutional).

3. GUIDELINES AND STANDARDS APPLIED TO SUSTAINABILITY The various existing standards provide companies with a broad debate about the management tools that are used to ensure sustainable development planning. These are mainly domestic actions necessary to achieve a detailed diagnosis of and reliable commitment by organisations. These methodologies and tools were developed with the aim of attracting businesses to pursue sustainable development and corporate responsibility and to improve their social impact and reputation (Olcese, Rodríguez Ángel & Alfaro, 2008). Consequently, compliance with standards also represent part of an organisations’ total strategy. According to Louette (2007), we distinguish between two types of standards in accordance with the aims of its supporters. First, there are those that are published by official standards organisations, which include ISO 14000 (environmental), ISO 9000 (quality), EC EMAS (environmental), BS 8800 (working conditions) and BS 8855 (environmental).

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EVENTS

YEAR

OBJETIVES

RESPONSIBLE ENTITY

PLACE

1972

Was an important milestone for the debates on the development and the environment and the beginning of the search of proofs of the mitigation of the effects of the climatic change.

United Nations (UN)

Stockholm, Sweden

Creation of the Program of the United Nations for the Environment (PNUMA)

1972

To coordinate the activities related to the environment, representing to the countries in the implementation of environmental suitable policies as well as to fomenting the sustainable development.

United Nations (UN)

Stockholm, Sweden

The Guidelines (OECD) Guidelines for Multinational Enterprises

1976

The Guidelines are intended to ensure that the lines of the activities of these enterprises are in harmony with government policies to strengthen the foundations of mutual trust between enterprises and the societies in which they conduct operations to help improve the climate for foreign investment and help for sustainable development made by multinational enterprises.

Organisation for Economic Co-Operation and Development (OECD)

France

The Vienna Convention for the Protection of the Ozone Layer

1985

The Parties to the Convention were determined to protect human health and the environment against adverse effects resulting from changes in the ozone layer.

Ozone Secretariat United Nations Environment Programme (UNEP)

Vienna, Austria.

Brundtland Report

1987

In this report, prepared by various nations to the UN was first used the term sustainable development, defined as one that meets present needs without compromising the needs of future generations. It involves a major change regarding the idea of sustainability, primarily ecological, and also a framework that gives emphasis to economic and social context of development.

World Commission on Environment and Development

Geneva, Switzerland.

The Montreal Protocol on Substances that Deplete the Ozone Layer

1987

The Montreal Protocol has discussed this issue on Substances that Deplete the Ozone Layer in order to stop the production and consumption of substances that deplete the ozone layer.

Ozone Secretariat United Nations Environment Programme (UNEP)

Montreal, Canada.

United Nations Conference on Environment and Development (UNCED)

1992

The Conference has tried to promote and recommend policies for sustainable development and they approved five agreements such as the Rio Declaration on Environment and Development, Agenda 21, Convention on Biological Diversity, Framework Convention on Climate Change, and Statement of Principles on Forests.

United Nations (UN)

Rio de Janeiro, Brazil.

Kyoto Protocol to the United Nations framework convention on climate change

1997

To promote the sustainable development each of the Parties should implement their commitments to limit and reduce CO2 emissions in the atmosphere.

United Nations (UN)

Kyoto, Japan.

UN Global Compact

1999

The United Nations Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.

United Nations (UN)

Davos, Switzerland.

United Nations Millennium Declaration

2000

The topic treats sustainable development, and considers to be the respect of the nature and the common responsibility essential values for the international relations in the 21st century.

United Nations (UN)

New York, United States.

Creation of Green Paper

2001

To foment an European frame for the social responsibility of the companies.

Commission of the European Communities

Brussels, Belgium.

2002

It treats the multilateralismo as a key strategy in the fulfillment and the application of the principles of the Sustainable Development.

The first World Conference on Environment.

World Summit on Sustainable Development Stern Review Report on the Economics of Climate Change

United Nations (UN)

Johannesburgo, Sudáfrica

Economic and Social Research Institute Hamburg, Vrije and Carnegie Mellon Universities

United kingdom

World Meteorological Organization and United Nations Environment Programme (UNEP)

Bangkok, Thailand.

2006

Report on the impact of the economy and climate change.

Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC)

2007

Report that notes that our planet is undergoing a process of anthropogenic global warming and provides scientific, technical and socioeconomic information relevant for the understanding of climate change.

The London Summit 2009 - G20

2009

Reforming the global financial system is necessary to: restore confidence, growth, and jobs; The Group of Twenty (G20) Finance Ministers and repair the financial system to restore lending; strengthen financial regulation to rebuild trust; Governors of Central Banks of Argentina, Australia, Brazil, fund and reform our international financial institutions to overcome this crisis and prevent future Canada, China, France, Germany, India, Indonesia, Italy, ones; promote global trade and investment and reject protectionism, to underpin prosperity; and Japan, Mexico, Russia, Saudi Arabia, Africa South Korea, build an inclusive, green, and sustainable recovery. Turkey, UK and USA.

S

l b

ti

(2009)

Source: Own elaboration (2009). Figure 1. International events related to the sustainability.

London

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Guidelines, standards and certification systems

S

YEAR

DESCRIPTION The ISO 9000 family addresses "quality management". This means what the organization does to fulfill the customer's quality requirements and applicable regulatory requirements, in order to improve customer satisfaction and achieve continual improvement of its performance in pursuit of these objectives. ISO 9001 System of quality management is the most popular of the series.

ISO 9000

1987

ValuesManagementSystemZfW VMSZfW

1988

EU Regulation No 761/2001 of EcoManagement and Audit Scheme (EMAS)

1995

Eco-management systems, as formalized in the ISO 14000 and EMAS Regulation define the method of operation to be adopted by Companies willing to achieve an integrated environmental management, thus allowing continuous improvement in their environmental performance.

ISO 14000

1996

The ISO 14000 series addresses "environmental management". This means what the organization does to minimize harmful effects on the environment caused by its activities and to ensure continuous improvement in environmental performance. The ISO 14001 is the most popular of the series and provides the basic guidelines for developing an environmental management system in the company.

British Standards 8800 – BS 8800

1996

SA8000 (Social Responsibility)

1997

It is the standard management of values that includes the moral dimension of economic transactions and other issues of securities to the strategies, policies and procedures of companies (standard procedures).

Standard addressed to the management of occupational health and safety, with the possibility of auditing and certification. The SA 8000 is a voluntary standard, certifiable, which facilitates the introduction of a management system to improve working conditions in the company. The OHSAS 18001 is a management system with the approach to occupational health and safety. In other words, the OHSAS 18001 is a tool that allows the company to achieve and systematically monitor and improve the performance level of health and safety requirements set by itself. The implementation of OHSAS 18001 reflects the concern of the company with the physical integrity of its employees and partners.

Occupational Health and Safety Assessment Series. OHSAS 18001

1999

Ethics Compliance Management System Standard - ECS 2000

1999

SGE 21

1999

Business Standard SSG 21 is the first system of management of European social responsibility that allows, on a voluntary, audit processes and achieve a certificate in Management Ethics and Social Responsibility.

Good Corporation Standard

2001

It is a certification awarded to organizations that demonstrate responsible management practices and improvements in relation to social, ethical and environmental basis of a set of criteria.

SI 10000

2001

SI10000 standard addresses the practices of "social responsibility and community involvement.

British Standard 8555 – BS 8555

2003

SD 21 000

2003

SD 21000 Guide represents the French contribution to international debate on sustainable development standards, organized by the ISO. However, the recommendations of the Guide to SD 21000 are not intended for certification, its main goal is to be a guide to good practice.

ti

PLACE

International Organization for Standardization (ISO)

Sweden

German Business Ethics Network (DNWE)

Germany

European Commission

Europe

International Organization for Standardization (ISO)

Sweden

British Standard Institution – BSI

England

Social Accountability International (SAI)

United States

Occupational Health and Safety Assessment Series

United States

The ECS 2000 is a standard that assists the implementation of Compliance with legal and ethical systems in organizations, in accordance with the principles of Human Rights and Freedom and the Co-Prosperity in the Japan Society for Business Ethics Study market economy.

Set of standards for environmental management aimed at small and medium enterprises (SMEs). Application (stages) of an environmental management system with the aim of continuous improvement and preparation for ISO 14001 and EMAS registration (European Regulation EMAS).

l b

RESPONSIBLE ENTITY

Japan

Forum for the Evaluation of Ethical Management – Forética

Spain

A Good Corporation Ltd.

United Kingdom

Standards Institution of Israel (SII)

Israel

The Acorn Trust

United Kingdom

Association Française de Normalisation AFNOR

France

(2009)

Figure 2. Evolution of the main guidelines, standards and certification systems related to sustainability. Source: Own elaboration (2009).

20

Anna María Gil Lafuente and Luciano Barcellos de Paula

The market has encouraged the creation of institutions that regulate certain high standards of management in areas such as security and working conditions, among others. The more important of these second types of standards are: SA 8000 (social rights), OHSAS 18001 (risks / accidents) and AA 1000 (accountability). In our study, we observed the creation of social accountability standards in several countries, the main highlights being those made in Brazil (ABNT NBR 16001), the UK (BS 8900), Australia (AS 8003), France (SD 21000), Israel (IS 10000), Japan (EC S2000), Italy (Q-Res) and Germany (VMS). Responses to international demand for policies dealing with social responsibility are underway and the creation of a third generation of standards - the ISO 26000, which deals with Social Responsibility, without taking into account the presentation of guidelines for certification, is scheduled for September 2010. The document is intended to add value to and not replace previous intergovernmental agreements dealing with social responsibility, such as the Universal Declaration of Human Rights (United Nations) and those adopted by the International Labour Organisation (ILO). This new family of standards will address issues regarding corporate environmental responsibility, human rights, labour practices, governments, organisations, fair business practices, community participation, social development and consumer protection. In figures 2 and 3, we present a summary of the evolution of the main guides, standards, certification systems and codes of conduct related to sustainability. We note that this process began in 1987 with the publication of ISO 9001 and intensified in the 1990s, eventually reaching broader adoption worldwide in the 2000s.

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4. REFLECTIONS ON THE THEME Stakeholders have increasingly required organisations to be more environmentally responsible (Hart, 1995; Porter & van der Linde, 1995). The reasons for these demands are primarily regulatory requirements, care for the environment, the desire for an improved public image, and the potential for such responsibility to expand the customer base and increase competitiveness (Hart, 1995; Porter & Van der Linde, 1995). It has been argued that a business’s sustainability performance can also be regarded as a measure of the business’s operating efficiency and also can help determine what proactive steps in the environment may produce long-term gains. For Elkington (1999), the concept of sustainability, in essence, demonstrates from the start that it has been a difficult task to integrate a diverse set of requirements in relation to human development in the long-term future. Integrated into a contradictory context of economic, social and ecological aspects, sustainability represents an effort to balance demands and aspirations that are fundamentally divergent. Overall, this leads to a broad and controversial debate conducted at a theoretical level and in particular with regard to practical application within a company. For Hart and Milstein (2003), sustainability is a complex and multidimensional concept that cannot be solved by a single corporate action. Respecting the environment has become a necessity rather than just an idea (Cambra-Fierro, Hart & Polo-Redondo, 2008). A growing number of voices have warned of the deterioration of the environment and its negative consequences, but it has become clear that market forces are insufficient to regulate the impact of business. For this reason, it is necessary to articulate a set of rules that consider the

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particularities of each industry and force companies to minimise their environmental impact (Cambra-Fierro, Hart & Polo-Redondo, 2008). The existence of laws regulating or requiring companies to assume and carry out activities associated with corporate responsibility is one of the most controversial and less consensual elements of the debate on corporate responsibility that is being held between companies and social organisations worldwide. To date, there is no agreed-upon or internationally accepted standard that, aside from being a requirement to report information, covers all aspects related to corporate responsibility (Olcese, Rodríguez Ángel & Alfaro, 2008). Moreover, issues such as sustainable development, climate change, sustainability and corporate responsibility, among others, are currently in the public spotlight, which increases the need to manage these issues for the business community. The worry about economic development and its consequences affects society and especially affects companies, which need to find mechanisms to survive in a market that is increasingly complex and competitive. Therefore, we propose the use of models to rediscover new ways to manage not only businesses but also their objectives, strategies and policies to simultaneously support the prosperity of enterprise and promote a sustainable quality of life at the planetary level. To do this, we must rely on flexible models that enable the hybrid treatment of objective and subjective estimates and allow estimates of the future conduct of companies, institutions and social actors, thereby offering a redesign of economic relations that affect all entities involved. In figure 4, we propose an approach to managing sustainability among enterprises. Many of the techniques that we propose have been implemented in different processes in which different aspects of sustainability are involved. To illustrate, the Theory of the Forgotten Effects1´2 (the process allows for arriving at “all” the direct or indirect relations, with no possibility of error or omission, in this way recuperating what has been called “forgotten effects”) has been used in the selection of elements that contribute to the sustainable growth of the company (Barcellos Paula & Gil Lafuente, 2009) and in the analysis of the organic purchasing decisions of consumers (Gil Lafuente & Salgado Beltrán, 2005; Gil Lafuente, Salgado Beltrán, Subirá Lobera & Beltrán, 2006).

CONCLUSION Our focus is on the future of corporate sustainability through the various instruments and management policies applied to promote corporate sustainable development. It is important to consider that in recent years, issues related to "sustainability", "sustainable development" and "corporate responsibility" have gained greater relevance in both regulatory and business communities at the scientific level. However, we wonder: how long will this last? Is the lack of consensus over or concern about sustainability standards going to put our future at risk?

1

Kaufmann, A., & Gil Aluja, J. (1988). Modelos para la investigación de efectos olvidados. Vigo, Spain: Editorial Milladoiro. 2 Gil Lafuente, A.M. (2008). Incertesa y Bioingenyeria. pp. 52-63. Barcelona, Spain: Real Academia de Doctores. Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

22

Anna María Gil Lafuente and Luciano Barcellos de Paula General Objective

Particular objectives To develop new applications and management models for decision making.

To propose the model utilization that there allow to rediscover new ways of managing the sustainability in the interprises.

To show the utility of these models in sustainable development in companies by the Theory of Stakeholders.

Action Lines

Techniques

Human resources management

Hamming's distance, Coefficient of Adequacy, OWA operators

Supplier management

Models of Subjective Preferences

Customer management

Theory of affinities

Identification, prioritization and dialogue with stakeholders.

Clans Theory Chain of inference

Business decision processes.

Theory of the Forgotten Effects

Implementation of eco-efficiency practices in businesses.

Coefficient of Qualification, Hungarian Algorithm

Risk management: social, To implement new contributions economic and environmental. to the methodological knowledge in decision theory Other applications

Other techniques

Source: ow n elaboration (2009)

Figure 4. Approaches to managing the sustainability in the enterprises. Source: Own elaboration (2009).

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In this context, it will be essential to create the conditions for the future maintenance of the level of involvement in the economic, institutional and social issues related to sustainable development so that future generations can live in harmony with the resources that our planet offers us. It will be necessary to maintain a constant level of agreement and consensus in international institutions by creating comprehensive and flexible rules. Future protocols on sustainability should then standardise or create consensus standards and/or mandatory regulatory compliance. Additionally, to determine how to face to all these demands in moments of crisis, an official would pay the costs of compliance. What role this official would play within the State in terms of granting major incentives, fiscal subsidies, etc., to sustainable enterprises is also yet to be determined. We believe that our contribution will serve to support future research in the field of corporate sustainability and that these lines of research can contribute positively to developing nations.

REFERENCES Barcellos Paula, L., & Gil Lafuente, A.M. (2009). Process of selection of elements that they contribute to the sustainable growth of the company. In International Conference and Doctoral Consortium, Social responsibility and corporate environment evaluation indicators. 1, 773-788. Lyon: ISEOR & Academy of Management. Cambra-Fierro, J., Hart, S., & Polo-Redondo, Y. (2008). Environmental Respect: Ethics or Simply Business? A Study in the Small and Medium Enterprise (SME) Context. Journal of Business Ethics, 82 (3), 645-656. Cano, M., Cruz, I., & Canadell, A. (2009). La Sostenibilidad, un recorrido histórico. Accessed 6th January 2010http://portalsostenibilidad.upc.edu/so.php?menutop=2 Commission of the European Communities (2001). Green Paper. Promoting a European framework for Corporate Social Responsibility. Accessed 6th January 2010 http://eurlex.europa.eu/LexUriServ/site/en/com/2001/com2001_0366en01.pdf Elkington, J. (1994). Towards the Sustainable Corporation: Win-Win-Win Business Strategies for Sustainable Development. California Management Review, 36 (2), 90-100. Elkington, J. (1999). Triple bottom line revolution: reporting for the third millennium. Australian CPA, Vol. 69.

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Gil Lafuente, A.M. (2008). Incertesa y Bioingenyeria. Barcelona: Real Academia de Doctores. Gil Lafuente, A.M., & Bertrán Salgado, L. (2005). Models for analysing purchase decision in consumers of ecologic products. Fuzzy Economic Review, 10, 47-62. Gil Lafuente, A.M., Salgado Beltrán, L., Subirá Lobera, E., & Beltrán, L.F. (2006). Forgotten effects theory in the sustainable consumption of organic products. In Centro de investigaciones biológicas del noroeste (Ed.), Sustainable Development: Myth or reality? (pp. 223-240). S.C., Mexico: Centro de investigaciones biológicas del noroeste. Group of Twenty (2009). London Summit [Leaders’ Statement]. Accessed 6th January 2010b http://www.g20.org/Documents/g20_communique_020409.pdf Hart, S.L. (1995). A natural-resource-based view of the firm. Academy of Management Review, 20 (4), 986-1014. Hart, S.L., & Milstein, M. (2003). Creating Sustainable Value. Academy of Management Executive, 17 (2). Intergovernmental Panel on Climate Change (2007). Climate Change 2007: Synthesis Report. Accessed 6th January 2010b http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ ar4_syr.pdf Kaufmann, A., & Gil Aluja, J. (1988). Modelos para la investigación de efectos olvidados. Vigo: Milladoiro. Louette, A. (2007). Sustainability Compendium, Social and Environmental Responsibility Management Tools. Accessed 6th January 2010b http://www.compendiosustentabilidade. com.br/2008/default.asp. Olcese, A., Rodríguez Ángel, M., & Alfaro, J. (2008). Manual de la empresa Responsable y Sostenible. Madrid: McGraw-Hill. Porter, M., & Van Der Linde, C. (1995). Green and Competitive: Ending the Stalemate. Harvard Business Review, 119-135. United Nations (1972). The United Nations Conference on the Human Environment. Accessed 6th January 2010b http://www.unep.org/Documents.Multilingual/Default.asp? DocumentID=97&ArticleID=1503. United Nations (1992). United Nations Conference on Environment and Development. Accessed 6th January 2010b http://www.un.org/geninfo/bp/enviro.html. United Nations (1997). Kyoto Protocol to the United Nations framework convention on climate change. Accessed 6th January 2010b http://www.un.org/millennium/law/xxvii23.htm. United Nations (1999). UN Global Compact. Accessed 6th January 2010b http://www. unglobalcompact.org/AboutTheGC/. United Nations (2000). United Nations Millennium Declaration. Accessed 6th January 2010b http://www.unmillenniumproject.org/goals/index.htm. United Nations Environment Programme (1985). The Vienna Convention for the Protection of the Ozone Layer. Accessed 6th January 2010b http://www.unep.org/Ozone/pdfs/ viennaconvention2002.pdf. United Nations Environment Programme (1987). The Montreal Protocol on Substances that Deplete the Ozone Layer. Accessed 6th January 2010b http://www.unep.org/OZONE/ pdfs/Montreal-Protocol2000.pdf World Commission on Environment and Development (1987). Our Common Future. http://www.un-documents.net/ocf-ov.htm#I.3.

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World Meteorological Organization, & United Nations Environment Programme (2007). Climate change 2007, The Physical Science Basic. Accessed 6th January 2010b www.ipcc.ch.

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 3

ENVIRONMENTAL GOVERNANCE, GLOBALISATION AND ECONOMIC PERFORMANCE Clement Tisdell School of Economics, The University of Queensland, Brisbane, Australia

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ABSTRACT Increasing globalisation of economic activity and accompanying economic growth have been factors in the worldwide loss of natural environments and biodiversity loss, and these losses have accelerated since the beginning of the Industrial Revolution. Emissions of many types of pollutants and wastes from human activity are rising globally and are exceeding the capacity of natural environments to absorb and neutralize them. This problem is exacerbated by the fact that the quality and size of some natural sinks for neutralizing them (such as forests) are declining. Consequently, these wastes are accumulating in many environments and pose a growing threat to human welfare and to sustainable economic development. There are, for instance, global concerns about greenhouse gas emissions, about the release of ozone-depleting substances and about the worldwide loss of existing biodiversity. Many new transboundary and local environmental issues have also emerged as a result of global economic growth. After considering such matters, arguments for global governance and the international harmonization of rules for regulating environmental use are examined. Reasons why the global spread of the Western evolved economic system reduces moral responsibility for environmental damage and increases the need for greater and more effective global and international environmental governance are outlined. Subsequently, several important global and international environmental problems are identified and shortcomings in their governance are highlighted. Further analysis is then completed to discover reasons why as economic globalisation increases, there are continuing failures in market and political systems to provide adequate governance of global and international environmental problems.

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Clem Tisdell

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1. INTRODUCTION All regions of the world have now become more closely interconnected in their economic operations as a result of growing market-oriented globalisation, a process described, for example, by Tisdell and Sen (2004, Ch.1) and Tisdell (2005) . In addition, global and international environmental problems have grown in importance and it is recognised that these need to be better addressed by extensions in governance, including more effective global governance. The term ‘governance’ is capable of a wide range of interpretations. The World Bank (1991, p.1) states that a suitable general definition of governance is that it is the ‘exercise of authority, control, management, power of government’. Governance refers to the processes involved in governing and the exercise of the power of governing bodies in managing these processes. Hence, the term ‘governance’ will be used to imply the exercise of authority or control by government(s) on economic decision-making by individuals and legal entities via the establishment (and enforcement) of rules or laws regulating their behaviour. As pointed out by the World Bank (1991, p.3), “even in societies that are highly market oriented, only governments can provide two sorts of public goods: rules to make markets efficiently, and in some cases, corrective interventions where there are market failures”. Economic globalisation, economic growth and some types of environmental deterioration are interrelated. It is widely believed and argued by bodies such as the World Trade Organization, (WTO) that greater economic globalisation stimulates economic growth, an outcome which the WTO favours. On the other hand, many neo-Malthusians argue that global economic growth of the type that has occurred since the Industrial Revolution is unsustainable because of its depletion of the stocks of natural resources and because of its continuing adverse impacts on natural environments, and, in some cases, also its negative effects on man-made environments and anthropogenic resource stocks, such as the diversity of cultivated crops and domesticated livestock. The spectre has emerged (according to neoMalthusians) of reduced economic scarcity (greater wealth) now as a result of economic growth at the expense of much greater economic scarcity in the future. The necessary conditions for sustainable economic growth are subject to debate and official reports such as the Brundtland Report (World Commission on Environment and Development (WCED), 1987) may have been overly optimistic about the prospects of achieving sustainable development. There appears to be strong political and institutional pressure for high rates of economic growth even though these may eventually add to economic scarcity, that is to a lack of sustainable development. The strong institutional constraints that are hampering efforts to achieve sustainable development are outlined in Tisdell (1999, Ch. 6). Because some environmental problems (such as global warming and biodiversity loss) have become matters of global concern and because several of these problems need to be addressed by improved global governance, the focus of this article is on environmental governance and how it affects economic performance. Initially, reasons are given about why the spread of the market system and increased globalisation are likely to add to important environmental problems and some of these major environmental problems are identified and discussed. After considering general failures in environmental governance, limitations of Western market systems as means for providing guidance on environmental use are outlined and then political inadequacies that contribute to lack of environmental deterioration are identified. No easy solution to these problems appears to be in sight.

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2. CONSEQUENCES OF THE GLOBAL ECONOMIC SYSTEM AND INCREASED GLOBALISATION FOR THE STATE OF THE ENVIRONMENT

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2.1. The Tendency of Modern Economic Systems to Reduce the Felt Moral Responsibility of Individuals for Environmental Damage Caused by their Economic Activity There is a strong tendency for the spread of Western-evolved economic systems based on a combination of market mechanisms and hierarchical procedures to reduce the moral responsibility individuals feel for the environmental damages caused by their economic choices. This occurs for a variety of reasons, many of which have been outlined in Tisdell (1990, Ch. 2). Most economists have praised the ability of market systems to co-ordinate economic activities in relatively complex modern economies, which involve a high degree of interdependence and often remote interconnections between different activities. It is argued that such systems are relatively efficient and perform well if they incorporate a sufficient amount of market competition. Originally, it was believed that such systems would be most advantageous if they were perfectly competitive but later economists such as John Maurice Clark (1940) argued that workably competitive markets might show superior economic performance in practice to perfectly competitive markets; a view compatible with that developed by Schumpeter (1954). Whereas the former group of economists (neoclassical scholars) tended to emphasize allocative efficiency, the latter group stressed the dynamic economic (growth) performance of economic systems. Despite these differences, a general consensus has emerged amongst economists that market systems have desirable economic consequences because they minimize the amount of information and costs of decision-making needed to ensure their relatively efficient operations of economies compared to economic systems that are highly centralized. As emphasized by members of the Austrian School of Economics (for example, Hayek, 1948), each economic actor in a market system need only have knowledge of a limited number of economic parameters in order to make ‘optimal’ economic choices. For example, a consumer in purchasing a commodity from a supermarket need only know its relative price and need not know by whom its ingredients were supplied, how they were supplied and from where they came. While this is an appealing consequence of modern market systems, it also has some drawbacks. In such a system, buyers are likely to be completely or partially unaware of many of the negative social or environmental consequences of their purchases. This lack of knowledge results in lack of felt moral responsibility by buyers. Secondly, because buyers are not directly responsible for decisions made in most of the links in the product chain, they may feel that they are free of moral responsibility for any negative social or environmental consequences of decisions involving earlier links in this chain. Because economic globalisation extends the geographical sourcing of products and tends to increase the remoteness of their sourcing (or that of their components) from buyers, this can add further to a reduction in the felt moral responsibility for the social and environmental consequence of their choices (See for example, Aurifeille, Medlin, & Tisdell, 2009). For example, how strongly do European buyers of margarine feel about the environmental consequences of their

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Clem Tisdell

purchases of margarine (or biodiesel) derived from palm oil? Such purchases are indirectly resulting in the loss of rainforests in Indonesia and Malaysia with significant biodiversity loss, They are threatening the survival of species such as the orangutan, and may actually be adding to greenhouse gas accumulation in the atmosphere (Swarna Nantha & Tisdell, 2009). In some cases, consumers often have poor knowledge about the type of vegetable oils used in margarine. They are relatively ignorant. Modern economic systems are, of course, not entirely market-based, but to varying degrees contain hierarchical components. This applies, in particular, to larger sized businesses, many of which are corporations, and an increasing number of these businesses are engaged in multinational activities. In such bodies, committees often make important decisions. This diminishes individual responsibility for decisions that have adverse social consequences, or which cause significant environmental deterioration. Secondly, when a company is engaged in international economic activity, its central managers may feel little social responsibility for adverse consequences of the company’s activities in remote locations. This may be partly because they only have limited knowledge about these consequences because of the regional delegation of management, and the old adage ‘out of sight, out of mind’ could apply. Furthermore, the members of a business enterprise form a social group. It is an in-group from the point of view of social psychology. An in-group is a social group to which its individuals display loyalty and respect sometimes at the expense of out-groups. Business enterprises can be envisaged as hierarchical in-groups that command the loyalty of their members, or most of these. Given in-group considerations, lower-level managers may be prepared to engage in morally and socially questionable behaviours (from a community’s point of view) to meet the objectives of senior management, for example, its profit maximization goal. For a discussion of in-group and out-group social psychology see, for example, Smith and Mackie (2008, Ch. 6). Economic competition is another factor likely to result in failure of businesses to mitigate environmental spillovers from their activities unless governments intervene by adopting policies, which make it more profitable for businesses to take account of these spillovers rather than neglect them. Even if businessmen do feel social responsibility for their adverse environmental spillovers, market capitalism may prevent them from making allowance for these. In many circumstances, the survival of firms depends on their ability to maximize profit or to come with striking distance of doing so. This can be a consequence of intense competition in product (or more generally commodity) markets or in capital (financial) markets. The former possibility is well recognized but the latter possibility is less well known. Marris (1964) argued that under corporate capitalism, public companies are limited in their ability to deviate from profit maximization and survive under their existing management because those that fail to maximize profit risk being taken over by financial raiders. Therefore, strong competitive pressures exist in modern market systems, which deter businesses from taking into account the adverse environmental externalities which they generate. Consequently, as this system spreads globally, these negative consequences become more prevalent. In the absence of government regulation of activities causing negative externalities, business may feel no compulsion to limit these externalities or they be unable to do so because of competitive pressures. They may adopt the view that it is incumbent on governments to adopt policies and laws to regulate negative environmental spillovers. In the absence of the requisite laws, business may believe that they are justified in generating

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adverse externalities because they do not break the law. Hence, their behaviour is increasingly governed by the law, rather than by their social conscience. However, as is well known, laws are not always enforced and corruption occurs in most countries with different degrees of prevalence. If corruption is a part of a local culture, businesses operating in these localities may find that the only way that they can succeed is by adopting local practices and they may not consider it ethically wrong to act corruptly in these circumstances. Therefore, the law becomes ineffective in regulating adverse externalities in such cases. Table 1. Some factors (increased in significance by globalisation) contributing in modern market economies to a reduction of felt moral responsibility of individuals for the adverse social and environmental consequences of their economic actions. These need to be addressed by greater and more effective legal governance

1.

2.

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3.

4.

5.

6.

Contributing Factor and Comment Buyers of commodities have become more ignorant of the remoter social and environmental consequences of their decisions as supply chains have lengthened and become geographically more dispersed with greater globalisation. This greater ignorance reduces felt moral responsibility of buyers for their choices and remoteness of consequences may reinforce this. On the supply-side, business decisions are increasingly made by committees because the size of many businesses have increased. Individual members of committees may not feel personally responsible for decisions by committees. This can weaken the exercise of ethical responsibility. Informational constraints in larger businesses (e.g. multinationals) operating in dispersed areas may reduces the knowledge of top management of adverse social and environmental consequences of the actions of the business in remote locations. This can result in failure by the business to address such issues. Economic competition (in the absence of relevant government regulation) weakens the ability of businesses to allow for the adverse social and environmental consequences of their actions. This can occur as a result of market competition in commodity markets and particularly in the case of public companies, competition in financial markets is relevant. These factors limit the scope which businesses have from deviating from profit-maximizing behaviour. Shareholders (investors) in public companies place little weight on the social and environmental consequences of the behaviour of these companies unless these behaviours reduce the returns on their investment. Investors are attracted to invest in companies that maximize the returns on their investment for reasons outlined in the text. Furthermore, because of the separation of ownership and management in public companies, investors feel little personal ethical concern about the negative social and environmental consequences of public companies in which they invested. Increased geographical nobility of individuals and resources reduces incentives to conserve local natural resources and environments for reasons explained in the text.

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In addition, it ought to be noted that increased geographical mobility of individuals and the geographical widening of their investment possibilities can result in individuals being less concerned about sustaining environments and natural resources in their locality. This is because they have the opportunity of shifting themselves or changing their investment to another locality if their local environment deteriorates or natural resources become scarcer in their locality. However, if everyone everywhere acts on this premise, all environments are likely to deteriorate. One of the features of increased economic globalisation is that it permits greater international mobility of resources, although liberalization of international labour movements still remains restricted. Is it likely that shareholders will deter public companies from engaging in negative environmental behaviour if this behaviour adds to the profitability of companies? There are several reasons for believing that this is unlikely. First, given the separation of management and ownership of public corporations, shareholders have little direct influence on the decisions of company managers. Secondly, the number of ethical investors in publicly listed companies is probably small so their influence is limited. Thirdly, investors who have ethical concerns may argue that other investors will be guided in investing by the returns on their investment rather than ethical considerations and therefore, whether or not they purchase shares in a particular company, will hardly influence the behaviour of its managers. Fourthly, since each shareholder is usually one of many investors in a public company and each has no direct influence on managerial decisions within it, all shareholders may feel justified in absolving themselves of any moral responsibility for the company’s actions. The fact also that a company is an independent legal activity may further weaken the sense of moral responsibility felt by its individual investors for its actions. Therefore, the global proliferation of public companies and the global spread of their activities (which is facilitated by the process of economic globalisation) increase the dependence of societies on good legal governance to ensure acceptable social outcomes from economic activities. Table 1 provides a summary of the type of influences in modern market systems that weaken felt moral responsibility of economic actors for the negative social and environmental consequences of their economic actions. These factors need to be addressed by extending and improving legal governance. Growing economic globalisation adds to the need for this.

2.2. Can Economic Globalisation by Stimulating Economic Growth Actually Lead to Environmental Improvement in the Absence of Greater Government Regulation of Economic Activity? It has been argued that if sufficient economic growth occurs, it can actually be environmentally beneficial because when incomes are higher, individuals are more concerned about pollution and environmental pollution and it has been observed that the level of emissions of many pollutants continually declines in relation to the level of gross output. For example, CO2 emissions in relation to GDP appear to increase as first with economic growth but once a sufficiently high level of GDP is achieved, they decline. The relationship is of a reversed-U shape and the curve involved has been christened the environmental Kuznets curve. It is widely believed that increasing economic globalisation stimulates economic growth and that given the above mentioned considerations, it will contribute eventually to

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environmental improvement. However, there is little evidence that continuing economic growth is likely to be sufficient to mitigate many of the important environmental problems associated with economic growth. Tisdell (2001) gives a number of reasons why this is so. For example, even if the intensity of pollution emissions decline as gross production increases, the aggregate level of pollution emissions can continue to rise. Furthermore, if the aggregate level emissions start to decline, the flow of these emissions can continue to exceed the capacity of the environment to absorb or neutralize these (Tisdell, 2009a, Ch. 7). In the case of greenhouse gases, for example, they can still continue to accumulate in the atmosphere and consequently, even deeper emissions cuts will be required in the future to lower the accumulation of these gases in the atmosphere. In addition, some environmental damages caused in periods of economic growth are irreversible, for example, biodiversity loss. Therefore, the environmental damages caused by higher economic growth (as a result of greater economic globalisation) seem to call for greater environmental regulation rather than less. Some advocates of the environmental Kuznets curve use it as an argument for reduced environmental regulation. This increased governance is also likely to require greater cooperation between nations in regulating environmental use in their individual countries. This is particularly evident in relation to measures to limit the emissions of greenhouse gases.

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3. IMPORTANT GLOBAL AND TRANSBOUNDARY ENVIRONMENTAL PROBLEMS IDENTIFIED Many global and transboundary problems are emerging and increasing in intensity This section outlines several of these problems but their governance is not analyzed at this stage but is considered later. The most prominent of these problems at present is global warming caused primarily by greenhouse gas emissions from economic activity and the accumulation of these gases in the atmosphere. According to scientific evidence, this is a major contributor to climate change and is expected to result (or is already resulting in) rising temperatures and sea-levels. Consequently, natural environments in all parts of the world are predicted to alter (mostly in a negative way from a human perspective) as a result of this phenomenon. Furthermore, greenhouse gas emissions in every part of the world contribute to this problem. Therefore, in order to control the problem, cooperation and coordination of all (or at most) nations are needed to collectively limit their greenhouse gas emissions. The basic problem was recognized in the United Nations Framework Convention on Climate Change (UNFCC) which came into force in 1992. However, progress in controlling the accumulation of greenhouse gas in the atmosphere has been slow. Attempts to do this through the Kyoto Protocol have proven to be largely ineffective. There were several reasons for this: (1) Some major emitters of greenhouse gases (such as the USA and developing countries, such as China and India) were not parties to the Protocol. (2) The emission targets of many of the parties to the Protocol were not met. (3) As discussed later, there was only partial accounting of the greenhouse gas imprint of most countries participating in the Kyoto Protocol. Whether or not a more effective

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Clem Tisdell form of global governance of greenhouse gas accumulations will be agreed to at Copenhagen when national representatives discuss a replacement for the Kyoto Protocol, and whether it will subsequently be implemented fully, remains to be seen.

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Another matter of concern because its effects are geographically widespread has been the release of ozone depleting substances. These cause a reduction in the ozone layer in the atmosphere. This layer reduces ultraviolet radiation in southern and northern portions of the globe. A reduction in this layer has several adverse environmental effects. These include an increase in skin cancer, reductions in plant growth and accelerated deterioration of paints. As a result of the Montreal Protocol, there has been a reduction in the emission of several ozonedepleting substances but not all (Tisdell, 2009a, Ch. 11). There are also other environmental problems that call for cooperative international agreement and governance. These include: (1) International transmission of acid rains For example, gases implicated in the occurrence of acid rains drift from China to Korea and Japan, from the UK to Scandinavian countries, and from the United States to Canada. (2) International smoke haze and drift of particulate matter Forest fires in Indonesia (often deliberately lit) periodically result in smoke haze in other parts of Southeast Asia, for example, Singapore. (3) Depletion of shared water resources In many parts of the world, water resources are shared by several nations. The Nile Basin for example involves many countries, as does the Mekong River Basin. Greater off-take of water upstream can reduce the amount of water available to nations downstream and have adverse environmental consequences. When the international shared water resources drain into an inland basin (such as that occupied by the Aral Sea in Central Asia), reduced discharge of water into it can have serious ecological consequences. (4) Pollution of internationally shared water resources When several nations share a water body, the individual nations involved may fail to take account of the adverse impacts on other nations of their release of water pollutants into the shared water body. (5) Inefficient utilization or conservation of shared and internationally mobile biological resources, for example, fish Many wild species travel across national borders (often as a part of their lifecycles) and therefore, are effectively shared resources. If the harvesting or conservation of these is not effectively co-ordinated, the collective outcome can be socially sub-optimal. For example, unrestrained harvest of a fish species early in its life-cycle (or in the early part of its migratory path) by the nation in which it initially appears usually reduces the catch available to other nations through which the migrating species subsequently passes and lowers the maximum sustainable economic catch of the species. International fishing agreements (such as those relating to different types of tuna stocks) attempt to address this issue. However, such agreements are frequently imperfect in their operation. (6) Unsatisfactory utilization of marine resources present outside of territorial waters

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In the absence of international agreements covering the use of particular natural resources occurring outside of territorial waters, these are open-access resources. Although the United Nations International Convention on the Law of the Sea (UNICLOS) extended the exclusive economic marine zone of nations, some ocean areas are still not territorial waters. This creates particular environmental problems for the optimal use of their resources. These resources are open-access resources and therefore, subject to excessive economic exploitation. Note also the UNICLOS did not solve the mobile marine resource problem mentioned in point (6) above. (7) International biodiversity loss Two international conventions are in force that attempt to control global biodiversity loss. These are the Convention on International Trade in Endangered Species (CITES) and the more recent Convention on Biological Diversity (CBD). The former bans or restricts international trade in species which are declared to be endangered. The latter, amongst other things, attempts to strengthen national property rights in genetic resources that exist within a country’s borders. These conventions aim to overcome biodiversity loss by adopting different economic approaches, neither of which is completely effective (see for example, Tisdell, 2009b). (8) Dangers posed by the International transfer and escape of genetically modified organisms Several international environmental problems can arise from the release of genetically modified organisms. The Cartagena Protocol is intended to address several of these problems. It focuses, however, only on the international transfer of genetically modified organisms by deliberate human actions and does not address all the international issues involved in the release of engineered organisms, for example, the accidental movement of such organisms internationally. These are only a sample of global and international environmental issues calling for effective governance. The extent and the importance of these issues have magnified with continuing economic growth and the accompanying extension of the process of economic globalisation.

4. FAILURES IN THE GOVERNANCE OF GLOBAL AND INTERNATIONAL ENVIRONMENTAL PROBLEMS 4.1. Inadequacies of Environmental Governance by Market Systems Market systems provide one means of governance of resource use. But often markets are missing (as in the case of pure public goods) or incomplete, as in the case of economic activity that gives rise to environmental spillovers. In such cases, market systems have shortcomings that in some cases can be rectified, or partially rectified, by government intervention in their operation. For example, pollution taxes or charges, or systems involving tradable permits for pollution emissions (cap-and-trade systems) may be introduced by governments to address the environmental shortcomings of market systems.

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However, if the government of a country decides to regulate an environmental externality that adversely affects its citizens as well as those of nearby countries, it has little or no economic incentive to do this in a manner that would be economically optimal from a collective international point of view. The country can be expected to ignore its negative environmental impacts on other nations unless the other countries adversely affected by such externalities compensate it for the economic benefit it forgoes as a result of its greater environmental regulation. Figure 1 illustrates this case. Economic production in Country I is assumed to generate X amount of pollution emissions. The marginal benefits to producers in Country I of being able to emit these pollutants is shown by the line AD. However, the citizens of Country I suffer marginal external damages as a result of these emissions as depicted by line OF. In addition, there is also an external environmental spillover on a second country, Country II, and the marginal external costs to Country II of this spillover is equivalent to the difference between line OF and OE. Therefore, the marginal aggregate (global) damages from pollution in Country I are as shown by the line OE. Reciprocal externalities (between these countries) are supposed to be absent. In the absences of intervention by the government of Country I, producers in that country will emit X3 of pollutants per period assuming that a market system exists and that producers are profit-maximizers. This is not collectively ideal from an economics point of view because a potential Paretian improvement can be achieved in Country I by reducing the quantity of pollution emissions from X3 to X2 and its government may adopt regulations, which bring this about. However, this action is not yet collectively ideal from an international point of view. Although it increases economic welfare in Country II, there is scope to further increases the collective economic welfare of the two nations involved.

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$

A

Marginal benefit to producers in Country I

Marginal aggregate external damages

E

F

B

C G

O

X1

X2

Marginal external damages in Country I

D X3

X

Quantity of pollutants emitted by Country I per period Figure 1. An illustration of a case in which a country has no economic incentive to regulate its pollution emissions in a way which takes into account these negative impacts on other countries.

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A further reduction in the level of pollution emissions by Country I from X2 to X1 per period can raise the aggregate economic benefits of the concerned countries by an amount equivalent to the area of triangle BCE. However, Country I has no economic incentive to take this action unless it is compensated for its reduced economic benefits (extra economic costs) by Country II. The extra economic cost to Country I of this action is the loss of economic benefits equivalent to the area of triangle BGC and the gains to Country II are equivalent to the area of the quadrilateral BGCE. Hence, a net collective economic gain of an amount equivalent to the area of triangle BCE can be achieved but Country I has no incentive to bring this about unless Country II compensates it in some way for the economic benefit it forgoes. Potentially, both countries can gain because there is scope for Country II to more than compensate Country I for its extra cost of environmental regulation and still be better off than beforehand. In other words, scope exists for a global potential Paretian improvement. Nonetheless, the above possibility does not ensure that an optimal solution for the governance of international environmental spillovers will be found. Bargaining problems and political considerations, as well as strong feelings about how just a possible solution is, can stand in the way of the resolution of such problems. Consequently, as economic growth and globalisation proceeds such issues can be expected to become more serious. This is because growing market failure is compounded by international political failures. Furthermore, the type of institutional failures (identified in Section 2.1) add to these environmental problems as market structures of the existing Western type become more widespread.

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4.2. Political Inadequacies in the Governance of Global Environmental Problems Global environmental governance is quite weak and has developed at a far slower pace than the rate of magnification of global environmental problems due to growing economic globalisation and continuing long-term economic growth. Here it is only possible to provide some short sketches of factors that result in political inadequacies in the governance of global environmental problems. Achieving awareness is the first step in searching for solutions to these shortcomings. Nevertheless, this does not mean that solutions can always be found. Even when a potential Paretian improvement (that is, a solution that can potentially make all parties better off) from improved international governance is possible, the following political impediments can stand in the way of such a solution: (1) Reactive political behaviour. Very often political action is not taken until serious environmental problems become obvious. Because of such delays (slow reactive behaviours) serious irreversible environmental damage may occur. Inadequate precaution may be taken (see Tisdell, forthcoming). (2) Bargaining problems. Even in cases where environmental regulation is advantageous to all countries (or a large number), bargaining about how the international costs of such regulation should be shared by nations can result in lack of agreement or suboptimal governance. In other words, distributional disputes restrict possibilities for international environmental governance. This is currently a problem in relation to the containment of greenhouse gas emissions.

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Clem Tisdell (3) A prisoners’ dilemma problem may occur. All nations may have a collective desire to impose environmental restrictions, but each nation individually has an incentive not to enforce these restrictions. As a result, all nations suffer. For example, Annex I (developed) nations who were parties to the Kyoto Protocol failed to meet their commitments to reduce their greenhouse emissions to agreed levels, and their collective goal was not achieved. (4) Lack of global enforcement mechanisms. In the absence of adequate sanctions on countries that fail to observe their international agreements, there is a high risk that some nations will not honour their international obligations. This is a particularly serious matter when an international environmental problem is akin to a prisoners’ dilemma. (5) Monitoring limitations. The enforcement problem is exacerbated by difficulties that can arise in trying to monitor national compliance with international environmental agreements. Most countries guard their sovereignty and may deny foreigners access for monitoring their environmental activities. (6) Imprecise specification of environmental objectives. Frequently, the purpose or objective stated in international environmental agreements is imprecise. This allows flexibility in their interpretation. This can be advantageous but on the other hand, it can provide an avenue for avoiding responsibilities and lead to confusion. The precautionary principle, as stated in several international environmental agreements, suffers from this problem (see Tisdell, forthcoming). (7) Partial solutions to global environmental problems. The Kyoto Protocol, for example focused mainly on greenhouse gas emissions generated within Annex I countries while at the same time ignoring additions to greenhouse gas emissions caused elsewhere by these countries. Greater greenhouse gas emissions in less developed countries supplying imports to more developed countries were ignored for the most part. For instance, Europe increased its use of biofuel, some of which was manufactured from palm oil exported from Southeast Asia. The expansion of palm oil production in Southeast Asia has added to tropical deforestation there and reduced carbon sequestration by these forests thereby contributing to the accumulation of greenhouse gases in the atmosphere and biodiversity loss (see for example, Hunt, 2009). Furthermore, while the import of greenhouse-intensive products from China and India by developed countries (rather than their production in developed nations) reduces the greenhouse gas emissions emanating from developed nations, it does not reduce global greenhouse gas emissions. In fact, developed countries importing these products should be held morally responsible for the associated greenhouse gas emissions in developing countries. (8) The need to pander to the wishes of special interest groups. In most countries, special interest economic groups are powerful lobbyists and may undermine potential international environmental agreements which would be in the collective global interest. For example, many large companies in Australia have lobbied successfully for special consideration (for instance, aluminium producers) in relation to the Australian Governments proposed cap-and-trade reforms to regulate greenhouse gas emissions on the basis that they will be forced to move their activities offshore (in the absence of such concessions) to nations that have no controls or less restrictive controls on those emissions, for example, China or India.

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EU Restricts GHG emissions within the EU and only counts these emissions as being attributable to its economic behaviour.

INTERDEPENDENT

37

ASIA Does not restrict GHG emissions. EU increases its demand for GHGintensive goods produced in Asia, and increases its imports of these. The EU imports products from Asia that reduce its GHG emissions in the EU but increases those in Asia, For example, use of palm oil by the EU results in deforestation in Asia.

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Figure 2. An illustration of flaws in the partial approach to regulating greenhouse gas emissions and global warming.

It could be argued that the situation described under point (7) above is a case of incomplete global environmental (or green) accounting because it fails to take into account foreign emissions of greenhouse gases which can be attributed to the economic decisions of another country or region. For example, suppose that the EU has restrictions on greenhouse gas emissions but these regulations are either absent in Asia, or minimal. As a result, the production of greenhouse gas-intensive products can be expected to alter their geographic location from the EU to Asia. The EU may well import many of these products from Asia rather than produce them itself. There is geographical displacement of the EU’s emission of greenhouse gases to Asia. However, the emissions which the EU indirectly generates in Asia are not attributed to the EU. Similarly, if the EU imports palm oil from Southeast Asia and this is produced by clearing forests in Southeast Asia, its negative environmental effect (for example, by raising greenhouse gas accumulation) is not attributed to the EU, even thought demand from the EU is the driving force in such forest clearing. Figure 2 provides a sketch of this phenomenon. In this case, reduced GHG (greenhouse gas) emissions in the EU result in an increase in GHG emissions in Asia due to economic choices by those in the EU. Therefore, the EU’s restrictions on GHG emissions are, to a considerable extent, globally ineffective. Should the EU be held morally responsible for the extra GHG emissions that its economic choices cause in Asia? Another possible political problem in developing effective global governance is that the period in office of elected politicians is relatively short and even those politicians who are not elected have a limited life-span. This may persuade them to concentrate on short-term visible (material) progress to help ensure their re-election or to leave behind a concrete legacy in their lifetime. From this angle, the adoption of long-term programmes to prevent environmental determination is unlikely to have a high priority for them. Politicians tend to adopt short-term horizons in their decision-making.

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CONCLUSION It has been argued that economic globalisation by spreading the economic market system (of the type which has evolved in the West) tends to reduce the felt moral responsibility of individuals for the adverse environmental and social consequences (some of which are remote) of their economic actions. Furthermore, it stimulates economic growth, which occurs in a manner that adds to environmental deterioration in important ways. While some environmental conditions can improve as a result of economic growth, others deteriorate and can eventually threaten the sustainability of economic activity, for example, greenhouse gas accumulation in the atmosphere. The weakening of felt moral responsibility is mainly a consequence of the institutional structure of market systems that have evolved in the West. Furthermore, the desire of individuals for economic growth remains strong because of personal desires for greater income and wealth accumulation. In addition to this desire, the structure of modern economies is such that they must continue to grow in order to maintain full employment (Tisdell, 1999, Ch. 6). The immediate economic welfare of all is locked into an economic system that needs to continually grow in order to satisfy most citizens. The system continues on its growth path even though the long-term environmental consequences of this could be disastrous. The above factors magnify in significance as economic globalisation proceeds and hence, the need for improved environmental governance of Western-evolved market systems and the nature of economic growth grows. However, because governance is primarily the responsibility, in the modern era, of individual nations, global governance is failing to develop in a manner needed to address these issues adequately. It is not yet clear how the global community can overcome this impasse. In this regard, the governing structure provided by the United Nations has been helpful but since its membership is based on national representation, it is still far from effective in providing mechanisms for desirable forms of global and international governance.

ACKNOWLEDGMENTS I wish to thank Dr Jaime Gil Aluja, President of the Spanish Royal Academy of Economic and Financial Sciences and Dr. Jacques-Marie Aurifeille, Director of FACIREM for inviting me to present the paper on which this chapter is based as a symposium held at this Spanish Academy. I am also grateful to Dr. Christopher Medlin for suggesting a couple of additions to an earlier version of this chapter.

REFERENCES Aurifeille, J.-M., Medlin, C.J., & Tisdell, C.A. (2009). Trust, Globalisiation and Market Expansion. New York: Nova Science. Clark, J.M. (1940). Towards a concept of workable competition. American Economic Review, 30, 241-256. Hayek, F. (1948). Individualism and Economic Order. Chicago: Chicago University Press.

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Hunt, C. (2009). Carbon Sinks and Climate Change: Forests in the Fight Against Global Warming. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Marris, R. (1964). The Economic Theory of Capitalism. London: Macmillan. Schumpeter, J. (1954). Capitalism, Socialism and Democracy (4th ed.). London: Allen and Unwin. Smith, E.R., & Mackie, D.M. (2008). Social Psychology (3rd ed.). London: Psychology Press. Swarna Nantha, H., & Tisdell, C. (2009). The orangutan-oil palm conflict: economic constraints and opportunities for conservation. Biodiversity Conservation, 18, 487-502. Tisdell, C.A. (1990). Natural Resources, Growth and Development. New York, Westport CT and London: Praeger. Tisdell, C.A. (1999). Biodiversity, Conservation and Sustainable Development. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Tisdell, C.A. (2001). Globalisation and sustainability: environmental Kuznets curve and the WTO. Ecological Economics, 39(2), 185-196. Tisdell, C.A. (2005). An overview of globalisation and world economic policies. In C. A. Tisdell (Ed.), Globalisation and World Economic Policies (pp. 3-16). New Delhi: Serials Publications.. Tisdell, C.A. (2009a). Resource and Environmental Economics: Modern Issues and Applications. Singapore, New Jersey, London: World Scientific. Tisdell, C.A. (2009b). Global property rights in genetic resources: Do they involve sound economics? Will they conserve nature and biodiversity? In J. B. Aronoff (Ed.), Handbook of Nature Conservation - Global Environmental and Economic Issues (pp. 199-212). New York: Nova Science Publishers. Tisdell, C.A. (forthcoming). The precautionary principle revisited: its interpretation and their consequences. Singapore Economic Review. Tisdell, C.A., & Sen, R.K. (2004). An overview of economic globalisation. Its momentum and its consequences examined. In C. Tisdell & R. K. Sen (Eds.), Economic Globalisation: Social Conflicts and Environmental Issues (pp. 3-23). Cheltenham, UK and Northampton, MA, USA.: Edward Elgar. World Bank (1991). Managing development: The governance dimension. Washington DC: The World Bank. World Commission on Environment and Development (WCED) (1987). Our Common Future. New York: Oxford University Press.

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Chapter 4

THE CHALLENGES OF GLOBALISATION AND GOVERNANCE IN COMPLEX TIMES Mario Aguer Hortal Royal Academy of Economic and Financial Sciences, Spain

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ABSTRACT The traditional methods of institutional analysis grounded in the State or Nation have been transformed not only from a political perspective but also from an economic one. A new world economic geography is emerging with new approaches, with added value chains articulated worldwide with their own regulations. A new concept, governance, is emerging to define a management model of public affairs based on the participation of the civil society at every level, thus promoting a balance between the State, the civil society and the economy market. One of the most important global challenges is the development of a new world governance in order to improve the collective organization of world management, guarantee both environmental and social protection and sustainability, as well as to achieve a considerable reduction of world poverty. It seems illogical that some 50 out of 200 states on the planet cannot govern themselves. The great challenge of globalisation is to be most beneficial to mankind.

1. INTRODUCTION More and more people think that globalisation is an economic, technological, social and cultural process that appeared and grew up mostly in the second half of the 20th century. This process implies the integration of local economies into a worldwide economy where money movements and production systems shape a worldwide new economy. With regard to technology, globalisation facilitates the free circulation of people and the overcrowding of the Internet. From the cultural point of view, this process involves a change from local cultures towards a globalised culture. Globalisation is still one of the greatest challenges that all the

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countries must confront. Governance designates the efficiency, quality and correct orientation of the State intervention as a new governing manner in a globalised world. Governance is used in the interaction between the public administration and both the market and civil society, which do not respect any type of hierarchical subordination, but rely on a network integration. Governance involves a paradigm change in the power relations. The European Union tries to set up a sustainable development model through multilateral governance so as to reconcile economic growth, social cohesion and environmental protection. It is obvious that all governments are losing political power because of the so called network society. These social networks become a source of activism. Regarding international relations, multilateralism and soft power become the most accepted devices for governing the international community.

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2. GLOBALISATION AND PROMOTION OF GOOD GOVERNANCE The world is increasingly complex, diverse and heterogeneous. If the world that emerged from World War II sixty years ago was divided almost equally between two superpowers, then over time a lot of other players have emerged in the international scene, with different rules, expectations and realities. When World War II broke out in 1939, the USSR was only one of seven major world powers - a few years after the conflict ended; it stood as one of the two superpowers that dominated the globe, feared for its capacity to bring threat to world stability. In 1947, there were only two superpowers with military capability. The ability of other major and minor states to influence the global balance of power had declined. Since then, the paradigm has changed. If we review the last sixty years, a powerful and continuing trend can be perceived: the number of essential players in the international arena has been growing increasingly. We should now recall some relevant dates: in 1973 the seven leading industrialised countries (Canada, United States, France, Italy, Japan, United Kingdom) met for the first time. Years later Russia joined and currently the appointment is usually extended to the Group of Twenty, which also includes the newly industrialized eleven countries from all regions of the world such as Saudi Arabia, Argentina, Brazil, China, India, Indonesia and Turkey and the European Union as a unit. What can be drawn from this trend? That the critical mass for making decisions on a global scale has increased tenfold in just sixty years, with consequent implications in terms of diversity, management and cultural orientation. The consequence is evident: when 80 years ago the League of Nations was comprised of a number of countries that did not reach 40, and it was an incipient attempt to structure an international institution that failed; today the concept of 'common heritage' in the international community is increasingly taken into account. We live in a global world, where human interactions are becoming more intense and take place in an increasingly unified territory; planning and production are based on a mutual influence framework, and involve a number of rules of intense and growing interdependence. Overcoming national barriers regarding markets, communications, business ownership, English as a common language and, above all the Internet, has led to the phenomenon known as ‘globalisation’. However, it is not only about market or communications. Aspects related to management and policy making, which are not just confined to national boundaries and

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increasingly influence larger populations, states, areas of influence or market zones with common interests, are also very important. Hence, the relationship between globalisation and governance is increasingly evident. Rosenau (1992) considers it necessary to regulate interdependent relationships in the absence of a global political authority. Over the last century a series of events that enhanced the global nature of reality has occurred, for instance through the development of new information technologies and communication. As we reflect on outcomes from the Forum on Internet Governance in Spain, it becomes clear that the Internet provides an open platform for debate on key challenges at this point in time, both at the national and international levels. The Internet can be understood as a paradigm of the convergence of technology and globalisation of communications, which has developed an original model of government very different from telecommunications. At the World Summit on the Information Society in Tunis in 2005, Internet governance was defined as "the development and application by governments, the private sector and civil society, in their respective roles, of shared principles, norms, rules, decision-making procedures, and programmes that shape the evolution and use of the Internet”. Therefore, there were discussions about the allocation of responsibilities to meet and address the digital divide between rich and poor regions, Internet safety and other communication networks, digital piracy or illegal distribution of multimedia content. In summary, the Internet and globalisation have created a unique public space divided into smaller regional and local areas which are strongly interrelated, but with two barriers: language and lack of freedom in some countries. The European Union, with political and institutional functioning through important competence transfer up and, in parallel, with a significant territorial decentralization in some countries, such as Spain, is an example of this diversity. But it is not alone. During the last five decades of the previous century these phenomena of integration have become much more common. Another example is regional integration, such as the Southern Common Market (MERCOSUR) or the North American Free Trade Agreement (NAFTA). These processes reflect a profound rethinking of the traditional notion of national sovereignty. That is, the traditional forms of institutional integration based on the Nation-State identity have been transformed not only from a political perspective, but also an economic one. As seen in the current financial and economic crisis, economic globalisation requires an adaptation of national regulations in the banking system, environmental and social policies and other sectors, making compulsory the participation of public institutions, universities and technology centres in the global space. As results emerge, a new global economic geography which is no longer a result of the sum of national economies under a perfect scheme, but one with new approaches with added-value chains is articulated globally and across borders. What is the result on the global scale? A certain amount of chaos, diversity, and also some complexity in collective management is generated. This new phenomenon has established a new space that is becoming increasingly global and which has its own rules to address the social, administrative, scientific and technical complexities, as well as markets, social values and lifestyles. Traditional institutions such as parliamentary democracy or traditional business leaderships are experiencing increasing difficulties to effectively manage this complexity. The result is the emergence of a new set of players and structures: in global systems like the WTO, international bodies like the IMF, global businesses and also NGO’s such as

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Oxfam or Medicins sans Frontiers, which are articulated networks and which trade social and environmental standards in a new cadre of global interdependence. The global economy is experiencing a disorderly proliferation of global standards that impacts on the basic structures of the global economy, on local clusters or even on developing countries that aspire to advance in the global economy. This is a phenomenon that began in the late 80s with the fall of the Berlin Wall and the collapse of the Soviet system. At the same time and not by accident, the concept of globalisation appeared in the Anglo-Saxon scientific literature of governance.

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3. GOVERNANCE: A NEW MODEL OF MANAGEMENT Although used since ancient times to refer to some idea of government, from 1990 the term governance has been used to define a new method of management of public affairs based on participation of civil society at all levels - local, regional, national and international under the principles of efficiency, quality and good guidance of the intervention. At the same time, this concept meets a boundary between public and private affairs which is blurred and causes many possibilities of negotiation and trade-offs. It also responds to some determining features, in the terminology of Inglehart (1990): in recent decades individualisation and detraditionalisation processes, politicisation of issues that previously had little relevance in public debates such as food, health or energy, as well as increasing the public's concern for the problems generated by industrialisation and globalisation itself are growing. Authors of an acute observation such as Giddens (2007) indicate that one of the characteristics of highly industrialised societies is that a growing number of their concerns and occupations are directly linked to major side-effects caused by the process of industrialisation. One of the more relevant effects is management under complexity. In this area, one of the key issues is to establish relatively structured network-based models with formal and informal procedures. One of the most relevant players in the world to operate with such rules is the European community, which works with hybrid combinations of countries and relations systems of national, supranational, intergovernmental, and transnational operators. This approach requires multiple negotiations, temporary alliances and coalitions moving between a fuzzy set of powers, multiple levels of government and public and private elites which interact constantly. In this regard, the European Commission in its White Paper on European Governance published in 2001, defines governance as “the rules, processes and behaviors that affect the way in which powers are exercised at European level, particularly as regards openness, participation, accountability, effectiveness and coherence”. Researchers with a recognised capacity to describe the world argue that the current period of globalisation requires greater flexibility, decentralisation and autonomy of small and medium components, in order to successfully be able to face the increasingly unpredictable, diverse and dynamic demands. The model is based on a network which evolves, adapts and weaves connections dynamically, in real time and continuously, with no absolute power centres, but interdependent. These features of the new economy have radically changed the way certain relationships between agents are produced, by redefining the labor market and employment, culture, politics, the State, consumption, and management. That is, the concept of governance must be

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extended to economic terms, since it describes a particular form of interaction of government with the market and civil society, based on a criteria that do not obey a strict hierarchical subordination. As mentioned earlier, the capacity of the word ‘globalisation’ coined in the 90s, to permeate through a lot of fields of knowledge is explained by its ability to raise the awareness of a paradigm shift in power relations from a multilevel perspective. The classical concept of government, both the private and the public, has been transformed from a complex systematic perspective and this occurs at different levels (from local to global) and in different sectors (public, private and civil). Indeed, the Real Academia de la Lengua recognizes the evolution of this concept. Formerly, the concept of governance was understood as an action and effect of government or being governed: now, the concept has been enriched with important values and it is understood as the art or manner of governing and which includes the economic, social and institutionally sustainable development, and promotion of a healthy balance between government, civil society and market economy. According to the definition by the United Nations Commission on Global Governance, given in 1995, governance is "the sum of the many ways individuals and institutions, public and private, manage their common affairs. It is a continuing process through which conflicting or diverse interests may be accommodated and co-operative action may be taken. It includes formal institutions and regimes empowered to enforce compliance, as well as informal arrangements that people and institutions have agreed". Innovative forms of regulation, based on negotiation and coordination, and even self-regulation, are replacing hierarchical direction and control processes. In the corporate world these innovations are translated in a set of processes and practices that affect the nature and the way in which a company is directed, managed or controlled and how it relates to those involved with them, such as shareholders, customers, suppliers, employees and the finally reaching the wider society. However, from a practical standpoint the UN Commission described good governance as being based on eight main features which resolve the present and future needs of society: participation, legality, transparency, accountability, consensus, equity, sensitivity, and efficacy and efficiency. Participation extends to a gender perspective, and also to the possibility of direct participation or through mediators, institutions and legal representatives. This participation should be based on legality, in other words, within a legal framework that is fair and impartially practiced under human rights, particularly those of minorities. This exercise should be transparent, so that all decisions made are carried out according to existing laws and regulations; with responsibility and consensus, under the certainty that many players are involved and, as result many points of view about the interests of the whole community and how they can be solved. Thus, a welfare society must continuously ensure that all of its members are aware of the fact that they are part of it and do not feel excluded from the overall functioning of their society, in this sense, equity is a key to improving behaviour or maintain well being. Furthermore, progress towards this goal must be done with sensitivity, essential to good governance, recognising the existence of government institutions, private sector and civil society, which will be affected by the decisions and actions taken. Effectiveness and efficiency are regarded as the closing elements of the concept of governance. In a similar manner, the Inter-American Development Bank has developed DataGob, an innovative portal that provides access to some 400 governance indicators selected by

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academic institutions, NGOs, private companies and multilateral agencies on diverse topics such as popular support for democracy, the cost of registering a company, government spending and corruption. Currently, one of the major global challenges is the development of a new global governance. From this perspective, many international forums have opened up several research centres to establish a roadmap and a framework for improving the collective organization for the management of the world, to get an effective international institutional framework, to guarantee the environmental and energy sustainability and the challenge of significantly reducing poverty in the world.

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4. TOWARDS A SYSTEM OF GLOBAL GOVERNANCE The road to global governance is slow but progressive, it is a process that seeks to help reform and redefine the role of the State and make society aware of how it can modify or rethink the way it is managed in order to obtain a model of governance consistent with the objectives that citizens want to achieve. Therefore, it must move towards a more participatory multilateralism. These trends impacting on public governance are also profoundly affecting the business world. The development of a global culture must be encouraged, including especially the culture of business, enhancing the role of the company and the employer as drivers of economic activity. On a daily basis companies are required to manage better and more intensely this complexity: financial institutions such as Caja Madrid have employees from 31 different nationalities and from four continents. The goal is to serve and better meet the customer’s demands, which are also increasingly diverse. For example, Spain has the 10th largest number of immigrants globally of any country. The United States, Russia, Germany, Ukraine, France, Canada and the United Kingdom have more immigrants. At the same time, multidisciplinary teams composed of professionals from various fields are created, which will undoubtedly take longer to organize and draw conclusions than a homogeneous group, although, this will provide richer and varied answers and solutions to a given problem. These two dynamics have an impact on the management of enterprises. But there is more. In recent years we have learned valuable lessons from a series of corporate collapses such as Enron Energy Company or, more recently, Freddie Mac and Fannie Mae, two giants of the U.S. mortgage lending system. These collapses produced crises that have affected not only the US, but many other countries. As a result many member states of the United Nations have taken steps to strengthen their regulatory frameworks in order to restore investor’s confidence and to improve transparency and accountability in the business. Oversimplifying, the objectives of a company can be divided into two major categories. First, the business objectives of increasing productivity, or identifying a sector of interest, in other words, anything associated with maximising profits for shareholders. This objective is no longer enough. Now it is necessary to find answers to the basic question of, why does this business exist? To answer this question, it requires us to consider issues related to governance, since the objectives of companies may vary according to the values of society. The codes of good corporate governance increasingly include social, environmental and economic aspects, as part of the fundamental objectives of the company. In particular, values

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such as the sustainability of the company in the long-term indicate that reality is highly interdependent and complex. Another important concept is transparency. The board of directors of any company has among its main objectives, the responsibility to ensure that shareholders and other stakeholders get high quality information on the financial and operating results of the company. Almost all the codes of corporate governance around the world, including the principles of the OECD and the International Corporate Governance Network (ICGN), the guidelines of the Commonwealth Association for Corporate Governance (CACG), and the Cadbury Report King II, stipulate that the board must provide shareholders and other stakeholders with information on the financial and operational results of the company to clearly help them understand the nature of their activity, their current situation and likely developments in future. That is corporate governance. In Spain, two of the most important initiatives in this regard are the Olivencia Report (2003) and the Aldama Report (2003). These reports seek to create transparency and accountability in the corporate sector, by calling for the operation of the Board of Directors as a collegiate body, the balance and independence of the Council, the system of appointment of directors, the use of performance assessments, full financial reporting and auditing, correct relations with shareholders and finally the requirement of an annual report. As in Spain, most of the guidelines and codes of best practice emphasize the role of leadership and supervision of the board of directors and distinguish their responsibilities from those of management. The problem with this Spanish initiative is that there is still a lack of a standard of best governance practices. If we look at the British model, we can see that there is only one code, as result of the consolidation of several previous codes, written by Sir Adrian Cadbury. In contrast, the Olivencia report only specifies good practices in a series of 23 recommendations. To bring coherence to the entire global economic system, these norms/rules should be designed with strength and from a global perspective. An example in this respect, is the standards for financial reporting, where there has been increasing convergence towards a set of widely recognized standards that do not belong specifically to a single jurisdiction. For example, the International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB) and provide a widely accepted and operational basis. It is clear that it is not and it will not be an easy road, the recipes often do not work because of the complexity of the environment in which we operate. An article published in 2003 by The Economist, about a Decalogue of good practices in business world, as an example of good corporate governance, as set out below, may be a useful guide to improve the situation of governance in Spain: 1. Close watch on the finances of the company by qualified and independent directors, without pressure from management and funds to hire their own consultants. 2. No conflict of interest by external directors. 3. The Management Board homogeneous by skill and age, selected by an independent committee different from the CEO. 4. Compensation to senior management directors that is more convincingly linked to long-term performance based on a variety of criteria. 5. Strictness in the requirements of the company to prevent executives and directors selling their shares at times of rising values.

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Mario Aguer Hortal 6. Possibility of meetings of outside board members without the presence of general director. 7. The Council must give short and complete instructions about strategic questions, followed by an open discussion. 8. The Council should know to stay away from operational issues and focus on the general ones. 9. The financial accounts should be accessible and clearly reflect the principles and inherent consequences regarding the significant accounting policies and decisions. 10. The information should be transparent and should give explanations of the corporate decisions on strategic issues and corporate governance.

Governance as a concept has, since its diffusion in the 90s, resulted in a paradigm shift in power relations. There has been a weakening of the traditional concept of government, which has served to describe some transformations that arise in the context of globalisation, ranging from local to global. Participation of civil society is becoming more involved in the new style of governance.

5. CHALLENGES INVOLVED IN COMBINING THE GLOBALISATION AND GOVERNANCE

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At this point, we must ask ourselves what are the main challenges involved in combining globalisation and governance. Challenges that we should interpret as goals towards which we must inevitably tend; goals that ultimately are nothing but the adjustment of imbalances that necessarily occur in any dynamic society under tensions of any kind. Summarising this briefly: 1. To reconcile and share the accumulated information in order to transform this into knowledge that can be administered, managed and applied to the objectives that will meet the needs of the new global society. 2. To protect the environment, heritage of everyone, and to harmonize the imbalances of the relationship production-consumption of energy. We all know about the tremendous problem arising from mis-use of energy. 3. Fair and social use of energy resources. The current tendency is to centralise energy production by development of increasingly larger plants that either use fossil fuels or nuclear fuel. The trend toward a condition of small producers in large number and self-managed similar to the Internet-style, could solve many problems caused by the current system of energy production. This is what, according to Rifkin (2002) has been named Distributed Generation. 4. To harmonize the population imbalances among countries. The rich industrialised countries need foreign labour, but at the same time the counterproductive issues produced by the inevitable cultural clash between local people and immigrants must be smoothed over. 5. To reconcile economic imbalances. This does not need much explanation since it widely known the differences between developed, emerging, and poor countries.

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6. To harmonize social imbalances by promoting a stable and economically bearable social protection. Finally, there is another aspect that we must emphasize that we mentioned earlier: energy. Energy is the driving force that moves the world and we are currently witnessing a revolutionary process of paradigm shift: the necessary replacement of fossil resources -scarce and polluting- by others that are clean and unlimited. This transition will not be easy or short, but if we do not proceed to give an appropriate solution to this phenomenon, we will suffer from successive crises and recoveries with a growing impact on the fragile world economy: if oil price goes up there is a crisis because the products related to it are expensive. When a financial crisis happens, the energy demand decreases and prices fall and the economy recovers. Do we want this vicious cycle to occur? Brave and risky solutions are proposed: the revolution of hydrogen, distributed energy generation, the massive use of renewable energy, reuse of materials and a forced return to traditional systems of storage and consumption. We insist that energy is one of the main problems that the world will face in the upcoming decades. How will there not be tensions if the resources are in the hands of a few? We could imagine a world in which power generation would be governed by an interconnected multitude of producers of the Internet-style.

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CONCLUSION Governance plays an important role in redirecting globalisation along paths, which are environmentally friendly and which lead mankind to a state of well being, understanding, and wisdom. In summary, it seems that a new responsible global governance is being built, one that adapts the political organization of society to globalisation, which would be feasible if there was a political legitimacy of the diverse institutions: at local, regional, national and global levels. The globalising phenomenon has been welcomed with great enthusiasm by some sectors, whereas others have openly rejected it.

REFERENCES Aguilar Villanueva, L.F. (2006). Gobernanza y gestión pública. México: Fondo de Cultura Económica. Aldama Report (2003). Accessed 9th August 2010, http://www.ecgi.org/codes/code.php? code_id=109 APEL, K-O. (2003). Globalización y necesidad de una ética universal. Madrid: Tecnos. Casado Cañeque, F. (2006). La RSE ante el Espejo: el papel de la empresa responsable en el S. XXI. Zaragoza: Prensas Universitarias de Zaragoza. Fundación ecología y Desarrollo. Castells, M. (1999). La era de la información. Economía, Sociedad y Cultura. Vol 2. El poder de la identidad. Madrid: Alianza Editorial. Cerrillo, A. (2005). La gobernanza hoy: 10 textos de referencia. Madrid: Ministerio de Administraciones Públicas, Instituto Nacional de Administración Pública.

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Comisión Europea. (2002). Towards a Global Pertnership for Sustainable Development. Bruselas: COM. Comisión Europea. (2004). Corporate Social Responsibility. National Public Policies in the European Union, Directorate General for Employment and Social Affairs. Bruselas. Delfour C. (2007). España, las autonomías y Europa. Ensayo sobre la invención de nuevos modos de organización territorial y gobernanza. Madrid: Trea. García Mexia, P. (2008). Ética y gobernanza: Estado y sociedad ante el abuso de poder. Valencia: Tirant Lo Blanch. Giddens, A. (2007). Europa en la era global. Barcelona: Paidós. Inglehart, R. (1990). Advanced Industrial Societies. Princeton NJ, Princeton University Press. Kohler-Koch B., & Eising R. (1999). The transformation of governance in the European Union. London: Routledge. La responsabilidad social de la empresa (RSE). (2007). Propuesta para una nueva economía de la empresa responsable y sostenible. Barcelona: Real Academia de Ciencias Económicas y Financieras. Libro Blanco sobre la gobernanza europea. (2001). Bruselas: Comisión de las Comunidades Europeas. Morata, F. (2004). Gobernanza multinivel en la Unión Europea. Valencia: Tirant Lo Blanch. Olcese Santonja, A. (2005). Teoría y práctica del buen gobierno corporativo. Madrid: Marcial Pons. Olivencia Report (2003). Report by the Special Commission to Foster Transparency and Security in the Markets and in Listed Companies, accessed 10th August 2010 http://www.ecgi.org/codes/documents/informefinal_e.pdf Pierre J., & Peters G.B. (2005). ¿Gobernanza sin gobierno? Replanteándose la Administración Pública, in A. Cerrillo i Martínez (Ed.), La gobernanza hoy: 10 textos de referencia. Madrid: INAP. Rifkin, J. (2002). La economía del hidrógeno. Barcelona: Paidós. Romero González, J. (2009). Geopolítica y gobierno del territorio en España. Valencia: Padilla Libros. Rosenau, J.N. (1992). Governance, order and change in World politics. In J. N. Rossenau, & E. O. Czempiel (Eds.), Governance without Government: Order and Change in World Politics. Cambridge: Cambridge University Press. Steinberg, F. (2007). Cooperación y conflicto: comercio internacional en la era de la globalización. Madrid: Akal.

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PART II

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POWER AND COUNTERVAILING POWER

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In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 5

THE CHALLENGES OF LEGAL PLURALISM IN THE SOUTH PACIFIC IN THE CONTEXT OF THE GLOBALISATION OF TRADE Anthony Angelo1 and Yves-Louis Sage2 1

2

Victoria University of Wellington, New Zealand Legal and Economic Department, University of French Polynesia, France

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ABSTRACT The legal systems of the small island states of the Pacific need to engage with modernisation in order to avoid being excluded from the development aid which is part of the globalisation process. This globalisation movement represents the implementation of the principle of universalism, which has as one consequence a devaluing of local social and cultural diversity. Despite the official statements of the proponents of globalisation, universalism, for legal systems is far from a unifying factor among the small island states of the South Pacific. Regarded as the corollary of an economic and cultural system, which is imposed on them by the leading industrialised states, globalisation is a cause of the loss of the specific identities of the small island states and is regarded by them as a thinly disguised form of neo-colonialism.

1. INTRODUCTION At the outset, it must be recognised that the jurist or the anthropologist who is interested in the legal systems of the South Pacific could only ever hope to study some of the myriads of islands of the region. There are many island communities in the South Pacific and they are geographically small and of infinite variety. It is possible nevertheless, in an attempt to order the discussion, to consider the different definitions given to legal pluralism (Tamanaha, 2008). This chapter will also locate legal pluralism in the process of colonisation of the small

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states and island territories of the South Pacific, and finally present some views about the future. The concept of legal pluralism was highlighted at the beginning of the 20th century when a sociologist raised the idea of pluralism in the legal sphere by affirming that “the centre of gravity of the evolution of law is not in legislation, nor in legal philosophy or judicial decision, but in society itself” (Ehrlich, 1912, cited in Ingber, 1972; Rouland 1993; 1995). Thus, it is necessary to consider the classification of social groups on the basis of specific criteria such as: (1) function (family groups, locality, followers of a chief, etc), (2) duration (temporary groups or groups of a more durable nature), and (3) social range (specific groups or global groups). According to Gurvitch (1940 cited in Ingber, 1972), each community develops social ordering systems of a legal nature, which are peculiar to it. He added that “certain groups therefore lack stability or a degree of organisation which will constitute legal categories” and, in establishing the theory of legal pluralism, all thought of state centralisation of law is put to one side. In other words, “against the state presented as the sole creator of law, it is a question of presenting the multitude of social areas which of a partially autonomous or self-regulated nature, which also are producers of legal rules” (Dupret, 2000). For Ingber (1972), legal pluralism refers to “legal norms of a similar nature which implies the use of constraint, and which co-exists in the same area”. According to Ingber (1972), legal pluralism finds its source notably in the “inter-penetration of customary laws, which results in the imbuing of the idea of the sanctity of space and of resort to tools of a legal nature”. Le Roy (2004), who refers to legal pluralism as “multi-legalism”, works a synthesis of these two definitions by describing the three pillars which according to him are the necessary foundation of the equilibrium between the state law and the law of the peoples. First, “a recognition of the plurality of the sources of law and the effective operation of the principal of subsidiarity in so far as it relates to the state law which will not be called upon except when methods of social regulation based on negotiation have been exhausted; next, recognition or the putting in place of new fora for the regulation of disputes, with a preference for negotiation; and finally, a functional specialisation of the various fora in order to avoid a pyramid effect from the systematic ascent towards a summit of decisions with authority and to promote a system of public justice which is largely decentralised” (LeRoy, 1998). Besides these definitions, pluralism in a broad sense has three forms: social, political and legal. Social pluralism is referred to when “there co-exist in the same society, different value systems used by distinct groups” (Lajoie, 1988). Political pluralism relates to the recognition and accepting of the diversity of political opinions. And finally legal pluralism has reserved for it an analogous treatment to that of existing legal methods. It may be analysed as a situation in which different areas of law superimpose on each other, inter-penetrate and become mixed both in spirit and in action. Introduced by the effect of colonisation, or already co-existing before colonisation, traditional law and imported law in matters “of private law, public law, judicial law (the coexistence of a principal justice and an indigenous justice of a special nature subordinate to the first), criminal law and social law”, pluralism therefore, makes for the co-existence of several legal systems in the same jurisdictional entity Vanderlinden (1972). Flowing from this is an equilibrium between different social groups whose origins vary in function according to the circumstances of each case.

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Belley (1986) speaks of pluralism as “multiple external normativities to the state law, phenomena which are empirically marginal and without substantial links between them “local usages, ethnic practices, and inter-familial behaviour”. He gives a double definition in his encyclopaedic dictionary of law Belley (2003). “In law - The simultaneous existence within a single legal order of rules of law which are different in their application to identical situations; the co-existence of a multitude of distinct legal orders which may or may not have legal relationships between them; in the sociology of law the co-existence of a plurality of arrangements or systems of law, is at the heart of a single entity of a given sociological analysis (local society, national society, international society)” (LeRoy, 2003, citing Belley, 1986, p.17). Belley (1986) agrees with Griffith (1986) in saying that there can exist only two conceptions of legal pluralism. First a moderate concept, which applies a positivist view of the law. This conception sees the existence of distinct social powers of the State that has a coercive power, which is sometimes more efficacious than its own. Second a radical conception, where the rule-making power is shared between the State and other parallel legal orders. These concurrent normative systems are not in a hierarchical arrangement and the legal practices of each individual are taken into account. Different social circumstances create their own norms for the moulding of social behaviour and their own institutions to reinforce and apply those norms. Vanderlinden and Le Roy (2005) are among the most eminent representatives of this view. Le Roy (2005), for example, distinguishes the two conceptions. Beyond this first differentiation, lawyers and legal anthropologists have different approaches in respect of pluralist societies (Griffiths, 1986). For example, Gilissen (1972b, p.332) emphasises the negotiation, which arises in relation to rules, norms and laws. Vanderlinden (1993) is interested in the mechanisms that arise from different legal ordering systems. Dupret (2000) studies the capacity for action and selection of subjects and decisionmaking fora. He speaks of the normative repertoire of judges. Greenhouse (1989) prefers to emphasise the plurality of forms of regulation by reference to type class or culture in the world. Le Roy (2005) focuses on the implicit cultural models of ordering of rights and obligations. Against this background it is necessary to distinguish pluralism and plurality on one hand from pseudo-pluralism on the other. According to Vanderlinden (1998), “plurality bridges the gap between the existence of several laws, and addresses situations where there are two legal orders which are completely independent the one from the other”. Pluralism engenders the simultaneous actions of several laws and “makes it possible therefore to consider the totality of legal phenomena without having to reduce them to a unity” (Vanderlinden, 1998). All of this is the opposite of pseudo-pluralism, which states the existence of several laws by reference to a normative system, which is hierarchically ordered, and where the laws interact among themselves. It is known that the law develops in a natural way in the different social groups within which individuals find their place. Thus, each community group has “total or partial capacity to organise the relationship between its members by way of a natural legal order”. Each social group produces its own particular law without taking account of the recognition of, or controlling, any other. This approach produces a plurality of views of law, which in their turn produce conflicts, whose manner of resolution also differ. Legal pluralism has the vocation of seeking to make a mosaic of different cultures coexistence, with a certain degree of shared sovereignty (Sage, 2008), but it tends to generate

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conflicts between formal law and customary practices. Indeed “a truly pluralist society has to find a modus vivendi in which the state preserves social order at the same time as it offers its citizen access to their beliefs and their spiritual way of life.” The question comes back to enquiring whether each individual has a choice for resolving different legal situations or whether it is only a question of the simple co-existence of legal orders. This is a modern conception of pluralism in which the individual is central to the problem, since it is the individual who makes the choice.

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2. LEGAL PLURALISM AND THE PROCESS OF COLONISATION IN THE PACIFIC The progress of colonisation in the Pacific involved openly and progressively imposing a new law (the phenomenon of imported law) as well as a new form of judicial organisation. As Rigo (2009) points out, and see also Wittersheim (2007), colonisation in Oceania has also triggered two historical ruptures: the transition from ancestral polytheism to Christian monotheism and the transition from religious rule to external secular rule. In this context, democracy appeared to be the culmination of a painful historical process, an outcome that could be perceived with ambivalence, the completion of a positive project or the ultimate expression of a soulless and de-structuring globalisation process. Although the phenomenon of the importation of colonial legal systems into the Pacific is a constant, nevertheless the small populations combined with the large territorial areas rapidly led the colonisers to delegate to local authorities a reduced form of power, allowing them to exercise in a limited way the former traditional rights particularly in land matters. This recognition of custom has however always been under the implicit and semisystematic control of the colonial administration. That is to say subject to its legislation and its principles of justice. The State remains “implicitly the ultimate unitary frame of reference”(Eberhard, 2003). As Vanderlinden (2000) observed “In Melanesia as in Africa … the traditional systems operate only according to the principles defined by the colonisers principles whose respect was in the final analysis controlled by the colonisers”.

3. ADAPTATION OF LEGAL PLURALISM IN POST-COLONIAL SOCIETIES IN THE SOUTH PACIFIC Although industrialised countries, like France and the USA, have favoured a very formalist and restrictive procedure for resolving disputes, the islands of the South Pacific region have only been confronted by these questions at a late stage. It is interesting to note that in this part of the world, though the plurality of laws has often been under threat, that the modern societies have never been able to totally replace them. For example, in relation to criminal law see Angelo (1995). Indeed from the beginning of the 19th century, colonisation under cover of “principles of civilisation of a superior kind”, have legitimated the putting in place of a colonial order founded on legal and institutional norms: but doing that has also meant “an institutional and

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ideological conversion” (Le Roy, 2004). The regions of the Pacific, which were within a colonial administration were inevitably submitted to a monist dynamic of power, which presents a European centrist view of the world strongly imbued by a desire to install a model society with the ideal of equality tending to objectivity in a hierarchy dominated by the law. According to this positivist conception, the State therefore remains the sole source of law the holder of the monopoly in the production of rules. It will be noted that in this approach the representation of law can only be linear and hierarchical. Beyond that this representation of the legal system raises inevitably the question of the legitimacy of the transfer of a foreign legal model because “this legal frame risks being the imposition of one specific worldview to the detriment of any other” (Haoua, 2003). Whether the case is the moderated or radical conception, the different patterns of analysis have all been used to explain the relationship of the post-colonial model with the state law of metropolitan origin. In colonial logic, its own institutions limit the law state. It promulgates written rules, which impose rights and duties, procedural rules, and notably create “a minimum recognisable criminal law which is publicly applicable, judicial procedures which offer guarantees and a system of fundamental rights which protects fundamental liberties” (Bauer, 2005). In the island countries of the South Pacific, the notion of legal pluralism therefore still lies in a direct link to the notion of the State.

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4. THE ELEMENTS OF POST-COLONIAL LEGAL PLURALISM Fundamentally it is the small legislative output of the developing states of the Pacific which has given rise to the revival of a customary mode of creating law, so consecrating postcolonial legal colonialism (Vanderlinden, 1996; see also Angelo, 1987; and Angelo, et al., 1988). Although at its origin the legal pluralism arose from the superiority of a dominant group, it is no longer the case today that it must be considered by reference to a particular society and to a hierarchical arrangement of legal systems within that society. In short, the post-colonial model of legal pluralism identifies a group of rights. “State law whose job is to apply across the whole of the territory and to all the people, in practice focuses on specific sectors of law (company law, contract law) and most efficiently in urban areas;” (Lajoie, 1998, p.686, in line with the analysis of Le Roy, 1982). Traditional law, which was practised by the indigenous people before the arrival of the Europeans, and which finds its origins in their own views, is comprised of customary law (which is a form of traditional law affected or modified by the colonial administration applies to new situations with which the traditional societies were not confronted); and local law, made under the influence of the State, which leaves the way in which it functions to be decided upon by local authorities. “This local law is characterised by the possibility of the re-interpretation of foreign legal categories in light of autonomous ideas” (Vanderlinden, 2003). According to Vanderlinden (1993, 2003), the individual is at the heart of this conception of pluralism and “the point of convergence of the diverse legal systems” contrasting thus with the reductionism positivist view in which the State is the sole creator of norms. State law is therefore only one of the elements of the legal situation and no longer constitutes the sole point of reference. Radical pluralists have successfully rejected monism (a single order), centralism (the State is the sole origin of norms), positivism and prescriptivism (imposed foreign laws). It can

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therefore be noted that in this particular context there is a margin of appreciation, uniquely national which is the natural corollary of the existence of a “pluralism of juxtaposition”. It will appear today always for a mal-adapted conceptual framework or at least as a too narrow conceptual framework to understand notions of culture and identity, which relate to the whole of the community of the small countries of the South Pacific. On this basis alone it is, therefore, hardly surprising that there has appeared a movement of challenge to the pre-eminence of state laws, and the legal pluralism which operates in the South Pacific can be explained by two sources of opposition. The first, relatively old and easy to understand, manifests itself in relation to the model of dominant colonial legal thought which appears to be the result of a tension born from the existence of oral and written systems of law. The second, more complex, lies in the more modern frame of the still strained relations between the local elite and the colonial or post-colonial powers. These oppositions together today form the main common denominator that unites almost all the countries of the South Pacific (Mara, 1997; South Pacific Forum, 1971). Thus the creation of the Pacific Islands Forum has its origin in a collective political response by the Pacific countries in 1971 by the heads of five small island states of the South Pacific, which were newly independent (Sage, 2001).

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5. IS LEGAL PLURALISM AN INDICATOR OF LEGAL INSECURITY IN THE SOUTH PACIFIC? The socio-historical circumstances, which have affected the South Pacific region over the past centuries, resulted in the appearance of multiple legal systems with various impacts in the legal sphere. This is a result of the range of different languages, the realities or practicalities of law enforcement, transport difficulties, and communications difficulties generally. These systems, the product of traditional custom, originally were developed locally, but always in isolation one from another. Then the colonial period imported its legal framework - its own legal processes, in order to maximise control over the colonies (Sage, 2000). The inheritance of the colonial period has allowed the traditional law of the local peoples to subsist in various forms, and one of the most important aspects of this pluralism is its survival in the field of judicial organisation. Therefore, two systems of law co-exist today. On the one hand, there is the formal system, which is product of colonial domination – the colonisers’ laws superimpose themselves on those of the native peoples – and the traditional customary law, which form a plurality of complex rights (De Deckker, 1995). Although the phenomenon is very widespread in the South Pacific, custom presents a pluralism of a unique type in Melanesia: the methods of local lawmaking result from acceptance of a multitude of relationships within a formal governmental framework which is shared at the national level (Fraser, 1999). Dualism is found in the systems of law attached to all the groups and the law linked to the national framework. Shortly stated, singularism opposes pluralism, and mono-centrism and poly-centrism co-exist. “In the same territory two legal systems are in force which apply to different groups of people which correspond to the different statuses created by the colonisers” (Gillissen, 1972a), but which for the most part have been continued at the time of

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independence or autonomy. In submitting legal matters to separate rules, pluralism is therefore a vector of inequality and of legal uncertainty. The continuing presence of competing systems of law in the same human space and within the same territorial space inevitably raises the question of conflict of laws within the country whose solutions borrow much from the current rules of private international law. Although preserving pluralism can be the only way to save cultural diversity in the communities of the small states and territories of the South Pacific, there remains the question of the unity of the internal law in countries where there are several customary systems. Customs are prima facie usually incompatible with the basic rules recognised in the constitutions or the fundamental laws of most of the small island states of the Pacific. That is notably the case in the relationship between traditional law and human rights (See Butler, 2009; New Zealand Association for Comparative Law and Association de Législation Comparée des Pays du Pacifique, 2009; New Zealand Law Commission, 2006; Eberhard, 2002, 2005; Angelo, 1992). For Vanderlinden (1996, p.87) pluralism enables “the recognition of the importance of social ethnic religious cooperative economic and other identities which impinge on each individual over and above the national identity - although that identity may not necessarily affect them. The individual in fact has a multiple identity which places the individual in several social groups and therefore in several legal systems”. However, this approach also favours discrimination and changes to the equality of the sexes or the education of children, which are humanist concepts which flow from ideologies of the Western world and which are not yet an integral part of the traditional ways of life of many of the little countries of the Pacific area. Moreover some breaches of human rights do not have the same degree of gravity that they would have attributed to them in Western society. For example, restrictions on the status of woman, marital violence against women, and the frequency of rape and other sexual assaults are weighted differently under customary law (Lassot, 2008). The manner of resolving conflicts does not escape this difficulty. Thus, the quasi-systematic search for a reconciliation or of a monetary compensation for the victim in order to avoid criminal or civil prosecution is difficult to make fully acceptable because it appears as a way of sanctioning acts which are nevertheless often regarded as criminally wrong. Finally if the vocation of custom to protect community peace seems ideal for restoring equilibrium within communities, customary conciliation is often a departure from the idea, because the reality of any arrangement between members of a group or between spouses is always subject to a guarantee. Through the alternative procedures, the parties can be seen to contribute actively to the arrangement of original solutions adapted to each case. The law is, therefore, more a subjective construction of the subjects of the laws (Vanderlinden, 2000, p.17). But it can also be maintained that under this form of justice which favours mediation, the weakness of the state is exposed, in particular its incapacity to fulfil its judicial role throughout the territory in question. Furthermore, the application of traditional law raises many questions: there is no legislative framework for the methods used or for the nature of customary rules, or even for the amount of compensation granted to achieve conciliation of the parties.

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6. THE INTERNATIONAL ECONOMY, STATE LAW AND CUSTOMARY LAW In order to understand globalisation and governance within a Pacific context it is important to understand the interaction of the international economy with both state and customary law. An example of an existing dichotomy is the right of citizenship: on the one hand the State is restricting the right of citizenship to those who were born within the state territory then on the other hand, it is exercising discretion to grant citizenship to those that will enhance economic advantage. Another trend concerns the linkages between citizenship and customary land tenure. In countries where a majority of the lands are held in accordance with custom, the access to citizenship has been orientated specifically to protect the customary rights and interests in the land. However, there is a contrasting attitude in some other South Pacific states that are introducing legislative regimes, which could have the effect of making available customary land for general commercial purposes. This trend is set against the background of the economic policies of bodies such as the Asian Development Bank and the continual flow of statements from aid donors about the economic impediments suffered because land is not available as a commercial security in the manner in which it is available in Western economies. There exists a competing tension between the rights that flow to an individual by virtue of their place of birth and the rights of those who have continued in occupation and physically remain to maintain and work the land. The migrating diaspora certainly retain a cultural link and familial link to the lands of their birth, however their property and political rights may be eroded as the number of generations increases with absence of that family line from the ‘homeland’. An example of this was the recent Referendum for Tokelau to become selfgoverning. Only those Tokelauans that had resided in Tokelau for three of the 18 months before the Referendum were entitled to vote. Culturally the proof of ancestral links is reliant on, potentially, centuries of oral records from potentially many countries. This depends on human memory, the capacity to share the oral records, status at birth and the effect of intervening political events. A state system will favour the certainty that a single written and contemporary record can provide. Moves in this direction as in the Samoa Land Titles Registration Act 2008 significantly strengthened the role of the state law and correspondingly have the potential to weaken the role of customary law. It is interesting to note that this sits amidst the state constitutional provisions that purport to protect customary land tenure. The pressures are evidenced particularly in the Pacific in relation to land. The pressures come from a number of things:     

From the diaspora - The Pacific has seen a substantial outward movement, with Auckland now the largest Polynesian community in the world; There are the questions of land scarcity (eg in the small islands such as Pitcairn); Land development pressures (WTO); Pressures for security of occupancy by the land owners; Adoption issues - customary law presents many complex systems relating to adoptions and the associated rights. The state system has an interest in simplifying

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the land right issues, both in the interest of certainty relating to ownership, but also in order to reduce the costs of dispute settlement; The relationship to citizenship - citizenship is an issue which has arisen with colonisation and the establishment of boundaries which have since become boundaries of independent states regardless of the communal or cultural links between people on different sides of the colonially established borders. Customary law and its relation to land rights – in addition to its spiritual significance, the land provided security and sustenance. For a comprehensive understanding of land issues in the Pacific, see in particular Anon (2008), Farran (2001), Farran and Patterson (2004) and Sage (2009). Access to those rights depended primarily on occupation, participation in work on the land and similar factors. This was against the background of limited options. In the late 20th century, options became available to move to work other than at a subsistence level, to occupy or own land in one’s personal right, and, with the introduction of democracy, to be involved in the decision-making affecting the community.

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The Pacific peoples have now moved in large numbers and left their homelands. In most cases the cultural and spiritual link with the ancestral land is strong, but it is not now linked to survival, support or security in a material sense. With the continued outflow of population there is an increasingly reduced language and cultural link with the country of origin (eg the bulk of the Niuean population lives in New Zealand - one in twelve Niueans speak Niuean and only 5% of the Niuean community live in Niue). Globalisation in all its forms has meant that customary law is weakened by the availability of money, of freedom of movement and improved economic possibilities. Those who reside in the countries of the South Pacific remain and develop their culture increasingly alone. The links with the diaspora are real but emotional (and sometimes economic through remittances) rather than physical. The diaspora may return to the home country, but for holidays. The residents of the countries may leave on visits to the diaspora and also aspire to leave their home country eventually. This raises interesting problems at the governance level. There are increased opportunities against this background for the governments to develop the law without regard for the customary law and, in respect of the land, increasing opportunities for state governments to bow to the pressures of the international community to commodify the land.

CONCLUSION Is there a programmed disappearance of customary law in the small island states of the Pacific or is there a failed attempt of transferring the western model of society and its institutions? So far one must note that the state endeavour has indeed failed. It should be noted however that in the present circumstances, there is inevitability about the demise of customary law. Resources are a critical factor and there are more of them at the centre – controlled by the State machinery. There is now an economic dependence of the community on the State mechanism. The tendency is for there to be more resources controlled from the

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centre, increased economic dependence of the non-state institutions and, as the State authority extends, there is more state law and improved systems of enforcement of it. The political rhetoric in many countries of the Pacific is for greater respect for customary law, but the practice is increasingly for the state to take over in areas previously controlled by customary law. “The challenge of pluralism is to reach accommodation with diversity without abandoning identity, limited not as the intelligible unity of elements or multiple factors which constitute either its being or by individual or by community or by culture, but as the consciousness that these elements or factors belong together” (Panikkar, 1990). The undertaking is not without dangers and the temptation is great, because of a desire for simplification, to give priority to the superiority of state law to the detriment of local custom and to tend towards a unification of legislation and other legal systems. It is however undeniable that “countries in the course of development feel strongly the need for a modern specific law as a condition of the development; but they cannot deny the force of local traditions and the fact that those often answer better today to the specific needs of the people” (Vanderlinden, 1972). The formal judicial system is often seen as a government organisation: customary tribunals must henceforth accept the challenge of modernising. This is why the traditional view of an oceanic law, the symbol of the unity and uniformity of the region seems utopian given the Pacific environment. What is more, on the international political scene the states of the Pacific region have to undertake a Westernisation of their way of life or else risk withdrawing themselves from globalisation and the development assistance that flows from it which is indispensable to them. Modernity tends to imply a universal logic and hence social and cultural diversity is irremediably devalued because that is contrary to the sought globalisation. It remains the case that in spite of the official rhetoric of those speaking of globalisation, universality is far from being a factor of unity in the island states of the South Pacific. For these countries it seems to be a simple corollary of an economic and cultural system, which is being imposed upon them by the leading industrialised states - among which Australia and the United States of America find themselves in the first rank. The consequences of this hegemony, which privileges a uniform world trade model of society and which implicitly presupposes the disappearance of frontiers - a notion which is based on diversity of identities - have an effect even more marked in the small island states of the South Pacific. In these states the model of societal development, known till now, rests primarily on what is appropriate for the individual and the protection of the individual’s environment. Furthermore, the phenomenon of globalisation of trade, the indicator of the levelling and the disappearance of rights of identity, is even more open to criticism because it appears to many political leaders of the small island states of the Pacific as a poorly disguised form of neo-colonialism. In fact, it is necessary that the dominant theory moves out from the neo-colonial and colonial conception in order to affirm the legitimate efforts of small states and territories in a renewed framework and in conformity with the law. Is this not in fact the position of all the populations of the world whose cultural, economic, political, and social coherence has most suffered under the legal pluralism conceived by the modern state? (Vachon, 1997). The principal challenge which legal pluralism in the South Pacific must face is in overcoming the traditional duality of the old and the new at the same time as rejecting systems which are based on a simple fusion of these elements of duality by giving a special

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value to ideas of laws of the people, their culture, and identity. These elements must in this new perspective take priority over other constitutive elements of legal pluralism. They allow small island states of the Pacific to avoid in advance all attempts of explanation or justification of the basis of other systems of culture which depend exclusively on Western or European ideas and thus reject a positivist view of law and legal and political systems of universal vocation of which those ideas are the consequence. Finally in a more general manner, as Hughes has said, this common denominator presents us with the basis of what must be a true policy of legal pluralism specific to the small island countries of the South Pacific. But it must not be misunderstood. This phenomenon cannot be achieved by a simple manifestation of a desire to return to sources which amount to a looking inward on oneself. On the contrary, an unequivocal reclaiming of the recognition of an open or relativist system in which the law and the structures which accompany its operation must take account of the cultural environment and the social specificities which prevail in the small island states of the South Pacific. That said, it is also a criticism of all evolutionist theories or those founded on development ideas whether they be Christian, Hegelian, Marxist, Darwinist, or marked by progressive liberalism, which present a particular legal order as a step towards a better development of society or culture. From this perspective the political divisions would no longer be seen simply in terms of relationships between social classes or ideologies. The result would be that the traditional western political categories which are so familiar, whether they be conservative socialist, liberal or democratic, will also be transformed. A number of countries in the South Pacific have since independence had the possibility of greatly strengthening the role of customary law in their systems. Vanuatu, Solomon Islands and Papua New Guinea in particular had this possibility - that of developing the “underlying law”. However the opportunity has not been taken by the holders of institutional power (i.e. judges) and may well now have been lost. Those with political power within the central state system have achieved that power by the use of the imported colonial legal mechanism. Most countries have been content to continue with the inherited political system and have done little either to modernise the laws or in the case of foreign enacted laws applying in the country, to patriate those laws. What is needed, therefore, is a new political elite if the challenges of the relationship of the state law to customary law is to be taken up and the opportunities presented by the customary legal systems fully exploited.

REFERENCES Angelo, A.H. (1987). The Indigenous People of Tokelau and the Legal System. Law and Anthropology, 347-358. Angelo, A.H. (1992). Lo bilong yumi yet. Human Rights in the Pacific, Victoria University Law Review Monograph 4, 33-48. Angelo, A.H., Kirifi, H., & Fong Toy, A. (1988). Law and Tokelau. Pacific Studies, vol 12 (3), 29-52. Anon (2008). Making Land Work, Volumes 1, 2 Commonweath of Australia. Bauer, S. (2005). Pluralisme politico-juridique: citoyenneté et évolution technologique.

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Belley, J.-G. (1986). L’Etat et la régulation juridique des sociétés globales. Pour une problématique du pluralisme juridique. Sociologie et sociétés, 18 (1), 11-32. Belley, J.-G. (1993). Dictionnaire encyclopédique de théorie et de sociologie du droit, sous la direction de A.-J. Arnaud. Paris, LGDJ, 446-449. Butler, P. (Ed.) (2009). Revue Juridique Polynesienne, 8 Chassot, L. (2008). Violences et discriminations dans les Petits Etats Insulaires du Pacifique Sud, Etat des lieux au Vanuatu. Revue Juridique Polynesienne, 14, 59-70. De Deckker, P. (1995). Évolution du droit et coutume autochtone dans les États et territoires du Pacifique. Paris: Collection l’Harmattan, Université Française du Pacifique, 356. Dupret, B. (2000). Systèmes coutumiers, centralisme juridique de l’Etat et usages de droit. Chroniques yéménites, 8, 2-6. Accessed 1st January 2001, http://cy.revues.org/9 Eberhard, C. (2002). Les droits de l’Homme face à la complexité: une approche anthropologique et dynamique. Droit et Société, 51/52, 455-486. Eberhard, C. (2003). Penser le pluralisme juridique de manière pluraliste, défi pour une théorie interculturelle du droit, in Les pluralismes juridiques, Cahiers d’anthropologie du droit, 56. Eberhard, C. (2005). Les droits de l’Homme à l’épreuve de la contemporanéité, Droits, 41, 219-234. Ehrlich, E. (1912). Grundlegung der Soziologie des Rechts. Cited in L. Ingber (1972), Le pluralisme juridique dans l’œuvre des philosophes du droit. In J. Gilissen (Ed.) Le pluralisme juridique (57–84) Brussels: ULB. Farran, S. (2001). South Pacific Land Law: Some Regional Challenges, Cases and Developments. Victoria University Law Reviews, 2001, 47-[end]. Farran, S. & Paterson, D. (2004). South Pacific Property Law: Resolving Claims to Property. London: Cavendish Publishing, 300. Fraser, I. (1999). Legal Theory in Melanesia: Pluralism? Dualism? Pluralism Long Dualism? Journal of South Pacific Law, 3, Accessed 220th September 2009, http://www. vanuatu.usp.ac.fj/journal_splaw/articles/Fraser1.htm Gilissen, J. (1972a). Introduction à l’étude comparée du pluralisme juridique. In Le pluralisme juridique. Brussels: Editions de l’Université de Bruxelles, 14. Gilissen, J. (Ed.) (1972b). Le pluralisme juridique Etudes publiées sous la direction de John Gilissen Editions. Brussels: University of Brussels, 332. Greenhouse, C. (1989). Dimensions spatio-temporelles du pluralisme juridique. Anthropologie et Sociétés, 13 (1), 35-51. Griffiths, J. (1986). What is Legal Pluralism? Journal of Legal Pluralism and Unofficial Law, vol 24, 1-55. Gurvitch, G. (1940). Eléments de sociologie juridique. Paris, Cited by L. Ingber (1972). Le pluralisme juridique dans l’œuvre des philosophes du droit, 80. In J. Gilissen (Ed.) Le pluralisme juridique (57–84). Brussels: ULB. Haoua, L. (2003). Pour un pluralisme juridique plus effectif. In Les pluralismes juridiques, Cahiers d’anthropologie du droit, Paris: Laboratoire d’anthropologie juridique de Paris, Paris: Editions Karthala, 157. Ingber, L. (1972). Le pluralisme juridique dans l’œuvre des philosophes du droit, in J. Gillisen (Ed.), Le pluralisme juridique (57-84). Brussels: ULB. Lajoie, A. (1998). Pluralisme juridique à Kahnawake? Les Cahiers de droit, 39 (4), 683-716.

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Lajoie, A. (1998). op. cit., 686, following the analysis of E. Le Roy (1982) Encyclopédie juridique de l’Afrique. Tome V: 39–47. Nouvelles Editions Africaines, Dakar. Leroy, E. (1998). L’hypothèse du multijuridisme dans un contexte de sortie de modernité. In A. Lajoie, R. MacDonald, R. Janda, & G. Rocher (Eds.) Théories et émergence du droit: pluralisme, surdétermination et effectivité (29-43). Brussels: Bruylant. Le Roy, E. (2003). Les pluralismes juridiques, Cahiers d’anthropologie du droit. Paris: Editions Karthala, 7-17. Le Roy, E. (2004). Les Africains et l’Institution de la Justice, entre mimétismes et métissages. Paris, Dalloz. Le Roy, E. (2005). L’anthropologue et le droit, juridisme, ethnocentrisme et reproduction des sociétés, N. dans Pierre (Ed.), Dans le regard de l’autre, in the Eye of the Beholder, Montréal, Les Éditions Thémis, 75-112. Malogne-Fer, M., & Wittersheim, E. (2007). Des sociétés dans l’État : anthropologie et situations postcoloniales en Mélanésie, Archives de sciences sociales des religions, Accessed 20 December 2007, document 140-87, http://assr.revues.org/index12213.html Mara, R.S.K. (1997). The Pacific Way: a Memoir, Hawaii: University of Hawaii Press, 170171. See also Joint Final Communiqué, South Pacific Forum, Wellington, 5-7 August September http://www.forumsec.org/_resources/article/ 1971, Accessed 20th files/1971%20Communiqué2.pdf New Zealand Association for Comparative Law and Association de Législation Comparée des Pays du Pacifique (2009). (www.upf.pf), Recherche, Revue Juridique Polynésienne). South Pacific Human Rights: Challenges and Changes, London: Routledge-Cavendish. New Zealand Law Commission (2006). Converging Currents: Custom and Human Rights in the Pacific, Study Paper 17, Wellington, NZ: Law Commission. Panikkar, R. (1990). The Pluralism of Truth, World Faiths Insight, XXVI, 12. Rigo, B. (2009). Exigences démocratiques et persistance des logiques océaniennes. Paper presented to the Seminar on New Approaches to Governance and Economic SelfReliance in the Pacific Islands. Rouland, N. (1993). Le pluralisme juridique en anthropologie. Revue de recherche juridique, 2, 567-571. Rouland, N. (1995). L’anthropologie juridique. 2nd Ed, Paris: P.U.F. Sage, Y.-L. (2001). Emergence et évolution du droit dans les petits Etats insulaires du Pacifique Sud anglophone. Revue Juridique Polynésienne, Hors-série, 2, 23-46. Sage, Y.-L. (2003). Facteurs d’émergence et d’évolution du droit dans les petits Etats insulaires anglophones du Pacifique Sud. In S. Levine & Y.-L. Sage (Eds.), Contemporary Challenges in the Pacific: Towards A New Consensus, 1, Revue Juridique Polynesienne Hors-série. Sage, Y-L. (2008). Democracy and Self-Determination: New Conceptual Approaches Shared sovereignty, autonomy models, and other options. In K. Graham (Ed.), Models of Regional Governance For The Pacific, 88-105. Christchurch: Canterbury School of Law & National Centre for Research on Europe in collaboration with the University of South Pacific, Pacific Institute of Advanced Studies in Development and Governance. Sage, Y.-L. (2009). Droits coutumiers dans les Petits Etats Insulaires du Pacifique: De quelques conditions nécessaires pour leur prise en compte dans les litiges fonciers; Du rôle des droits coutumiers dans les litiges fonciers dans les petits Etats Insulaires du

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Pacifique. Presentations made during the 18th Judiciary Conference of the Pacific (Papeete Tahiti), 15-18 June 2009. Tamanaha, B.Z. (2008). Understanding Legal Pluralism: Past to Present, Local to Global, Sydney Law Review, 30, 375-411. Vachon, R. (1997). Le mythe émergent du pluralisme et de l’interculturalisme de la réalité. Séminaire Pluralisme et société, Discours alternatifs à la culture dominante, Institut Interculturel de Montréal. Vanderlinden, J. (1972). Le pluralisme juridique, essai de synthèse. In J. Gilisen, Directeur d’edition, Le pluralisme juridique Institut de Sociologie, Editions de l’Universite de Bruxelles, Bruxelles, 19-56. Vanderlinden, J. (1993). Vers une nouvelle conception du pluralisme juridique. Revue de la Recherche juridique, 2, Droit prospectif, 573-583. Vanderlinden, J. (1995). Contribution en forme de mascaret à une théorie des sources du droit au départ d'une source délicieuse. RTD Revue Trimistrielle De Droit Civil, 69-80. Vanderlinden, J. (1996). Rendre la production du droit au peuple. Politique africaine, 62, 8394. Vanderlinden, J. (1998). Villes africaines et pluralisme juridique. Journal of Legal Pluralism, 42, 245-274. Vanderlinden, J. (2000). Les droits africains, entre positivisme et pluralisme. Bulletin des séances de l’Académie Royale des Sciences d’Outre-mer, 46, 279-292. Vanderlinden, J. (2003). Trente ans de longue marche sur la voie du pluralisme juridique, in Les pluralismes juridiques, Cahiers d’anthropologie du droit. Karthala, Paris, 21.

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Chapter 6

THE CONTRIBUTION OF THE NON-PROFIT SECTOR TO A GLOBALIZED POST-CRISIS GOVERNANCE Patrick Valéau and Frédéric Annette Franco-Australian Centre for International Research in Management, University of La Reunion, France

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ABSTRACT In 2008, the global crisis came to question the sustainability of a mode of development exclusively based on a global market system. As a result, people are now expecting governments to set up a new globalized ethical governance. This chapter questions the part that the non-profit sector could play in this context. The social entrepreneurship model promotes efficient ways to acquire resources and to solve social problems. The traditional approach of non-profit organizations can be reinterpreted as a form of institutional entrepreneurship providing society with new ideas and values. In a globalized post crisis ethical governance, institutional entrepreneurs will be as useful as social entrepreneurs. Governments are looking for a grassroots sector able to counterbalance the forces of the market. Considering the partial failure of alterglobalization, this invitation may be a last opportunity for non-profit organizations to make a socio-political contribution.

1. INTRODUCTION Since world war two, non-profit organizations (NPOs) have grown progressively to answer the needs of the poor and the forgotten minorities. Progressively, they have become a formidable force. For example, today in the USA, the non-profit sector represents a population of nearly 2 million organizations, generating 1.4 trillion dollars, creating over 8% of the employment (NCCS, 2007). They provide a large variety of services for people. They also tend to organize their actions in participative and empowering manners, creating social bonds between those involved. Last but not least, non-profit organizations keep feeding

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modern society with new values and ideas helping it to develop in an ethical and sustainable way. In the 80s, globalization began: a process increasing the connectivity and interdependence of the world's markets and businesses. The latter expanded geographically but also conquered new sectors that were, traditionally, held by public or non-profit sectors. Forms of resistance took place, typified by “alterglobalization”: a movement focused on increasing the connectivity and interdependency of the world’s populations aiming for more solidarity and more equity (Valéau, 2009). However, too much heterogeneity among the participants didn’t permit the development of a long running coordinated movement able to influence the way the global market was expanding. Non-profit organizations had to adapt and social entrepreneurship came as an answer. As recommended, they started to use means and tools from for profit organizations in order to acquire the resources they needed to achieve their non-profit goals. In 2008, the world experienced its worst economic crisis since 1929. Experts concluded that speculative finance had taken over economic development. This crisis suggested that, contrary to Smith’s economic model, actors seeking to make a maximum of profit would not always contribute directly to the common good. Governments from all over the world assert that they are now working on transforming institutions in order to control and regulate the market (Battilana, Laca & Boxenbaum, 2009). They are calling for a new globalized governance based on ethical and social values. This context may be an opportunity for the non-profit sector to go back to its socio-political roots. This chapter explores the part the non-profit sector could play in this new globalized ethical governance. First of all, we review the economic, social and political role traditionally played by non-profit organizations in our societies, and then, we examine the nature of and issues surrounding “social entrepreneurship”. The third part analyses the evolution of the sector through a new-institutionalist framework: on the one hand, market institutions tend to penetrate the non-profit sector; on the other, non-profit organizations could once again become institutional entrepreneurs changing norms. Part four, referring to recent political speeches, indicates a resurgence of the non-profit sector in a context of crisis where governments are seeking to create new partnerships in order to feed society with social innovation. Table 1. Socio-political and economic means and ends of NPOs

Techno-Economic Level Socio-political Level

Means – Ways Efficiency Productivity Collective action Shared values Social bonds

Result – Ends – Output Goods and services responding to a need Impact Social change

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2. THE TRADITIONAL PLACE OF THE NON-PROFIT SECTOR IN SOCIETY The most well known attempt to define non-profit organizations was proposed by the international team of research lead by Salamon and Anheier within the Hopkins project (1997). Their goal was to carry out a comparative analysis of the non-profit sector in 12 different countries. Five criteria were selected to determine the organizations that could be part of the group under study: (1) organized i.e. with an institutional existence, (2) private i.e. separated from the public sector, (3) non-profit distributing, (4) self-governing i.e. having a board of their own to define their orientation, and (5) voluntary: i.e. involving, to some extent, voluntary donations or voluntary unpaid workers, even if this only concerns members of the board. Many definitions have been proposed since then, each of these five criteria can be challenged and debated, some could be emphasized or moderated, but they are, nevertheless, representative of a classical approach to these organizations. Different typologies have tried to structure the diversity of the non-profit sector. As far as the activity is concerned, Salamon and Anheier (1997) have developed the following classification: culture and leisure, education and research, health, social service, environment, development and housing, law, advocacy and politics, philanthropic intermediates and voluntarism promotion, international, religion, business and professional associations and unions. One of the most used distinctions is between advocacy and service (Mintzberg, et al, 2005; Nicholson, 2009), the first one tries to change people’s opinions whereas the second tries to change the world in more immediate and concrete ways, both being of course very useful. Another distinction concerns the beneficiaries: some non-profit ventures serve their members whereas some serve others (Mintzberg, et al, 2005). The first instance rejoins the principal of mutual and cooperative collective action (Rothschild & Stephenson, 2009); the second refers to philanthropic and altruistic movements (Sulek, 2009). Another difference often referred to is the presence or absence, next to the volunteers, of paid workers (Van Vuuren, de Jong & Seydel, 2008). But beyond their observable actions and activities, the specific nature of non-profit organizations lies in the way they combine and integrate sociopolitical and economic means and ends. TRADITIONAL APPROACH OF NPOS

Militant Community

Professional Organisation

3

Figure 1. The dual nature of non-profit organization (inspired from Valéau & Sharma, 2010) .

3

Sharma developed a similar figure to account for the dual nature of family businesses.

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From an economic point of view, non-profit organizations have often been referred to as the “third sector”. They are analyzed as organizations producing goods or, more often, services with the purpose of supplying demands that have been ignored or neglected by the private profit sector and by public services (Salamon & Anheier, 1997). With this in mind, one of the main issues with the economic view of NPOs concerns the added value of this production. For many authors, one of the main difficulties is the separation between those who finance and those who benefit from these activities (Valéau, 2004). Beyond the economic value of the means involved, many authors underline the social, and sometimes indirect, usefulness of these goods and services. The sociological view of non-profit organizations analyses the NPO as a network that integrates individuals within the society (Mintsberg, 1983; Rothschild & Stephenson, 2009). This social integration would include the creation of jobs for people who are usually excluded from the other sectors, as well as the sense of belonging provided by volunteering. Volunteers and paid workers’ motivations (Jamison, 2003) and commitment (Boezeman & Ellemers, 2007) often differ significantly from those of workers in other organizations. According to this psycho-sociological approach, the performance of these NPOs relies, beyond activities, on the way they work. NPOs’ members share common values on the basis of which they are committed to spontaneous collective action (Boezeman & Ellemer, 2007). This aspect of NPOs can be connected to Durkheim’s mechanical solidarity that characterizes traditional society (1915). It can also refer to the mechanism identified by Kanter (1968) used in utopian communities to commit their members. These social links constitute for the venture a social capital (Grady & Wang, 2009), which stands as a means and an end. The political view emphasizes the part NPOs play as agents of change within the society in which they find themselves: most of them may be more or less directly and more or less explicitly working for a “better world” (Kanter & Summers, 1987; Cooperrider & Passmore, 1991; Strichman, Bickel & Marshood, 2008). Different NPOs may target different levels of change: some want to alter people’s behaviour, others are just trying to answer people’s needs, others are trying to change people’s mentality. Authors such as Eisenberg (2000) emphasize the second: “The extraordinary problems that are tearing at the fabric of our society as we enter the 21st century, poverty, racism, environment degradation, lack of health protection, declining trust in government and many others, can only be tackled by strong policy work, advocacy and citizen mobilization. They will not be resolved by better services, and programs, although these are important. A much greater portion of our non-profit activities in the future will have to be devoted to policies and action that can produce change” (p 325). These actions involve very open and sometimes indirect impacts, and as such remain very difficult to measure (Kanter & Summers, 1987). The management view of non-profit organizations questions the articulation of the three above dimensions. Indeed, most of these ventures may, by definition, be, to a certain extent, concerned with them all, but different proportions and configurations are possible depending on the values and the purpose of the organization. In lots of discussions NPOs are regarded along a continuum going from informal community to professionalized organization (eg. Anheier, 2005; Simon, 2009). But, the development may not be so harmonious. Valéau and Sharma (2010) consider that non-profits are made of two distinct entities, a community and professional organization, eventually overlapping and almost certainly interacting (figure 1). In fact professional efficiency often contradicts community values (Rothschild & Stephenson, 2009). The importance of community, its overlap and interactions with the organization vary

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from one non-profit venture to another. It often declines as the latter becomes more professional. Nevertheless, in most cases, non-profit organizations succeed in saving a community base, with values based action. Most NPOs aim, to a modest or ambitious extent, to work for a better and more sustainable development of the world. Indeed, most of them introduce new ideas and propose change. However moving on from this, a new approach, social entrepreneurship, is now emphasizing radically more professional organization. The tensions between informal community and professionalized organization probably explain part of the failure of the globalization of the non-profit sector. Alterglobalization was supposed to be the non-profit answer to market globalization, providing a counter power able to stop its excess and providing society with alternative models of development. This movement had its glory days at the end of the 90s with demonstrations in Seattle, followed, in the early 2000s, by social forums systematically responding to the Davos Economic Forums. The alterglobalization movement involves a very large range of non-profit organizations, big NGOs and small grassroots ones, professional advocate groups and radical political parties. The movement rapidly met difficulties in coordinating with a common voice and a common line of action. All of them shared aspirations for a better world, but some were looking for an evolution of the system, others wanted a revolution. To date the alterglobalization movement has still not found its second wind.

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3. SOCIAL ENTREPRENEURSHIP AND THE ADAPTATION OF THE NON-PROFIT SECTOR TO THE GLOBAL ECONOMIC MARKET SYSTEM Authors such as Gartner (1990) have always kept the door of the field of entrepreneurship open to NPOs, but it is only during the last decade that this branch area has been institutionalized as part of a new stream of research labeled: “social entrepreneurship”. It has helped to import the concept of entrepreneurship within the context of NPOs. Social entrepreneurship can be connected to a broader set of contributions, supporting the introduction of management practices such as marketing for fund raising, job profile and evaluation for human resources management, cost controlling for accountancy and strategic planning for general management (Anheier, 2005; Herman, 1994; Simon, 2009; Stevens, 2001). All these contributions support innovation in the sense of a rationalizing approach based on the use of tools from for profit businesses. Social entrepreneurship research does not only study NPOs, but has a vocation to study a large variety of activities developed along a continuum going from the profit to the non-profit sector, including the public sector (Dees 1998; Johnson, 2000; Austin, Stevenson & WeiSkillern, 2006; Townsend & Hart, 2008). It can either concern businesses with a social commitment or non-profit or public organizations trying to improve their efficiency (CCSE, 2001). Prabhu (1999) considers that social entrepreneurship can take all kinds of legal forms including new ones. A large number of texts even value this “in between”, as part of social entrepreneurship. For Townsend and Hart (2008), the choice of a given form of organization depends on the nature of the project; including social goals within a project, essentially for profit or introducing efficiency in a non-profit venture. For Wallace (1999), social entrepreneurs create new models of organizations that narrow the borders between the profit

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and the non-profit sector. For Johnson (2000) this hybridization is a fundamental part of the innovations social entrepreneurship produces to answer the complexity of the problems it addresses. As a result, non-profit organizations in the traditional sense, as defined by Salamon and Anheier (1997), can be part of this larger group practicing “social entrepreneurship”. Social entrepreneurship is often defined by referring to its goals, such as the use of entrepreneurial behaviors for social purposes (Hibbert, Hogg, & Quinn, 2002). More precisely, it is often introduced as an attempt to solve social problems efficiently and creatively (Wallace, 1999; Johnson, 2000; Hibbert, Hogg, & Quinn, 2002). Social entrepreneurship is driven by individuals who want to improve society and who consider that the classical approach of profit and non-profit organizations cannot correctly address this issue. Social entrepreneurship reintroduces values and social considerations within the profit context and assesses performance in attracting and retaining human resources, fund raising and finance in a non-profit sector often viewed as inefficient (Dees, 1998). Social entrepreneurship is very focused on the acquisition of resources. It recommends non-profit organizations not to use public grants (Boschee, 2001; Brunham, 2002). The first reason is because these may not be safe as they could be taken away, arbitrarily, at any time. The second reason is that grants create a dependency on the public sector, which is in contradiction with the principle of independence that characterizes entrepreneurship as well as the non-profit sector. Social entrepreneurship prefers private donations from people and businesses. They propose fund raising techniques using marketing tools. But social entrepreneurship has a preference for commercial activity able to produce a « real » income. This can involve selling a service to the beneficiary. It can also consist in selling another profitable service in order to finance a social non-profitable action. This commercial dynamic matches the entrepreneurial spirit of opportunity creation. But these authors also consider this to be real value creation compared to grants and donations which, according to them, mainly consist in the redistribution of money taken from others. One of the main issues of social entrepreneurship is the measure of performance. Social entrepreneurship would like to integrate economic and sociological added values, trying to assess the level of efficiency of these organizations (Dees 1998; Johnson, 2000; Hibbert, Hogg, & Quinn, 2002; Austin, et al., 2006; Townsend & Hart, 2008). This approach often involves a ratio confronting the output produced with the means invested. Social entrepreneurship has tried to introduce innovation and efficiency into the non-profit venture equation. Most authors agree on the difficulty, in the for-profit as well as in the non-profit sector, of measuring this entrepreneurial achievement of social value (Dees, 1998; Austin, et al., 2006). As a result, it does not really succeed in considering and preserving the communitarian dimension of these ventures (figure 2). Social entrepreneurship moves non-profit organizations closer to for profit ventures. At first, this involves adopting certain management practices, but these means may soon introduce new ends. Social entrepreneurship appears as a pragmatic approach, essentially focused on technical and economic efficiency, i.e. the ratio between means and results. Services delivered are units for which it is possible to calculate a unit cost of production. Because of the difficulty of measuring them these ratios will not include all the indirect values mentioned in part 1; social bonds and development and democratic progress, whereas these other values may justify higher costs. These social utilities are obviously hard to quantify and optimize, but they may also contradict technical and economic performance (Tisdell, 2001; Valéau, 2009). Thus, social entrepreneurship tends to turn non-profit

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organizations into more productive units. It helps them to compete with for profit ventures but, in doing so, often take them away from the socio-political dimensions of their action.

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4. SOCIAL ENTREPRENEURSHIP, INSTITUTIONAL ENTREPRENEURSHIP AND THE NEW-INSTITUTIONALIST THEORY The evolution of the third sector within the global market society can be re-analyzed through a series of theoretical frameworks: new institutionalism, stake-holders, social capital and institutional entrepreneurship. It is our view that the main difference between social entrepreneurship and the traditional approach to non-profit organizations does not only concern efficiency, but also has to do with the place this sector wants to take within the global market system: does it want to survive as part of this system or, be more at the cutting edge, trying to influence its development, advocating for new, more ethical rules of governance (figure 3). These two views constitute different strategies serving fundamentally different visions: traditional non-profit organizations tend to take a stand as a form of resistance, whereas social entrepreneurs seem to consider that the war is over and try to adapt in order to survive. Indeed, until recently, governments from all over the world were doing everything they could to set the global market free and were “helping” non-profit organizations to turn into social entrepreneurs. But then came the global crisis. “If you can’t beat it, joint it!” This could be the leitmotif of the social entrepreneurship approach to non-profit organizations. The advent of the global market society introduced new rules and new expectations. The social entrepreneurship movement considers that the nonprofit sector has to adapt. According to new institutionalism (Dimaggio & Powell, 1983; Powell, 2007), this adaptation is not only economic; it is also about social legitimacy. Legitimacy refers to acknowledgement by other actors and groups of actors of the relevance of one’s behaviors. Acknowledgement has to do with social norms: a set of unwritten, unspoken and sometimes unconscious rules that define what is appropriate and inappropriate to do, to say or even to think in a given set of circumstances. In a global market system, legitimacy is, to a great extent, synonymous with efficiency. In the context of this “institution”, social entrepreneurship may actually be the right answer. Productivity is becoming the non-profit sector’s “iron cage”. As a result, the social entrepreneurship model of non-profit organizations is spreading all over the world. Social norms in a given community have to do with an emergent culture (Becker, 1982; Durkheim, 1915 Dimaggio & Powell, 1983), but also, sometimes, with deliberate strategies of control (Kanter, 1968). Another useful framework for understanding the non-profit sector is stakeholder theory (Freeman, 1984). Freeman defines stakeholders as groups concerned by the organization or able to influence its goals. In non-profit organizations, the beneficiaries are not always the payers; the service is often given for free or for a price lower than the market value. Non-profit organizations are very concerned about their beneficiaries, but also have to consider their financers’ points of view. The power held by this particular stakeholder is the direct counterpart of the dependency of the organization toward it (Emerson, 1958). Indeed, social entrepreneurship aims to limit the dependency of non-profit organizations on public institutions, but, on the other hand, one can ascertain that all resources tend to involve dependency. Obtaining donations requires specific marketing once called “charity business”,

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which has often been criticized for escalating emotions. Creating new for profit activities in order to finance non-profit ventures may permit independence from public institutions, but is subject to the rules of the market. Competition requires a reduction in production costs that could involve managerial pressure and a stagnation of wages that could contradict non-profit traditional values. Social entrepreneurship considers public grants to be the worst source of income. It is true that dictatorships always start by cutting back on a government’s aid, whereas democratic governments generally acknowledge their ability to take charge of new or forgotten demands. However, over the last decade, governments have been so inspired by social entrepreneurship that they have begun to treat non-profit organizations just like businesses, in subcontracting some of their work out to them. In fact, all financial resources involve a form of dependency and require a level of accountability in return. Before the 2008 crisis, all financial stakeholders, government, the market and even citizens, seemed to be preoccupied with the same thing: productivity. However, non-profit organizations are not totally helpless when facing up to their financial partners within the global market; they develop some unique social capital that can be used in negotiations (Schneider, 2009; Putman, 1995). The concept of “social capital” belongs to French sociologist Bourdieu (1964), who used it to explain how elite families transmit their dominant positions through the generations. Putman (1995) and more recently Schneider (2009) re-introduced it in the non-profit context; these authors define social capital as a reciprocal, enforceable trust that enables these organizations to gain access to resources. Part of the trust that stakeholders develop for non-profit organizations comes from the managerial skills they use to efficiently achieve their mission, but more and more scholars also emphasize their ability to preserve their grassroots (eg. Batliwala, 2002; Eliasoph 2009; Graddy & Wang, 2009; Sobeck, Agius & Mayers, 2007). Tisdell’s model (2009) actually shows that the relationship between technical efficiency and fundraising is at first very strong, but later tends to decline and even become negative. This is an Icarus Paradox (Miller, 1986) where efficiency can be a source of success, but too much of it may down the line be negatively perceived as a loss of grassroots base. Non-profit organizations can be seen as acting, by the people, for the people and with the people. This community base stands as an organizationally embedded non-transferable specific resource (Sharma, 2009)4 constituting a competitive advantage (Penrose, 1959). This connection represents something that the market or states would like to share with non-profit organizations. This access can be negotiated. This margin of negotiation can also be found in Crozier and Freidberg (1977), where they consider that actors can find within the system possibilities to serve their own purposes. The institutional entrepreneur theory goes one step further: not only does it consider the possibility for actors to achieve their own goals in a given system; it foresees the eventuality of even changing the latter. Institutional entrepreneurship may be new institutionalism’s second wind. It complements the influence of social systems on individuals with its reverse. This reverse enables the theory to think endogenous change. Di Maggio introduced the concept of institutional entrepreneurship in 1988. More recently Battlilana, et al. (2009) in the annals of the Academy of Management gave an overview of this approach. For them, institutional entrepreneurship reintroduces agency theory in a positive manner: nonconformist, at times disobedient actors may be the only ones able to challenge social institutions. According to Watzlavick’s lexic of change (1974), institutional entrepreneurs do 4

Sharma (2009) about family business.

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not limit themselves to finding opportunities to realise their vision within a given system (1st order change), they change the system in order to create fundamentally new possibilities (2nd order change). Creating a new system may sometimes be just a side effect of non-profit action, but for some actors creating new values and new patterns of behavior may be part of the program (Cooperrider & Passmore, 1991).

SOCIAL ENTRENEURIAL APPROACH OF NPO

Com. Milit.

Organisation Professionnal

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Figure 2. The social entrepreneurship approach to non-profit organizations.

Society State Market Social entrepreneur organizations

Traditional Non profit organizations

Nonprofit sector

Figure 3. The place of traditional non-profit organizations and social entrepreneurship in society.

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Crozier and Friedberg (1977) explained how actors could exploit incertitude within the system such as the absence of rules relating to a given point or contradictory rules, to achieve their own purposes. From an institutional entrepreneur’s perspective, these indeterminate states become a form of “decrystallization” (Lewin, 1952) or “confusion” (Watzlavick, 1974) propitious to a change in the system. The 2008 crisis was about economic disequilibrium, but also about people’s doubts about the relevance of the system that globalization has created over the last decade and governments hesitations about the part they should play. This climate of confusion and hesitation may serve as an opportunity for institutional non-profit entrepreneurs to advocate and promote changes for a more ethical form of governance.

5. AN OPPORTUNITY TO COME BACK AS INSTITUTIONAL ENTREPRENEUR

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The 2008 crisis could represent a unique opportunity for the non-profit sector to become part of what could be a new globalized ethical governance. According to Battilana, et al. (2009), the demand is there: “with most countries facing a major financial and economic crisis (…), the demand for institutional change is increasing among organization members and citizens the world over.” These authors add “the question of how to reform existing institutions has assumed greater urgency”. The question is as much about the change that has to be achieved as how to start it. People have demanded that their governments address this problem and they are now turning to the non-profit sector. What kind of contribution can it bring? More than their ability to efficiently compete with businesses, non-profit organizations seem, today, to be valued for their vision, their innovation and, to a certain extent, for their ability to remain a counter power. Frame 1. B. Obama about the crisis “We meet at a moment of great uncertainty for America. The economic crisis we face is the worst since the Great Depression. Markets across the globe have become increasingly unstable (…)I know these are difficult times. I know folks are worried. (…) this crisis has reminded us that without a watchful eye, the market can spin out of control. (…)We've lived through an era of easy money, in which we were allowed and even encouraged to spend without limits; to borrow instead of save. (…) It's a serious challenge. But we can do it if we act now, and if we act as one nation.” Lake Worth, Florida, October 21, 2008

A crisis is classically defined as a situation reaching a critical phase of instability, an unstable or crucial time, or state of affairs with the distinct possibility of a highly undesirable outcome. Crisis is the turning point for better or worse, in which a decisive change is impending; an emotionally significant event or radical change of status5 . The 2008 crisis corresponds without a doubt to this definition. Beyond economic recession, this crisis is a socio-political turning point, where the market institution is challenged. Its mechanism and 5

Wesbter dictionary, 2010.

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underlying values are questioned (Frame 1). This loss of faith can be interpreted as Lewin’s de-crystallization (1975): what once seemed absolutely obvious is now questioned. Using Watzlavick’s vocabulary (1974) the time is characterized by doubt and confusion about the necessity of carrying on the same way. People seek alternatives. They call for real change, not minor change that would still be, using Watzlavick’s words, “more of the same thing”. Obama’s speech just like those of other leaders addressed this call for change.

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Frame 2. B. Obama about the government and the market “I realize you're cynical and fed up with politics. I understand that you're disappointed and even angry with your leaders. You have every right to be. (…) It will take a new direction. It will take new leadership in Washington. Finally, this crisis has taught us that we cannot have a sound economy with a dysfunctional financial system. We passed a financial rescue plan that has the promise to help stabilize the financial system, but only if we act quickly, effectively and aggressively. We can bring a new era of responsibility and accountability to Wall Street and to Washington. We can put in place common-sense regulations to prevent a crisis like this from ever happening again.” Abington, Pennsylvania, October 3, 2008

Beyond the global market system itself, one of the institutions that has been challenged is government and its ability to regulate the latter (Frame 2). Obama speaks about common sense regulations. The question is two fold: is regulation relevant? Governments from all over the world have asserted their intention to introduce regulation. The next question is about their capacity to enforce this regulation. A lot has been said about the limits of government action in global market system, but new voices have come to “discuss how government ideology and capability affect a broad range of organizational and managerial outcomes” (Pearce, Dibble & Klein, 2009). Governments are “bodies that develop and administer the laws, policies and regulations for a nation and a community” (Pearce, et al., 2009). If governments do have the “capability” to bring about change, it now needs new “ideologies”, i.e. new values and new ideas to inspire and orientate this movement. Frame 3. B. Obama about the government’s action on the market “Yesterday, the President announced that he would ask Congress in the FY2010 budget to provide $50 million in seed capital for his Social Innovation Fund, fulfilling a campaign pledge. The Fund will identify the most promising, results-oriented non-profit programs and expand their reach throughout the country. (…) This is a dramatically different way for the government to do business – and it reflects the President’s new governing approach -- finding and scaling the best social innovations; partnering with those who are leading change in their communities; and creating a policy environment for all these innovations to thrive. (…) President Obama has said that this is an "all-hands-on-deck" moment and that government cannot solve our nation’s problems alone. He has said that it is critical to partner with citizens, non-profits, social entrepreneurs, foundations and corporations to make progress on our nation’s great challenges. The President has also talked about finding new solutions to old problems, and this is where the social innovation can play a unique role.” The White House Blog, 6th May 2009

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Obama’s project (frame 3) is part of a new global move by governments toward the nonprofit sector. This bridge building aims to connect with grassroots civil society, but political leaders are also looking for new ideas and values to feed their new political vision of a globalized ethical governance. After decades of aiming to sustain global market development and adapting all possible activities to this framework, governments are now seeking for alternative innovations able to reduce inequality, exclusion, unemployment, poverty and illness. After a decade of promoting social entrepreneurship in order to find more efficient non-profit organizations to subcontract with, governments now seem to be taking a new interest in the ideas of equality and solidarity, traditionally promoted by the sector. Governments also need non-profit organizations’ force of conviction. They are looking for an ally, a counter power able to say what they cannot say, able to do what they would not dare to do. For instance, Obama’s health insurance reform has found decisive support and help from the US non-profit sector. This new institutional approach of the non-profit sector is based on a paradox: governments may consider financially helping non-profit organizations advocating ideas opposed to their own. The decision to support a venture would be based on innovation, as much as productivity. The aim would be to feed democracy with alternative stakeholders promoting new points of view. Socio-diversity as such would be a first ethical remedy to the standardisation often induced by the global market.

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CONCLUSION In 2008, the global crisis came to question the sustainability of a mode of development exclusively based on the market sector. As a result, the world is now calling for a new globalized ethical form of governance. This is unique opportunity for the non-profit sector to make a new decisive socio-political contribution. However, some of these organizations have traditionally been very reluctant to work with governments. They often perceive themselves as sentinels against dictatorial excess. They have always considered that independence was a necessary condition for exercising this role. Should they participate in this new global ethical governance? The uniqueness of the non-profit sector lies in its socio-political dimension. In fact, this has been the forgotten dimension of social entrepreneurship. In our opinion, nonprofit organisations, at least in part, do have a vocation to play the part of institutional entrepreneurs. Alterglobalization was supposed to implement this principle, but, to date, because of its divisions and lack of coordination, has not succeeded. Considering, this failure, a new global ethical form of governance may represent a unique opportunity for NPOs to assert themselves as institutional entrepreneurs.

REFERENCES Anheier, H.K. (2005). Non-profit organizations. New-York, NY: Rootledge. Austin, J., Stevenson, H., & Wei-Skillern, J. (2006). Social and commercial entrepreneurship. Entrepreneurship Theory and Practice, 30 (1), 1-22. Batliwala, S. (2002). Grassroots movements as transnational actors. Voluntas, 13, 393-409.

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Battilana, J., Laca, B., & Boxenbaum, E. (2009). How actors change institutions. Academy of Management Annals, 3 (1), 67-107. Becker, H. S. (1982). Culture: A Sociological View. Yale Review, 71 (4): 513–27. Boezeman, E.J., & Ellemers, N. (2007). Volunteering for charity: Pride, respect, and the commitment of volunteers. Journal of Applied Psychology, 92 (3), 771-785. Boschee, J. (2001). Eight Basic principles for Non-profit Entrepreneurs. Non-profit World, 19 (4), 15-18. Bourdieu, P., & Passeron, J.C. (1964). Les Héritiers. Les étudiants et la culture. Minuit, 1964 Brunham, K. (2002). What Skills Will Non-profit Leaders Need in the Future? Non-profit World, 20 (3), 33-35. CCSE - Canadian Center for Social Entrepreneurship. (2001). Social Entrepreneurship. Discussion Paper, 1. Cooperrider, D.L., & Passmore, W.A. (1991). The Organization Dimension of Global Change. Human Relation, 44 (8), 763-788. Crozier, M., & Friedberg, G.E. (1977). L'acteur et le système. Paris: Le Seuil. Dees, J.J. (1998). The meaning of social entrepreneurship. Kauffman Foundation, Accessed 30 March 2010, http://www.fntc.info/files/documents DiMaggio, P. (1988). Interest and Agency in Institutional Theory, in L. Zucker (Ed.), Institutional. Patterns and Organizations: Culture and Environments. Cambridge MA: Ballinger. DiMaggio, P.J., & Powell, W.W. (1983). The Iron Cage Revisited. American Sociological Review, 48, 147-160. Durkheim, E. (1915). The Elementary Forms of the Religious Life. New York: Free Press. Eisenberg, P. (2000). The Non-profit Sector in a Changing World. Non-profit and Voluntary Sector Quarterly, 29, 325-330. Eliasoph, N. (2009). Top-down civic projects are not grassroots associations. Voluntas, 20, 291-308. Emerson, R. (1962). Power-Dependance Relations, US Sociological Review, 27 (1), 31-41. Freeman, R.E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman. Gartner, W.B. (1990). What are we talking about when we talk about entrepreneurship? Journal of Business Venturing, 5 (1), 15-28. Graddy, E., & Wang, L. (2009). Community foundation development and social capital. Nonprofit and Voluntary Sector Quarterly, 38, 392-412. Herman, R. (1994). The handbook of non-profit leadership and management. San Francisco: Jossey-Bass. Hibbert, S.A., Hogg, G., & Quinn, T. (2002). Consumer response to social entrepreneurship. International Journal of Non-profit and Voluntary Sector Marketing, 7 (3), 288-301. Jamison, I. B. (2003). Turnover and retention among volunteers in human service agencies. Review of Public Personnel Administration, 23 (2), 114-132. Johnson, S. (2000). Literature review on social entrepreneurship. Canadian Centre for Social Entrepreneurship, University of Alberta. Kanter, R.M. (1968). Commitment and social organization mechanisms in utopian communities. American Sociological Review, 33, 499-517. Kanter, R.M., & Summers, D.V., Doing well while doing good, in W.W. Powell (Ed.), The Non-profit Sector. A Research Handbook. Yale: University Press. Lewin, K., (1952). Field Theory in Social Science, New-York, NY:Harper.

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Miller, D. (1992). The Icarus paradox. New-York, NY: Harper Business. Mintzberg, H., Molz, R., Rauflet, E., Sloan, P., Abdallah, C., Bercuvitz, R., & Tzeng C.H. (2005). The Invisible World of Association, Leader to Leader, 36. Mintzberg, H. (1983). Power in and around organizations. Englewood Cliffs, N.J.: PrenticeHall. NCCS. (2007). Research on the non-profit sector. National Centre For Charity Statistics, Accessed 30th March 2010, http://nccs.urban.org Nicholson-Crotty, J. 2009. The Stages and Strategies of Advocacy Among Non-profit Reproductive Health Providers, Non-profit and Voluntary Sector Quarterly, online. Pearce, J.L., Dibble, R., & Klein, K. (2009). The effects of governments on management and organization. Academy of Management Annals, 3, 503-541. Penrose, E.T. (1959). The Theory of the Growth of the Firm. New York: Wiley. Powell, W.W. (2007). The New Institutionalis. In The International Encyclopedia of Organization Studies. Thousand Oaks Ca: Sage Publishers Prabhu, G.N. (1999). Social entrepreneurial leadership. Career Development International, 4(3), 140-147. Putnam, R.D. (1995). Bowling alone: america's declining social capital. Journal of Democracy 6 (1), 65-78. Rothschild, J., & Stephenson, M.J. (2009). The meaning of democracy in non-profit and community organizations. American Behavioral Scientist, 52, 800-806. Salamon, L.M., & Anheier, H.K. (1997). Defining the non-profit sector. Manchester, UK: University Press. Schneider, J.A. (2009). Organizational Social Capital and Non-profits. Non-profit and Voluntary Sector Quarterly, 38 (4), 643-662. Sharma, P. (2008). Familiness: Capital stocks and flows between family and business. Entrepreneurship Theory & Practice. Supplementary Readings November, 971-983. Simon, J.S. (2009). The five life stages of non-profit organizations. Saint-Paul, MN: Wilder Publication. Sobeck, J., Agius, E., & Mayers, V.N. (2007). Supporting and sustaining grassroots youth organizations. Voluntas, 18, 17-33. Strichman, N., Bickel W.E., & Marshood, F. (2008). Adaptive capacity in Israely social change non-profits. Non-profit and Voluntary Sector Quarterly, 37, 224-238. Sulek, M. (2009). On the modern meaning of philantropia. Non-profit and Voluntary Sector Quarterly, on line. Tisdell, C.A. (2009). Institutional Economics and the Behaviour of Conservation Organizations: Implications for Biodiversity Conservation. In K.N. Ninan (Ed.), Conserving and valuing ecosystem Services and Biodiversity. London: Earthscan. Townsend, D.M., & Hart, T.A. (2008). Perceived institutional ambiguity and the choice of organizational form in social entrepreneurial ventures, Entrepreneurship Theory and Practice, 32 (4), 685-700. Valéau, P. (2009). International Volunteering and Alter-Globalisation: A Road to Trust and Commitment. In J-M. Aurifeille, C.J. Medlin, & C.A. Tisdell (Eds), Globalization and Market Expension. 149-166, New-York, NY: Nova Publisher Valéau, P., & Sharma, P. (2010). Social responsability in non-profit organizations, Social responsability, entrepreneurship and common good, ESC Rennes.

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Van Vuuren, M., de Jong, M., & Seydel, E. (2008). Commitment with or without a stick of paid work. European Journal of Work and Organizational Psychology, 17, 315–326. Wallace, S.L. (1999). Social entrepreneurship: the role of social purpose enterprises in facilitating community economic development, Journal of Developmental Entrepreneurship, 4 (2), 153-175. Watzlavick, P., J. Weakland, R. Fisch. D. (1974). Change, Principles of Problems Formation and Problem Resolution. New-York, NY: Norton.

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In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

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Chapter 7

DISSOCIATED GOVERNANCE Jérôme-Benjamin Gardody FACIREM, University of La Reunion, France

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ABSTRACT Due to recent economic and ethical scandals, in particular those revealed by the 2008 crisis, globalisation of investments will require credible management strategies able to reassure investors. Many traditional studies of corporate governance highlight the necessity for the board of directors to discipline their CEO, using incentive and direct supervision mechanisms. The financial scandals that continue to shake the economic sphere show that this approach has not proven to be effective. We have to question the classical paradigm that considers the CEO to be a passive actor. Opportunistic managerial behaviors are not the only causes of organisational abuses. Indeed, shareholders can ruin organisational value with short-term pressure. Our main hypothesis is that power and counter power are at the same time sources of acts and interactional constraints, creating a dynamic relational field between the shareholder and the CEO. Thus, a double agency relationship is proposed, specifically based on a double relationship of control between the Chairman of the Board and his CEO.

1. INTRODUCTION In the context of the global crisis, the return in confidence of investors with respect to companies will be influenced by an analysis of the system of corporate governance. Using a framework of dissociated corporate governance, which allows for a separation between the function of Chairman of the Board and his Chief Executive Officer (CEO), this chapter contributes to the elaboration of an efficient and broadly applicable method that deals with the inter-relationships and dysfunctions between these two parties. Agency theory (Jensen & Meckling, 1976) highlights the conflict of interests between the two parties, by integrating a perspective of management in conflict with the shareholders’

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expectations (Berle & Means, 1932). Agency theory also proposes a disciplinary dimension to lead and determine the Chief Executive Officer’s behavior through incentive and surveillance mechanisms. Instead of this mechanical and unilateral dimension, this chapter suggests replacing the analysis with a dynamic relational field, sensitive to the interpersonal interactions that seem more realistic between the CEO and the Chairman of the Board. According to this framework, we could support the idea that the manager will not perpetually undergo the regulatory mechanisms of governance systems, but could establish a dialectical relationship. Within this context, the notions of power and counter power appear as fundamental elements structuring the relationships by determining the potential of action of each actor. Indeed, it is through direct power that the shareholders can guarantee the efficiency of their governance system and by their counter power that the CEO removes himself from hierarchical domination. Second, we will adopt the original perspective of a double agency relationship in which each party could pursue opportunistic strategies to maximise their interests. Furthermore, while questioning the "classical" approaches to the theory of corporate governance, we will suggest a paradigm opening towards a relationship of double control by using both power and counter power. We will begin, in the first part, with an overview of the theoretical contributions of the main theories of corporate governance. This part highlights the restrictive vision of disciplinary approaches, exclusively turned to the research on the omniscience of the shareholders. The second part will analyze the fundamental role of power that ensures the efficiency of the control of a manager’s behavior, while emphasising the fact that he will not remain deprived thanks to his counter power. In the third part, we will assert the individual and organisational impact of a double agency relationship in a dynamic context sensitive to interactions.

2. THEORETICAL APPROACH OF CORPORATE GOVERNANCE 2.1. Agency Theory The conceptual framework of this chapter begins with agency theory, which is the essential doctrine concerning relationships in corporate governance. Agency was defined by Jensen and Meckling (1976), as a contract by which a person “the principal” engages another person “the agent” to execute on his behalf a certain task. Indeed, building from the transactional theory of action highlighting the partnership nature of the economy (Dewey & Bentley 1949), the structure of dissociated governance joins a logic separating the shareholders from those making effectively the decisions (CEO) (Milgrom & Roberts, 1992). It is in this context that we focus on the established relationships between a chairman of the board and his manager. As supported in the theory of property rights (Alchian & Demsetz, 1972), this decentralised allocation of decision rights and management (Fama & Jensen 1983), does not come along, with fructus rights, it then appears as a source of conflict due to a disintegration of interests (Parrat, 2003). Mintzberg (1986) illustrated these contributions, by describing the opposition between the objectives of organisational growth by the CEO, on one side, and the

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financial objectives of the shareholders on the other side. Berle and Means (1932) studied the effects of these divergences and concluded that there would be a permanent conflict between management and shareholders. Indeed, we are in a situation within which agents will have made a choice between maximising their own interests and the obligation to honor their contractual commitments. Adopting an individualistic view (Hirsch, Friedman & Koza 1990), agency theory brings a partial answer to this dilemma, by supporting the hypothesis that the agent (CEO) could adopt opportunistic behavior (Jensen & Meckling, 1976; Charreaux, Couret, Joffre & Alii, 1987). Therefore, in the same point of view as the theory of transaction costs (Williamson 1988), agency theory proposes that these conflicting relationships will incur costs, so altering the possible gains from cooperation (Jensen & Meckling, 1976). These costs are a partial result of the difficulties to perfectly control information asymmetry and the inability to write complete contracts (Mintzberg, 1986). Turning our analysis more particularly to the postcontractual situation concerning the respect of contractual obligations, agency theory directs us to the question of the mechanisms that allow shareholders to protect themselves from the behavior of the manager. Some approaches reduce or remove the uncertainties by suggesting alternatives that maintain the relationship of contractual cooperation (Williamson, 1988). These alternatives are now addressed.

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2.2. Shareholder and Stakeholder Dimensions of Corporate Governance: Disciplinary Solutions Agency theory, as defined by Jensen and Meckling (1976), builds the balance of the initial relationship on the “contractual” concept. This contract is defined as a deliberate and autonomous agreement of wills, in the sense of Reynaud (1989), so creating the rights and the obligations of each party. This balance is arrived at in theory by the mutual maximisation of the utility functions that satisfy both parties (Charreaux & Pitol-Belin, 1985). But this approach, offering an optimal theoretical situation, does not appear permanent and does not resolve the post-contractual problems concerning doubts about opportunistic behavior. As a result, the main approaches to corporate governance joined a paradigm of efficiency founded on disciplinary models of regulation (Charreaux, 1998). Theories of corporate governance transferred their attention from the way the CEO governs, towards the way they are governed (Charreaux, 1998). In this context, control was considered "easy to verify if everything went according to the adopted program and to the given orders” (Fayol, 1916). In corporate governance, control represents the ability to impose behavior and attitudes, to contain the actions of the agent (Maati, 1999). In this perspective of control, the perspectives of the shareholder and stakeholder are at stake. The shareholder dimension supports the role played by financial investment, in the production of organisational values and in the viability of the company. The shareholder objective is to save factors of production (Shleifer & Vishny, 1997). Indeed, based on the assumption that shareholders would be particularly vulnerable to the opportunism of the managers (Wiliamson, 1988), this point of view preserves exclusively the financial investment, by establishing the mechanisms constraining the CEO and so maximising the interests of the principal (Shleifer & Vishny, 1997). This supports the idea that only the

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disciplinary mechanisms align the interests of the agent with those of the principal. According to Fama (1980), the system of corporate governance would include both “internal” mechanisms into the company, set up deliberately by the shareholders, and “external” mechanisms from the spontaneous functioning of markets. Within this vision, we will retain voluntarily as control mechanisms: direct supervision of CEO from the board of directors. This choice being motivated by the growing intention of public authorities to strengthen the control of managers, in particular by recommending a greater activism of the shareholder (Charreaux, 1998). Remembering the structural description of the allocation of the decisionmaking rights inside the firm (Fama & Jensen, 1983), we define as mechanisms of direct supervision any device with the objective to ratify the initiatives of the manager and to verify their good implementation, in other words to observe regularly the management of the company. These mechanisms can take several forms (e.g. office of experts, internal or external audit, direct supervision by administrators of board of directors), any of which may apply penalties. Importing a different paradigm to the previous approach, which is considered too restrictive (Rouleau, 2007), the stakeholder dimension of corporate governance supports the idea of creation of organisational values with a synergic character (Charreaux, 1998). Indeed, the notion of properties is redefined, extending this status to all participants of the productive system including the CEO (Hill & Jones, 1992). Attention is now focused on all participants and so Castanias and Helfat (1991) considered the importance of the managerial contribution by inverting the relationship. The relationship is considered a reciprocal relationship between the manager (becoming the principal) and the chairman of board of directors (becoming the agent) according to which, the first rents his managerial capacities to the second, thus introducing a dual agency relationship (Charreaux, 1998). Following the contributions of Jensen and Meckling (1976) revealing that every employee, excluded from the status of “residual creditor” should rather use a part of the wealth of the firm for his personal satisfactions, the limitation of the opportunistic behavior would be situated at the level of the distribution of incomes. In this frame, the use of control through incentive mechanisms would appear as a solution integrating a logic privileging the individual relationship to the organisation by looking for a level of congruence with the psychological and material needs of the manager (Maslow, 1954; Argyris, 1964). In other words, the reduction of opportunistic behavior would be relevant if the agent obtains, a part of the rights of decisions and organisational values produced (e.g. Bonuses, Shares) (Charreaux, 2000). Undeniable conceptual differences exist between the shareholder and stakeholder approaches, particularly as regards the origin of the creation of organisational values and the description of the systems of governance for limiting opportunistic behavior. Despite these differences, they offer both a post-contractual disciplinary approach insofar as it is recommended to shareholders to control or to incite the manager in order to secure the gains from the initial agreement. Furthermore, this relational analysis underlies a mechanical and unilateral dimension within which the shareholder, the single actor, would use regulatory devices in order to determine choices and behavior of the agent.

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3. DISSOCIATED GOVERNANCE: AN APPROACH IN TERMS OF POWER AND COUNTER-POWER In this part, we will use a perspective that considers power as an essential element in the understanding of systems of governance. In other words, we will support the hypothesis that the study of relationships between shareholders and manager could be analyzed in terms of power. So Crozier (1977) and Louart (1993) examined this concept of such a mode of fundamental exchange between the individuals in their interactions.

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3.1. Power: An Essential Concept of the Disciplinary Approach of the Governance There are various definitions of power ensuing from various paradigms. Within the disciplinary dimension, it seems to us pertinent to approach this concept by its manifestations, particularly the ability to influence and to control the behavior of others (Crozier, 1977). In this sense, we can take Dahl’s definition (1957): “we have power over someone else to the extent that we can get that person to do something that otherwise they would not want to do”. Following these contributions, power would have an instrumental dimension, becoming a tool for an actor to reach its objectives. This first approach would coincide exactly with the mechanical logic of the systems of governance described previously. This reasoning also underlies an unbalanced relational perspective (Giasson, 1977). Indeed, an individual can be without power in absolute terms, but still powerful to another person (Rojot, 2006). This relative nature of power means it is necessary to wonder about the origin of disciplinary power. Referring to agency theory expressing a situation of contractual delegation between principals and agents, the initiated relationship would be hierarchical. Following this description, through this link of subordination, we could distinguish the concept of authority as the first organisational source of power. Indeed, authority will offer the possibility of using prerogatives of selection/revocation, coercion/reward and control (Mintzberg, 1986). Interpreted according to this point of view, the relationship of power could be analyzed as being exclusively imposed. Nevertheless, Weber (1922) approached this hierarchical relationship under a different angle, describing it rather as the capacity to make orders respected voluntarily, by introducing the term of legitimacy. It is explicitly understood that the simple hierarchical position would not be enough to determine the behavior of the subordinate, because the authority must be consented. In this sense, one of the conditions guaranteeing the efficiency of the power relationship would be that at the time of making the decision to act according to the order, the subordinate considers that it is not incompatible with his personal interest (Barnard, 1938). The relationship of power which seemed to be at first imposed and constraining, appears now as an "exchange" taking into account the consent of the subordinate. Blau (1964) deepened this approach and supported the idea that the immediate superior would have a potential of power only, if he holds desired resources for his subordinates (e.g. financial, intellectual, psychological). These desired resources are not exclusively material, with French and Raven (1959) integrating into their analysis other systems of influence connected to the power of expertise, resulting from the possession of specialised skills and knowledge, and to the referent power characterising informal and

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personal types of power. This analysis seems essential in the sense that it shows in the background, the concept of dependency that represents the basis of a power relationship. It is often supported that power is inseparable from the relationship of dependence. Thus, “the power of A over B is directly tied to the dependence of B relative to A" (Emerson, 1962). This concept being, firstly proportional to the value allocated to the resources brought into the game and secondly inversely proportional to the availability of those resources outside the relationship. Despite an opening of the field of understanding of a power relationship from an imposed approach towards a consented dimension, these contributions remain in an instrumental and unilateral perspective insofar as the manager is analyzed as a passive actor governed by the relationship of dependency.

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3.2. From Power to Counter Power The dimensions of power discussed above do not seem to us unalterable and becomes more complex when we integrate recent research introducing explicitly the strategy of the CEO. Introducing the assumption of active behavior from the manager leads eventuality to a theoretical transition towards a paradigm limiting the previous unilateral conceptions. In this approach, the manager will be represented, as an influence holder, with personal needs to complete (Mintzberg, 1986). Therefore, the idea develops that there is no social system fully settled or controlled (Crozier & Friedberg, 1977). To work on these assumptions we can suppose that the managers will be able to adopt behavior neutralising the regulatory mechanisms (Charreaux, 1996). We will refer here to actions that help them to maximise their personal goals (e.g. financial, physical, psychological), as supported by the theory of entrenchment (Charreaux, 1996). This behavior will be possible through the emergence of real counter power. So we will integrate a new dimension, the reciprocity of the relationship of power. Crozier (1977) introduced this notion by affirming that in these relationships, there are inequalities without which one person is totally deprived in front of another person. That is why we will identify the concept of counter power, as such a power raising against an established authority. In other words, its appearance seems to be dependent on the existence beforehand of an unbalanced power relationship. So, Etzioni (1964) affirms that every power, as soon as it is considered as unfairly undergone, arouses strengths of correction or reversal compensating the situation. What are the sources of these counter-powers? Referring to the contributions of Dewey and Bentley (1949) concerning the partnership nature of economy and Emerson’s research (1962) describing the relationships between power and dependence, we can integrate the concept of interdependence as allowing the expression of the power of each person, in a dyadic relationship (Kim & Fragale, 2005). In fact, Pastor and Bréard (2007) supported the following thesis: "you depend on others, and vice versa". In this chapter, interdependence illustrates the meeting of different actors who take parts voluntarily in a situation of mutual dependence, in order to take personal advantages of the association. It is in this frame, that Crozier and Friedberg (1977) imported the original idea of zones of uncertainty. These are areas where the activities and their coordination are not totally defined, in other words where the formal rules are insufficient (Crozier, 1977). Some positions provide particular control of

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these sources: mastery of specific expert knowledge, the control of information and communication resources, and organisational rules. How do the counter powers act? Hirschman (1970) found that a person in a system has two fundamental modes of protest: “Exit” or stay and try hard to change something, “Voice”. We will prefer to focus on the study of the second as this illustrates more the active character of the manager. In this sense Charreaux (1996) defined entrenchment, as all actions that the manager can undertake in order to increase the dependence of the shareholders and his own discretionary space. Initially entrenchment can be made through idiosyncratic investments, supposing that by realising investments specific to them, the manager reduces the risk of being replaced (Shleifer & Vishny 1989). Indeed, in this frame, their eviction would impact the viability of the organisation. In another perspective, entrenchment is achieved by holding important information (Stiglitz & Edlin, 1992), which will permit establishment of power (Pfeffer & Salancik, 1978). The manager is a central actor, through whom all information flows (Mintzberg, 1986). The manager has the possibility to increase the situations of information asymmetry (Alexandre & Paquerot, 2000). Another mechanism of entrenchment is enabled by the relational networks (i.e. formal and informal, external and internal) that managers develop (Charreaux, 1997). These relationships are based on implicit or explicit contracts with different actors taking part in the life of the organisation. The CEO will watch over and maintain these relationship agreements based on his presence at the head of the firm. In other words managers can build social networks of relationships by granting advantages, bonuses or by promising plentiful promotions. Counter power is largely associated with the control of fundamental idiosyncratic resources. We can refer in this case to Pfeffer’s contributions (1981), explaining that power belongs to the persons who bring an indispensable resource to the functioning of the organisation. Thus, the CEO should rather manage areas of uncertainty in order to become an irreplaceable factor of production, as well as in the intellectual, financial and relational domains.

4. CORPORATE GOVERNANCE: A DYNAMIC RELATONSHIP FIELD 4.1. Towards a Change of Paradigm Traditional approaches of governance in a disciplinary perspective seem to be questioned by these previous contributions describing the active behavior of the CEO. It leads us then towards an analysis approaching the agency relationship from a different more dynamic angle. Before developing this new angle, it seems necessary to illustrate the potential limits of the exclusive use of disciplinary mechanisms. Indeed these systems of control do not seem optimal, because of dysfunction as evident in these last few years, which reveal the negative results of these methods. Supposing that the mission of control of the board of directors is perfectly effective, being able to discipline the manager. One of the consequences would be that the requirements established by the shareholder would be at the center of the concerns of the agent. Indeed, the shareholders will transfer their wishes of short-term return and so lead managers to adopt behavior that will quickly increase the stock exchange value. This situation is not necessarily

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synonymous with performance (Aglietta, 2000). These requirements can also be made to the detriment of the viability and growth of the company (Mintzberg, 1986). In addition, this shareholder philosophy may also incite the manager to divert data, when results will not allow him to keep the trust of the principal. Similarly, a too rigid control could, as we saw previously, result in feelings of injustice and protest, leading the agent to adopt strategies for restoring relationships. But these disciplinary lapses are not exclusive to the mechanisms of direct supervision, and also result from the consequences of incentives measures. In this context, it is possible to suppose that the manager in the same way as the shareholders would be also induced to defend their interests through the valorisation of their bonus or shares. So the agent can adopt shareholder reasoning in which financial logic would prevail over the industrial logic, with the eventuality of the same negative endings seen previously (Aglietta, 2000). Furthermore, the exclusive use of these incentive measures could induce the manager to take advantage of their zones of uncertainty to extend their discretionary space and their personal rewards. This brief presentation illustrating the limits of the classical precepts of corporate governance represents indubitably the introduction of a new paradigm. The first paradigmatic modification conceives a situation where shareholders and manager are considered as active individuals, fitted to use their power. This interrelational perspective would allow them to integrate a dynamic game concept (Crozier & Friedberg, 1977), defining a situation where the behavior of an actor would be affected by the actions of another actor. In this way, it is implied that everyone will try to force the other person to satisfy his own requirements and escape the constraints through the systematic protection of his own zone of uncertainty (Crozier & Friedberg, 1977). We can suppose that the success, or not, of regulating systems will be sensitive to these interactions. The second modification, ensuing from the previous one, results from the perspective of a double agency relationship, not only in the sense of property rights as raised by the stakeholder approach, but focused on the eventuality of a reciprocal non- conforming behavior. This double vision of the agency problem seems to us original insofar as the eventuality of this deviance was already acquired as regards the CEO, but it was different concerning shareholders. In this sense, we should define as shareholder opportunism, any act or decision introduced by them privileging the financial and stock exchange value to the detriment of the other stakeholders of the company. Integrating the “positive” dimension of agency theory, developing the idea that the systems of corporate governance should evolve when they are no longer, it seems necessary to open the classical analysis to these new contributions (Charreaux, 1997).

4.2. A Situation of Balance Sensitive to the Interactions While the disciplinary approaches, in the name of organisational performance, had their objective to determine the acts of the CEO, we will try, in our dynamic context, to end in a relational balance representing a situation within which every actor could protect himself against opportunistic attitudes of the other party. How to perpetuate this situation considering the individualism and the potential power of every actor is an issue. A solution is to import the “normative” approach of agency theory, an element of response; the reciprocity of control being made at the same time for the benefit of shareholders but also of the manager. Before

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developing more finely this perspective at an organisational level, we will try to demonstrate at first the relevance of this reciprocal control from the individual point of view. In this first stage we will try to demonstrate, by using contributions from the theory of games, the utility of each party to use its power or its counter power in a control perspective. Thus we propose the following grid (see Figure 1). In the case of a “Perfect Agreement”, where neither of the parties uses power, the relationship would take the shape of a cooperation within which the original contractual configuration would be sufficient to guarantee the respect of the commitments undertaken. This situation is based on the notion of agreement that would allow at the end, a balance satisfying the objectives of each. It is an uncertain relationship, because the possibility exists that an individual can act in an opportunistic way, so the other party may want to protect itself (Parrat, 1999). The case of “Managerial Control Domination”, within which the board of directors uses very little of its disciplinary powers, appears as unbalanced because this is a situation facilitating the use of counter power by the manager. Nevertheless, it could be possible that shareholders are aware of non-conforming acts, but that they do not voluntarily intervene because the costs to supervise the CEO would turn out to be higher than the incurred losses. In another perspective, this unbalanced situation could result from actions of entrenchment and neutralisation by the manager, making the board of directors passive and dependent. Whatever the reason, this type of shareholder behavior seems really dangerous because it would also be synonymous with perpetuation and growth of opportunistic attitudes. In the case of “Shareholder Control Domination”, the CEO applies counter power to a lesser degree, with the board of directors making effective use of its regulatory mechanisms. As seen previously, this kind of situation may be harmful to the manager, because it can lead to short term choices from the shareholders damaging managerial and organisational values. In addition, this unbalanced relationship could, as discussed previously, incite the use of counter power to answer a situation of injustice perceived by the CEO. In the case of “Mutual Control”, the situation can be compared to a chessboard on which every party resorts to their own strategy. So in this context, each actor can be in an offensive or defensive strategy respectively, by seizing opportunities to improve their position and by their capacity to preserve their discretionary space (Crozier & Friedberg, 1977). Whatever the situation, the actors should adopt a “dominant” strategy allowing them to maximise their position for each possible choice of their counterpart (Penard, 2004). Indeed, leaving aside the “Perfect Agreement” appearing conflicting with the behavioral hypotheses of agency theory, the board of directors will have an interest in the case of “Managerial Control Domination”, to use its authority to protect itself against the opportunistic behavior of the CEO, and to keep him disciplined in the case of “Shareholder Control Domination”. As regards the manager, in the case of “Managerial Control Domination”, he should adopt behavior maximising his interests and in the case of “Shareholder Control Domination”, use his zones of uncertainty and counter power, in order to get free of shareholder pressure. We thus see, whatever the perspective (offensive or defensive), each actor should rather use the power by incorporating constraints from the other actor. It is within this relational typology that will appear the concept of mutual control.

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Figure 4. Various power relationships between the chairman and the CEO.

Our chapter now turns toward the impact of this reciprocal relationship of control on organisational performance. We will approach a relational balance in a situation between two persons, allowing the viability of the company and the organisational value. Already some research has shown that the use of power and counter power, even if allowing the actors to adopt opportunistic behavior, can have no harmful consequences for the organisation and its performances. So a non-conforming attitude can maximise the utility of an actor, while being a source of value for the company. In this frame we can take the contributions of Castanias and Helfat (1992) showing that certain practices of entrenchment increased the growth of the company. Nevertheless, the convergence is not guaranteed (Pige, 1998). However, the double relationship of control would allow, as discussed previously, neutralisation of the instigator of non-conforming behavior whatever their origins. Furthermore, it is a question of not repeating any more the same errors as the classical approach and it will also be important to specify mechanisms that will be used. As regards the control of the manager, we raise the idea of a complementarity between surveillance and incentive measures. Indeed, by analyzing the negative endings of one mechanism, it seems that the element of response to this dysfunction would be within the other process. Thus incentive measures would allow CEOs to guard themselves against feelings of injustice, while direct supervision measures would compensate the disorders bound to the freedom provided by incentives. It is not a question any more of using these mechanisms in an exhaustive way, but of assisting them to end in a new relation of corporate governance. Concerning the control of shareholders, it would be possible for the agent to impact the decisions and actions of the principal, thanks to the use counter power. Indeed, the CEO could neutralise strategic orientations that he thinks risky for the viability of the company and to save his managerial salary.

CONCLUSION There is a real gap between the contributions from the classical research of corporate governance and the results obtained in practice. Indeed, the developed disciplinary perspectives do not allow us to effectively identify the whole problem, unable to neutralise the emergence of non-conforming behavior of management. Many explanations can be advanced: an exclusive point of view of a stakeholder or shareholder dimension, an

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opportunistic and passive vision of a CEO, or an over developed shareholder approach. The observations according to these contributions have difficulty to prove their efficiency, and this questions the paradigm studied. The goal of this chapter was to propose a new paradigm within which, at the same time, is an active behavior of the CEO and a double relationship of agency; including opportunistic behavior from agent and principal. In this way, corporate governance would become a dynamic relational field where each actor would adopt strategies based on the power and the counter power at their disposal. These acts are sensitive to the interactions restricting their implementation. Thus, the encounter between divergent interests and the dialectical relationship that ensues does not seem harmful for the organisation. Indeed, a double relationship of control, within the background of maximising interests, by using power and counter power, would allow the end of perpetuating the organisational utility and reducing significantly the opportunistic attitudes. Integrating this perspective, we questioned the exclusive use of incentives and direct supervision mechanisms. It seemed necessary to combine these mechanisms gradually to limit in an effective way the same dysfunctions resulting from their separate use. In addition, a real counter power would allow, and it would be an original idea, measure of short-term decisions of the shareholders. Indeed, by using zones of uncertainty, the CEO can neutralise the strategic decisions that seem risky to him for his managerial salary. This paper includes many limitations, in particular a lack of methodological confrontation, and an arbitrary restriction to the incentive and supervision mechanisms and to power relationships. But it can also open a door to other aspects of double control such the study of the degree of complementarity between incentive and direct supervision measures offering an effective control or on the development of the formal or informal methods of control of the shareholders by the employees.

REFERENCES Alchian, A.A., & Demsetz, H. (1972). Production, information costs, and economic organization. American Economic Review, 5, p.777-795. Alexandre, H., & Paquerot, M. (2000). Efficacité des structures de contrôle et enracinement des dirigeants. Finance Contrôle Stratégie, 3, p.5-29. Aglietta, M. (2000). Shareholder Value and Corporate Governance: Some tricky Questions. Economy and Society, 29, p.146-159. Argyris, C. (1964). Integrating the Individual and the Organization, New York: Wiley. Berle, A.A., & Means, G.C. (1932). The modern corporation and private property. New York: MacMillan. Blau, P.M. (1964). Exchange and power in social life. New Jersey: Transaction. Castanias, R.P., & Helfat, C.E. (1991). Managerial Resources and Rents, Journal of Management. 17, p. 155-171. Charreaux, G., & Pitol-Belin, J.P. (1985). La théorie contractuelle des organisations: une application au conseil d'administration. Economies et Sociétés, 6. Charreaux, G., Couret, A., Joffre, P. & Alii. (1987). De nouvelles théories pour gérer l'entreprise, Paris: Economica.

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Charreaux, G. (1996). Pour une véritable théorie de la latitude managériale et du gouvernement des entreprises. Revue Française de Gestion, p. 50-64. Charreaux, G. (1997). Le gouvernement des entreprises: Corporate Governance, Théories et Faits. Paris: Economica. Charreaux, G., & Desbrières, P. (1998). Gouvernance des entreprises: valeur partenariale contre valeur actionnariale. Finance Contrôle Stratégie, 1, p. 57-88. Charreaux, G. (2000). Le conseil d'administration dans les théories de la gouvernance. Revue du Financier, p. 6-17. Barnard, C. (1938). The Functions of the Executive, Cambridge: Harvard University Press. Crozier M. & Friedberg E. (1977). L’acteur et le système, Ed. du Seuil. Dahl, R.A. (1957). The concept of power. Behavioral science, 2, p.201-218. Dewey, J. & Bentley, A.F. (1949). Knowing and the known. Boston: Beacon press. Emerson, R.M. (1962). Power-dependence relations. American Sociological Review, 27, p.3140. Etzioni, A. (1964). Modern Organizations. New York: Prentice-Hall. Fama, E.F. (1980). Agency problems and the theory of the firm. Journal of political Economy, 2, p.288-307. Fama, E.F., & Jensen, M.C. (1983). Separation of ownership and control, Journal of law and Economics. 26, p.301-326. Fayol, H. (1962). Administration Industrielle et Générale. Paris: Dunold. French, J.R.P., & Raven, B. (1959). The bases of social power. Studies in social power, p.150-167. Giasson, F. (1977). Dirigeants, qu'est-ce qui vous donne votre pouvoir? Revue internationale de gestion. 2. Hirsch, P.M., Friedman, R., & Koza, M.P. (1990). Collaboration or paradigm shift? Caveat emptor and the risk of romance with economic models for strategy and policy research. Organization Science, 1, p.87-98. Hirschman, A.O. (1970). Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. Harvard University Press. Kim, P., & Fragale, A. (2005). Choosing the path to bargaining power: an empirical comparison of BATNAs and Contributions in negotiation. Journal of applied psychology, 90, p.373-381. Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financials Economics, 3, p. 305-360. Louart, P. (1993). Pouvoirs et paradoxes dans les pratiques managériales. Communication au congrès Histoire et Gestion, Toulouse. Maati, J. (1999). Le gouvernement des entreprises. Edition De Boeck. Maslow, A.H. (1954). Motivation and Personality. New York: Harper. Milgrom, P., & Roberts, J. (1992). Economics, organization and management, New Jersey: Prentice Hall. Mintzberg, H. (1986). Power in and around organizations. Les éditions d’Organisation. Parrat, F. (1999). Le gouvernement d’entreprise. Edition Maxima Laurent Du Mesnil. Pastor, P., & Bréard, R. (2007). Gestion des conflits. Paris: Editions Liaisons. Penard, T. (2004). La théorie des jeux et les outils d’analyse des comportements stratégiques. Université de Rennes 1, CREM.

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Pige, B. (1998). Enracinement des dirigeants et richesse des actionnaires. Finance Contrôle Stratégie, 1. Pfeffer, J., & Salancik, G.R. (1978). The external control of organizations: A resource Dependence Perspective. New York: Harper et Row. Reynaud, J.D. (1997). Les Règles du jeu: L'action collective et la régulation sociale. Paris: Armand Colin. Rojot, J. (2006). La négociation. Edition Vuibert. Rouleau, L. (2007). Théorie des organisations: approches classiques, contemporaines et de l’avant-garde. Presses de l'université du Québec. Shleifer, A., & Vishny, R.W. (1997). Management Entrenchment: The Case of ManagerSpecific Investments. Journal of Financial Economics, 25, p.123–139. Shleifer, A., & Vishny, R.W. (1997). A Survey of Corporate Governance, Journal of Finance. 52, p.737–783. Stiglitz, J.E. & Edlin, A.S. (1992). Discouraging rivals: managerial rents seeking an economic insufficiencies. NBER Working paper series. Weber, M. (1922), Economie et société. Paris: Pocket. Williamson, O.E. (1988). Corporate Finance and Corporate Governance, The Journal of Finance. 43, p.567-591.

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PART III

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PARTNERSHIPS

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Chapter 8

INTER-FIRM GOVERNANCE AND RELATIONSHIP PERFORMANCE: A STUDY OF MARKET, HIERARCHY AND RELATIONAL COORDINATION MECHANISMS Jacques-Marie Aurifeille1 and Christopher J. Medlin2 1

2

Professor, University of French Polynesia, France Senior Lecturer, Business School, University of Adelaide, Australia

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ABSTRACT Inter-firm alliances are an effective means of globalising, with each firm providing an element of the final product and receiving a share of total profit. However, activating and maintaining an inter-firm alliance is fraught with governance difficulties. Governance within inter-firm alliances refers to oversight of strategic direction and the mechanisms for resolving disagreement. Within inter-firm business relationships governance modes have been conceptualised as a mixture of three ideal coordination mechanisms: market, hierarchy, and relationships. Measuring governance effectiveness requires choice of a managerial goal. As the purpose of business relationships is profit through joint action, we examine governance effectiveness with regard to relationship performance. A coordination mechanism model of governance is proposed and examined in the empirical setting of 162 software-exporting firms and their cross-border business relationships. A structural equation model indicates that relational coordination is a mediator variable explaining relationship performance. Two governance modes explain relationship performance. A non-market relational governance mode and a plural mode comprised of contract-hierarchical and relational coordination mechanisms. The final sections of the paper discuss future research and managerial implications.

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1. INTRODUCTION Inter-firm alliances are a cost effective way of geographically spreading a firm’s activities. In an alliance each firm provides an element of the final product and receives a share of total profit. However, setting up and maintaining an alliance is fraught with governance difficulties. When two firms work together to profit from their joined activities in a market place they face uncertainty from the actions of other firms, from customers and with each other’s performance and strategic intentions. Das and Teng (1998a) categorise these risks as either performance or relational. Governance brings a degree of certainty, on which the firms can rely. In an inter-business relationship governance is concerned with the procedures and rules that exist to allow the firms to work together; that is to decide their future joint strategy, their resource commitments, the division of profit and how to resolve the disputes that are certain to arise (Bergen, Dutta, & Walker, 1992; Heide, 1994). In the social science literature, three ideal coordination mechanisms are recognised: (1) market, or control through competition; (2) hierarchy, or control through authority; and (3) relational, or trust based management through jointly controlled processes (Bonoma, 1976; Bradach & Eccles, 1989). Governance modes for inter-firm relationships apply a mixture of these three ideal coordination styles (Haugland & Reve, 1994; Poppo & Zenger, 2002; Powell, 1987). In other words, the ideal coordination mechanisms are a part of any specific inter-firm governance mode. The mixture of coordination mechanisms depends on the nature of the business relationship and the specific focus of the present governance issue within the relationship (Ness & Haugland, 2005); whether resolving a strategic or profit issue, or coordinating resources to resolve a specific market based issue. Our purpose in this chapter is to examine the interplay of the three coordination mechanisms and specifically how they operate within governance modes. The chapter is structured in the following manner. First, we examine the inter-firm governance literature and discuss differences between firm and inter-firm governance. We also identify the distinctions between the coordination mechanisms. Next we elaborate a theoretical framework based on relationship performance to examine different governance modes and develop hypotheses. In a third section, we report an empirical test of our model, based on data of export firms in alliances that extend across national boundaries. In the final sections of the chapter, we discuss future research and managerial implications.

2. GOVERNANCE AND COORDINATION MECHANISMS Governance, in an inter-firm business relationship setting, is about attempting to control specific elements of the future. When two firms work together to profit from their joined activities in a market place they face uncertainty from the actions of other firms, from customers and concerning each others strategic intentions and performance (Das & Teng, 1998a). Under conditions of uncertainty, governance modes bring a degree of certainty, on which the firms can rely (Heide, 1994). According to Williamson (1996) governance of a firm is concerned with the “identification, explication, and mitigation of all forms of contractual hazards”. Whereas governance, in an inter-firm context, refers to the way firms have oversight of their strategic

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direction, allocate resources to resolve problems faced by the firms, and finally share the profits of their strategic alliance, or joint action (Heide 1994). However, there is an important distinction that must be made between governance ‘of’ the firms in a business relationship and governance ‘by’ the firms. This distinction relies on the degree of jointness of the governance mode. Before fully explicating this distinction we first elaborate the differences between market and hierarchy by following Williamson’s (1991; 1975; 1993; 1996) transaction cost perspective on governance. The main question from a transaction cost perspective is whether a firm should outsource or undertake production within the firm (Williamson, 1975). The decision is based on the economic costs of outsourcing versus maintaining production within the firm; where authority ensures compliance of product quality and efficiency of production. According to Williamson (1985), three variables influence the cost of the decision: (1) the potential frequency of transactions, (2) the degree of uncertainty, and (3) the level of asset specificity, or the degree to which a resource can be applied to multiple uses. Each of these three variables influences “the costs associated with writing, executing, and enforcing contracts” (Williamson, 1985). According to Williamson (1985), when contractual costs are high, “markets fail and hierarchies emerge in their place”. Under outsourcing, the matters of product quality and production efficiency are controlled through market price. The firm can pay a higher price and gain product quality, while competition within the market ensures efficiency. On the other hand, when a firm produces in-house, the authority structure of the firm and the firm’s systems of control ensure production efficiency and product quality. Thus, from a transaction cost perspective, the two forms of coordination mechanism substitute for each other. Noteworthy in this discussion, and assumed within the transaction cost perspective, is that the buy or make decision is made by the firm. That is, governance is solely a firm matter. The transaction cost perspective has resulted in a number of papers considering the matter of governance as a market-hierarchy continuum, with relational governance existing in the middle (cf Richardson, 1972; Thorelli, 1986; Webster, 1992). Thus, Webster (1992) considers a whole range of market relationships extending from transactions to vertical integration; including repeated transactions, long-term relationships, partnerships, strategic alliances, and network organisation. Hennart (1993) considers this changing sequence of relationships as the “swollen middle” on a continuum of institutions from firm to market, noting that institutions and governance should not be conflated. This distinction between coordinating mechanisms and inter-firm institutional arrangements is important and is further elaborated shortly. Transaction cost economics, and more broadly, the field of organisational economics has been criticised from at least three distinct directions. First, there is the question of forefronting economic costs and back-grounding the information benefits of control within organisations. Perrow (1981) argues that taking only a transaction perspective under values the advantages of internal control within hierarchies. For example, Eccles and White (1988) point to the ability of a firm’s control systems to provide different sets of information than is available in a market. “Conflict [within a hierarchical firm] makes information available to top management that otherwise might not be known or would be difficult or expensive to obtain” (Eccles & White, 1988, p.102). In other words a buy-make analysis based only on transaction costs ignores the information benefits of hierarchical control within a firm.

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Second, and at a more general level, the transaction cost approach is based on the concept of opportunistic human behavior (Donaldson, 1990a; Ghoshal & Moran, 1996). Indeed Williamson (1985) argued that ‘trust’ is redundant and that guile and opportunism are the norm within a transactions perspective. Alternately, Donaldson (1990a; 1990b) and also Ghoshal and Moran (1996) argue that a transaction cost approach is reductionist in not allowing managers to behave according to other contingencies. For example, a transaction cost approach completely negates the possibility of managers working together on the basis of trust. The third criticism relates to the distinction, made earlier, between governance ‘by’ the firms in a business relationship and governance ‘of’ the firm. When firms work together in an inter-firm relationship, governance happens within the business relationship, between the firms and ‘by’ the firms. No longer is governance a matter for only one firm, as in the transaction cost perspective. This difference parallels Hennart’s (1993) distinction between governance modes and the institutions. Further, the distinction matches that made by Heide (1994) between unilateral and bilateral governance. These distinctions led Powell (1990) to argue that networks were not a hybrid between market and hierarchy; rather that networks were a completely different organisational arrangement. Larson (1992), using an empirical case study approach, provides evidence that relational governance exists outside of a markethierarchy continuum The three weaknesses of a transaction cost perspective and the distinctions between institutions and coordination mechanisms resulted in a number of authors proposing that multiple governance forms exist (Cannon, Achrol, & Gundlach, 2000; Heide, 2003; Hennart, 1993). These same issues and distinctions also led to other authors suggesting a three dimensional governance space for inter-firm situations, based on three ideal coordination mechanisms (Alajoutsijärvi, Möller, & Rosenbröijer, 1999). This is achieved with Stinchcombe’s (1985) argument that contracts between firms are a form of hierarchy. Medlin (2003) summarised the three ideal coordination mechanisms as market, relational and contract-hierarchy (see Table 1). Governance modes for inter-firm alliances exist as plural forms of these ideal coordination mechanisms. Summarising Table one, the locus of control varies across the ideal coordination mechanisms. With market coordination the locus of control is within the firm, and governance is ‘of’ a firm. Whereas, under ideal contract-hierarchical coordination the relationship is one of leader and follower, with one firm directing and controlling and the other following. The locus of control is within one firm and so governance is ‘by’ one firm and ‘of’ two firms. Heide (1994) called this a non-market and uni-lateral hierarchical governance mode. Under ideal relational coordination, the firm governance mode is joint, ‘by’ the firms, but the relationship is of partners and decisions are taken under conditions of mutual trust. Evidently, the ideal coordination mechanisms do not exist in real business relationships, rather plural forms of the ideals complement and substitute for each other in different parts of the governance processes. For example, a contract may specify the expected sales of the two firms and prices will determine relative profit share, while resources and activities are specified according to a relational coordination process. In the next section we introduce a theoretical framework to examine the interplay between the three ideal coordination mechanisms and how they might form different governance modes.

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Table 1. Ideal Coordination Mechanism for Inter-firm Relationships

Level of organisation Time horizon Control Locus

Market Coordination Firm

Relational Coordination Relationship

Short term Within the firm

Long term Relationship level, between the firms. Joint control Two firms with no competing provider

Number of alternative partners

Several parties which are played against each other

Dependence on other firm

Both are independent of each other No particular relationship Weak positive

Relationship is particular for both Strong positive

Strong or weak negative

Strong or weak negative

Weak

Medium to strong

Particularity Connectedness to partner Connectedness to alternative partners Trust

Both are dependent on each other

Contract-hierarchy Coordination Supra-firm Leader and follower Long term Within the dominant firm

One or few partners depending on the functional benefits they can provide, with partner submissive Leader less dependent; follower more dependent Varies by dependence Strong positive Varies by level of dependence between leader and follower Medium to strong

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Source: adapted from Medlin (2003).

Figure 1. Theoretical Model of Inter-firm Governance Explaining Relationship Performance, Based on Three Ideal Coordination Mechanisms.

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3. THEORETICAL FRAMEWORK: RELATIONSIP PERFORMANCE AND THE THREE IDEAL COORDINATION MECHANISMS

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When the focus of governance mechanisms is on inter-firm business relationships, the inter-play between the three ideal coordination mechanisms takes on special significance. Many inter-firm relationships start out as single encounters in a market place and move towards a relationship. Lambe, Spekman and Hunt (2000) discuss the idea of a market – relationship continuum, with a mid-range that includes “repeated transactions” and “intermistic” relational exchanges. Yet other relationships are formed as a result of a search process, where a firm seeks a partner with complementary resources that will aid in entering a market place. In this case the relationship is contractual, either explicit or implicit, with the two firms agreeing to work together on a single strategy. In each case the firms work together on a joined set of complementary strategies: their goal is “relationship performance” and so derived firm profit. Relationship performance is defined as a dyad level construct, which accounts for the joint performance of two firms operating together in a relationship (Medlin, Aurifeille, & Quester, 2005). Given the link between two firms working jointly to achieve performance, we propose a direct and positive association between the ideal of relational coordination and relationship performance (see Figure 1). Relational coordination is defined as jointly controlled governance processes where the two firms work out their future strategy and resource allocation together. Each firm considers the impact of change on the other firm, and each firm is able to rely on the other firm to handle unexpected contingencies. Relational coordination is characterised by high levels of cooperation and mutuality between the firms, and is very likely correlated with a high degree of trust and commitment between the parties (cf Morgan & Hunt, 1994). Thus we hypothesize: H1: Within an inter-firm business relationship, greater degrees of relational coordination result in higher levels of relationship performance. Contract-hierarchical coordination is where both parties work together on the basis of an explicit or implicit contract. In this ideal coordination mechanism, there is a leader and a follower firm, with the leader commanding a form of authority or leadership that provides a means of control over the other party. Thus, at the ideal, the relationship is one of master and slave, however in a less ideal form both parties may be leaders over different aspects of the relationship. Further, there is also an attribution issue (cf Smith & Barclay, 1997), as some managers will perceive the relationship to be leader-follower, while others may not. The concepts of power and influence over another party have long been discussed in the channel literature (cf Boyle, Dwyer, Robicheaux, & Simpson, 1992; Frazier & Rody, 1991; Thomas, 1984). In matters of influence, perception and attribution are key issues. Given that authority and trust should substitute for each other to some degree (Das & Teng, 1998b), we expect that the ideal mechanism of contractual-hierarchical coordination is positively associated with relational coordination. When firms know and understand their contractual relationship, we expect that they will be able to work together more effectively. Under explicit, or implicit, contract conditions the specification of resources, relationship

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responsibilities and risks should lead to a form of joint decision making over time, one that is contained within the boundaries set by the contract. In fact Poppo and Zenger (2002) found some evidence of this association and concluded that authority and trust are complementary coordination mechanisms. Thus we hypothesize: H2: Within inter-firm business relationship greater degrees of contract-hierarchical coordination result in greater levels of relational coordination. Finally, we expect a negative association between the ideal form of market coordination and relational coordination. We define ideal market coordination as price driven and where the decisions are taken in the present exchange without consideration to the long term. As pricing in the present exchange is the basis of the inter-firm coordination, that is there is no future ramification, the firms will have mutually exclusive goals. Thus we hypothesize: H3: Within inter-firm business relationship greater degrees of market coordination result in lower levels of relational coordination.

4. METHOD

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4.1. Empirical Study The empirical setting for the study was business relationships between business software principals and their cross-border distributors. The sample frame was developed from Australian Government web sites listing software firms from different vertical markets. Firms were located in either Australia and had alliances with firms in New Zealand, Malaysia or Singapore. The final convenience sample consisted of 162 principal and distributor firms. A check for equivalence of response by firm type found no significant difference. Each firm was contacted by telephone in 2006 and their CEO or Marketing Manager identified a specific relationship on the basis of the following criteria: (1) the relationship was important to the firm’s strategy, (2) the relationship was arranged only by the two firms, (3) the relationship required continuous interaction between the firms, and (4) the relationship was not with a consumer. The business-to-business nature of the relationships and the existence of set market boundaries according to country meant that respondents could easily gauge expectations of market performance and competition. Thus, measurement of relationship performance was enhanced.

4.2. Measurement The indicators for the study are given in appendix A. The dependent variable of relationship performance was measured as a latent construct, which was focused exclusively on economic indicators for the joint outcomes of two firms’ activities in a single market

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(Medlin et al., 2005). The indicators for the remaining variables were developed for this study based on the definitions given above and the focus dimensions displayed in Figure 1. All answers were collected on nine point semantic difference scales, which Jöreskog and Sörbom (1996) consider as ordinal. The association of these ordinal variables can be considered as either a Kendall, canonical or a polychoric correlation. The latter option was chosen because several Monte-carlo studies have demonstrated that polychoric correlations are (1) less biased in the case of relatively small samples, as in the present study, and (2) are usually the best estimator of association whatever the number of points of the ordinal scale (Jöreskog & Sörbom, 1996). Following the two-step approach suggested by Anderson and Gerbig (1988) construct measures were prepared using the Maximum Likelihood method. The measurement approach for the four theoretical constructs in the model is displayed in Appendix B. The KaiserMeyer-Olkin Measures of Sampling Adequacy ranged between 0.616 for ‘contracthierarchical coordination’ and 0.766 for ‘relationship performance’. The Bartlett’s test of sphericity for all constructs was significant (p < 10-4). The polychoric correlation matrix and final measurement model are displayed in appendix B. The t values of the measurement parameters are all significant at the 95% level of confidence (see appendix B).

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4.3. Results A structural equation model was fitted, using the Maximum Likelihood regression and using Lisrel 8.80 software (Jöreskog & Sörbom, 1996). All hypotheses were supported (see Figure 2). The Goodness of Fit Index was 0.97 and the Adjusted Goodness of Fit Index was 0.96. The RMSEA of this model was 0.066 with a 90% confidence interval extending from 0.041 to 0.081. The Chi-square statistic of 85.33 with 50 degrees of freedom indicated an acceptable discrepancy between the observed and the estimated structures (Bentler, 1990) and a positive probability of no difference between them (p = 0.0014). These measures suggest that the model has a “correct fit”. That is, the observed structure of associations is correctly reproduced in the parsimonious model.

Figure 2. Structural Equation Model.

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4.4. Discussion

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The theoretical implications of this study are interesting as comments can be made with regard to effectiveness of governance modes. In each case, our discussion is based on ideal coordination mechanisms forming governance modes. We also note that the following comments are made relative to the goal of “relationship performance”, a collective outcome of the inter-firm relationship. In choosing this dependent variable the question of governance mode performance and coordination mechanism operation is made relative to the collective inter-firm effort, not the self-interest profit of each firm. However, evidently the profit of each firm is derived from relationship performance. First, in achieving relationship performance the role of relational coordination is most important. Relational coordination explains 28% of relationship performance (R2 = 0.28). Moreover, neither contract-hierarchical or market coordination have a significant direct influence on relationship performance. In other words, relational coordination is a true mediator of the effect of contract-hierarchy coordination and market coordination on relationship performance. Without effective and efficient relational coordination mechanisms, inter-firm relationships will not easily achieve collective economic outcomes. Second, two governance modes explain the collective outcome of relationship performance. The first is the contract-hierarchical and relational coordination mechanism path. In this plural governance form, contract and certainty about roles is mixed with relational coordination ( = 0.25, p = 4.31). The other mode is a non-market relational governance path, composed as long-term non-market coordination (ie the negative association between market and relational coordination constructs) and relational coordination ( = 0.16, p = 3.52). This jointly focused governance mode, where both parties take a long-term view and work together, is shown to be slightly less effective in explaining relationship performance than the plural contract-hierarchical and relational governance mode.

5. FUTURE RESEARCH Future research of plural governance modes can be undertaken in three broad areas on the basis of the ideal coordination constructs developed in this paper. The first research area is an elaboration of the different ways that the ideal coordination mechanisms apply in each of the areas of governance, namely: (1) strategic issues, (2) profit sharing, (3) resource and activity coordination, and (4) dispute resolution. An alternate approach is to examine the ideal coordination mechanisms within the relationship maintenance dimensions suggested by Heide (1994): (1) role specification, (2) planning processes, (3) adjustment processes, (4) monitoring procedures, (5) incentives systems, and (6) enforcement methods. We can expect the ideal coordination mechanism to interact in dissimilar ways in each different relationship type. Clustering techniques would be suitable for examination of the different relationship types, provided independent trait variables were included in the study to classify relationship types and the governance areas or maintenance dimensions. Studies in this area should allow more detailed elaboration of the way plurality exists in inter-firm governance modes. The second area of study examines the question of how non-market relational governance ‘by’ firms operates when two parties interact (ie dyad studies). This stream of research takes a

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more dynamic approach by including both relationship parties in the issue of governance modes. The ideal coordination variables developed in the present study can be used to examine governance modes, where both parties are involved (for example see Aurifeille and Medlin 2001; 2006; 2007). Dyad studies will be important, as governance that results in relationship performance has been shown in this chapter to require relational coordination where both parties work together. Thus, examination of the different dynamics of relationships requires more than one-sided attributions by managers. That is the nature of the interaction between the parties is also important. A third important area of future study is the degree to which contracts are explicit or implicit. More explicit contracts reduce the domain available for relational coordination. The research presented in this chapter suggests that reducing the domain of relational coordination will reduce relationship performance. Adaptability is a known strength of business relationships (Hallén, Johanson, & Seyed-Mohamed, 1991). The likely mechanism is that increasing contractual control reduces the degree of adaptability that can be achieved through relational coordination, so reducing relationship performance over the longer-term. The question of how explicit to make relationship contracts deserves considerable research in different contexts.

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6. MANAGERIAL IMPLICATIONS In today’s globalised economy the use of business relationships has been increasing as technological differentiation and complexity have led to the situation where it is increasingly rare that a single firm can undertake all production activities (Achrol & Kotler, 1999). The empirical results presented in this chapter have important ramifications for CEOs and the managers of firms that must operate globally through business relationships. The results indicate that relational coordination, where two firms jointly control governance processes and the firms together work out their future strategy and resource allocation, is vitally important in achieving relationship performance. And since firm profit is derived from the implementation of all of a firm’s business relationships, the management of relational coordination mechanisms becomes paramount. The importance of relational coordination has subtle implications, depending on the level of management being considered. First, managers at the business relationship level will need to have in place processes for ensuring that change and adaptations between the firms are implemented in a way to ensure attribution of continuing trust and commitment. Essentially, sound communication is required between the parties. That implies regular meetings to discuss the future strategy, the changes in resources and activity allocation and finally prompt resolution of any differences. Managing the relationship should be two-sided so that each side is valued in the creation of end-customer value. On the other hand CEOs have a different role and must ensure that relational governance at the operational level is successful. However, the CEO will be more concerned with strategic issues and resolution of difference at the strategic level. The CEO should focus on achieving common strategic understanding of the relationship with the CEO of the other firm. Involvement in resource and activity implementation would only be on the basis of redirecting strategic matters, or resolving strategic disputes, with the partner CEO. The day-to-

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day resource and activity implementation should be left to the managers, so that relational coordination can achieve the adaptive changes necessary to achieve relationship performance. Thus, the CEO is more concerned with providing contractual and business oversight, which structures the business relationship as part of the firm’s strategy. Consequently, the CEO is concerned with contractual issues for all business relationships. Deciding which contracts should remain implicit, rather than explicit, is a key decision faced by the CEO. Explicit contracts will lead to a reduced domain for relational coordination, while implicit contracts leave a broader sphere of influence to relational coordination. The empirical evidence in this chapter suggests that relational coordination and thus implicit contracts result in greater relationship performance. However, relational coordination also has a cost, which contracts can mitigate by reducing the domain of relational coordination. Thus, the CEO may choose some relationships, important to long-term adaptation by the firm, to be operated on a more relational governance mode than others. In essence the future of the firm depends on certain relationships, more than others. The CEO is responsible for deciding the number of relationships to operate according to relational governance, and the degree of relational versus contractual coordination in each relationship. The resolution of these important relationship matters shapes the future strategy, adaptability, efficiency and profit of the firm.

APPENDIX A Construct Indicators Construct Indicators

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Relational Coordination

Contracthierarchy Coordination Market Coordination

Relationship Performance

1. In the future we can count on the other firm, to consider how its decisions and actions will affect our firm 2. Though circumstances change, we believe the other firm will be ready and willing to offer us assistance and support. 3. When making important decisions, the other firm is concerned about our firm's welfare. In this relationship, one firms directs and the other follows. In this relationship, one firms leads and the other follows. In this relationship one firm has a degree of control over the other. 1. Our firm is only interested in the short-term with this relationship. 2. Our firm is willing to change from this partner at any time. 3. This relationship is short-term oriented. Consider all of the costs and revenues with the Focus Relationship. Relative to your firm's expectations in the focus market, what has been the performance of the interfirm relation on the following dimensions? 1. Sales, 2. Sales growth, 3. Market share

Response Anchors 9 point scale Strongly agree to strongly disagree

9 point scale Strongly agree to strongly disagree 9 point scale Strongly agree to strongly disagree 9 point scale Extremely strong to extremely weak

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APPENDIX B Polychoric Correlation Matrix Relat-1 Relat-2 Relat-3 Hier-1 Hier-2 Hier-3 Mark-1 Mark-2 Mark-3 Perf-1 Perf-2 Perf-3

Relat-1 1.00 0.66 0.68 -0.03 0.43 -0.01 -0.29 -0.24 -0.44 0.30 0.34 0.41

Relat-2 Relat-3 Hier-1 Hier-2 Hier-3 Mark-1 Mark-2 Mark-3 Perf-1 Perf-2 Perf-3 1.00 0.74 -0.08 0.46 0.02 -0.41 -0.38 -0.54 0.29 0.31 0.35

Measurement Model Construct Relational Coordination Contract-hierarchy Coordination

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Market Coordination Relationship Performance

1.00 0.08 0.41 0.15 -0.29 -0.34 -0.44 0.25 0.30 0.35

1.00 0.27 0.69 0.01 0.10 0.08 0.30 0.04 0.01

1.00 0.45 -0.34 -0.16 -0.30 0.21 0.23 0.28

Item 1 2 3 1 2 3 1 2 3 1 2 3

1.00 -0.03 0.05 0.05 0.03 0.05 0.01

1.00 0.65 0.73 -0.22 -0.30 -0.27

Lambda 0.74 0.83 0.83 0.69 0.72 0.85 0.84 0.76 0.89 0.90 0.93 0.78

1.00 0.66 -0.17 -0.22 -0.32

1.00 -0.21 -0.26 -0.31

1.00 0.86 0.73

1.00 0.78

t-value 14.33 15.98 15.27 13.38 15.56 19.19 22.79 22.37 18.49 19.15 20.78 17.98

1.00

R2 0.55 0.69 0.69 0.48 0.52 0.72 0.71 0.58 0.79 0.81 0.86 0.61

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Chapter 9

GOVERNANCE AND SUBSIDIARITY IN FIRMS Antonio Argandoña1 and Lena Strandberg2 1

Royal Academy of Economic and Financial Sciences, Spain 2 IESE Business School, Spain

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ABSTRACT Both the governance and the principle of subsidiarity have been thoroughly discussed in political contexts, however, their application to firms has been to varied degrees. Corporate governance has been applied to firms as a set of processes, customs, policies, laws and institutions affecting the way people administer, direct or control a corporation or business firm, whereas the application of the subsidiarity principle to corporations has been limited. We believe that both of these concepts can have interesting aspects and implications for corporations. The purpose of this chapter is to discuss the parallelism between political/ administrative and corporate structures and governance under the light of the principle of subsidiarity. The focus is on an explanation of the definition and role of an organization, which can be a natural example of the role of subsidiarity in governance. This chapter is a first approximation to the development of a governance model based on subsidiarity founded on theory of the firm and theory of action. With this chapter we are not developing the consequences of this new way of looking at the subsidiarity principle, but we believe that there are several interesting conclusions which can be derived from it for corporate governance – and also to other forms of governance, since the theory of action, on which we have based our analysis, is valid for any human community.

1. INTRODUCTION The concept of governance originates from political theory and was initially defined in relation to territorial or political government. Governance was thus given a meaning of the way power is exercised in the management of a country’s economic and social resources

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through application of responsibility, participation, information availability, transparency and the rule of law (Saunier & Meganck, 2009). However, governance can also be applied to any human society or organization besides that of a political community, including both formal and informal institutions and process. In relation to corporations the concept of governance has been applied as the set of processes, customs, policies, laws and institutions affecting the way people direct, administer or control a corporation or business firm. Theories of governance comprise and lead to various aspects and principles, amongst others the principle of subsidiarity, which has become well known due to the initiatives of the European Union, especially the Charter of Fundamental Rights of 2002. As a political principle subsidiarity has been used to allocate powers within the Union, and in situations where there is a hierarchy of authorities with different responsibilities but separate interrelated decisions – for example, in environmental issues or, in general, in situations of market failure. However, the principle can be applied to all human organizations. We believe that the ideas, theories and experiences of the political principle of subsidiarity can be fruitfully applied to corporations. Therefore the purpose of this chapter is to discuss the parallelism between political/administrative and corporate structures and governance, under the light of the principle of subsidiarity. The focus is on corporate governance, or better, on an explanation of the definition and role of an organization which can be a natural example of the role of subsidiarity in governance. This chapter is a first approximation to the development of a governance model based on subsidiarity founded on theory of the firm and theory of action. We begin with an introduction to the concepts of governance and subsidiarity to be followed by a discussion of the process of decision making in organizations, although many of the conclusions of our analysis can be translated to broader societies. The discussion will then be put in relation to the application of the principle of subsidiarity within a firm.

2. GOVERNANCE AND SUBSIDIARITY Governance can be defined as the sum of the many ways individuals and institutions, public and private, manage their common affairs (Commission on Global Governance, 1995) and it can be applied to informal arrangements which people and institutions have agreed upon or perceived to be in their interest. A narrow definition of governance can be characterized by decisions issued by one actor that a second is expected to obey (Kahler & Lake, 2004), whereas a broad definition can include all modes of coordinating individual action, such as hierarchies, networks, associations, or markets (Knill & Lehmkuhl, 2002). In a limited way, corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer & Vishny, 1997). In addition to return on investments Demb and Neubauer (1992) speak of the rights and wishes of stakeholders and the processes by which corporations are made responsive to them. Koehn (1999), in turn, argues for a broader definition, stating that corporate governance encompasses issues ranging from how companies should behave on the Internet and how management can best motivate employees and board members, to how institutional investors should discharge their responsibilities to the beneficiaries whom they represent. Federowicz (2003) discusses sound corporate governance, defined as a set of institutionalized (but not

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only formal) settings and practices that orient the key actors of decision-making towards the sustainable development of the firm. The principles of subsidiarity, has often been characterized in a political context as a social order, oriented against the totalitarian and centralist state in which the larger community acknowledges the potentials of the subordinate ones and exercises only those tasks which the latter cannot fulfill (Stöhr, 2001). Stöhr further compares the principle to a social system, which is structured from below with the family and the primary groups, characterized by personal contact and transparent structures. The secondary groups have a local or functional character and, finally, the state acts as a comprehensive political community. Handy argues that it is even “a moral duty to delegate” and claims that it is an injustice, a grave evil and disturbance of right order for a larger organization to allocate itself functions which can be performed efficiently by smaller and lower bodies (Handy, 1999). Usually two explanations have been given as reasons for applying subsidiarity in public or private governance:

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1) The respect of the dignity and the rights of the citizens (as individual persons or as members of low-level groups: families, local communities, voluntary associations, etc.), rights that they have before their participation in the governance relationship (Melé, 2005). 2) The satisfaction of the citizens’ preferences to the greatest extent possible (Schäfer, 2006). This means that the citizens have their own interests, which only partially coincide with the goals of the society or organization of which they form a part. The first reason is the basic one, and it has been discussed during centuries in social and political ethics through issues like the just distribution of costs, benefits and burdens in the common endeavor (Follesdal, 1998) and many others. But the second one is nonetheless as important. When applied to the issues of governance, subsidiarity is related to the degree to which governance ultimately responds to the wishes of those who are governed (Kahler & Lake, 2003) or the mechanisms by which the citizens and groups define their interests and interact with institutions of authority and with each other (McCawley, 2005). This means that the individuals have their own personal values, interests and preferences that usually can only be satisfied in relationship with other people, in “natural” (family, country) or “artificial” communities (firms, clubs, associations). In fact, both points of view are connected: the dignity of the persons and their personal rights are one of the justifications of their legitimate preferences or interests. Therefore, the arguments presented when discussing the second reason cannot be only arguments about the “comparative efficiency” (Follesdal, 1998) of the different decision makers (the individual alone, the family, the small group, the city, etc., until the country or the global society), but also about the basic rights of all of those implied. As we said before, both justifications of subsidiarity are reasonable. Nevertheless, they are not compelling, especially when applied to private organizations. Obviously, persons have dignity and rights, but must they be understood as limitations to the principles and rules of corporations? Is subsidiarity a limit to the optimal governance of corporations, in the name of the rights and/or preferences of the owners, managers or employees? Or should subsidiarity be founded on grounds of efficiency?

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In the following sections we will present an explanation of the decision making process in the firms that can serve as a foundation of the principle of subsidiarity. It is not a theory of corporate governance but can be useful as a framework of a theory of governance, in which subsidiarity can have a new interpretation.6

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3. DECISION MAKING IN ORGANIZATIONS An organization (a business firm, a not-for-profit institution, a private association) is “a group of people who coordinate their actions to achieve objectives in which they all have an interest, albeit for different reasons” (Pérez-López, 1993, p.13). In an organization we find a group of people, all of them with different motives to join the group; a common objective which they would not be able to achieve, or would find more difficult to achieve, without the combined efforts of the other members (Rosanas, 2008); some form of coordination of the individual actions to get those common objectives, and a purpose of continuity or permanence along time. Based on this definition of an organization, we will here give a brief explanation of the core of any decision. Let us assume that an “active” agent (e.g. a manager) makes a decision that implies his or her relationship with a “passive” agent (for example, an employee), to whom the active agent gives, for example, an order to do something. What the active agent expects from the decision is one or several outcomes, which may be: 1) extrinsic (the consequences for the active agent of the response from the reactive agent); 2) intrinsic (something the active agent learns or the satisfaction he obtains from performing the action, e.g., the satisfaction of managing); and 3) external (something the reactive agent enjoys or learns) (Pérez-López, 1991a, p.28). This, in turn, gives rise to three possible motives for action, from the point of view of the active agent: 1) extrinsic motives (in our example, the expected reaction of the passive agent, as intended by the decision maker); 2) intrinsic motives (the expected satisfaction and the learning of the active agent as derived from the action), and 3) external motives (the expected consequences of the action on the passive agent or on other people). In any case, whether the active agent intends it or not, her action will always give rise to each of the three types of outcome, and “each of these outcomes can be a powerful source of motivation; that is to say, each can be directly intended by the agent and so can be a motive to act” (Pérez-López, 1993, p.52). An action can therefore be evaluated by the decision-maker using three separate criteria: 1) effectiveness, measured by the satisfaction that the expected extrinsic outcome provides to the active agent; 2) efficiency, measured by the extent to which the agent is ratified from the internal outcome; and 3) consistency, measured by the extent to which the change in the reactive agent resulting from the interaction makes it easier or more difficult for the active agent to obtain the desired response in future interactions7. It is important to realize that effectiveness, efficiency and consistency can operate in different directions. For example, an action plan may be effective (the employee does what the manager tells him to do), yet inefficient (the manager becomes increasingly dissatisfied 6 7

The next sections use the ideas of Pérez-López (1991a, 1993); cfr. also Argandoña (2008a, b). We follow here the terminology of Pérez-López, although it does not coincide with the one of other authors.

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with telling people what to do, or in so doing damages her competencies as a manager) or inconsistent (the reactive agent is increasingly reluctant to respond as desired)8. And if an action plan is inconsistent, it will give rise to “negative learning” on the part of the active agent, in that it will reduce the agent’s ability to see what is really important in the interaction, probably without the agent’s realizing it until it is too late. In our example, we assumed that the manager: 1) wants to solve a present problem by making a decision, 2) which entails interacting with other people in the organization (other managers, employees, etc.), 3) bearing in mind that he will have to make other decisions in the future involving him and other people (not necessarily the same ones as in the previous decision), and 4) that the decision he makes now will affect his ability to make decisions in the future and also 5) the reaction of the people affected by his decision, as well as, 6) in some cases, the reaction of other people (Pérez-López, 1998, p.201). And, from point 3 on, he or she must take into account that any changes in the effectiveness, efficiency or consistency of an action will change the agent’s ‘decision rule’, i.e. “the set of operations (…) by which an active agent chooses an action” (Pérez-López, 1991a, 28)9. We mentioned before three criteria that a manager must consider in any decision. Likewise, when considering the activities of an organization as a whole, the manager must monitor three “state variables”: 1) its effectiveness (profitability), i.e. its capacity to create a difference as big as possible between what the company receives for providing a service to consumers and the resources it employs, roughly equivalent to the value added it makes; 2) its efficiency or attractiveness, that is, its capacity to develop their members’ skills and to enhance their satisfaction in order to develop the distinctive abilities that will enable the organization to resolve problems more effectively, or resolve more complex problems, because its members are more aware of the needs to be met and more capable of meeting them; and 3) its consistency or unity, that is accomplished when the organizational members identify themselves with the organization and trust is built up between employees, managers, owners and other stakeholders. It can be demonstrated that these three “state variables” are necessary for the survival and growth of companies, understood as groups of people who coordinate their actions to achieve economic results, namely the production and distribution of material goods in order to satisfy organizational members’ needs as fully as possible, given the limited resources available. Profitability or effectiveness is a necessary condition for long-term survival of an organization because without it the company will not be able to satisfy its members’ extrinsic motives. A company must offer its employees and managers a salary that outweighs their opportunity cost (the salary and benefits they could obtain in comparable alternative employment), and it must also offer its owners remuneration at least equal to what they could obtain in the capital market for the same level of risk. To do this, it must ensure that the aggregate cost of the contributions it receives from its suppliers of resources (including its employees) does not exceed the revenue it obtains from the sale of its products or services. In other words, by producing and selling goods in the 8

An extreme example would be a decision to cut off the branch of a tree in order to get at the fruit: the action is highly effective but totally inconsistent. Another example would be a manager who abuses an employee’s trust and so makes it more difficult for himself to persuade the employee to collaborate in the future. 9 That people’s preferences can change during the decision-making process as a result of learning is well known (cf., for example, Kahneman & Tversky, 2000). The possibility of negative learning, however, is often overlooked.

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market, a company must be capable of obtaining the material means with which to satisfy the extrinsic motives of those who contribute capital, labor and other resources. In short, a company’s effectiveness is measured by the difference between the resources it obtains from the sale of its goods and services and the resources it employs in producing them, which roughly corresponds to its profit (or better, to its value added). However, the necessary and sufficient condition for an organization to exist is not profitability, but that there be a group of people (shareholders, managers and employees) who are motivated to belong to the organization, with all that this implies. To achieve this, an organization must deliver at least some of the benefits, in terms of attractiveness, which motivate people to contribute: the jobs a company provides must not be unpleasant for its employees or at least not so unpleasant as to make them unwilling to make the effort that must be made for production to continue (and this is valid also for the owners and the other stakeholders), and employees must be able to learn from their work in a way that makes them more effective as employees in the future. Up to a point, therefore, there is a trade-off between effectiveness and efficiency, insofar as a company does not need to pay as much for pleasant work as for unpleasant work10. Lastly, a company must also consider how the employment it provides affects consistency or unity. As an economic institution the company needs to be both effective (profitable) and efficient (attractive); yet neither will guarantee survival: it depends on consistency. And survival is not an economic problem that can be solved by designing a control system to ensure that the organization’s operational capabilities are used to satisfy the needs of its members, because designing any such system “is absolutely impossible if organizational members learn – operationally [on the plane of efficiency] or morally [on the plane of consistency] – from their actions in the organization (…). Achieving optimal economic outcomes is not an economic problem; it cannot be solved by manipulating economic variables alone. It depends on psychological and ethical variables. Only if these latter variables were fixed and unaffected by learning processes (…) could the optimal economic outcome be achieved through purely economic processes” (Pérez-López, 1987, 1213)11. Every decision within the organization must therefore respect certain minimum levels of effectiveness and efficiency. And any decision that meets these minimum requirements (i.e., any decision that does not cost more than it earns and that is not unpleasant for the people who have to implement it) will be feasible. But once the choice has been made, a series of consequences will be felt throughout the organization, whether or not those consequences have been taken into account in the decision. The efficiency and, above all, the consistency of the organization will be altered.

10

Only up to a point, however, as there will be limits to this trade-off. If a worker has material needs, the company will have to pay him a wage, even if the work is very pleasant and satisfying. And if the work is very unpleasant, paying a higher wage will soon lead to diminishing returns in terms of motivation. 11 On the limitations of formal control systems, cf. Rosanas & Velilla (2005). Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

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4. CORPORATE GOVERNANCE AND SUBSIDIARITY How does all the previous discussion affect governance? We suggested that all activities in the firm (strategy, policies, management systems, operations, structure, etc.) should take into account three criteria effectiveness, efficiency and consistency or unity. Obviously, governance should also take into account these three criteria. We said before that we are interested in the degree to which governance ultimately responds to the wishes or motives of those who are governed (Kahler & Lake, 2003). This is important not only because this is the way to win the disposition of those people (owners, managers, employees, suppliers, clients, etc.) for cooperating in the organization, but mainly because the necessary and sufficient condition for an organization to exist over time is that there be a group of people who are motivated to belong to the organization, with all that this implies. The organization must choose its goals so that the goals conserve and strengthen those motivations, as otherwise the organization will disintegrate. And this should also be the goal of corporate governance –or, at least, one of its goals. Whatever the objectives of an organization may be, managers must achieve them. To do this, they must persuade the members of the organization, i.e., the people who possess the human and material resources that the company needs (owners, employees and, to a certain extent, suppliers, customers and other stakeholders), to work together. A “group of people” can become an organization either because one person summons others to a common task (for example, an entrepreneur hires several employees), or as a collective initiative of the group (several friends decide to create a sports club, just for fun). In any case, once the group is organized, one or several persons (the principal) should exercise authority over the others (the agent): this is why usually the issues of governance are focused from the viewpoint of the person or persons with authority. Nevertheless, subsidiarity is better understood if we present an organization in which both parties are simultaneously principals (active agents) and agents (reactive agents), because the interactions are reciprocal (Rosanas, 2008). Consider, for example, in the situation we presented before: the manager (the active agent) has a problem (a non-optimal situation that she wants to change, or an opportunity she wants to avail herself to: for example, to process the order of a client) that she expects to solve giving an order to an employee (the passive agent) whose result will likely be the solution of the problem. But the situation may be reversed: the employee (now the active agent) has a problem (he needs some income, for example) that he expects to solve being hired by the manager to do a job that includes receiving an order to do something for the sake of the company or of the manager herself (the passive agent). Now, we may apply to this situation our previous reasoning: the employee (the active agent) will get the expected external results (the salary), plus other results, both extrinsic (the manager’s praise or censure), intrinsic (the satisfaction for the work done and the learning of new abilities and knowledge) and external (the manager will have her problem solved and the ultimate client’s needs will be satisfied). The employee must take into account the three criteria: the effectiveness of the action (the solution of his problem, provided by the salary), its efficiency (the satisfaction and operational learning obtained in the job) and its consistency (the creation of the conditions that allow the present relationship with the passive agent, the manager, to continue in the future: and not only with this manager, but with any other person,

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in this firm or in other firms). And again, the behavior of the employee must provide him with at least a minimum of effectiveness and efficiency, but also with a development of his consistency. This means that the decisions made by subordinates also affect the effectiveness, efficiency and consistency of the decisions made by their superiors and thus also the organization as a whole. In other words, we need to consider the three dimensions from the point of view of both agents, because both are simultaneously active and reactive. This applies equally to the relationship between owners and managers, or even between owners and other stakeholders (customers, suppliers, etc.). Employees usually do not worry about governance, but companies do, and they must take into account the other side of the relationship with the employees, as we have just explained. Herbert Simon (1991, p.26) asked years ago: “How are the employees of firms motivated to work for the maximization of the firm’s profit?” The usual answer to this question refers to “incentives”, i.e. extrinsic motivation. But this does not explain “how employees are induced to work more than minimally, and perhaps even with initiative and enthusiasm” (Simon, 1991, p.26). For that, we must invoke intrinsic motives, which is what has been done in the literature12, or external motives – other-oriented behavior, social behavior, altruism, etc.13 Our notion of external motivation differs, however, from the traditional concept of altruism, insofar as the altruist is assumed to obtain some personal satisfaction from the wellbeing of others14. That form of altruism would be understood, in our model, as a form of extrinsic motivation, in that it relates to actions from which the agent expects to benefit. External motivation, as we understand it, is governed entirely by the well-being of the reactive agent, regardless of the impact on the active agent. Moreover, this is not merely a hypothesis; it is stated as a condition of long-term equilibrium in the interaction between agents, namely, to meet the demand for consistency. “For the organization to work well, it is not enough for employees to accept commands literally. (…) What is required is that employees take initiative and apply all their skill and knowledge to advance the achievement of the organization’s objectives” (Simon, 1991, p.32). Or as Melé (2005) points out, the employees must act as entrepreneurs and have initiatives for the good of the organization. How does this identification of the employee with the goals of the company come into being? According to the action theory we have presented, an employee may identify with the company for any of the three types of motives mentioned earlier: extrinsic outcomes (higher pay, for example), job satisfaction, or a sincere concern for the impact his actions may have on others. This is how Pérez-López explains it: when negotiating a sale, a sales representative “will be motivated by the money he expects to earn (extrinsic motives) (…); if he is a person who likes his profession, intrinsic motives will likely prompt him to make a special effort to sell (…) [and] if he is an honest professional, transcendent [or external] motives15 –the desire to provide a service to the customer, i.e., satisfy the customer’s needs while at the same time satisfying his own and the company’s needs– will also encourage him to act in a way that ensures the sale is completed” (1993, 107). 12

The distinction between extrinsic motives (satisfaction provided by the environment) and intrinsic motives (satisfaction internal to the agent) has long been accepted in social psychology, sociology and economics (cf., for example, Bolton & Ockenfels 2000, Frey 1999, Osterloh & Frey 1997). 13 Cf. Frey and Meier (2002), Stark (1995). 14 As Rosanas (2008, p.457) points out, external motivation is rational, not just emotional, and may have the dimension of a moral obligation, as Sen (1977) suggests. 15 Pérez-López calls these external motives “transcendent”, because “they refer to values that transcend the individual” (Rosanas, 2008, p.455).

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But the first two motivations have a limited capacity to secure the employees’ loyalty to the firm. Essentially, “the only way an organization can become both more attractive and more effective is if its members internalize the organization’s goals. Such internalization requires (…) transcendent [or external] motivation (…), bringing an organization’s ultimate purpose (to satisfy human needs) into line with the motives a person must have in order to develop his own potential (to help satisfy the needs of others, i.e., acting for trascendent [or external] motive)” (Pérez-López, 1993, p.103). And having these motives depends not only on “what a person does” (effectiveness) or “how he does it” (efficiency), but on “what he does it for” (consistency) (Pérez-López, 1993, p.104). Consistency is achieved when there is a climate of trust in the organization (Melé, 2001; Reichheld, 1995). A climate of trust requires both “functional trust”, which “has to do with the trustor’s assessment of the operational knowledge and abilities of the trustee”, and “personal trust”, which “has to do with the trustor’s assessment of the quality of the trustee’s motives” (Rosanas & Velilla, 2003, p.56), i.e., whether the trustee’s decisions are made for external motives, seeking the good of others. This means that consistency creates trust. As we have said, an organization’s decisions must be minimally effective and efficient in order to maintain the incentive for employees (and owners, managers and other stakeholders) to continue to collaborate for extrinsic and intrinsic motives. An organization must also ensure that any increase in extrinsic or intrinsic motivation in some of its members does not lead to a decline in such motivation in others. This means that all employees must have at least a minimum of external motivation, i.e., consideration for the needs of the company and of other persons – not because of the consequences this may have for their personal utility, but because of the consequences it is likely to have for the other persons. This assumes that the agents are capable of evaluating the impact their actions will have, not only on themselves (the effectiveness and efficiency of their actions), but also on others (the consistency of their actions). Decision-making is the result of a combination of motives, some spontaneous, others rational. Spontaneous motives demand an immediate decision, based on the expected extrinsic outcome (effectiveness). In the interest of efficiency and consistency, however, the agent may make rational decisions, resisting the appeal of spontaneous motives. The mechanism that helps people make decisions that are consistent is the mechanism classically known as moral virtues. By practicing moral virtues, a person learns to be ethical and develop her ability to act ethically. Moral virtues strengthen a person’s “capacity for self-governance” or “self-control” (Pérez-López, 1998). This capacity is manifested in “something as basic as choosing an alternative that will bring less economic benefit [i.e., a less effective alternative] than one that could have been chosen instead” (Pérez-López, 1991b, p.6). An agent acquires and strengthens moral virtues when she strives to achieve what is good for another person precisely because it is “good” for the other person (not because of any other consequences of the action relating to intrinsic or extrinsic motives). By “good” we mean that the action: 1) satisfies the other person’s needs; 2) is intended to help the other person learn (to “do what he does better”); and 3) is intended to help the other person gain in moral virtues.

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CONCLUSION In this chapter we have developed a theory of the firm based on a theory of decision making that implies a complex set of relationships between the organization and its managers and directors, on the one hand, and the employees and other stakeholders, on the other. We defined the firm as a community of people with different motivations and interests, with a common goal to be attained by all of them and with a structure and organization that give place to the governance mechanisms, institutions and rules. And we showed that the managers need to take into account all these motivations, not just as an external demand or expectation of the society or of the stakeholders, but as a condition for the success of the firm, measured not by one dimension, profits, but by three dimensions: 1) effectiveness or profitability; 2) attractiveness, i.e. making the firm a place pleasant enough for the persons and helping them to develop their distinctive capacity that are necessary for the future success of the firm, and 3) consistency, i.e. the development of moral attitude, values and virtues of all the persons in the firm (owners, managers, employees, suppliers etc). This implies the identification of all these people with the goals of the company. We think that this viewpoint has many implications for corporate governance: for example, it must comply not only with one criterion, profitability, but with three criteria, that are not reducible to a unique one. This is not what the traditional theories of the firm propose, and it does not make the task of governing the corporations easier. Nevertheless, we think that this adds realism to the theory, and especially that it provides a unified framework for the discussion of corporate governance, as well as facilitate the understanding of the role of ethics in governance issues. In a certain way, subsidiarity has an important role in this new way of understanding corporate governance. If companies are communities of people, if the motivations of these people should be considered in the process of decision making and if the learning and reactions can change the “rules of the game” and the results of the firms’ strategic policies and actions, then we should give these people a certain prominence in the decision making process, especially if we understand that the actions in the corporation are bi-directional: both agents, the manager and the employee, are simultaneously the active and the passive agent, both learn, and the results of these learning are felt by both of them – as well as by the organization, and by the other stakeholders. We think that this adds new insights to the theory of corporate governance and especially to the role of the principle of subsidiarity in it. The foundations of this principle, specifically the dignity and rights of the persons, are the same, but the way of understanding why this is important may be different. In this chapter we have not develop the consequences of this new way of looking at the subsidiarity principle, but we think that there are many interesting conclusions which can be derived from it for corporate governance – and also to other forms of governance, because the theory of action in which we based our analysis is valid for any human community. Subsidiarity will also have important consequences for persons, companies and countries. The principle of subsidiarity indirectly requires that individuals and inferior social groups do as much as they can. It carries a positive requirement to be entrepreneurs, to have initiatives and to strive to obtain whatever one can in accordance with the maximum extent of one’s capabilities. In other words, the principle of subsidiarity entails both freedom and the

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corresponding responsibility and accountability (Melé, 2005). It is merely by “handling their own choices that people learn to grow and be free. Choices, in fact, are our privilege, although, they come distinguished as problems, and stealing people’s choices is wrong” (Handy, 1999).

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REFERENCES Argandoña, A. (2008a). Integrating ethics into action theory and organizational theory. Journal of Business Ethics, 78, 435-446. Argandoña, A. (2008b). Anthropological and ethical foundations of organization theory. In S. Gregg & J.R. Stoner (Eds.) Rethinking Business Management. Examining the Foundations of Business Education (pp. 38-49). Princeton, N. J.: Witherspoon Institute. Bolton, G., & Ockenfels, A. (2000). ERC – a theory of equity, reciprocity, and competition. American Economic Review, 90, 166-193. Commission on Global Governance (1995). Our Global Neighborhood. Accessed 21 December 2009, http://web.archive.org/web/20020224001108/www.cgg.ch/chap1.html. Demb, A., & Neubauer, F. F. (1992). The Corporate Board: Confronting the Paradoxes, Oxford: Oxford University Press. Federowicz, M. (2003). Corporate governance from a comparative perspective: bridging East and West. In M. Federowicz & R. V. Aguilera (Eds.), Corporate Governance in a Changing Economic and Political Environment: Trajectories of Institutional Change. New York, NY: Palgrave Macmillan. Frey, B.S. (1999). Economics as a Science of Human Behaviour. Towards a New Social Science Paradigm (2nd. ed). Dordrecht: Kluwer. Frey, B.S., & Meier, S. (2002). Pro-social behavior, reciprocity, or both? Munich: CESIFO, Working Paper No. 750. Føllesdal, A. (1998). Survey Article: Subsidiarity. The Journal of Political Philosophy, 6, 190-218. Handy, C. (1999). Subsidiarity is the word for it. Across the Board, 36, 7-8. Kahler, M., & Lake, D. A. (2003). Globalization and governance: Definition, variation, and explanation. In M. Kahler & D. Lake (Eds.) Governance in a Global Economy: Political Authority in Transition (pp. 1-30). Princeton, NJ: Princeton University Press. Kahler, M., & Lake, D. A. (2004). Governance in a global economy: Political authority in transition. Political Science and Politics, 37, 409-414 Kahneman, D., & Tversky, A. (2000). Choices, Values, and Frames. Cambridge: Cambridge University Press. Knill, C., & Lehmkuhl, D. (2002). Private actors and the state: Internalization and changing patterns of governance, Governance. 5, 41-64 Koehn, D. (1999). Corporate Governance – Ethics across the board. Houston: University of St. Thomas, Center for Business Ethics. McCawley, P. (2005). Governance in Indonesia: Some comments. ADBI Institute Discussion Paper No. 38. Melé, D. (2001). Loyalty in business: Subversive doctrine or real need? Business Ethics Quarterly, 11, 11-26.

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Melé, D. (2005). Exploring the principle of subsidiarity in organisational forms. Journal of Business Ethics, 60, 293-305. Osterloh, M., & Frey, B.S. (1997). Managing motivation: crowding effects in the theory of the firm. University of Zurich, Institut für betriebswirtschaftliche Forschung, Working Paper No. 31. Pérez-López, J.A. (1987). El desarrollo de la calidad ética de las personas y su influencia en los logros económicos de la empresa. May, mimeo. Pérez-López, J.A. (1991a). Teoría de la acción humana en las organizaciones. La acción personal. Madrid: Rialp. Pérez-López, J.A. (1991b). El logro de la eficacia social a través de la libre iniciativa individual. In A. Pastor, J.A. Pérez-López & D. Melé (Eds.) La aportación de la empresa a la sociedad (pp. 27-49). Barcelona: Folio. Pérez-López, J.A. (1993). Fundamentos de la dirección de empresas. Madrid: Rialp. Pérez-López, J.A. (1998). Liderazgo y ética en la dirección de empresas. Bilbao: Deusto. Reichheld, F. (1995). The Loyalty Effect: The Hidden Force behind Growth, Profits and Lasting Values. Boston, MA: Harvard Business School Press. Rosanas, J.M. (2008). Beyond economic criteria: A humanistic approach to organizational survival, Journal of Business Ethics, 78, 447-462. Rosanas, J.M., & Velilla, M. (2003). Loyalty and trust as the ethical bases of organizations. Journal of Business Ethics, 44, 49-59. Rosanas, J.M., & Velilla, M. (2005). The ethics of management control systems: Developing technical and moral values. Journal of Business Ethics, 57, 83-96. Saunier, R. & Meganck, R. A. (2009). Dictionary and Introduction to Global Environmental Governance. London: Earthscan. Schäfer, W. (2006). Harmonisation and centralisation versus subsidiarity: which should apply where? Intereconomics, 41, 246-249. Sen, A. (1977). Rational fouls: A critique of the behavioral foundations of economic theory. Philosophy and Public Affairs, 6, 317-344. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52, 737-789 Simon, H.A. (1991). Organizations and markets. Journal of Economic Perspectives, 5, 25-44. Stark, O. (1995). Altruism and Beyond. An Economic Analysis of Transfers and Exchanges within Families and Groups. Cambridge: Cambridge University Press. Stöhr, W.B. (2001). Subsidiarity: A key concept for regional development policy. In W. B. Stöhr., J.S. Edralin, & D. Mani (Eds.) New Regional Development Paradigms. Volume 3. Decentralization, Governance, and the New Planning for Local-Level Development (pp. 35-52). Westport, CT: Greenwood Press.

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ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 10

HIERARCHICAL NETWORK GOVERNANCE: AN EXAMINATION OF KEIRETSU NETWORKS Takao Ito1 and Christopher J. Medlin2 1

2

Ube National College of technology, Japan Business School, University of Adelaide, Australia

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ABSTRACT This chapter elaborates network governance on the basis of information and influence. A network structure is defined in terms of boundaries and differentiation of interdependencies between firms. Two hypotheses allow examination of the relative role of relational versus hierarchical governance, through the mechanisms of information sharing versus influence respectively. In an empirical examination of the Keiretsu networks of Toyota and Mazda, we find a strong correlation between network centrality, measured as out-closeness, and firm profitability. This result suggests that influence proceeds mainly in the direction of share ownership and that these networks are hierarchical. The final sections of the chapter discuss the limitations of the research and future research.

1. INTRODUCTION In the commercial world, business networks formed of connected firms have taken on greater importance (Achrol & Kotler, 1999). Today, multi-national firms operate as networks of brother and sister firms across the globe, not always operating in concert and not always according to a master drum. Rather firms are internationalising via many modes; including full ownership of subsidiaries, to strategic alliances that involve cross share-holdings, and through a range of contractual relationships that extend from highly formalised to relationships based on trust and the shake of a hand. These networks of firms are an important element of the present globalisation and their governance procedures provide them with an

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ability to be adaptive in a changing global environment. This chapter examines how firms govern themselves in a network. Why do firms create networks, rather than maintain arms’ length market transactions? Networks allow risk sharing, lower transaction costs, and are always based on an opportunity for joint value creation (Jarillo, 1988). Also, the flexible and adaptive nature of networks allows firms to react quickly to environmental change (Miles & Snow, 1984). In a business network, firms are connected by interactions (Håkansson & Snehota, 1995). The interactions are based on exchanges of resources, products and information. The exchanges connect the capital equipment and activities of many individual firms (Johanson & Mattsson, 1987). Gulati (1998) notes that there are structural and relational connections in a network. Developing, building and maintaining structural connections between the firms requires executive and managerial time and resources. However, equally, the relationships formed by executives across a network create the conduit for information flow and so the governance of the network. The governance processes can follow a structural and/or relational path. In this chapter the focus is on these two governance mechanisms. Williamson (1996) defined governance as the “identification, explication, and mitigation of all forms of contractual hazards”. Governance in a network setting evidently extends further than contractual issues, because networks extend through time (Medlin, 2004) and contracts are always incomplete (Macneil, 1974). Thus, network governance is a different concept to firm level and relationship governance, but evidently related. In this chapter, we explore the role of network governance and network structure on the way firms achieve their profit goals. This requires an elaboration of the concepts of firm networks and their governance. The chapter is structured in the following manner. First, we discuss the concepts of networks and governance. We begin by elaborating firm networks and their structure. Next, we introduce the concept of governance and explore how access to strategic information can shape network structure. In the second section, we contrast relational and hierarchical governance in networks. We also develop hypotheses to examine the association between network structure, a result of governance, and firm profit. The third section introduces our methodology, including the keiretsu of Mazda and Toyota and an introduction to graph theory and data collection. Subsequently, we discuss the results and draw conclusions concerning network governance in the Mazda and Toyota networks. In the final two sections, we discuss limitations and future research.

2. FIRM NETWORKS AND GOVERNANCE In this section we discuss the nature of firm networks and the goals of firms in joining a network. Subsequently, we discuss network governance and contrast relational and hierarchical governance in networks.

2.1. Networks A network is a set of actors connected by their activities. Thorelli (1986) defined a network generically as ‘nodes’, and ‘links’ manifested through some forms of interaction.

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This definition highlights the importance of interactions in defining the actors and their relative position to each other. Interactions create the network structure. Of course, as interactions are on-going and changing, the positioning of the actors, and so their interdependencies, is constantly in flux. Further, as the network is an evolving structure, the network pre-exists any single firm (Johanson & Mattsson, 1987; Ritter, 2000). In a business network, interactions are based on exchanges of resources, products and information. The exchanges connect the firms and their activities (Johanson & Mattsson, 1987). The connections across a network of firms creates a resource constellation and an activity pattern (Håkansson & Snehota, 1995). The operation together of the activities and the resource constellation across the network embeds raw materials and supplies into final products for end customers. The expected future demand of final customers is the reason for the firms to create the network. Consider the interactions: they are on-going. The network extends through time (Medlin, 2004). The interactions are based on connected capital investments by the firms (Medlin & Möller, 2009). Developing, building and maintaining these capital connections between firms requires executive and managerial time and effort in shaping the inter-firm business relationships (Johanson & Mattsson, 1987). The connection of relationships across a network creates the conduit for information flow. Why do firms join networks? Networks offer benefits, as the connections between firms provide information and spread risk (Jarillo, 1988). Networks join the capital equipment and resources of firms into greater constellations, more able to compete. A network competes against other networks (Thorelli, 1986), and when a firm joins a network the competitive risk is spread across the network. The lower the barriers of entry to an industry, and the greater the level of capital investment and risk, the more likely firms will seek network membership. Each firm brings a different resource, production technology, or market access to the network (Håkansson & Snehota, 1995). Thus, each firm has different goals within the network (Halinen, 1998). While there is interdependence between the firms in the network, each firm remains self-directed and to some degree autonomous. Joining a network, or thinking in network terms about competition, is a firm’s way of ensuring self-interest and profit. Implied in the above paragraphs are three very important provisions. First, all firms in the network must benefit, that is each firm must achieve long-term profit or they will leave. Second, there are common commercial interests between the firms that call them together and provide a range of commercial logics to the cooperative undertaking. Third, the network is composed partly organically and partly intentionally with firms connecting through chance and/or specific strategies. Thus, a business relationship might begin by chance (cf Hite & Hesterly, 2001) or by design (Moller & Rajala, 2007), and then is maintained because of access to resources or market.

2.2. Network Structure Network structure is the pattern and strength of connections between firms. The connections are not only direct; rather in a network there are many chains of connections, so that a firm can even be connected to a firm far removed through more than one chain. Thus, more connected firms are in a number of chains of connections. In addition, network structure

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depends on the relative importance of the interdependencies between the firms (Gulati 1998) and on definitions of network boundaries. Importantly, variations in structural interdependencies create network boundaries, and boundaries affect interpretations of interdependencies and so network internal structure. With regard to boundaries a useful concept to consider is the distinction between ‘a’ network and ‘the’ network. ‘A’ network of firms exist when a boundary is imposed (Jones, Hesterly, & Borgatti, 1997). ‘The’ firm network exists without boundaries. Ford and Håkansson (2006b) note that all firms are connected within the single network. Further, the firm network is spread through time (Medlin, 2004), with a past and potential futures, and without a time boundary. In the network all firms are eventually connected to each other and all are competing to hold and enhance their position in the future network. Both cooperation and competition exist beside each other in the network of firms (Thorelli, 1986). The firms compete for their relative share of the network profits. The firms also compete to maintain a strategic position within the network (Jarillo, 1988). But what is strategic position in a firm network? All strategic positions are relative to the network boundary. Where is the boundary? That is a strength of a firm network: the boundary shifts as the firms adapt. New firms with specialist resources can be brought into a network to resolve specific problems (Jarillo, 1988); equally positions change within the network as the firms adapt. The network structure is always changing as interdependencies between the firms adjust. Executives and managers can only influence firms near to them within the network, because they face the problems of bounded rationality (Simon, 1979) and limited resources. As a result executives, in managing their firms and relationships, impose network boundaries in time and space. Firm and relationship strategies are bounded in time, with presumed capital investments, and activities directed at specific markets. In this limited perspective of the network, many separate networks are present: each is a network. The open question is: how many business relationships should be included within a network? The structure of interdependencies between the firms in a network provides at least two ways to configure boundaries. First, the interdependencies exist for the sake of common purposes: the end customers. Managers recognise end customers, to some degree, and can apply the concept to configure boundaries (Kadushin, 1976). This is the concept of a value net (Parolini, 1999), where firms are focused on providing value to specific customers. Second, the nature of interdependencies between firms also provides natural network boundaries. Interdependencies between firms extend from (1) high and co-committed through to (2) almost one-sided contract-hierarchies and around to (3) completely independent, as with market exchanges (see Aurifeille & Medlin, Chapter 8, also Medlin 2003). Evidently the existence of market exchanges between firms acts as a network boundary enclosing those firms that are highly interdependent, and excluding firms that operate independently in a pure market context. The existence of market connections acts naturally as a type of network boundary. In addition, firms connected by contract-hierarchy to a lead firm within the network are inside the boundary. The follower firm in these relationships has little influence and simply follows the direction of the lead firm. Here we draw a strong boundary beyond the following firms, however in reality there is a more indistinct boundary, as interdependencies are always changing. For example, a following firm has countervailing power (Etgar, 1976), which is based on the limited dependence of the leading firm. However, the follower firm also has the

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potential to shift to another network. Thus, the boundary is clear for the moment, depending on the present commitment of the follower firm, whether towards a network or in the direction of another network. Evidently, the commitment of the follower firm strengthens the boundary affect, at least while commitment continues. Apparent within the preceding discussion is not only the idea that the interpretations of boundaries must continually shift; but that there are central firms in the network structure. That is, there are central firms in secure positions and other firms in less secure network positions. There can be inner-partial boundaries and an outer network boundary. Here we approach network structure as a question of position relative to boundaries, where variations in position and strengths of interdependencies inside a boundary influence network position. Thorelli (1986) and Ford and Håkansson (2006a) remind us that all positions in a network are a matter of relativities. The ability to change another firm’s position in a network is evidently a key to influencing network membership. Thorelli (1986, p.38) comments that all positions are a matter of power, defined as the “ability to influence the decisions or actions of others” and that power is rarely uni-lateral, rather power like position is a relative matter. Cook and Emerson (1978) report an empirical association between power and network position, with power being an attribute of position. There are at least two ways that more connected firms in a network can influence network structure, that is firm position. First, more connected firms command greater access to information (Jarillo, 1988), and so are aware of significant change before other firms. Information, and especially information of external changes driven by end customers and the resulting strategic changes of firms, allows the connected firms to position themselves with their resources and activities into more profitable positions in a network. Second, firms with large capital investments and long investment life-spans cast a shadow from the future (Axelrod, 1984). This shadow acts as a form of ‘environmental power’ (Gaski, 1984; Tedeschi & Bonoma, 1972). These firms do not need to use their environmental power. The mere recognition of the existence of environmental power is enough to constrain re-positioning by other firms. These firms, that command environmental power, have a greater influence over other firms’ relative position in a network. Interesting in the two ideas above is the question of cause and effect; for network position is necessarily highly interrelated with information access/quality and power/resource application. However, the arrow of time helps disentangle cause and effect to some degree, for while power/information and position within network structure are necessarily highly correlated, ‘the’ network and ‘a’ specific network both have a past. This means joining and moving into central positions in a network requires entering ‘a’ network, or creating ‘a’ network. Since all firms are already in ‘the’ network or are created to join in ‘the’ network, the new member must be invited into ‘a’ network. For example, the boundary is shifted so that specialist resources can be brought in to resolve specific problems (Jarillo, 1988). In the case of ‘a’ network initiator, other firms must change their allegiance and interdependencies to other networks to join, but already the initiator firm is in a key position. Thus, in both cases, network position and structure precedes and provides access to information and power. This argument supports Cook and Emerson’s (1978) empirical results in an experimental laboratory study. Power is an attribute of network position first, and position provides access to information and power over other firms network positions, so that a firm’s positions in a future network structure are secured. However, this analysis of network dynamics is determined by where boundaries are imposed.

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2.3. Network Governance Williamson (1996) defined governance as the “identification, explication, and mitigation of all forms of contractual hazards”. This definition points to the central concerns of governance: creating certainty, that is risk reduction, and ensuring profitable outcomes. Clearly, governance in a network setting extends further than contractual issues. Contracts are written at a point in time and are always incomplete (Macneil, 1974), but firm networks are dynamic with boundaries and positions in continual flux. Network governance is evidently an analogue concept to firm level and relationship governance (see Aurifeille & Medlin, Chapter 8), with the same intended outcomes of certainty and profit; but with concerns and methods relative to a network level. Thus, network competitiveness and certainty are the outcomes and the instruments are an ability to change business relationships; that is, to influence autonomous firms network position through information and resources. Jones, et al. (1997, p.914) described network governance as involving “a select, persistent, and structured set of autonomous firms … engaged in creating products or services based on implicit and open-ended contracts to adapt to environmental contingencies and the coordinate and safeguard exchanges”. This definition has all firms governing through an under-determined and evolutionary approach, without explicit contracts to formalise exchanges. However, in our view firms in a network operate in their own self-interest, as well as to collective interests (Medlin 2006). Thus, in distinction to Jones et al. (1997) we contend that contracts maybe ‘explicit’ or ‘implicit’ to varying degrees and that firm self-interest and so the intention to safeguard exchange, or reduce uncertainty, is considerably more prominent in the processes of developing a network. This means that network governance is a firm level competence, rather than an under-determined and dispersed function of the firm network. Thus, we define network governance as the use of resources, information and influence by a firm to change the position of any firm within a network, so as to increase the long-term competitiveness and adaptability of the network relative to other competing networks, and so increase the profit for the focus firm. As the definition is regarding a network, a specific boundary is required. The definition also means that network governance is concerned with structural matters first and that relationships between firms are second and supportive. Competence at the processes of network governance is a firm level construct; while the outcome is conceptualised at the network and firm levels. A firm is to some degree competent at influencing the position of firms in a network and sound network governance results in a more effective network capable of greater profit relative to competing networks. Thus the outcomes of network governance, apart from greater network competitiveness and adaptability, are a change of interdependencies across relationships in the network or a change of boundaries, which can be either inner-partial and/or outer network boundaries. Network governance is different from the concept of network capability, which has been defined as a firm’s “ability to develop and utilise inter-organisational relationships” (Walter, Auer, & Ritter, 2006). Network capability has the purpose of relationship and firm profitability, whereas network governance has wider concerns than inter-organisational relationships. Evidently, network governance relies on network capability, but the purpose is the competitive interests of the collective network. As with network capability, the use of influence is important to network governance. However, the role of power and influence in firm networks is not strongly researched. Clearly, position in a firm network provides the opportunity for influence and gives a more

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connected firm considerable power (Cook & Emerson, 1978). Yet, the concept of network governance expounded above relies on the concept of collective interests, where the more connected firms somehow reconcile variations in firm self-interest, as they shift the dependencies between firms in a network. This suggests that network governance, like business relationships (see Aurifeille & Medlin, Chapter 8), is composed as mixtures of market, hierarchy and relational coordination mechanisms. According to Thorelli (1986) fiat and power are important in networks. However, within the industrial marketing and purchasing literature (cf Håkansson, 1982; Håkansson & Snehota, 1995) the role of power is underplayed. This follows directly from the concept that each firm has autonomy and different goals within the network (Halinen, 1998). Instead there is a reliance on relationships based on trust and mutual gain through interdependence (Easton & Araujo, 1994). Trust allows managers to accept the influence of another firm, whether by a resource allocation or the provision of key information, on the basis that mutual goals will be achieved. In this perspective of the business network, interdependence between firms is stronger in effect than is dependence of one firm on another. As a result, network governance is highly decentralised, as suggested by Jones, et al. (1997), with social and relational mechanisms coordinating the network. However, power is not removed from networks because, even if power is not applied, firms will still organise their strategy according to interpretations of power (Thorelli, 1986), especially environmental power. Thus, influence and perceived power can also play a role in network governance. Influence can be thought of as the “ability to strongly suggest a specific future deployment of resources and commercial exchanges” (Ito et al., 2009). In a network, the ability to sustain influence arises from access to information and control of key resources. This suggests that more connected firms in a network will have greater ability to influence the position of other firms, including which firms can join in a network, and how firms are connected to each other in a network. However, these roles of more connected firms also open the question of whether an intentionally formed network is governed more strongly through hierarchical or relational mechanisms. Presumably different networks will have varying blends of these two governance forms and the mix will vary through time.

3. HYPOTHESES The literature on networks proposes two main forms of influence that can be applied to positioning firms relative to each other in a network. The first is relational mechanisms, where there is mutual trust so that information and influence flows bi-directionally through business relationships. The influence processes are reciprocated between the firms. In the second mechanism the application of influence and power is more heavily weighted towards one direction, with a lead firm more strongly influencing a follower. Thus, we propose competing hypotheses. The first follows the industrial marketing and purchasing literature (Håkansson, 1982; Håkansson & Snehota, 1995) and proposes that influence is bi-directional, so that network governance is essentially relational. This suggests that chains of connectedness to more powerful firms should lead to greater firm profitability. Being connected to a more powerful firm that is connected to a more powerful firm and so on

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should result in the initial focal firm being more profitable than a firm that is not connected in such a manner. H1: Firms more connected by chains of relationships to more powerful firms in a network have greater profits. The second follows Thorelli’s (1986) hypothesis that the influence processes in a network are based on position power. As a result influence processes and mechanisms will be more uni-directional within a network. Thus, the relative position of a firm in a specific network connection has an impact on profitability. This uni-directional elaboration of influence suggests that chains of connectedness to less powerful firms should lead to greater firm profitability. That is greater influence over a firm, that has greater influence over another firm and so on should result in the initial focus firm being more profitable than a firm that is less connected in such a manner. H2: Firms more connected by chains of relationships to less powerful firms in a network have greater profits.

4. EMPIRICAL TEST

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In this section of the chapter we introduce the empirical setting, the network boundary, the data, the key constructs, and the results. The results are presented in parts; moving from descriptive measures of the networks that aid in framing our discussions, to a final part presenting results that allow an examination of our hypotheses.

4.1. Keiretsu Network Organisation The keiretsu is a specific and intentional network of organisations with integrated and interlocking business relationships and joint shareholdings. As an affiliation of enterprises, the keiretsu plays an important role in the growth of automotive manufacturing in Japan. Lincoln and Gerlach (2004) commented that “the most distinctive form of network organisation in Japan – and the most critical to understanding its economy – is the clusters of industrial, commercial, and financial corporations known as the keiretsu ”(pp.15). Both historical and qualitative analyses of the keiretsu have been recently undertaken (Lincoln & Gerlach, 2004; Moloney, 2005). Most of the quantitative approaches have applied graph theory. For example, Brass and Burkhardt (1992) conducted a study of centrality and power in the organisation of a newspaper publishing company. Other recent studies have also focused on the analysis of the relationships among the firms in the keiretsu of Toyota and other organisations (Ito, 2002; Wakabayashi, 2003). Ito (2004) examined the correlation coefficients between the production centrality index of a network and corporate performance indicators, such as sales and ordinary profit.

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Table 1. Firms by Category in the Mazda and Toyota Networks in 2004 Network Mazda Toyota

Total Firms 223 255

Banks/ financial institutions 40 47

Suppliers

Singletons

58 75

118 130

Independent pairs 6 firms 2 firms

Carmaker 1 1

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4.2. Network Boundary Given that firm-network position is also a result of the network boundary decision, we decided to conduct our empirical test with two cases: Toyota and Mazda. In this study we define the boundaries of the keiretsu of Mazda and Toyota by using three criteria. First, the firm must be a member of the appropriate value net. That is the firm must supply financial resources, raw materials or car parts that end up embedded within Mazda or Toyota automobiles. Second, provided firm A and B hold shares in each other or at least A or B holds shares in the other we assume that these firms are within the network boundary. Third, the firms must all be connected by their cross shareholdings. Thus, if firm C and D are in the value net, and there is a cross-shareholding, but they are not connected to other firms by cross shareholding they are excluded. In graph theory firms C and D are referred to as either ‘singletons’ or ‘independent pairs’. As a result, analysis proceeded with 99 firms in the Mazda network (ie Mazda, 58 suppliers and 40 banks/financial institutions) and 123 firms in the Toyota network (Toyota, 75 suppliers and 47 banks/financial intermediaries). The banks/financial institutions cannot be excluded from the networks as they provide suppliers with resources to smooth production and assure supply. These institutions are also fully embedded in the network through crossshareholdings. Table 1 provides an overview of the data, including the addition of Mazda and Toyota to their respective networks.

4.3. Data Data on cross-shareholdings in the keiretsu of Mazda and Toyota was collected from secondary sources including the Japan Automotive Parts Industries Association (JAPIA), the Automotive Trade Journal Co., Inc. (ATJC) and investigations of the selected companies (JAPIA&ATJC, 2005). The time boundary for data collection was 2004 for both Mazda and Toyota. There were no firms who were involved in both networks on the basis of cross-share holding. The cross-shareholding data was placed in a matrix, as shown in Table 2, where values in each cell indicates the percentage of cross shareholdings. For example, Master Trust Bank of Japan (row 40) invested in the stock of three firms: Pioneer Corporation (col.105 - 7.9%), Hitachi Ltd. (col. 108 - 6.7%), and the Furukawa Electric Co., Ltd16 (col. 112 - 3.6%). Thus, the data matrix is asymmetric, as firms may invest in one direction, or have different shareholdings in each other. 16

The Furukawa Electric Co., Ltd. Changed its name to Furukawa Electric Co., Ltd. from August 1, 2009.

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Takao Ito and Christopher J. Medlin Table 2. A Selected Section of the Cross Shareholdings Matrix for Mazda in 2004

31 32 33 34 35 36 37 38 39 40 41 42 43 44

105 0 0 0 0 0 0 2.3 0 0 7.9 9.1 2.3 0 0

106 0 0 0 0 0 0 0 0 0 0 0 0 0 0

107 0 0 0 0 0 0 0 0 0 0 0 0 0 0

108 3.1 0 0 0 0 2.4 0 0 0 6.7 6 0 0 0

109 0 0 0 0 0 0 0 0 0 0 0 0 0 0

110 0 0 0 0 0 0 0 0 0 0 0 0 0 0

111 0 0 0 0 0 0 0 0 0 0 0 0 0 0

112 0 0 0 0 0 0 0 0 0 3.9 4.9 0 0 0

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The networks of cross shareholdings for Mazda and Toyota are illustrated in figures 1 and 2 respectively. A visual comparison of the cross-shareholdings shows that the Toyota network is more connected than the Mazda network. This gives a first indication that network governance effects are more likely to be highly displayed in the Toyota network.

Figure 1. Depiction of Cross Shareholdings of Mazda in 2004.

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Figure 2. Depiction of Cross Shareholdings of Toyota in 2004.

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4.4. Construct Measurement The hypotheses require constructs that measure relative power of one firm over another, and also chains of relationships. Centrality is one of the key indexes in network structure analysis. Centrality is calculated from many different viewpoints; such as ‘closeness’, ‘degree’ and ‘information’ (Borgatti & Everett, 2006). The closeness measurement can be based on many different flows, such as money and gossip (Borgatti, 2005). Communication links are also valid for the calculation of closeness (cf Pathak, Mane, & Srivastava, 2006). Closeness, on the basis of relative cross-shareholdings, is applied in this paper. In a first step we examine absolute closeness, and specifically in-Closeness and outCloseness. In-Closeness provides a numerical value for each firm in the network, according to the degree that the firm is connected to other firms by incoming connections; while outCloseness is based on out-going connections. The asymmetric nature of cross-shareholdings allows an examination of the relative direction of share ownership, and so the relative power. Thus, greater relative power is attributed to the firm owning more shares by proportion in another. In addition, the direction of share ownership allows calculation of a measure of chain connectedness so that we can examine our hypotheses.

4.4.1. Absolute Closeness Absolute closeness is calculated as follows (Sabidussi, 1966): C C ( p K ) 1 

n

 d(p i 1

i

, p k );

k  1 , 2 ,   , n

where Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

(1)

136

Takao Ito and Christopher J. Medlin d(pi,pk) …. the number of edges in the geodesic between pi and pk.

Because the network of cross shareholdings is asymmetric, closeness is calculated in two ways: in-closeness and out-closeness. Figures 3 and 4 display the Mazda and Toyota networks of cross-shareholdings, respectively, on the basis of in-closeness and out-closeness. In figure 3 firms are shown on the horizontal axis, with firms 1 to 40 being banks/financial institutes, firm 41 is Mazda, and the remainder supplying firms. In figure 4, firms on the horizontal axis are banks and financial institutes (1 - 47), Toyota (48) and supplier firms (49 - 123). A further examination of Figure 3 and Figure 4 shows variation of in-Closeness and outCloseness according to whether the firm is a bank/financial institution or a supplier. For both Mazda and Toyota the in-Closeness of banks/financial institutions is stable, while inCloseness for suppliers varies dramatically. The pattern for out-Closeness is, in general terms, the converse. That is, for both Mazda and Toyota the out-Closeness of banks/financial intermediaries displays variation, and for suppliers out-Closeness is generally stable. However, there is evident some variation in out-Closeness for suppliers in the Mazda and Toyota networks. The meaning of these results is that banks/financial institutions hold cross-shareholdings in other firms, but other firms do not hold shares in the banks/financial intermediaries. Whereas supplier firm shares are held by banks/financial institutions and also other supplier firms. Here is evidence of an inner-partial boundary.

0.00016

0.000116 0.000114

0.00014

0.000112 0.00012 0.00011 0.0001

0.000108

0.00008

0.000106 0.000104

0.00006

0.000102

Left axis = inCloseness

inCloseness outCloseness Right axis = outCloseness

0.00004 0.0001 0.00002

0.000098 0.000096

0 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

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4.4.2. Closeness Centralization Closeness centralization, also called ‘entire closeness’, is the variation in the closeness centrality of nodes, divided by the maximum variation in closeness centrality scores possible in a network of the same size (Freeman, 1977). This measure allows a comparison of different networks on a single scale.

Figure 3. In and Out Closeness in the network of Cross Shareholdings of Mazda in 2004.

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Figure 4. In and Out Closeness in the network of Cross Shareholdings of Toyota in 2004.

Closeness centralization is calculated as follows:

Cc 

n 2n  3 C c' ( p * )  C c' ( p i )  2 n  3n  2 i 1





(2)

where

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C ' C ( p*)  max C ' C ( p i ) The closeness centralization algorithm gave a result of 20.29 for Mazda and 33.03 for Toyota. This indicates, after accounting for the relative differences of each network, that the Toyota network has firms with a higher level of connectedness, or centrality, than the Mazda network. This difference is a result of a pattern within the Toyota network, where Toyota and a few Toyota suppliers have very high values of out-Closeness. This pattern means that a central group of Toyota supply firms have share-holdings in other supplier firms. The implication of this pattern is that influence within the Toyota supplier inner-partial boundary is stronger than within the Mazda supplier inner-partial boundary.

4.4.3. Analysis of In-Closeness, Out-Closeness and Profit In this section we present a correlation analysis between in-Closeness, out-Closeness, and ordinary profit for each of the firms in the Mazda and Toyota keiretsu (see Tables 3 and 4). These tables allow comments on our hypothesis. There is no correlation between in-Closeness and firm profit, so that hypothesis one is not supported. That is when a firm is connected to more other firms by chains of partial in-coming share ownership that firm is neither more or less profitable.

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Takao Ito and Christopher J. Medlin Table 3. Correlation ratio between closeness and profit of Mazda

Ordinary Profit

**

in-Closeness

out-Closeness

Pearson’ correlation ratio

-0.13

.839**

Significant probability

0.352

0.000

N

53

53

The correlation ratio is significant (two sided) at 1%. N is the number of firms.

Conversely, there is a strong correlation between out-Closeness and firm profit, supporting hypothesis two. That is when a firm is connected to more other firms by chains of partial share ownership that focal firm is more profitable. This supports the notion that the pattern of influence in the Toyota and Mazda keiretsu is more uni-directional than bidirectional. That is these keiretsu networks are hierarchically governed.

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5. DISCUSSION The results are interesting when considered together. While the results suggest that network governance, in the case of Toyota and Mazda, is through hierarchical mechanisms, the lack of a correlation between in-Closeness and firm profit is intriguing. The explanation appears to be that the connectedness of other firms shareholdings inward bound to a firm does not lead to information and influence flow back along the chain of share-holdings; rather influence and information tends to flow more in one direction from share owner to the partly owned firm, and so on in the direction of share ownership. The interesting finding of the empirical study is that the relative direction of connectedness in the Mazda and Toyota networks affects firm performance. Centrality to the network and so information flow according to position alone is not enough to secure firm performance. Rather the direction of influence and the chains of that influence are what explain firm performance in the Mazda and Toyota keiretsu. This result supports Thorelli’s (1986, p.38) hypothesis that power is “the central concept in network analysis”. Table 4. Correlation ratio between closeness and profit of Toyota  Ordinary Profit

Pearson’ correlation ratio Significant probability N

**

in-Closeness -0.003 0.982 66

out-Closeness .795** 0.000 66

The correlation ratio is significant (two sided) at 1%. N is the number of firms.

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6. LIMITATIONS AND FUTURE RESEARCH We begin this section by considering methodological limitations and then move onto theoretical research directions. There are a number of methodological limitations to the empirical study in this chapter. First, we have examined only two very specific networks. The Toyota and Mazda keiretsu are strongly embedded in Japanese society. An historical analysis of keiretsu by Ozawa (2003) suggest that the keiretsu are one phase in the development from a hierarchical society to one where economic organisations are linked according to functional efficiency. This may be the case, as our results are found within specific boundary conditions. Second, the choice of boundary was on a limited version of cross-shareholdings. While shareholdings appear to be an appropriate way to consider influence and resource disposition to influence firm-network position, the specific role of owning shares in other firms (ie outcloseness) suggests that a boundary based on share ownership and in particular the ratio of ownership, or weighting of influence, would be an interesting area for future study. A third limitation is that the data applied in this paper is cross-sectional, that is for only one fiscal year. The time boundary chosen has an influence on the result when the phenomena being studied is a dynamic one, as is the case with a network. Future studies might apply a time series approach. Finally on methodological limitations, although in-Closeness and out-Closeness are effective indices to show the distance of stock-holding from a firm to other firms and so the structure of a network, other closeness indices should also be calculated. Future studies could calculate the centrality indices of degree and betweeness, as well as density, balance and effective size. With regard to future theoretical research, the results presented in this chapter suggest that industrial networks can be composed of hierarchical governance mechanisms. However, there remains considerable theoretical development to fully conceptualize how networks are governed. In this chapter we proposed that network governance is a firm level construct with outcomes at the network and firm levels of analysis. How governance of a network is differentiated from relationship governance and network capability requires further theoretical development.

CONCLUSION We reviewed the literature of network structure and network governance, and differentiated network governance from network capability. The relative nature of network structure was explored through discussion of network boundaries and firm interdependencies. We proposed a new definition for network governance based on a firm capability, but a network goal; with the driving force being eventually firm performance as derived from the network and the business relationships that make up a network. We hypothesized that both information and influence are the mechanisms by which firms govern their network. In a quantitative, empirical study of the Mazda and Toyota keiretsu, we found a strong correlation between out-Closeness and firm profit, but no correlation for in-Closeness and firm profit; where the connection was relative firm cross-shareholdings. These results suggest that partial ownership of another firm, which has partial ownership of another firm and so on

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in a chain like effect through a network is associated with firm performance, at least for the Mazda and Toyota keiretsu. From an international and global perspective these results suggest that strategic patterns of partial share ownership, including the chains of partial ownership, offer a governance mechanism that is effective for geographically spread firms. Further research is required to substantiate this claim, as the present research was conducted for only two Japanese networks.

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REFERENCES Achrol, R.S., & Kotler, P. (1999). Marketing in the Network Economy, Journal of Marketing, 63 (4), 146-164. Aurifeille, J.-M., & Medlin, C.J. (2011). Inter-firm Governance and Relationship Performance: A Study of Market, Hierarchy and Relational Coordination Mechanisms. In J.-M. Aurifeille, J.G. Aluja, C.J. Medlin & C. Tisdell (Eds.), Globalisation, Governance and Ethics. New York: Nova Science. Axelrod, R. (1984). The Evolution of Cooperation: Basic Books, New York 1984. Beauchamp, M.A. (1963). An Improved Index of Centrality, Behavioral Science, 10, 161163. Borgatti, S.P. (2005). Centrality and Network Flow, Social Networks, 27, 55-71. Borgatti, S.P., & Everett, M.G. (2006). A Graph-theoretic Perspective on Centrality, Social Networks, 28, 466-484. Brass, D.J., & Burkhardt, M.E. (1992). Centrality and Power in Organizations, in Networks and Organizations: Structure, Form and Action, N. Nohria and R.G. Eccles, (Eds.), Harvard Business School Press, 191-215. Cook, K.S., & Emerson, R.M. (1978). Power, Equity, and Commitment in Exchange Networks, American Sociological Review, 43 (5), 721-39. Easton, G., & Araujo, L. (1994). Market Exchange, Social Structures and Time, European Journal of Marketing, 28 (3), 72-84. Etgar, M. (1976). Channel Domination and Countervailing Power in Distributive Channels, Journal of Marketing Research, 13 (August 1976), 254-62. Ford, D., & Håkansson, H. (2006a). The Idea of Business Interaction, The IMP Journal, 1 (1), 4-27. Ford, D., & Håkansson, H. (2006b). IMP - Some Things Achieved: Much More To Do, European Journal of Marketing, 40 (3/4), 248-258. Freeman, L.C. (1977). A Set of Measures of Centrality Based on Betweenness, Sociometry, 40 (1), 35-41. Gaski, J.F. (1984). The Theory of Power and Conflict in Channels of Distribution, Journal of Marketing, 48 (Summer 1984), 9-29. Gulati, R. (1998). Alliances and Networks, Strategic Management Journal, 19, 293-317. Håkansson, H., & Snehota, I. (1995). Developing Relationships in Business Networks, London: International Thomson Business Press. Halinen, A. (1998). Time and Temporality in Research Design: A Review of Buyer-seller Relationship Models, in Network Dynamics in International Marketing, P. Naudé & P.W. Turnbull, (Eds.), Oxford: Elsevier Science, 112-139.

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Hite, J.M., & Hesterly, W.S. (2001). The Evolution of Firm Networks: From Emergence to Early Growth of the Firm. Strategic Management Journal, 22 (3), 275-286. Ito, T. (2002). Network Organization and Information, Hakuto Shobo, (Japanese Edition). Ito, T. (2004). Quantitative Analysis of a Firm's Relationship in the Keiretsu of Toyota Group, Proceedings: Innovations Through Information Technology, New Orleans: Information Resources Management Association. Ito, T., Medlin, C.J., Passerini, K., & Sakamoto, M. (2009). Influence, Trust and Trade in the Keiretsu of Toyota: A Centrality Analysis, in Trust, Globalisation and Market Extension, J-M. Aurifeille, C.J. Medlin, & C. Tisdell, (Eds), New York: Nova Science, 101-118. JAPIA&ATJC (2005). Japanese Automotive Parts Industry '05 (Japanese Edition): Automotive Parts Publishing Company. Jarillo, J.C. (1988). On Strategic Networks, Strategic Management Journal, 9 (1), 31-41. Johanson, J., & Mattsson, L-G. (1987). Interorganizational Relations in Industrial Systems: A Network Approach Compared with the Transaction Cost Approach, International Journal of Management and Organization, 17 (1), 34-48. Jones, C., Hesterly, W.S., & Borgatti, S.P. (1997). A General Theory of Network Governance: Exchange Conditions and Social Mechanisms, Academy of Management Review, 911-945. Kadushin, C. (1976). Networks and Circles in the Production of Culture, American Behavioural Scientist, 19, 769-784. Lincoln, J.R., & Gerlach, M.L. (2004). Japan's Network Economy: Cambridge University Press. Macneil, I.R. (1974). The Many Futures of Contracts, Southern California Law Review, 47, 691-816. Medlin, C.J. (2003). A Dyadic Research Program: The Interaction Possibility Space Model. Journal of Business-to-Business Marketing, 10 (3), 63-79. Medlin, C.J. (2004). Interaction in Business Relationships: A Time Perspective, Industrial Marketing Management, 33 (3), 185-193. Medlin, C.J. (2006). Self and Collective Interest in Business Relationships, Journal of Business Research, 59 (7), 858-865. Medlin, C.J., & Möller, K. (2009). Capial Investment and Network Logic, Proceedings: Annual IMP Conference, Marseilles. Miles, R.E., & Snow, C.C. (1984). Fit, Failure and the Hall of Fame, California Management Review, XXVI (3), 10 - 28. Moller, K., & Rajala, A. (2007). Rise of Strategic Nets: New Modes of Value Creation. Industrial Marketing Management, 36 (7), 895-908. Moloney, J., (2005). Keiretsu in Japan, Last Access: October 1st, 2009 from http:// encyclopedia. thefreedictionary.com/keiretsu. Ozawa, T. (2003). Japan's Network Capitalism in Evolution. In J. H. Dunning & G. Boyd (Eds.), Alliance Capitalism and Corporate Management: Entrepreneurial Cooperation in Knowledge Based Economies (pp. 230-248). Cheltnam, UK: Edward Elgar Publishing. Parolini, C. (1999). The Value Net: A Tool for Competitive Advantage, Chichester: Wiley. Pathak, N., Mane, S., & Srivastava, J. (2006). Who Thinks Who Knows Who? Sociocognitive Analysis of Email Networks: In: Proceedings of the 6th IEEE international conference on data mining. University of Minnesota.

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Ritter, T. (2000). A Framework for Analyzing Interconnectedness of Relationships, Industrial Marketing Management, 29 (4), 317-326. Sabidussi, G. (1966). The Centrality Index of a Graph, Psychometrika, 31, 581-603. Simon, H.A. (1979). Rational Decison Making in Business Organizations, American Economic Review, 69 (4), 493-513. Tedeschi, J.T., & Bonoma, T.V. (1972). Power and Influence: An Introduction, in The Social Influence Process, J.T. Tedesch, ed., Chicago: Aldine-Atherton. Thorelli, H.B. (1986). Networks: Between Markets and Hierarchies, Strategic Management Journal, 7 (1), 37-51. Wakabayashi, N. (2003). Social Network and the Trust of Continuous Cooperation within Firms, Shakaigaku Nenpo, (in Japanese), 32, 71-92. Walter, A., Auer, M., & Ritter, T. (2006). The impact of network capabilities and entrepreneurial orientation on university spin-off performance, Journal of Business Venturing, 21 (4), 541-567. Williamson, O.E. (1996). The Mechanisms of Governance, New York: Free Press.

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PART IV GLOCAL GOVERNANCE

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In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

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Chapter 11

THE EFFECTS OF GOVERNANCE ON THE PERCEPTION OF PARTNER BRANDS Sinove Marde FACIREM, University of Caen Basse-Normandie, France

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ABSTRACT In business literature analyses about governance emphasise the firms’ and shareholders’ interests. The opinions of consumers are rarely considered. Yet, what consumers think about the consequences of governance is fundamental, as a sudden strategic change could confuse their image of the firm. This chapter aims firstly to propose a way of considering the consumers’ points of view and secondly to present a variable which could moderate the negative consequences of governance for consumers. To attain this purpose, an experiment testing the consumers’ image of brands was conducted in two steps: before and after they were suddenly aware of a strategic change. Then, the influence of one variable, the affective component on the change of consumers’ image and behaviour is analysed. The results provide concrete evidence that an important affective component for at least one partner brand moderates the negative consequences of governance and leads to better perceptions of two partner brands.

1. INTRODUCTION Nowadays, to face up to recession and global competition, most firms make alliances. An alliance is a strategic decision that represents a long-range commitment for firms. Thus, particularly for ethical and economic reasons, it is important for firms to take into account the positions of all the actors, especially the shareholders, the managers and the customers, to make a successful decision. In specialised literature, many studies deal with this phenomenon, often from the point of view of firms and shareholders (Aurifeille & Medlin, 2001, 2004; Kalaignanam, Venkatesh & Varadarajan, 2007; Nielsen, 2007). However, less attention has been given to the consumers’ perspective (Goh & Uncles, 2003). Yet, what consumers think

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and feel about governance is fundamental because the last decision is theirs: to buy or not to buy the product. In this chapter, we analyse consumers’ perceptions concerning a strategic decision: a partnership between two firms. We emphasise the consumers’ perceptions or their image of the brand because, for them, it is the representation of the firms’ offer (Dobni & Zinkhan, 1990; Keller, 1993); it represents every physical and symbolic characteristics of the product. So, it is important for firms to construct a strong image to avoid the possible negative consequences due to governance. To do so, firms must know which factors could moderate a change in the consumers’ image. According to Yeung and Wyer (2005) emotional factors determine the choice of a product and it is a basis in assessing the brands (Pham, Cohen, Pracejus & Hughes, 2001). Nevertheless, could this variable moderate change in the consumers’ perceptions, when they face up to the strategic evolution? And consequently, could this variable influence the intention to purchase the brand? To answer these questions, we consider the importance of the consumers’ image of governance. The emotional factor is emphasised, as it is likely to moderate the change in consumers’ image. Next, an empirical illustration is presented of two firms that operated an important change in their governance as they set up a partnership: Renault and Nissan. The chapter ends with a discussion on the findings and their implications for marketing practises.

2. CONSUMER PERCEPTIONS OF GOVERNANCE: THE CASE OF A PARTNERSHIP

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2.1. Governance and Consumer Perceptions Nowadays, with globalisation, firms have to make strategic decisions to be competitive. This way, opening up new firms and markets becomes necessary. Various external strategies exist such as mergers, acquisitions, joint ventures, external growth, etc. Among them, one major strategy has developed considerably for decades: strategic alliances (Goh & Uncles, 2003). This strategy consists of an agreement between firms to work together to attain some strategic objectives (Harrigan, 1986). Also, it is a long-term commitment. So, it is very important to consider all the actors for the governance of these firms. Generally, firms focus on the share-holders’ and managers’ positions (Shamdasani & Sheth, 1994; Bonnera, Kim & Cavusgil, 2005; Nielsen, 2007) because they have most of the information concerning the firm, which allows them to have a long-term perspective for the strategic development of the firm. They also have decision-making power to win acceptance for their interests. On the contrary, the consumers’ positions are situated on another level, as they don’t participate directly in the governance. The governance of firms, such as the process of forming a strategic alliance, is composed of three key stages: creation, implementation and assessment (Buono, 1997; Das & Teng, 1999). The first two stages, upstream of the process, concern above all the shareholders and the managers, whereas these actors and in addition the consumers can carry out the assessment downstream of the process. In marketing, it is irrelevant to ask consumers what they think about governance, as the answers to the question cannot be used to elaborate marketing strategies. Actually, it is

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possible to have a difference between what the consumers think or say and their reactions when buying. For example, consumers think that the sale of Opel by General Motors is a good strategy, as it would preserve more jobs; however, they would not buy an Opel car because the equipment could change. Yet, in marketing, to use adequate strategies, it is important to find congruence between what consumers think about the products and their buying decisions. Consequently, to consider the positions of consumers, it is more relevant to focus on their perceptions and assessment of the consequences of governance, as well as on the effects of the latter on their behaviour. In other words, the questions concern the firms’ image and the consumers’ intention of buying the products after a strategic change. The firm’s image and more precisely the image of the firm’s brands is what people think and feel about it (Bullmore, 1984). It is seen that the representation of a brand in the consumer’s mind is linked to an offering (Dobni & Zinkhan, 1990). So, brand integrates some affective and cognitive components, which a consumer or a group of persons associate with the product (Kapferer & Thoening, 1989). In short, for consumers, brand image is the representation of a firm. This explains why companies spend a vast sum of money on the development and measurement of their corporate/brand image (Romaniuk & Sharp, 2003). They know that a strong image provides benefits to the consumers and firms: 

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

Firms: A strong image permits to differentiate the brand from competitive offerings, as it provides a visible representation of difference between products (Nandan, 2005). It enhances brand reputation, which is one important attribute in the consumers’ decision making (Joon-Wuk Kwun & Oh, 2005). Also, it increases sales and, as authors Kandampully and Suharanto (2003) assert, it is positively correlated to the customer’s intention to recommend and repurchase the product/service. Consumers: a strong image has a positive impact on the perceived quality of the product (Cretu & Brodie, 2005). It also induces a high level of consumer acceptance, which reduces the perceived risk when they have to buy the products. So, consumers trust and remember the brand, which simplifies the process of decision-making.

To sum up, a strong brand is beneficial to firms and consumers. The problem is its stability when firms operate strategic decision such as a partnership. These strategic changes could produce variations in the consumers’ image of firms in particular, if other partners with their own brands intervene. In this case, consumers must imagine a common product manufactured by two different firms, which could make the image of the firm confusing, especially if no product really exists. For this reason it is important to emphasise the factors likely to moderate the negative consequences of change on the consumers’ image. In the next section we analyse one factor: the emotional/affective variable.

2.2. Influence of the Affective Variable in Consumers’ Perceptions of Governance As a large body of theorising and research in marketing documents: affect is often emphasised in order to understand consumers’ behaviour. Among the three components of attitude: cognitive (thinking), affective (feeling) and conative (buying), we think affect is the

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most important because it is a global concept, which also includes the cognitive component and influences the intention of buying. The cognitive and affective components are closely linked. For example, when we ask consumers “how they feel about a product” their responses are undoubtedly a mix of cognitive and affective reactions because when verbally asked for their affective reactions, respondents must think about them (Derbaix, 1995). Forgas and George (2001) further develop this idea. For them, affect can influence judgments, decisions and behaviours in organisations because it influences both what people think (the content of cognition) and how people think (the process of cognition). Regarding the connections between affect and conative components, it seems obvious that when consumers like a product they are willing to buy it. In marketing, affect is used to explain other facets of consumer behaviour. For example, Martin (2003) demonstrated that positive or negative affective states of individuals determine their message-processing strategies and thus alter the way they respond to advertising messages. It is also likely that consumers use affect as an information input for assessment of a brand (Pham, 1998). So, when consumers are in a positive affective state, they will probably be confident and perceive that there are no threats in the environment. In contrast, when individuals are in negative affective state they perceive that the environment is threatening (Chang, 2005). Consequently, when firms operate strategic decisions with a new environment and new partners, it is very important to look into consumers’ affect, for each firm, in order to know the consequences of these changes in their brand/product image. A positive affective state would moderate the negative consequences in consumers’ images. From this point of view, we can formulate the following hypothesis:

Table 1. Brand Image under different scenarios of firm brand affect

Entreprise A

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H1: When affect is important, the change induced by governance has no influence on the brands’ image.

Negative affect Affect < 4 Positive affect Affect  4

Entreprise B Negative affect Positive affect Affect < 4 Affect  4 Image firm A Image firm B Image firm A Image firm B Unstable Unstable Unstable Stable Image firm A Image firm B Image firm A Image firm B Stable Unstable Stable Stable

Note: Affect was measured on a semantic differential scale with seven points. A score < 4 means that the brand is not liked whereas a score  4 means that the brand is appreciated.

This hypothesis is put forward when affect is important for the two brand partners. One important question is raised when consumers face different levels of affect concerning each firm or brand. In this situation, several cases happen as shown in table one. Table one describes two major types of situations concerning brand image: When both brands are appreciated by consumers, we consider that the brand image is stable because consumers do not attach importance to the possible negative consequences due to governance.

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On the contrary, when at least one of the two brands is unappreciated by consumers, the image of both brands is likely to be unstable. In the case of a brand alliance that represents a unity, where one brand is presented in the context of the other and vice versa (Simonin & Ruth, 1998), there may be confusion about the images consumers have of the partner firms. However, in the case when consumers prefer one brand to its partner’s, the change of perceptions could be positive. Consumers may base their brand perceptions on their subjective affective reactions to the most familiar brand without considering the change that the alliance might entail. Actually, consumers who feel good about a core brand may assess its extension favourably, even if the extension is highly dissimilar to the core (Yeung & Wyers, 2005). This phenomenon is similar to the “halo affect” which is the influence of affect on consumers’ perceptions (Aurifeille, 1991). It occurs when affect or preference for an object distorts the judgment of its attributes in such a way as to make the judgment more consistent with preference (Huber, 1978). So, when consumers are in a happy mood, they are more likely to rely on heuristic cues and to pay less attention to detail (Bless, Bohner, Schwarz & Strack, 1990). In the case of a brand alliance, the change that occurs could be overlooked in favour of some positive attributes of one brand. So we can posit the following hypothesis: H2: When brand A is more appreciated than brand B, the image of brand A is stable whereas that of brand B changes positively.

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If this hypothesis is validated, the consequences could be beneficial for the sales of the two firms in the alliance. In literature the link between the affective and the conative attitude has been demonstrated (Morris, Woo, Geason & Kim, 2002). When a consumer feels positive about a brand he/she is likely to buy this brand. In the case of a brand alliance, as a consequence of what happens to the image, we consider that the intention of buying the product varies according to the degree of affect. So the third hypothesis is the following: H3: When brand A is more appreciated than brand B, the intention of buying brand A is stable whereas that of brand B changes positively. The validation of those three hypotheses could emphasise the role of affect in consumer behaviour. For marketers the consequences are important, as they can use this variable to bring marketing strategies into play. In the last section we describe the managerial consequences and also we analyse the theoretical contributions of this variable in marketing.

2.3. Theoretical and Managerial Interests In this chapter we consider that a positive affective state for at least one brand in the alliance would improve the image of the two firms. If this hypothesis is validated, marketers can assess the consumer outcomes of strategic alliances prior to their formation. They will know that it is adequate to propose common advertisements, which could reduce the communication costs. Also, they could emphasise the advantages that the partners gain, so that consumers accept the change induced by governance. Some results validating the important role of affect could be used to help consumers in the last step of their decision-making process and this may favour impulse purchasing. Indeed

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this sort of purchase happens when consumers feel an uncontrollable need to buy a product immediately (Rook, 1987). So it corresponds to the situation when an individual in a positive affective state pays less attention to detail and lets his emotional state prevail. In the car sector the impulse buy becomes important, because nowadays firms attempt to develop their brands and products on a global scale, by operating as if the entire world were a single entity (Levitt, 1983). The supply of cars becomes large with a vast choice of products becoming identical. So, for consumers, it is more and more difficult to make a choice. For this reason, it is important to reassure them by promoting the product they like. For example, by highlighting the aspects of a product important for them, like design or options, so that they are really taken with it. In this chapter, the methodological procedures followed provide some reliable information for marketing strategies. First, the affective component of consumers’ attitude was analysed before they were aware of the partnership. Next respondents observed a documentary introducing the alliance between two brands. Finally, the affective components is measured again they are aware of the partnership. Before the documentary, their feeling is specific to each firm without the influence of the alliance. So, the power of an affective component in the change of firms’ image could be proved without methodological bias. In the next section we present some empirical tests, to validate our hypothesis and justify the interest in the subject.

3. EMPIRICAL STUDY 3.1. Experimental Framework

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The study concerns the choice of a car. We selected this product for several reasons: 





In order to stay competitive in the global market, all the firms in the car sector make alliances, either sporadic or permanent. This strategy has shown unprecedented growth worldwide in the past few years, since it is hard for firms to remain selfsufficient in a turbulent and changing environment (Crossnan & Inkpen, 1995). These alliances have a direct influence on supply and probably on demand, because the products change. So, an analysis about alliances in the car sector is an adequate object for this study. The car industry generates a lot of money. Global production has increased by 40% since the 1990s, with 69.3 million cars manufactured (SESSI, 2008). In Europe, this industry represents 3% of the gross domestic product (Meot, 2005). Despite the economic crisis of 2008, car production remains high with 70 million cars manufactured worldwide (Freyssenet, 2009). Moreover, it is a product which has become commonplace, the prices tend to be affordable for many people in developed countries and also in developing countries. For example, Tata, launched a new lowcost car on the Indian market. Another reason justifying the choice of cars is that generally consumers have different motivations to buy a car. For example, the cost, particularly in this period of economic crisis; or for some utilitarian aspects like the number of doors; or the

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symbolic aspect like pleasing the family etc. So, the car is an adequate product to measure the multi-dimensional aspect of the consumer’s image of firms. The empirical part of this chapter concerns one alliance between the French brand Renault and the Japanese brand Nissan. We chose these two brands as our sample of respondents lives in France and it is important for our study that respondents know the brands. Renault is the first national brand, whereas Nissan has been present in Europe since 1962. Both brands have a good reputation as they are among the first car groups all over the world. An experiment about this alliance was carried out with 150 respondents. The methodological procedure consisted in several steps in order to better assess the evolution of the consumers’ perceptions. In the first step, to test the respondents’ global knowledge about partnerships in the car sector, we proposed six pairs of car brands and we asked respondents to note which pairs they thought were partners. Respondents also answered how sure they were about each pair being partnered on a seven-point scale from “not sure at all” to “completely sure”. Next, respondents gave their perceptions concerning the two brands: Renault and Nissan, our target firms. In a second step, a documentary was shown to present the partnership between the two brands. A product from the alliance was presented. This film allowed all the respondents to be aware of the partnership. Finally, we asked them to give again their perceptions about the characteristics proposed in the first step. This procedure enabled us to measure the consumers’ perceptions before and after they became aware of the partnership. In this chapter, in order to validate the hypothesis it is necessary to consider only the respondents who do not know the existence of the partnership. It is important to note that 54% of respondents did not know the existence of the partnership between the two brands Renault and Nissan and, among the respondents who answered correctly the global question concerning knowledge of partnership17, 28% were not sure. The empirical analysis presented below will concern this sample of 125 respondents. The characteristics of the image we have chosen come from a study proposed by Hsieh (2002). This author proposed a four dimensions scale: sensory, utilitarian, symbolic and economic, with 12 items. The details of the items are presented in appendix 1. This scale is adequate for this study for three main reasons. The scale:  considers several facets of car image: the concrete, abstract and also the symbolic attributes. In marketing literature, it has been shown that consumers take into account these facets of the product when they have to make a choice, (Olson & Reynolds, 1983; Aurifeille, 2004) particularly when it is a complex product such as a car.  has been created with data from several countries. So, it is a global scale adapted to our study, which concerns two global brands.  concerns the product studied in this chapter, that is to say a car. So, it is adequate as in marketing most brand image scales are specific to a particular product or to a store attribute and do not generalise the other categories (Faircloth, Capella & Alford, 2001). It seems obvious that the consumers’ motivations to buy a car or a computer are different as the needs change. 17

The question is: In your opinion, what brands of car are in partnership? Please, indicate how sure you are? Renault- Nissan □ yes, □ no, 7 point scale from “Not sure at all” to “Completely sure”.

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To adapt this scale to our study, two exploratory and confirmatory analyses were made to determine the significant dimensions of car image for our sample of respondents. All the attributes of car image were assessed through seven-point bipolar semantic differential scales to provide accurate data. The results are presented in table 2. We used the sofware Lisrel 8 (Jöreskog & Sorbom, 1993) to confirm the results of the exploratory analysis. The Cronbach's alpha for each dimension is superior or equal to 0.70 meaning that the items used to form the measuring scale have internal consistency, that is to say these items measure the same thing. The other results obtained with Lisrel 8 are also acceptable as the chi-square statistic is nonsignificant (χ2 (24) = 20.03, p = 0.69), and the goodness of fit index, the adjusted goodness of fit and the comparative-fit index are equal to 1, indicating perfect fit. Further, the indicators of residuals, the root mean square error of approximation and the root mean square is low at 0.027 showing that the residuals are weak. Three dimensions are extracted from the exploratory and confirmatory analyses: the sensory, symbolic and utilitarian dimensions composed of nine items (see appendix 2). These results tend to be identical to those proposed by Hsieh (2002). However, we note two differences: firstly the item “Fun to drive” suppressed in the “sensory” dimension and secondly, the economic dimension which is not significant. Possibly this dimension concerns above all the cost of the car and not the maintenance costs such as proposed by the author. In the next section the results based on the modified scale of image are used to test the hypotheses. Table 2. Results of the exploratory and confirmatory analyses – car image

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Dimensions of car image  de cronbach Fit statistics

Sensory Symbolic 0,82 0,70 Chi square (p) = 0,69 RMR = 0,027 RMSEA= 0 AGFI= 1 GFI = 1 CFI= 1

Utilitarian 0,83

3.2. The Results In this section, the results for each hypothesis are presented successively.

3.2.1. Hypothesis 1 This hypothesis makes it possible to check if the importance of affect could reduce the negative consequences on brand image when firms operate a strategic change that is to say when they make a partnership. To test the hypothesis we consider two situations: 

When the affective component of respondents is high for the two brands, i.e. when the score of affect is superior or equal to 4 on a seven-point bipolar semantic differential scale,

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When the affective component of respondents is low for the two brands, i.e. when the score of affect is inferior to 4 on a seven-point bipolar semantic differential scale.

The results are presented in Tables 3 and 4. Table two presents the results for respondents who like the brands. In this case their image of the two brands is stable since the t-test for the three dimensions is non-significant. This means that there is no difference between the consumers’ perception of the brands, before and after they became aware of the partnership. One exception exists, with the symbolic dimension of the Nissan brand, where the t-test is significant (p Renault

Renault

Nissan

p= 0.721 t= - 0.359 ddl : 55 Average: [3.9643 – 4.0536]  Stability of intention to buy p=0.050 t= - 2.031 ddl : 34 Average: [2.9429 – 3.6571]

p= 0.019 t= - 0.403 ddl : 55 Average: [2.3929 – 2.8036]  Instability of intention to buy p= 1 t= 0 ddl : 34 Average: [4.7429 – 4.7429]

 Instability of intention to buy

 Stability of intention to buy

To validate this hypothesis, the same procedure as previously has been chosen, a t-test measuring the differences in means is used. The two cases are presented: first when Renault is more appreciated than Nissan and secondly the reverse situation when Nissan is more appreciated than Renault. Table 6 recapitulates the data. We notice the same trend as in the results concerning brand perception. When the affective component is favourable to one brand (affect  4), the intention to buy products of

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this brand is stable, whereas when the affective component is lower (affect < 4), the purchase intention is unstable. The change evolves positively for the less appreciated brand, which confirms the influence of a brand on its partner. The change in the intention to buy is more important for Renault, with a difference in the average equal to: 0.7142, than for Nissan with a difference of 0.4107. Consequently, hypothesis 3 cannot be rejected: H3: When brand A is more appreciated than brand B, the intention to buy brand A is stable whereas that of brand B changes positively. The affective component has an influence on the change of image and also on the intention to buy the product. In the case of a partnership, particularly here, concerning Renault and Nissan, the change is relatively different. We discuss these results in the next section.

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3.3. Interpretation of Results In this section we discuss two different aspects: the important role of affect and the different changes that occur for both brands when consumers are faced with a strategic change. Results from hypothesis one emphasise the important role of affect in the respondents’ behaviour. When consumers like the brands, the image they have of them is stable. This result confirms the previous studies in marketing, which have demonstrated that attitude is a relatively stable psychological construct (Fishbein & Ajzen, 1975) and because of this stability it is expected to influence the assessment of partner brands directly (Simonin & Ruth, 1998). So, when attitude and, more precisely the affective component, is low the assessment of the brands is directly influenced. It is unstable because both brand images become confused. Consumers do not succeed in differentiating the brands; moreover, their judgement of a product is influenced by what Lynch, Chakravarti and Mitra (1991) call the “context effects”, since the partner is ubiquitous. So, to give their perception about the partner brands they try to imagine a product manufactured by both firms, which is difficult, especially as they didn’t know about the existence of a partnership before the experiment. In our case, the brand image for all dimensions was unstable, showing a disruption in the consumers’ memory due to governance effects. However, it is important to notice that the change was positive. That is to say, once respondents are aware of the partnership, the images of both brands improve. Several reasons could explain this specific phenomenon: 



Renault and Nissan are complementary brands: Renault positions its car mainly between the bottom and middle-of-the range whereas the cars of Nissan’s cars are positioned top-of-the range, for example with its series of 4WDs. We note that the changes for Nissan are more significant possibly because the sample of respondents live in France and have more experience with the national brand Renault. So, they use it as a cue to form their assessment of the Nissan brand. There

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Sinove Marde is a levelling up so that the assessment of both brands tends to be identical. However, this positive situation occurs in the case of a national brand. What would the consequence be in other situations, for example in the case of two foreign brands? There may be a levelling down. Therefore, it is important that consumers should have a high affective component to stabilise their image.

The results from hypothesis 2 confirm that the levelling effect depends on the degree of affect. When a brand is more appreciated than its partner, there is a “halo effect” which benefits the least appreciated brand. In the case of Renault and Nissan the levelling up effect is different for each of the three dimensions: 



Nissan has the benefit of the symbolic and utilitarian dimensions. The symbolic dimension because Renault is the first car manufactured in France and it is a well known firm. So, as Fang and Mishra (2002) have shown, the brand with the lesser notoriety may gain considerable credibility once an established brand “endorses” it by forming an alliance. The benefit from the utilitarian dimension can be explained by the possibility to widen one’s product range. Renault has the higher benefit in the utilitarian dimension. As for Nissan, the partnership allows an extension of the market, particularly in the 4WD range. In 2008, for instance, the Renault 4WD, called “Koleos,” was launched on the market. It was the first 4WD born from the alliance.

To sum up, the main findings of this chapter are:

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 

The affective component allows a strong and stable image and influences positively the consumers’ intention to purchase, In the case of a new partnership, when a brand is more appreciated than the other there is a levelling up of image.

Firms in their marketing strategies can apply these results. Indeed, if the affective component is high for at least one brand, it is suitable to communicate the partnership because the consequences are beneficial for both firms. For example, it is possible to communicate on the symbolic and utilitarian dimensions to persuade consumers. However, if both brands have a low affective component then a levelling down effect is likely, so lowering the image of both partners. These results suggest each firm should improve their brand independently in order to trigger a better attitude from consumers and then communicate on the alliance.

CONCLUSION The study presented in this chapter is interesting in two major respects: 

First, it takes into account the opinion of consumers on governance, which is often neglected by firms. Actually, it presents a way to consider their opinion, ie focus on the consequences of governance,

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Second, it emphasises a psychological variable, which is likely to explain the negative consequences of governance on consumers’ perceptions and also moderates the effect on purchase intention.

The affective component has an important impact on consumers’ behaviour. In further studies however, it would be interesting to analyse other variables influencing the consumers in their choice, such as involvement in the product (Zaichkowsky, 1984; Kapferer & Laurent, 1985). The above methodology also opens other research tracks. Here, to present the partnership we used a film with one model of car built by the two firms, which probably influenced the consumers’ perception. Other means like a written description on paper or the presentation of several car models might lead to different results. Finally, on a quantitative level, the main research issue is to extend this procedure to other types of alliance. Here, we analysed the partnership between a national brand and a foreign brand, which led to a levelling up of both brand images. Further research based on joint venture, acquisition or partnership between two national/foreign brands could provide an interesting extension to the findings of this paper.

APPENDIX 1 Table A1. Measure of brand image in car sector– (Hsieh 2002) Dimension

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Sensory

Symbolic Utilitarian Economic

Items - Exciting - Fun to drive - Good acceleration - Stylish - Sporty - Luxury features - Prestige - Made to last - Reliability - Safe in accident - Good fuel economy - Good dealer service

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APPENDIX 2 Table A2. Dimensions of brand image come from exploratory and confirmatory analyses Dimensions Sensory:

Symbolic: Utilitarian:

Items Exciting Good acceleration Styling Sportive Luxury features Prestige Made to last Reliability Safe in accident

Lambda 0.74 0.79 0.71 0.73 0.73 0.77 0.80 0.83 0.77

t- value 34.19 35.48 33.19 33.73 23.22 23.50 31.39 32.40 31.07

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Chapter 12

INTERACTIONS BETWEEN GLOBALISATION AND RETAIL PRODUCTIVITY: SOME GOVERNANCE ISSUES Gérard Cliquet,*1 and Steve Burt2 1

CREM UMR CNRS, IGR-IAE Université de Rennes 1, France 2 Institute for Retail Studies, University of Stirling, UK

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ABSTRACT The interactions between retail productivity and globalisation are key relationships in the internationalisation of retail firms, yet they have received little attention from researchers. In this chapter globalisation and retail productivity are defined from the literature and the latter concept is discussed from the perspectives of its determinants and methodological aspects. The interactions between these two concepts are then developed through a series of models, which lead to questions of governance. Entry and expansion modes seem to be key issues when entering a new country and the correct choice between these modes of local governance may have a positive impact on productivity. A strategic approach is chosen to discuss governance issues at the headquarters level, which may need to change its management approach if plural form networks are necessary at the local level.

1. INTRODUCTION Globalisation and governance seem currently to be two fashionable concepts. Relating these two concepts can be of great value in understanding how firms overcome the challenges they face in international markets. In retailer internationalisation the key question of performance arises, requiring researchers to look at the impact of the globalisation phenomenon on firm performance, and to establish which governance system can lead to improvements in productivity. *

The authors thank the ANR for the French side and the ESRC for the British side, which supported this work.

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In this chapter, the international expansion strategies of retail firms are considered. The potential interactions between retail productivity and globalisation are examined, along with some issues relating to the implications of governance modes of market entry and expansion for local organizations as well as for the retailer’s headquarters. An important but under-researched topic in globalisation is the effects on the productivity of firms involved in international distribution. Popular accounts describe the activities of firms (such as Wal-Mart in China), but such accounts only serve to highlight the dearth of substantive research and knowledge in the generic area of the impacts of the globalisation of supply chains and store operations on productivity processes in the retail sector. Globalisation (Douglas & Wind, 1987) and productivity in retailing (Achabal, 1984; Ingene, 1982; 1984; 1985; Sparks, 2005) are complex concepts. This complexity has become particularly apparent as the retail sector has been re-structured over the last 20 years, in part as a result of globalisation processes particularly, but not exclusively, associated with supply chains and store operations. Globalisation processes have a profound impact on the internationalisation of retailing and the management of retail firms, yet these firms also have a direct influence on the forms and functions of the globalisation process itself. The concepts previously applied to retail productivity analyses, essentially limited to labour productivity largely at an establishment level, are not applicable to the complex relationships that now characterise retailing. Productivity must be seen in a wider context than the establishment; involve more input variables than labour; and explore a greater variety of output concepts. There is a need for the development of new conceptual and theoretical approaches to the definition and measurement of productivity in retailing. The interactions between globalisation and productivity are apparent in productivity relationships throughout the whole retail channel and affect all stages of the value chain. International or globalised retailing should not be considered only in terms of the operation of shops in ‘foreign’ countries. An initial attempt to categorise the types of impact at the macro and the micro levels suggest that general and retail specific globalisation processes impact on productivity, at the country, channel and firm levels, in terms of: 



the sourcing of products for resale and the procurement of products and services for use within the firm. Productivity impacts occur on the retailer, on its suppliers of products and services, and on the competitors of its suppliers through demonstration and competitive effects. These impacts extend across a range of behaviours (for example negotiations and contracts), processes (for example technological and innovative) and structural factors (for example firm expansion). Productivity of a channel, and a firm, can both be affected in these ways by globalisation. the competitiveness and profitability of the retailer in the markets in which it operates. Globalisation encourages the retailer to operate shops in multiple markets and to have a multi-continental network of stores. This network structure - and the information and knowledge flows within it - influences the productivity of major international retailers, such as Carrefour, Ikea, Tesco, Zara, I-Y Holdings, B&Q/Castorama, Dixons and Wal-Mart. The impact of globalisation on store level productivity is present not only on the operation of the stores of the international firm, but also on the operations of other retailers in the market through competition

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



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

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and diffusion processes. These effects impact upon the operational practices in the home market as well as in the multiple foreign markets. the amount, variety and composition of consumers’ consumption. The mutuality of the globalisation and productivity concepts generates processes that deliver new products to consumers, for example fashion, furnishings, electronics, year-round specialist foods, lower priced mass-market items, for example shoes, house-wares, and new brands, for example Louis Vuitton, Lush. There is a shift in lifestyles resulting from the productivity changes linked to globalisation, and from globalisation resulting from productivity increases in retailing. the public policy response, with international retailers acting as catalysts for productivity enhancement in domestic firms and also generating power shifts with the sector. The extent to which changes are freely allowed, encouraged, or tightly managed is debated by public policy agencies. Often the response is reactive to threats of perceived horizontal and vertical power shifts within the distribution channel, arising from productivity changes and globalisation. Responses include measures to limit store openings in host markets, to mitigate changing retailer and supplier relationships in domestic and host markets, and to control trade patterns at the global level (e.g. WTO-EU textile dispute). In other cases, productivity enhancement is welcomed and encouraged with policy initiatives facilitating the diffusion of productivity improvements. the choice of governance modes both at the local (country) level through initial entry modes (Agarwal & Ramaswami, 1992) and later through expansion modes (PicotCoupey, 2006), and at the firm’s headquarters. A franchised network may have the opportunity to open stores internationally, but might face difficulties in finding good franchisees, and will consequently have to open company-owned units: this happened to Groupe Beaumanoir (a clothing retailer with several fascias: CacheCache, Bonobo, Scottage, Patrice Bréal and Morgan) from France when they expanded into China, where they now have more than 200 stores with very few franchisees. In these instances the headquarters has to manage units in the foreign market in a very different way from their usual franchise network management.

Although there are these strong links between globalisation and productivity, with influences acting in both directions, we presently understand very little about these interactions in retailing and distribution: how they relate to managerial cultures in the firms; how they are changing; the extent to which they differ in different politico-economic regimes; and what are the implications in terms of governance especially at the local level. Empirical studies are needed to explore these connections in both channels and firms, but first a conceptual framework should be built, involving globalisation, productivity and governance considerations. Additionally these relationships in a retail context have important socioeconomic and political ramifications that are currently neither clearly identified nor understood. In the remainder of the chapter we will first briefly describe globalisation in the retail sector, followed by retail productivity. Then, we will deal with interactions between these two concepts, and highlight some of the governance issues for retail firms.

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2. THE GLOBALISATION IN THE RETAIL SECTOR What is globalisation? Levitt (1983) defines globalisation as a strategy dealing with a world considered as one large market in which consumers are becoming more and more alike and hence experience a converging commonality with more and more products, which can be designed the same way despite cultural differences (Levitt, 1984). But what can and cannot be globalised? What needs to reflect local environmental issues (Wind, 1986)? The longstanding debate over whether globalisation is a myth (Douglas & Wind, 1987) or not (Gwynne, 2003; Spich, 1995; Stevens & Bird, 2004; Went, 1996) is far from being resolved. This question has been asked primarily in the context of goods but what about services and more specifically retailing? No retailer has reached a real global position at the world level with respect to our traditional views of “global”. The question should rather address which stage the globalisation process has reached in retailing (Leknes & Carr, 2004). Some researchers consider “globalisation” to be reflected in the number of countries or regions within which a firm operates (i.e. market coverage). Carrefour, which is one of the most internationalised grocery retailers, is present in about thirty countries but large areas of the globe remain untouched. Similarly, Wal-Mart is not considered a global business and has no global strategy according to Rugman and Girod (2003). Others define “globalisation” in respect of the approach to marketing or trading strategies (i.e. market approach) (Salmon & Tordjman, 1989). From this perspective Laulajainen (1991) identified IKEA and Toys ‘Я’ Us as global retailers almost 20 years ago. We can also debate other dimensions suggested from the growing number of classifications in the literature (Alexander & Myers, 2000; Burt, et al., 2008; Helfferich, et al., 1997; Wrigley, 2002). In retailing, it may be more appropriate to speak about “glocalisation” instead of globalisation. Being “glocal” (Drucker, 1982) means that retailers who want to go global should take into account local conditions - as it has been shown as far as youth culture is concerned (Kjelgaard & Askegaard, 2006). This viewpoint leads us once again to question globalisation as a myth. When considering the linkages between globalisation (however defined) and retail productivity, the key point is how can we adapt to local conditions at the lowest cost? How can a retail company, which wants to go “global”, maintain its productivity in an international context where regulation, consumer habits and infrastructure are different from what is found in the domestic market?

3. PRODUCTIVITY IN RETAILING Generally speaking productivity is defined as the relationship between physical output and a physical input, with all other inputs constant (Achabal, Heineke, & McIntyre, 1985). In the case of services this leads to greater difficulties in capturing inputs and if retailing is considered as a service activity (Goodman, 1985), the problem becomes both conceptual and methodological. Several authors have tackled retail productivity since a seminal article focusing on retail labour productivity (Ingene, 1982) and the special issue of the Journal of Retailing in 1984 (Achabal, 1984). Further special issues include one on channel productivity in the

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International Journal of Research in Marketing (Bultez & Parsons, 1998), and a special issue of the International Review of Retail Distribution and Consumer Research (Sparks, 2005) which summed up the most recent developments on the topic with a focus on the UK. Many perspectives were developed in these articles on retail productivity (for example Achabal, et al., 1984; Reynolds, et al., 2005) but one of the recurring challenges in retailing is that of measurement (Achabal, Heineke, & McIntire, 1985; Griffith & Harmgert, 2005; Reardon & Vida, 1998). Several alternatives have been put forward: the DEA method (Donthu & Yoo, 1998; Keh & Chu, 2003); the stochastic frontier method (Barros, 2005); specific indicators (Dobson, 2005); the Malmquist productivity index (Barros & Alves, 2004), whilst others have argued that methods should incorporate consumer satisfaction measures (Reynolds & Biel, 2007), and Dubelaar, Bhargava, & Ferrarin (2002) have asked what really matters when measuring retail productivity. A second common issue in the literature is the level of analysis: store level (Barros, 2005; Guy, Bennison, & Clarke, 2005; Jorge Moreno, 2008); network level (Barros & Alves, 2004; Kamakura, Lenartowicz, & Rachtford, 1996); or firm level (Keh & Chu, 2003). Some researchers have developed sectoral retail productivity measures related to either a specific product sector: food retailing (Good, 1984; Park & King, 2007; Ratchford, 2003), fast-food (Doutt, 1984); or to the organisational form: franchising (Darr, Argote, & Epple, 1995; Hennessy, 2003) given that franchising is often the chosen organisational form of entry mode at the international level (Fladmoe-Lindquist & Jacque, 1995). Finally others propose productivity measurement linked to specific factors: administrative productivity (Barthélemy, 2004), service productivity (Grönroos & Ojasalo, 2004; Darr, Argote, & Epple, 1995), and labour productivity (Ingene, 1984; Lusch & Moon, 1984; Thurik & Van der Wijst, 1984). If retail efficiency is measured through profit or sales density (e.g. productivity per square metre) or through labour productivity (e.g. productivity per employee) (Reynolds, et al., 2005), then efficiency can be increased through at least five sources: 1) an increase in size of store format; 2) an increase in network size; 3) the development of information and communication technology (eg ICT); 4) a change in labour organisation (e.g. by making working hours more flexible); 5) an increase in retailer buying power. These sources then define five factors: 1 - store format; 2 - network size; 3 - ICT; 4 labour organisation; and 5 - buying power. Factors 1 and 4 are directly related to the store level, whereas factor 2 is, directly linked to the network level, and factor 5 to the retail firm level. Factor 3 can be related to the store, network and firm levels. Public policy through regulation, and cultural issues evident in consumer behaviour, can influence all of these five factors. As far as factor 3 (ICT) is concerned, it is very difficult to assert that information technology may directly improve retail productivity. Although a number of articles exist (Achabal & McIntire, 1987; Johnson, 2002; Park & King, 2007; Reardon, et al., 1984) none of these provide empirical support but rather just state opinions…. Solow said in 1987: “You can see the computer age everywhere but in the productivity statistics”. Triplett (1998) tried to explain the Solow paradox, and other authors have also strived to show the impact of ICT on productivity (Fernald & Ramnath, 2004). O’Mahony & Van Ark (2005) defended the idea of a real impact of ICT on retail productivity, whereas Reynolds, et al. (2005) are more cautious about ICT when talking about the need for a more clever use of technology “particularly in relation to space”. Park and King (2007) also tried to highlight the ICT

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influence through a stochastic frontier method. The debate concerning the impact of ICT revolves around ICT as not an easily measured factor of productivity. Paradoxically, it is widely recognised that more information is needed to support a successful globalisation process, and more specifically to operate in local markets, which are often remote from the domestic market and hence more costly and risky (Martin, 1988). The development of geo-marketing techniques (Cliquet, 2006) is one way that retailers can improve their information systems in a local market, and therefore they develop a real “glocal” knowledge, but this is at a high cost which then questions the gain in retail productivity, unless the scale of the network mitigates against the sunk cost.

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4. POSSIBLE INTERACTIONS BETWEEN RETAIL PRODUCTIVITY AND GLOBALISATION Interactions between globalisation and retail productivity can be compared to a spiral phenomenon. The two main sources of productivity increase obtained from pursuing a global strategy are: 1) the increase of network size at the international level; 2) the increase of buying power at the international level. An increase in the network size is strictly related to economies of scale and the development of retail brand awareness at the level of the firm: the larger the number of stores, the greater the economies of scale. Outputs can increase with almost no new inputs. Growth of network size is facilitated through the internationalisation process. Indeed if new stores are located in countries which are culturally close to domestic market conditions, the globalisation process can help increase productivity as well. However this relationship could be envisaged differently if the internationalisation process leads to expansion into countries which are culturally very different. This brings us back to the question of definition: should we consider globalisation as a presence on all continents (Africa, Americas, Asia and Europe) or in all large countries? An increase in retailer buying power is probably the most characteristic feature of the relationship between retail productivity and globalisation. To benefit from productivity gains through a global purchasing process needs a strong negotiation; an efficient purchasing organisation, and impeccable logistics. In other words, supply chain management is a key success factor in retailing if it is able to bring real value to the distribution process (Ketchen & Hult, 2007) and especially at the international level (Swoboda, Foscht, & Cliquet, 2008). From this discussion, a first proposition emerges which deals with the link between the internationalisation process and retail productivity. By enlarging its market area across international boundaries, a retailer can on the one hand spread its fixed costs over a larger number of outlets, and on the other hand increase its product purchasing capacity to obtain better prices and terms from suppliers. Theoretically, productivity grows and increases each time a new country is penetrated through the globalisation process. By generating larger financial returns in this way retailers are also able to develop more accurate and effective information processes through for instance geo-marketing techniques (Cliquet, 2006). This micro-marketing strategy, in turn, pushes domestic retailers to implement such techniques as well. However, at least two factors could hinder this relationship: local cultural issues and local market regulation.

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This phenomenon looks like a spiral because although globalisation normally entails an increase in overall retail productivity, which enables companies to conquer new markets and then achieve new gains in productivity and so on, when a new country is entered at first costs are high and retail productivity falls, before retail productivity increases again. This spiral works if, and only if, retailers going international are able to adapt their retail concepts and operational methods to suit local conditions: i.e. local cultural issues and local market regulation. For instance Carrefour left South Korea and Japan after failing to adapt to local market conditions. Problems can also occur as geographical and cultural distance increases, because costs could rise. These costs relate to either coordination and/or control depending on the organisational form chosen to enter and then develop retail activities in the new market (Picot-Coupey, 2006), and from the costs of managing cultural differences as a new market entrant. Domestic retailers are also affected by the globalisation process (Dawson, 2003; Coe & Hess, 2005). Whenever a foreign retailer enters a market, the more dynamic local retailers learn from the newly imported business methods, whereas the less dynamic companies suffer. The best domestic retailers may then ultimately export the new know-how learnt from international retailers. This is probably what happened to Korean retailers who benefited from the economic liberalisation of their domestic market (Lee & Choi, 2004). Organisational learning, in a globalised world, is not simply an internal process.

Figure 1. Globalisation as a moderator of retail productivity construct for a global retailer.

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Therefore a second proposition emerges, concerning the relationship between the globalisation process and domestic retailer productivity. Proactive and adaptive domestic retailers can benefit from the entry of international retailers into their own markets. First by being able to strengthen their position within their domestic market; second by eventually taking over failing (non adaptive) local retailers, thereby developing their domestic market position; and third by eventually starting an international diffusion process of their own. As noted earlier other factors can also play a moderating role in these relationships. In some countries, regulations concerning store size or working hours are for example different. Less regulated countries can provide retailers with a higher productivity gains and higher revenues, which can enable them to be more competitive in other international markets and often even in their own domestic market. This exogenous factor (regulation) may also stimulate the interactions between productivity and globalisation in an indirect way. Whenever the French government has attempted to restrict domestic retailers from developing too many large retail formats it has inadvertently boosted the internationalisation efforts of some of these retailers. This was the case twice: in 1973-74 when the Royer Act was passed and between 1993 and 1996 when E. Balladur, the Prime minister, decided to stop any new large store opening, until the Raffarin Act (1996) changed this position. Presently a new act, the LME (Loi de Modernisation Economique), has been passed by the French Parliament to liberalise the location process for small stores (below 1000 m² in size). One of the consequences of this legislation could be that French retailers will become more concerned with protecting their domestic market from French or foreign contenders than with international activities and the pursuit of the globalisation process. A similar liberalisation process was studied in South Korea (Lee & Choi, 2004) and other studies especially from the OECD have tried to examine the impact of regulation on retail productivity (Pilat, 2005). A related question also arises: what influence does the globalisation process itself have on the liberalisation in the retail sector? It is widely argued, for example, that the French government has made its decision because raw material prices are increasing at the international level…! A number of propositions can be defined from Figure 1. A first series deal with the moderator effect of globalisation on the relationships between retail productivity and its determining factors; a second series considers the moderator effect of cultural issues and regulation on the relationship between globalisation and specific factors of the retail productivity. Beyond these propositions, it is also of interest to revisit these interactions through a strategic approach in order to highlight governance issues. The link between strategy and governance in retail firms has already been highlighted, especially at the level of the board of directors (Berry & Lusch, 1996). These authors considered most of these boards to be ineffective, because of the lack of information, and the internationalisation process is unlikely to improve this situation. However, according to the same authors, improvements in retail governance are necessary to overcome growing competition. The Porter model (1980, 2008) can provide one framework for considering to what extent the five sources of retail productivity identified above, are “strategic” (Figure 2).

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Bargaining power of suppliers: Store size and network increase, new relationships for innovation

Rivalry among existing competitors : Intra- and interformat competition

Threat of substitute products or services: Ecommerce + ICT

Threat of new entrants: International competitors

Bargaining power of buyers: New shopping modes, country of origin of retail fascias

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Figure 2. Porter’s model applied to retailing.

The model shows how factors 1 (increase in store size) and 2 (increase in network size) can be related to factor 5 (increase of bargaining power) for retailers to impose their thinking upon suppliers and to drive innovation, which can play a role in the interactions between globalisation and retail productivity. The model also highlights the importance of ICT (factor 3), through the threat of substitute products and services, especially in the form of Internet use - for instance in the “drive” system for grocery stores (Bevan & Murphy, 2001) which entails new shopping modes (Picot-Coupey, et al., 2009). Through the bargaining power of buyers construct, two kinds of threats appear: one for the internationalising retailers who could face a consumer reaction to their fascia - like some products have done - through a “country of origin” effect. These perceptions could be either positive or negative (eg Wal-Mart had a negative image in Germany, and Carrefour had problems in China for political reasons). The second threat is that of the new entrant to domestic retailers who fail to respond to the foreign “invaders”. Finally, concerning the rivalry among competitors, productivity becomes a key issue. According to Ingene (1982) for example, labour regulation varies from market to market and impacts upon labour productivity. Moreover competition can be inter-format or intra-format (Gonzales-Benito, et al., 2005), which make comparisons difficult because of disparities depending on specific regulations or typical conditions within certain geographical sectors (tourist regions for instance): hence store location is of importance. In summary, examination of the interactions between globalisation and retail productivity leads to several key questions for the internationalisation process of retailers:

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Gérard Cliquet and Steve Burt 1. the comparison of the performances of retailers through their international expansion, taking into account inter- and intra-format competition and local regulations especially those dealing with labour conditions; 2. the impact of size (stores and network) at the international level on the bargaining power with suppliers, and the consequences for supply chains, and the ability of retailers to develop innovative products (goods, services and new formats); 3. the ability of retailers to develop multichannel strategies through the Internet at the international level and to understand new shopping modes; 4. the resilience of domestic retailers and the consequences for foreign retailers; 5. the resistance vs. acceptance of foreign fascias by local consumers with considerations of geographical, cultural (Shenkar, 2001) and psychic (Sousa & Bradley, 2006) distances; 6. the governance issues stemming from the interactions between retail productivity and globalisation. It has been shown very recently that there is a positive association between efficiencies (productivity as measured through a DEA method) and corporate governance in retail firms (Bhat, 2009)

The first five questions will constitute new bases for future research which should be answered by managers before defining new governance rules in order to be sure that globalisation has a positive impact on retail productivity. The last question about governance issues stemming from the interactions between retail productivity and globalisation is now considered at both the levels of the local market and the firm’s headquarters. This raises a complex series of problems mixing governance structures and expansion strategies.

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5. SOME ISSUES FOR THE GOVERNANCE OF RETAIL FIRMS The internationalisation process leads to several governance issues: some at the local level dealing with entry then expansions modes, others at the headquarters level, both for the board of directors and for operational management. At the local level, entry modes are key choices. Gielens and Dekimpe (2001) have shown empirically that entry modes influence post-entry sales and efficiency, especially when entering early by offering a new retail format in emerging economies. However, entry modes may be determined by local circumstances and regulation. To provide three examples, entry into the Chinese market was initially difficult for foreign retailers as firms had to be at least 51% owned by local. Consequently, joint ventures were often chosen before the liberalisation of market entry regulations. Today it is still difficult to find reliable franchisees and franchised networks often start Chinese networks through company-owned units with salaried staff use - the management of whom is totally different from franchising, and is often difficult due to the distance (geographical, cultural and psychic). The costs of controlling networks at a distance (Kaufmann & Lafontaine, 1994; Martin, 1988) can raise dramatically and hinder retail productivity. In contrast, some countries cannot be entered without a franchised system: for instance Carrefour needed a Dubai master franchise to enter Dubai, then Egypt and probably Lebanon. Carrefour, despite becoming the largest French franchisor in September 1999 when it merged with Promodès, is not primarily a franchising organisation – especially

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for large stores. Finally, India is still a closed market with retailers looking to enter this market having to form joint ventures with local firms (Hiscock, 2008). As these examples show, entry modes are often different from what the retailer would like to implement, and this has consequences for governance structures. Most of these retailers will at some point try to revert to their “more usual” organizational forms, once they are more firmly established in the country. This is the reason why some authors distinguish between expansion modes and entry modes (Picot-Coupey, 2006). Finally organizational forms and their associated governance issues can change from one country to another and sometimes become obstacles to productivity of operations in specific countries. Plural forms (Bradach, 1997; 1998) in retail and service networks (which means both franchised and company-owned units within the same chain) can be difficult to implement according to the original organization of the firm. The main drawback of such a system is in having a dual management system because it is difficult to manage companyowned outlets with salaried managers which are run in a hierarchical way and franchisees who need to be convinced before any decision (Cliquet, 2000). These two governance modes: based on hierarchy on the one hand, and on conviction on the other, often need to be implemented separately in a company and can become costly, with consequences for retail productivity. It is sometimes even more complex when other entry or expansion modes are implemented as it often the case in a sector like clothing retailing where franchising, whollyowned systems, affiliated arrangements, corners in department stores and so on (PicotCoupey, 2006) are commonly used. At the global level (headquarters of the firm) there are two important governance issues: the information of the shareholders and the ability to resist to predators. The SOAR (Strategic and Operating Assessment for Retailers) model (Berry & Lusch, 1996) is presented as one response to the difficulties faced by boards of directors who represent shareholders in public retail companies. Berry and Lusch warn of dangers of “information overload” which “creates distracting noise that can hide key signals of a company's effectiveness and efficiency”. Assessing the operations of national expansion can quickly lead to information overload in retail activities and ‘a fortiori’ when dealing with international expansion. Managers are always ready to champion their point of view in opening new units in other countries. But a board of directors should be in the position of asking the right questions in order to avoid the failures observed in international retailing - even in the largest retail groups (e.g. Wal-Mart, Carrefour, Ahold and Tesco) have all withdrawn from individual international markets. These unsuccessful operations are costly even though failure is always difficult to predict (Burt, et al., 2003). Retail governance should be based on more reliable information and a system that supports board members in order to prevent them from signing any “blank cheques”. Future research should address these key points by trying to measure retail productivity in various organizational systems and to present information in a decisive way. Protecting the retail company against potential hostile takeover is another stake. Companies with stronger shareholder rights have better results in terms of profits, sales, capital expenditures, and firm value (Gompers, et al., 2003). These shareholder rights can be reinforced through anti-takeover provisions to avoid being a target for hostile predators (Bhat, 2009). But such a governance strategy should lead to a higher level of financial results. Hence increasing productivity makes sense.

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CONCLUSION Globalisation can be considered as a facilitator to retail productivity for international retailers. But other coordination costs can occur due to physical distance, cultural issues and specifically cultural distance (Glenn & Alston, 1968; Kogut & Singh, 1988), and psychic distance (Klein & Roth, 1990) - both being considered together (Sousa & Bradley, 2006), or as country of origin issues (Miranda & Konya, 2006; Thorelli, et al., 1989). The same procedure can be used for regulation. A typology of countries, and at least a distinction between developed countries and the others, is probably necessary because large retailers seem to have much more difficulty in entering developed countries than emerging ones. Globalisation can be also a hindrance for domestic retailers in the host markets, which cannot adapt to modern formats or new management methods. Is globalisation able to improve retailers’ information systems and the buying power of retailers especially through international supply chain improvements? This is also a key question and probably the key to Wal-Mart’s success even though this company has had difficulty in adapting its operational concepts and methods in market, without talking about governance issues. Globalisation seems to have no real meaning in retailing, and “glocalisation” probably fits better even though Wal-Mart, Carrefour and Tesco are in a process of globalising their brand and standardising their stores as far as Carrefour is concerned. Adaptation to local conditions seems to be a key point in international retailing, but it is a costly approach for retailers who are not accustomed to a long-term investment process as is traditionally the case in a manufacturing environment. These adaptation costs, due to cultural differences and local regulations or logistics management issues, reduce the productivity gains of international retail expansion during a period of time, which needs to be as short as possible. This is likely to be the price to pay for increasing retail productivity through international expansion. But political borders are not always relevant to geographical market segmentation. Sometimes geographical markets cross borders, as has been shown in Europe for meat (Hofstede, et al., 2002). Last but not least issues do arise concerning governance. The objective of these future research projects is to provide managerial and strategic perspectives to retailers in order to prevent them from reducing their productivity when going global, and to define the right governance mode to allow better control from the perspective of the board.

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In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

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Chapter 13

TRUST AS A SUBSTITUTE TO LEGAL GOVERNANCE IN INTERNATIONAL TRANSACTIONS Magali Debat FACIREM, EA, University of La Reunion, France

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ABSTRACT With more than 600 million users the Internet represents a huge potential for Business-to-Consumer commerce. Vendors can sell their products to consumers worldwide. However, consumers are generally reluctant to purchase products overseas. The major obstacle seems to be the lack of trust in the e-vendor, partly due to the underdeveloped legal environment of electronic commerce. The impact of the vendors’ origins on the consumers’ trust is investigated in the case of weak legal governance of the online transactions. We demonstrate that perceived cultural proximity compensates for the limitation of legal regulations, to the point of outperforming them. Conversely, perceived geographical proximity is quite ineffective on trust, thus suggesting that Globalizing firms could focus on cultural traits to resolve the heterogeneity of the legal constraints acrosss countries.

1. INTRODUCTION “The Internet promises to revolutionize shopping” (McKnight, Choudhury & Kacmar, 2002) and selling. The Internet is transforming the purchase behaviour of more than 600 million users, including 325 million users in Europe. E-commerce has become a widely used means to purchase goods and services all over the world (Connolly & Bannister, 2007). In 2008, 32% of Europeans have purchased products or services via the Internet, as compared to 20% in 2002 (Eurostat, 2008). A constant increase is foreseen within the next years. In 2011, the amount spent via the Internet is estimated at 263 billion euros (Forrester). However, statistics demonstrate that, in order to reach this volume, electronic commerce has to gain trust from consumers.

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Online purchases have not reached “a point of critical mass” (Hassanein & Head, 2004), mainly because of the lack of online consumer trust (Baldwin & Currie, 2000; Head & Hassanein, 2002). In the e-Commerce environment, where transactions are more impersonal, anonymous and automated, trust is a key element for any business exchange. In France, only 3% of the population has completely integrated the Internet into their consumption habits (Harris Interactive, 2008). 53% of European consumers claim they do not completely trust the Internet when acquiring a product (Harris Interactive, 2008). 64% of American users show cautiousness about the trusthworthiness of e-commerce sites (Princeton Survey Research Associates, 2002). Past research on e-commerce showed that the greatest barrier to its expansion and adoption is the lack of trust (Gefen, Karahanna & Straub, 2003). This explains the fact that “while vendors on the Internet may have enjoyed an increase in the number of clicks on their Web sites, they have also faced disappointments in converting these clicks into purchases” (Kim, Xu & Koh, 2004). This lack of trust is mainly due to the fact that Internet shopping involves more uncertainty and risk than traditional shopping. The reason is the underdeveloped legal environment of electronic commerce and the absence of governance. The Internet is generally considered a “zone de non-droit”. “In the electronic commerce context, consumers have no control over the online vendors, no guarantee of the quality of the online content, and no power to influence the website’s behavior” (Hsu, 2008). Moreover, if the transaction fails, consumers experience difficulties to have their purchase fixed, exchanged or refunded. The lack of trust in e-vendors is particularly deep when dealing with an overseas evendor. Although one of the advantages of e-commerce is the possibility to purchase products from all over the world, most consumers are reluctant to do so (Lim, 2003). For example, only 24% of French Internet users feel no hesitation to purchase products from overseas vendors (Fevad, 2008). 13% feel it is too dangerous to purchase products from an overseas site and 15% simply do not buy from overseas (Journal du Net. 2001). Consumers doubt the quality of products that they will receive. “Because of different standards, some overseas products may be unsuitable for local use”. Consumers “are worried that businesses are likely to refuse to take responsibility for damaged products” (Lim, 2003). Thus, we face a paradox: while the Internet represents a fantastic tool to reach consumers that were traditionally unreachable due to their distance, consumers remain unreachable because of their lack of trust in overseas e-vendors. In this study, we investigate the impact of perceived proximity on online-trust. Specifically, this study sets out to answer to two research questions: (1) Does perceived geographical proximity reassure consumers? (2) Does perceived cultural proximity reassure consumers? The structure of the chapter is as follows: The concepts of online trust and governance in the Internet are briefly discussed in section one. A model, which enables study of the impact of perceived geographical proximity and perceived cultural proximity on underlying trust is introduced in section two, along with the various hypotheses for this study. Sections three and four outline the methodology and data analysis of our experimental study. Finally, section five contains a discussion of our findings and some conclusions.

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2. THEORETICAL BACKGROUND AND CONCEPTUALISATION Before examining the relationship between perceived geographical proximity, perceived cultural proximity and online trust, the primary concern of marketers will be to better understand the concept of online trust. We propose in this part of our study a literature review to specify the term: its definitions, its links with uncertainty and risk, and its role in consumer behavior. This paper will begin with a brief review of the authorities that intervene on the Internet, so as to rule commerce transactions and protect consumers.

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2.1. The Internet and its Lack of Governance There is no specific authority, nor rules dedicated to the online environment. There is a “lack of clarity about legal standing of online rules and legal jurisdiction over the Internet” (Pavlou & Geffen, 2004). As stated by Pavlou and Gefen (2004), “because of the unclear and underdeveloped legal environment of e-commerce, some institutional mechanisms used in online marketplaces do not benefit of the same legal protection and enforcement provided by governmental agencies in traditional markets”. On a national scale, the rules that govern the commerce transactions over the Internet are the national laws. On an international scale, two cases are possible. In the first, the e-vendor and the consumer are both in the European community. Since laws between the European countries have been made uniform, the consumer should not experience too much difficulty if s/he has to lodge a complaint. The judgment taken by the court in the consumer’s country should be applied in the country of the e-vendor. When dealing with an e-vendor who is outside the European frontier, the risk is higher in case of a lawsuit. Each country has its own rules that determine which jurisdiction is relevant and which laws must be applied. Therefore, law conflicts generally appear. Moreover, once the court in the consumer’s country makes the judgment, there is no warranty of its application in the e-vendor’s country. The absence of international laws and courts dedicated to online transactions thus generates uncertainty for the consumer, when dealing with an overseas e-vendor. Uncertainty refers to the extent to which an individual or organization cannot anticipate or accurately predict the environment (Pfeffer & Salancik, 1978). Liang and Huang (1998) identified two types of uncertainties in an e-commerce transaction: (1) product uncertainty and (2) process uncertainty. Product uncertainty refers to uncertainty on the quality of the product that will be received, while process uncertainty addresses how transactions are carried out. Aware that the degree of freedom of their overseas supplier is quite important, consumers know that the behavior of their trading partners is not fully predictable. The e-vendor may not send the merchandise and yet still debit the account, or debit more than the amount that was announced, or send a conterfeit product pretending it is a genuine product, or could refuse to take responsibility for damaged products. The uncertainty about future events generates risks for consumers. Risks assessment can be defined as the amount that would be lost if the consequences of the act were not favourable; and the individual’s subjective feeling of certainty that the consequences will be adverse (Cunningham, 1967). The two components are often multiplied together to provide an

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overall perceived risk. If consumers perceive risks, they expect a potential loss (Littler & Melanthiou, 2004). Theses authors put forward that “it arises because consumers’ actions are faced with probably negative consequences”. Kaplan, Szybillo and Jacoby (1974) identified five types of risk: performance, physical, financial (called economic risk), psychological and social. A sixth one could be added: time loss (Roselius, 1971). Performance risk refers to the fact that the product may be defective; physical risk to a potential health threat, while financial risk refers to the possibility of monetary loss related to the purchase on the Internet or the perceived likelihood of not getting the best value for money (Boksberger, Bieger & Laesser, 2007). Psychological risk refers to stress experienced during the purchase or consumption, social risk to the possibility to send a negative image of one self to others or to loose one’s self-esteem due to the consumption of the product; and time-loss risk refers to the possibility of losing one’s time to return defective products. Consumers dislike uncertainty (Qiu & Lee, 2008) and taking risks. When making a purchase decision, consumers want to be quite sure that they are choosing the best alternative and that they will not regret their choice. Decision-making is inhibited by too much perceived uncertainty and too much perceived risk. Indeed, previous research shows that uncertainty during the purchase process may reduce customer loyalty, undermine consumer confidence, and delay purchase decisions (Qiu & Lee, 2008).

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2.2. Online Trust 2.2.1. Uncertainty and Trust Uncertainty is a prerequisite for trust existence (Lewis & Weigert, 1985; Zazzali, 2003). Without a minimum of uncertainty, all future events are perfectly known in advance. Consumers have thus no need to suppose the e-vendor’s behaviour will fulfill promises and will not adopt opportunist behavior. “As a consequence, uncertainty and trust are closely related in a logical sense” (Liang, et al., 2005). If a minimum uncertainty is required for trust building, too much uncertainty produces the opposite effect. Trust is a major factor influencing consumer behavior, especially in the e-commerce context, where uncertainty predominates (Ba & Pavlou, 2002; Friedman, et al., 2000; Gefen, et al., 2003; Pavlou, 2003). Trust helps consumers overcome perceived uncertainty (Lewis & Weigert, 1985; Liang, et al., 2005). As stated by Pavlou and Gefen (2004), “trust is one of the major social uncertainty reduction mechanisms”. Consumers are thus motivated to build trust to reduce perceived uncertainty. Past research studied the relationship between uncertainty and trust with a static approach. This could explain the absence of consensus on the direction of the relationship. In some previous research, perceived uncertainty is viewed as an antecedent of trust, in other research perceived uncertainty is viewed as a consequence to trust. We argue that the two concepts present a mutual relationship and that this relationship should be studied with a dynamic approach. An acceptable degree of uncertainty, non-null, motivates consumers to build trust. Consequently, once consumers feel trust, their perception of uncertainty is affected: the degree of perceived uncertainty is lowered.

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2.3. Risk and Trust Risk is one essential condition to motivate consumers to engage in a process of trust building (Coleman, 1990; Kim, So & Lee, 2007). Without a minimum of potential loss, there would be no need to build trust. Trust implies the willingness to become vulnerable to the actions of the other party (Mayer, et al., 1995), on the basis of the expectation that the trading partner will not adopt an opportunistic behavior. The trustors thus take “the risk of losing something important to them and relying on the trustees not to exploit the vulnerability” (Wang, et al., 2005). If a minimum risk is required for trust building, too much risk produces the opposite effect. “The relation of trust and risk is reciprocal and complex” (Kim, So & Lee, 2007). Previous research either presented risk as an antecedent of trust or as a consequence of trust (Gefen, et al., 2003; Cheung & Lee, 2006). Previous research has shown that trust reduces risk perceptions (Anderson & Weitz, 1989; Ganesan, 1994). Online marketplaces lack the legal power of traditional marketplaces (Pavlou & Gefen, 2004). Consequently, consumers are much more vulnerable during the online transactions than during traditional transactions. “Because of the high complexity and anonymity associated with ecommerce, merchants can behave in an unpredictable manner on the Internet” (Wang & Emurian, 2005). Aware of this vulnerability and reluctant to take too much risk, consumers need to feel confident they will not be duped.

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2.4. Defining Online Trust Online trust research is a continuity of research on offline trust, but there are some distinctions specific to the online environment. First, we will present the conceptual framework of online trust on the basis of research that deal with offline trust. Second, we will highlight the distinct characteristics of online trust.

2.4.1. Offline Trust Offline trust refers to the gereral and traditional approach of the concept of trust. The most cited definition considers trust as the “willingness to rely on an exchange partner in whom one has confidence” (Moorman, Deshpande & Zaltman, 1993). The interest for this concept is new in economics and marketing disciplines. Researchers began to consider it as a potential factor to explain consumers’ behaviour in the second half of the eighties whereas it emerged in psychology in the fifties with the works of Deutsch (1958) and those of Rotter (1967). The paradox is that the increasing number of researches dedicated to trust did not help clarifying the concept. On the contrary the have rendered the concept fuzzier. There is no consensus about how to define the concept, operazionalize and measure it (Delerue & Berard, 2007). This situation may be explained by three major reasons: Trust is a complex multi-faceted concept that consists of cognitive, emotional, and behavioral dimensions (Lewis & Weigert, 1985). Trust is an “abstract concept” (Wang, et al., 2005).

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The heterogeneity of methods and contexts. “Trust has been widely studied in many disciplines, but each discipline has its own understanding of the concept and different ways to operationalize it” (Wang, et al., 2005). This is even observable between researches within a same discipline. Although trust has been treated as a unitary concept in some studies, it is generally grasped as a multidimensional concept. Ganesan (1994) has a bi-dimensional approach. The author identified credibility and benevolence as the pricipal components of the concept of trust. Gurviez (1999) added integrity to the construct. Credibility relates to a person's perception of the truth of a piece of infomation. Benevolence refers to the intention of the vendor to act in the interest of the consumer, “putting to one side his egoistic profit motives” (Raimondo, 2000). Integrity refers to keeping commitments, being honest and not cheating (McKnight, Choudhury & Kacmar, 2002). The only point that reaches unanimity is that trust plays an important role in social interactions. However, the conceptions of the specific roles played by trust differ among researchers. Trust appeared to be key significant driver affecting:   

 

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 

development and stability of market shares (Urban, Sultan & Qualls, 2000); cooperation (Anderson & Weitz, 1989; Mayer, et al., 1995); commitment (Geyskens, Steenkamp, & Kumar, 1996; Frisou, 2000, Chaudhuri & Holbrook, 2001). In their meta-analysis, Geyskens, Steenkamp, and Kumar (1999) showed that trust explained about 28% of the variance in commitment. satisfaction (Aurier, Benavent & N’Goala, 2001; Harris & Goode, 2004), purchase intention and loyalty (Doney & Cannon, 1997; Sirdeshmukh, Singh, & Sabol, 2002; Harris & Goode, 2004). According Reichheld and Schefter (2000), “to gain the loyalty of customers, you must first gain their trust”. probability of allocating resources in favour of the partner who is trusted (Anderson, Lodish & Weitz, 1987; Doney & Cannon, 1997). power of persuasion of the vendor (Swan & Nolan, 1985; Swan, Trawick & Silva, 1985);

2.4.2. The Specificities of Online Trust “Online trust refers to the trust in a Web site or the company that hosts the site. This trust could be enhanced through two complementary approaches: secured information technology and trusted business practices” (Lauer & Deng, 2007). Pavlou (2003) defined online trust as the willingness to become vulnerable with reference to e-vendors. Jarvenpaa and Tractinsky (1999) defined online trust as the willingness to rely on the e-vendor and to act even if these actions produce vulnerability. Online trust does not seem basically different from offline trust. The main differences identified by Hassanein and Head (2004) are:   

the absence of simultaneous exchanges between the consumer and the e-vendor the distance between the two partners in the online environment and the rules and regulations may vary across each zone. the facility of entry and exit for online businesses (‘‘Is the company going to disappear overnight?’’).

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the data control is almost non-existant during and after transfers in the online environment. the absence of physical trust cues in the online environment. the physical evaluation of products is difficult in an online setting. Consumers cannot personally inspect products or compare the quality, size, or style of products. electronic transactions are generally impersonal, anonymous and automated.

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3. PROPOSED MODEL AND HYPOTHESES Online trust has become a topic of increasing interest to consumer behaviourists and to marketers. Our central question is: How to reassure consumers that are reluctant to buy overseas? It would be a waste to limit its market to national consumers wheras the Internet allows to reach consumers wherever they are. Previous research focused on the following types of antecedents to explain the level of trust in a web site: graphic design, structure design, content design (the textual or graphical cue information included in the web site), and social design (social connection). We propose to put our interest in one piece of information that can be communicated in a different way by the e-vendor: its origin. More precisely, the aim of this study is to demonstrate that perceived geographical proximity and perceived cultural proximity between the consumers and the evendor reassure them and that trust is a formidable substitute to legal governance. Because of the unclear and underdeveloped legal environment of e-commerce, consumers need to perceive reassuring signals from e-vendors. We propose that consumers are more reassured when the trading partner seems close to them, geographically and culturally. Geographical proximity is often measured in kilometers (Grote & Raube, 2007). It refers to the physical or spacial distance between two parties, but it takes into account the fact that some geographic points are brought nearer thanks to infrastrusture and transports. Moreover, the fact of belonging to a same region increases geographical proximity (eg. Europe, Indian Ocean). Cultural proximity refers to sharing similarities in language, history, religion, ethnicity, living patterns and customs, values, beliefs, attitudes and clothing styles across groups of people. Moreover, cultural proximity has been identified with the existence of governmental and jurisdictional traditions (Felbermayr & Toubal, 2006). As noted by Disdier and Mayer (2007), “proximity helps exchanges”. But how does it operate? Our first thought is that it is easier to trade with partners that speak the same language, that share the same culture and values and that distance is minimal so as to simplify the merchandise flows. It also reduces transaction costs. But that it is not the only effect: cultural and geographical proximities may favor trust emergence. “People tend to trust those who are similar to them and to distrust those who are dissimilar from them” (Earle & Cvetkovich, 1999). This paper raises these two main questions: 

Does cultural proximity between the e-vendor and the consumer favour trust in the evendor?

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Does geographical proximity between the e-vendor and the consumer favour trust in the e-vendor?

To better understand the logic of the relationships, we integrated intermediary variables, which are trust in the e-vendor’s national legal system, and degree of awareness of the legal “cloisonement” between one’s own country and the e-vendor’s country. We hypothesize that (see Figure one): H1: The higher the perceived cultural proximity between the e-vendor and consumers, the higher is the trust in the e-vendor’s national legal system. H2: The higher the perceived geographical proximity between the e-vendor and consumer, the higher is the trust in the e-vendor’s national legal system. H3: The higher the perceived cultural proximity between the e-vendor and consumer, the less aware the consumer is of the national legal barriers. H4: The higher the perceived geographical proximity between the e-vendor and consumer, the less aware the consumer is of the national legal barriers.

the the the the

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It is presumed that: H5: The higher the trust in the e-vendor’s national legal system, the less uncertainty consumers perceive about the outcomes. H6: The higher the trust in the e-vendor’s national legal system, the less risk consumers perceive. H7: The less aware are consumers of the national legal barriers, the less risk they perceive. H8: The less aware are consumers of the national legal barriers, the less uncertainty they perceive. H9: The less uncertainty consumers perceive about the outcomes, the less risk they perceive. H10: The less uncertainty about the outcomes consumers perceive, the more trustful the consumers feel. H11: The less risk about the outcomes consumers perceive, the more trust consumers feel. And H12: The more trust consumers feel, the higher is their intention to trade with the evendor.

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Source: developed for this research. Figure 1. The proposed model and hypotheses.

4. RESEARCH METHODOLOGY

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4.1. Measurement Development Measurement items were adapted from the literature wherever possible. Due to an absence of existing scales, we based scale development on the definitions of the concepts presented above. For example, to measure the degree of perceived cultural proximity, the interviewees were asked to score the degree of difference they perceive between their own country and another one on the basis of language, religious beliefs, traditions and living habits. To measure the degree of geographical proximity, we asked how far a country was from the interviewee’s one, how easy it was to travel to this country, how expensive it was to go to this country and if s/he thought that the country belongs to the same area that his/her own country. The scores could range from 1 to 7. The lowest scores meant that the perceived differences between the two countries were small and the highest scores that the perceived differences were big.

4.2. Survey Administration To achieve the objective of the present study and provide material for hypotheses testing, we conducted 135 interviews using convenience sampling. Most interviewees were students in the library of the University of Saint Denis Reunion, which is located near Mauritius in the southern Indian Ocean. Each interviewee was asked to evaluate the degrees of cultural and geographical proximities s/he feels between his/her own country and four other ones: Mauritius, Belgium, China and Mexico. They were also asked for each country their level of trust in its justice, their level of perceived legal barriers with their own country, the levels of risk and uncertainty attributed to exchanges with a e-vendor from this country, the level of trust on a e-vendor from this country and the degree of dealing intention with a e-vendor from this country.

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5. DATA ANALYSIS AND RESULTS 5.1. Preliminary Analysis The sum of the differences scored between their own country and each country highlights that the interviewees feel culturally closer to Mauritius (1,831), then Belgium (2,495), Mexico (3,590) and at the end China (4,030). Geographically, the interviewees feel closer to Mauritius (1,270), then Belgium (2,316), China (2,904) and Mexico (3,065). The geographical position of our study field, Reunion Island, explains these results: Mauritius is the closest island, the infrastructure is well developped between these two countries and they share a common history. China is perceived culturally different from the inhabitants of Reunion Island, but seems geographically closer thanks to direct air routes. Before analysing the correlations between our variables, we first controlled their distribution. Skewness and kurtosis tests were checked and the results were satisfactory. Coefficient alphas for all constructs were above 0.70, except Purchase Intention with 0.60, and all items loaded significantly on their assigned latent constructs.

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5.2. Confirmatory Factor Analysis Subsequently, a structural equation analysis was conducted to assess causal effects between the variables. We computed Pearson correlations between all possible pairs among the 22 items and tested our model with Lisrel (see Figure 2 and Table 1). Chi-square for the independance model was satisfactory (889.39, df = 196, P = 0.0). Divided by the degrees of freedom ratio, the chi-squared was 4.54. This value is acceptable as it is below the recommended level of 5 suggested by Marsh and Hocevar (1985). The obtained Root Mean Square Error falls within the acceptable standards (RMSEA = .08), indicating a good fit between the model and the data. AGFI was 0.83, higher than the threshold of 0.8 (Bentler 1990). However, GFI and CFI were a little bit lower than the 0.90 recommanded (GFI = .87 and CFI = .89). Since they were just a bit lower, we stated that these results displayed a satisfactory model fit and decided to continue our analysis.

Source: developed for this research. Figure 2. The tested causal model.

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Table 1. Summary of the hypothesis tests Hypotheses

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H1: Cultural Proximity to Trust in the e-vendor’s national legal system H2: Geographical Proximity to Trust in the e-vendor’s national legal system H3: Cultural Proximity to Perception of national legal barriers H4: Geographical Proximity to Perception of national legal barriers H5: Trust in the e-vendor’s national legal system to Uncertainty H6: Trust in the e-vendor’s national legal system to Risk H7: Perception of national legal barriers to Uncertainty H8: Perception of national legal barriers to Risk H9: Uncertainty to Risk H10: Uncertainty to Trust in the e-vendor H11: Risk to Trust in the e-vendor H12: Trust to Purchase Intention

Unstandardized structural coefficients .72

Tvalues

-.35

-4.16

-.93 .39

-7.94 4.13

-.17 -.07 .56 .32 .49 -.28 -.35 .65

-3.36 -1.54 7.78 4.51 6.44 -3.70 -4.55 8.39

8.10

The results of the empirical test show only one coefficient, which is not significantly different from zero. H6, which stated a relationship between trust in the e-vendor’s national legal system and risk, is therefore rejected (t = -1.54). For H2, the valence was the opposite of what had been hypothesised. We hypothesized a positive relationship between geographical proximity to trust in the e-vendor’s national legal system, whereas it revealed to be negative. We observed the same results for H4, the relationship between geographical proximity to perception of national legal barriers. This highlights the fact that geographical proximity is not associated with trust.

6. DISCUSSION AND MANAGERIAL IMPLICATIONS The main results of this research are:  

the existence of a strong negative relationship between cultural proximity and perception of national legal barriers between the two countries, the existence of a strong positive relationship between cultural proximity and trust in the e-vendor’s national legal system.

These results mean that consumers tend to think that e-vendors from similar cultures to theirs present a protection against the lack of international governance. If a problem occured in the transaction, consumers tend to think that it would be easier to solve it and that the judgement would be more impartial. Regarding the counter-intuitive results:

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Magali Debat  

the existence of a weak positive relationship between geographical proximity and perception of national legal barriers between the two countries, the existence of a weak negative relationship between geographical proximity and trust in the e-vendor’s national legal system.

The valence for both coefficients was the opposite to that hypothesized. This would mean that geographical proximity is not an argument that should be used by e-vendors for two reasons: first, its impact is weak and secondly it could be counterproductive. This finding deserves further investigation. Regarding the moderate support for hypotheses, that is the existence of moderate negative relationships between uncertainty and trust in the e-vendor and between the degree of perceived risk and trust in the e-vendor, we expected stronger coefficients between these three concepts. Uncertainty and trust in the e-vendor share only 8% of common variance and risk and trust 12%. The negative coefficients confirm that uncertainty and risk may be prerequisites for trust existence (Lewis & Weigert, 1985; Coleman, 1990; Zazzali, 2003; Kim, So & Lee, 2007), but are not sufficient to explain the degree of trust. According to our results, visual and word clues on an Internet site meant to highlight the geographical proximity with consumers do not favour trust building in the site and in the evendor. It is not worth to insert them in the site, as they will not have the expected effect. On the other hand, visual and word clues on a website meant to highlight the cultural proximity with consumers do have a modest effect. Therefore, we recommend site managers to adapt the form and the content of their messages, the language, images and arguments to their different target groups.

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CONCLUSION The justification for this research arose from recognition that theoretical and empirical research into the construct of trust for online environments has been very limited. Research on the determinants and consequences of consumer trust in e-vendors remain insufficient to move closer to truly understanding e-consumers (Bramall, Schoefer & McKechnie, 2004). The research makes a contribution to the existing body of knowledge within ecommerce and trust literatures. “Understanding what motivates consumers to adopt the electronic commerce is important because it is the key to online vendors’ survival in this intensely competitive market” (Hsu, 2008). Over 80% of users report that being able to trust a web site is very important for them in making a decision to interact with that site (Princeton Survey Research Associates, 2002). As stated by Wang and Emurian (2005), “lack of trust has been repeatedly identified as one of the most formidable barriers to people for engaging in ecommerce […]. The future of e-commerce is tenuous without a general climate of online trust”. If the e-vendor does not inspire trust, consumers will not buy (Ang & Lee, 2000). High uncertainty and risk prevail on the online environment due to the absence of specific authorities, the absence of online rules and of legal jurisdiction. The role of trust is therefore important. Consumers, before engaging in a transaction, have to feel trust. They are receptive to all cues that reveal potential dangers and the trustworthiness of the e-vendor. We

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showed that the cultural proximity participates in trust building. We also demonstrated that geographical proximity was ineffective on trust building. This study is not free from limitations. The major ones are:   

the use of non validated scales to test the model; the restricted research field, Reunion Island, that presents particularities due to its island nature; and, the use of a convenience sample. Most of our interviewees were university students.

The findings of this experiment need to be replicated in other research fields and with other countries. Due to the fact that the obtained coefficients were not high, it would be interesting to integrate other variables inherent to consumer choices and to carry out typologies. It could be hypothesized that different behaviors would be observed. This could be explained by the fact that people do not have the same experiences with the Internet and eshopping. It would be also interesting to classify according to the perceptions consumers have on the different countries that are studied, for example, the level of economic development. This could generate variance that is not supported by our general model.

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REFERENCES Anderson, E., & Weitz, B. (1989). Determinants of Continuity in Conventional Industrial Channel Dyads. Marketing Science 8, 310–323. Anderson, E., Lodish, L.M., & Weitz, B.A. (1987). Resource Allocation Behavior in Conventional Channels. Journal of Marketing Research 24, 85–97. Ang, L., & Lee, B.-C. (2000). Influencing Perceptions of Trustworthiness in Internet Commerce: A Rational Choice Framework. In Proceedings of Fifth Collecter Conference on Electronic Commerce, 1–12. Aurier, P., Benavent, C., & N'Goala, G. (2001).Validité Discriminante et Prédictive des Composantes de la Relation à la Marque. Actes du 17ème congrès international de l'AFM. Deauville, 156-159 Ba, S. & Pavlou, P.A. (2002). Evidence of the Effect of Trust Building Technology in Electronic Markets: Price Premiums and Buyer Behaviour. Management Information Systems Quarterly 26, 243– 268. Baldwin, L.P. & Currie, W.L. (2000). Key Issues in Electronic Commerce in Today's Global Information Infrastructure. Cognition, Technology and Work. 2 27-34. Bramall, C., Schoefer, K., & McKechnie, S. (2004). The Determinants and Consequences of Consumer Trust in E-Retailing: a Conceptual Framework. Irish Marketing Review. 17. (1 - 2). Boksberger, P., Bieger, T., & Laesser, C. (2007). Multidimensional Analysis of Perceived Risk in Commercial Air Travel. Journal of Air Transport Management, 13 (2), 90-96. Cheung, C., & Lee, M.K.O. (2000). Trust in Internet Shoing: a Proposed Model & Measurement Instrument. The 6th Americas Conference on Information Systems, 69-82 Coleman, J.S. (1990). The Foundations of Social Theory. The Belknap Press of the University of Harvard.

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Kim, J., Jin, B., & Swinney, J. (2009). Journal of Retailing and Consumer Services. 16 (4) 239-247. Kim, J.J, So, S.H., & Lee, Y.H. (2007).The Effects of Trust on the Intention of Adopting Business Process Outsourcing: An Empirical Study. International Journal of Computer Science and Network Security. 7 (10) 12-26. Kim, H.W., Xu, Y., & Koh, J. (2004). A Comparison of Online Trust Building Factors between Potential Customers & Repeat Customers. Journal of the Association for Information Systems. 5. (10) Lauer, T., & Deng, X. (2007). Building Online Trust through Privacy Practices. International Journal of Information Security. 6. Lewis, J. D., & Weigert, A . (1985). Trust as a Social Reality. Social Forces. 63, 36-49. Liang, T.-P., & Huang, J.-S. (1998) An Empirical Study on Consumer Acceptance of Products in Electronic Markets: A Transaction Cost Model. Decision Support Systems 24, 1-22. Liang, H., Xue, Y., Laosethakul, K., & Llyod, S. (2005). Information & Health Care Systems .I: Trust, Uncertainty, & On-Line Prescription Filling. Communications of the Association for Information Systems. 15, 75-91. Lim, N. (2003). Consumers’ Perceived Risk: Sources versus Consequences. Electronic Commerce Research and Alications. 2 (3) 12-32. Littler, D., & Melanthiou, D. (2006). Consumer Perceptions of Risk & Uncertainty & the Implications for Behaviour towards Innovative Retail Services: The case of Internet Banking. Journal of Retailing and Consumer Services. 13, 52-67. Mayer, R. C., Davis, J. H., & Schoorman, F. D. (1995). An Integrative Model of Organizational Trust. Academy of Management Review. 20, 2-23. McKnight, D.H., Choudhury, V., & Kacmar, C. (2002). Developing & Validating Trust Measures for e-Commerce: An Integrative Typology. Information Systems Research. 13, (3) 85-99. Moorman, C., Deshpe, R., & Zaltman, G. (1993). Factors Affecting Trust in Market Research Relationship. Journal of Marketing. 57 (1) 101-112. Pavlou, P. A. (2003). Consumer Acceptance of Electronic Commerce: Integrating Trust & Risk with the Technology Acceptance Model. International Journal of Electronic Commerce. 7 (3) 63-78. Pavlou, P., & Gefen, D. (2004). Building Effective Online Marketplaces with InstitutionBased Trust. Information Systems Research. 15 (1) 98-112. Pfeffer, J., & Salancik, G. R. (1978). The External Control of Organizations: A Resource Dependence Perspective. New York: Harper & Row. Qiu, C., & Lee, Y. (2007). Uncertainty, Virtual Consumption, and Prolonged Happiness. Advances in Consumer Research, 34, 650-749. Raimondo, M.A . (2000) The Measurement of Trust in Marketing Studies: A Review of Models and Methodologies, 16th Annual IMP Conference, Bath. Reicheld, F.F., & Schefter, P. (2000). E-loyalty: your Secret Weapon on the Web. Harvard Business Review. 78, 52-75. Roselius T., (1971). Consumer rankings of risk reduction methods. Journal of Marketing. 35 (1) 56-72. Sirdeshmukh, D., Singh, J., & Sabom, B. (2002). Consumer Trust, Value, & Loyalty in Relational Exchanges. Journal of Marketing. 66, 23-35.

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PART V

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MODELLING

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Chapter 14

THE UNPREDICTABILITY OF FINANCIAL CRISES IN A GLOBALISED WORLD: IMPLICATIONS FOR PUBLIC GOVERNANCE Arturo Rodríguez Castellanos1 and Nerea San Martín Albizuri2 1

Royal Academy of Economic and Financial Sciences, Spain 2 University of the Basque Country, Spain

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ABSTRACT The globalisation process has not succeeded in eliminating international financial crises; quite the opposite, a number of authors argue that it has contributed to trigger them. The adoption of governance measures that surpass the national scope, reaching a transnational character, can contribute to avoid or to reduce these problems at least. But, in addition, globalisation seems to have accentuated the unpredictability of the crises, as it can be verified in the current one: it is a global crisis, and, what is more, despite the prior existence of warnings about several imbalances in financial markets and in the global economy, neither supervisors nor the multilateral organisations predicted the exact form that it would take, the timing of its onset and the nature of its consequences. However, this lack of foresight does not seem to be an inherent feature of the current crisis, but rather a common factor to external financial crises in the globalisation era. And it happens despite the existence of a large variety of methods to assess country risk and, therefore, to measure the risk of a crisis episode, particularly the so-called “country risk indexes”. The aim of this chapter is to contrast whether the two indexes most known and used by experts, the Euromoney index and the ICRG, were capable of predicting well in advance the crises episodes that occurred during the period 1994-2002. For this purpose, we consider a sample that includes 13 countries in crisis and 50 countries which, even belonging to the same “country risk group” as the first, did not develop a crisis. On the basis of this sample, both discriminant and logistic regression analyses are performed in order to check the success of both indexes in discriminating between the two groups. The

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Arturo Rodríguez Castellanos and Nerea San Martín Albizuri results indicate that neither of the selected indexes were suitable for carrying out this objective. These results suggest two conclusions: the first is that country risk indexes, although able to reflect a certain set of economic vulnerabilities, do not appear to identify the last combination of factors which trigger a crisis; the second is that in a globalised world the governance models must reject the approaches based on the easy predictability of economic events, assuming on the contrary the relevance of the uncertainty in the analysis and the management of the economic reality.

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1. INTRODUCTION The current crisis has renewed the interest on the impact of the globalisation process on the outbreak of international financial crises. Although there are different versions, most authors agree on the fact that the globalisation process has not succeeded in its purpose of preventing not only the crises but also vulnerabilities such as volatility and the distortions in economic fundamentals. Quite the opposite, the most widespread impression is that globalisation has contributed to trigger them. In addition, it seems to have accentuated the unpredictability of the crises, as it can also be verified in the current one. Despite the prior existence of warnings about several imbalances in financial markets and in the global economy, neither the supervisors nor multilateral organisations managed to predict the exact form that it would take, the timing of its onset and the nature of its consequences. Therefore, in view of the fact that the globalisation process involves more global concerns, such as the increasing of both volatility and unpredictability of the crises, it seems necessary to organise major international cooperation and more global strategies to cope with them. The adoption of governance measures that surpass the national scope, reaching a transnational character, can contribute to avoid, or to reduce these problems at least. The aim of this chapter is to contrast whether the two indexes most known and used by experts, the Euromoney index and the ICRG, were capable of predicting well in advance the crises episodes that occurred during the period 1994-2002. For this purpose, we consider a sample that includes 13 countries in crisis and 50 countries which, even belonging to the same “country risk group” as the first, did not develop a crisis. On the basis of this sample, both discriminant and logistic regression analyses are performed in order to check the success of both indexes in discriminating between the two groups. If the indexes are not able to discriminate between countries which triggered a crisis episode and countries without crisis, the guesswork on the indexes ability to forecast and to anticipate external crises would be confirmed. Finally, if this supposition is revealed as correct the consequences for the public governance should be analysed through a new model, which reflects the relevance of the uncertainty in the economic context. To this end, this chapter is organized as follows. The next section discusses two of the negative consequences of the globalisation process: volatility and the increasing uncertainty in economic events; and how they affect the triggering of financial crises. The third section raises some structural changes in the public governance model that are needed to mitigate or prevent these issues. The fourth section describes the country risk indexes that will be used to contrast the hypotheses raised in this chapter. These hypotheses, together with the data, the

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methodology used to contrast them, and the results, are presented in the fifth section. Finally, the conclusion and the references are collected at the sixth and seventh sections, respectively.

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2. GLOBALISATION, VOLATILITY AND UNPREDICTABILITY Globalisation is a complex and broad concept. It is usually related to goods, services, financial products, information and cultures, which are more mobile all around the world (IMF, 2002). With regards to economic globalisation, it is the increasing integration and interconnection between economies, particularly through the movement of goods, services and capital across borders, that encourages several economic agents to employ more efficiently their resources, outside the national field, thus causing a growing economic interdependence between the different countries (Urionabarrenetxea, 2006; De la Dehesa, 2009; Rodríguez, et al., 2008). Although economic globalisation basically covers the globalisation of three types of markets: financial capital, productive capital, and goods, in this chapter we will focus on the first, since it bears directly on the country risk. This process, like any other, has many aspects of interest but, undoubtedly, the issue that raises most comments is the growing number of adverse consequences that financial globalisation causes. Among others, we can highlight (Bustelo, et al., 1999; Pedrosa, 2003): the speculative pressures, the rise in systemic risk, and the increased vulnerability of emerging countries. But what really concerns all the market participants is the rise in volatility and unpredictability. Despite the fact that there is no clear consensus about the relation between globalisation of financial markets and the evolution of volatility, the global strand of thought states that the first exacerbates intrinsic distortion of financial markets, which lead to an increase in the second (Hermaling & Rose, 1999). From this point of view, there are three channels through which these distortions are enhanced: 1) the lack of information deriving from the existence of asymmetric information, which leads to two mayor problems: adverse selection and moral hazard18; 2) the use of derivatives, which widens the cross-border capital flows and, therefore, the volatility; and 3) the role played by institutional investors, in the sense that this type of financial agent tend to trade large volumes of capital and have greater information, so that, they may contribute to encourage inequalities and, finally, volatility19. Another fundamental problem, closely connected to this issue, is the premature capital market liberalisation without an earlier upgrading of financial supervision, above all, in the emerging economies (Goldstein, 2005). This inadequate and premature financial liberalisation has been shown to be incapable of decreasing volatility, and what is more, it seems to be a factor associated with credit booms as well as a leading indicator of financial crises (Reinhart & Rogoff, 2008). The second adverse consequence of the globalisation process, stressed in this chapter, is the unpredictability of the events. The best example to explain this link is the current crisis: the first major financial crisis of the 21st century originated in 2007 and which has developed into an unprecedented fact, battering financial and real markets. In an overall view of the 18 19

These concepts are widely explained in Gutierrez (2001), Mishkin (2005), and De la Dehesa (2009). Actually, there is no academic consensus on whether the role of institutional investors increases volatility or not (Sias, 1996).

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situation, there are a number of reasons why this crisis is notable; for example, its severity and speed, as well as the fact that almost all the industrialised countries have been affected (Rose & Spiegel, 2009). Attempts to identify a single cause of the crisis are misplaced, but a number of experts point out that at the root of the episode lay a fundamental inconsistency between financial globalisation and existing public rules and policies both in the domestic and international levels (European Economic Advisory Group, 2009). In this sense, De la Dehesa (2009) also argues that there are two main driving forces behind the triggering of the crisis: on the one hand, the “macro” causes, with regard to the growing accumulation of current account imbalances in the world and the policy for maintaining a low level of interest rates; and on the other hand, the “micro” causes, such as failures both in the system of incentives in financial entities and in the measurement of the country risk. In short, the current crisis is the result of complex interactions between a range of factors. Next are set out the most mentioned in the theoretical literature. First, we should consider the macroeconomic context prior to the crisis, which was characterised by a long period of robust global growth and low interest rates. This global expansion, the so-called Great Moderation or Great Stability20, led to the relaxation of monetary policy, creating extremely attractive credit conditions 21 , promoting the huge run-up in real estate prices (De Long, 2009) and encouraging financial markets and investors to downplay macroeconomic risk (Haldane, 2009). Under this framework, the second and third factors consist of excessive risk taking and excessive leveraging by financial institutions, contributing to the concentration of systemic risk in the financial system and, specifically, in housing market (IMF, 2009). Every discussion of the causes of the global financial crisis also includes: the level of opacity regarding the size and incidence of risk; the run-up in real estate values and the subsequent bubble; and the boom in subprime US mortgage market (Feldstein, 2009); the previous mentioned information asymmetries; and a total market failure due to widespread supervisory shortcoming22. But, leaving aside the causes, what really raises our interest, and the concern of most experts, is why the crisis was not foreseen. That is, “to look past blame in the crisis, it is useful to ask why financial institutions, supervisors, multilateral organisms, and policymakers failed to heed the looming threat” (IMF, 2009: 1). In spite of several alarms, nobody foresaw the form that the crisis would take, its ferocity, its location, and the timing of its onset. It is argued that a key failure was the inability to understand the risk as a whole: policymakers only focused on their own threat, overlooking the larger problem. However, this lack of foresight does not seem to be due to market distortions, but rather a common factor to financial systems in the globalisation era, as is evident with no previous episodes of external crises foreseen. And it happened in spite of the existence of a large variety of methods to assess country risk and, therefore, to measure the risk of a crisis

20

The Great Moderation or Great Stability are terms used to describe the combination of low inflation and reduced volatility experienced in the UK, US and a number of the other major economies from the late 1980s onwards. For the latest ideas about this issue see, for example, Stock and Watson (2002), and Young (2008). Besley and Hennssy (2009), for example, use another similar concept to define this situation: the feel-good factor. 21 About bank lending behaviour, its pro-cyclicality and its regulatory frameworks see, among others: De Gregorio (2009), Brunnermeier (2009) and Demirguc-Kunt and Serven (2009). 22 Kane (2009) shows that the global financial problem is due to a double failure. On the one hand, the market failure, which shows a high lack of self-discipline, and on the other, a monitoring error.

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episode: the so-called Early Warning Systems (EWS)23, credit risk rating and country risk indexes, among others. Consequently, there are many experts that cast doubt on the ability of existing methods for anticipating monetary and financial crises (Goldstein, et al., 1998; IMF, 1998, 2009; Radelet & Sachs 1998; Oetzel, et al., 2001; Reinhart, 2002; Amadou, 2003; Gorfinkiel & Lapitz, 2003; Medina, 2004; Di Gregorio, 2005); and calling for the creation of more efficient and objective techniques. In this chapter, giving continuity to this dilemma, we examine whether two country risk indicators, the mixed type country risk indexes published by Euromoney and by PRS Group (ICRG index), are able to discriminate between countries with crisis and without crisis and, ultimately, if their ratings adequately reflect the degree of risk in the different countries.

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3. THE NEED OF A NEW GOVERNANCE MODEL Since globalisation involves more global concerns, with increasing volatility and crisies unpredictability, the solution also requires more global strategies (across a range of economic and financial issues) and major international cooperation. The adoption of governance measures that surpass the national scope, reaching a transnational character, can contribute to avoid or to reduce these problems at least. Of course, this means that more global public policies should be implemented; and this will require, at the same time, to involve all mayor players in global economic governance. This global form of public policy will first of all reinforce the importance of international organisations24, such as World Trade Organization, International Monetary Fund, or the World Bank. What is clear, and there is broad consensus on it, is the need to reform the global finance architecture and the public governance model (Stiglitz, 2007; Girón & Chapoy, 2009; Hume, 2009; Krugman, 2009). Concretely, the new governance model regarding to the financial systems, has to achieve, among others, the following structural changes (IMF, 2009): 

Coordinate monetary and fiscal policies globally. So far, monetary policy has focused basically in maintaining price stability (inflation targeting), and in the light of the circumstances recently triggered, this seems to be insufficient to avoid and prevent bubbles and the crises that follow. So the mandate of monetary policy should be shifted towards a more complex set of objectives that include macro-financial stability and the prevention of systemic risk (Leijonhudvud, 2009)25 . Meanwhile, most analysts suggest that the fiscal policy should be stronger in times of prosperity, and highlight the need to build up buffers and to avoid tax systems encouraging the build up of leverage (Claessens, 2009).

23

Although, for the time being, the use of the EWS from international financial institutions as forecast systems of crisis is limited, many authors advocate its use, arguing that it seems to be more effective than the traditional methods. Among others, we can find Kamin, et al. (2001), Reinhart (2002), Edison (2003), Kaminsky (2003), Lestano, et al. (2003), Manasse, et al. (2003), Berg, et al. (2004), King and Daniel (2004), Jacobs, et al. (2005), Davis and Karim (2008), and Van Rijckeghem and Weder (2009). 24 Nevertheless, this evolution raises a problem of loss of sovereignty, viewed as the exclusive authority of a nationState to manage itself. 25 However, other authors point out that while monetary policy seems appropriate for many countries individually, at the global level it is too loose (Hume, 2009).

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

Set a greater degree of cooperation between financial regulators in different countries to operate such a system, and expand the regulatory perimeter. These measures mean strengthening the system of macro-prudential regulation, which seeks to address the vulnerability of the financial system as a whole, rather than focussing on specific institutions (Guttmann, 2008; Hume, 2009; The Turner Review, 2009). In fact, the great majority of experts plead for the establishment of a global finance regulator, reiterating the inconsistency between a capital market without borders and national monitoring and regulation (Soros, 2008). Despite that, this new regulation framework is still being developed, and it is clear that it will have to contain three key elements (OECD, 2009): 1) procedures to ensure the flow of information between monetary authorities and supervisors; 2) effective early warning mechanisms, since the future will remain uncertain; and 3) effective supervisory action to control them. Finally, the new governance model should improve and extend the surveillance of the financial system. The aforementioned unpredictability in events has increased the difficulty of measuring and predicting the risks associated with participation of different actors on the international market, from multinational companies through to the individual investor (Hoti, 2005; San Martín & Rodríguez, 2009), revealing as the principal concern among both the economic and financial community (Zopounidis, et al., 1998; Oetzel, et al., 2001; Hoti & McAleer, 2004, 2005).

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4. COUNTRY RISK INDEXES Generally, country risk indexes are used to “sort” countries according to their more or less level of risk. Usually the index consists of an aggregate, with subjective weightings, of values of certain variables for a reference period (Bascomb, 1993; Gorfinkiel & Lapitz, 2003). There are diverse kinds of indexes, depending on the type of variable used in their processing, although most of the agencies produce mixed indexes, including both observational and opinion variables: Euromoney, Business Environment Risk Intelligence, Economist Intelligence Unit, Political Risk Services: International Country Risk Guide (ICRG), IBC index, EFIC´s Country Risk, and Japanese Centre for International Finance, among others. One reason for using the information from both Euromoney index and ICRG in this chapter is that they are the most well-known and used in international financial circles. Another reason is that some of the variables included are, to a great extent, the result of a prior synthesis of other methods, such as the sovereign rating awarded by the main international agencies. In addiction, the fact that they have been published for a large group of countries over a period sufficiently long facilitates the application of statistical techniques (Ramacharran, 1999; Ayala, et al, 2000; Iturralde, et al., 2010). The method to develop the Euromoney index is to obtain, for each six month reference period, the weighted sum of the variables included. Currently, the index consists of nine variables grouped in three categories of indicators (Ayala, et al., 2000; Gorfinkiel & Lapitz, 2003; Euromoney risk report in www.euromoney.com): “analytical indicators”, which contain two opinion-based variables; “external debt indicators”; and “market indicators” (these last

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

The Unpredictability of Financial Crises in a Globalised World Components Analytical indicators  Economic performance  Political risk External debt indicators  Synthetic indicator  Unpaid or renegotiated debt  Credit ratings Market indicators  Access to bank lending  Access to short-term finance  Access to International bond  Discount on forfaiting

205

Weighting (%) 50 25 25 30 10 10 10 20 5 5 5 5

Source: own preparation based on Euromoney semester country risk report (Euromoney, 2009). Figure 1. Components of the Euromoney index.

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Variables Political risk Government stability Socioeconomic conditions Investment profile Internal conflict External conflict Corruption Military in politics Religious tensions Law and order Ethnic tensions Democratic accountability Bureaucracy quality Economic risk GDP per head Real GDP growth Annual inflation rate Budget balance as a % of GDP Current account as a % of GDP Financial Risk Foreign debt as a % of PIB Foreign debt service as a % of export. and services Current account as a % of export. and services Net international liquidity as months of import cover Exchange rate stability

Punctuation 100 12 12 12 12 12 6 6 6 6 6 6 4 50 5 10 10 10 15 50 10 10 15 5 10

% in indiv. index 100 12 12 12 12 12 6 6 6 6 6 6 4 100 10 20 20 20 30 100 20 20 30 10 20

% in composite 50 6 6 6 6 6 3 3 3 3 3 3 2 25 2.5 5 5 5 7,5 25 5 5 7,5 2,5 5

Source: own preparation according to information obtained from the website www.prsgroup.com. Figure 2. Components of the ICRG index.

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two include only observational variables26). Figure 1 shows these variables and the respective weightings, subjectively established by the experts who draw up the index at the present time. The International Country Risk Guide (ICRG) has been published monthly since 1980 by the Political Risk Services (PRS) company. The ICRG is made under the assumption that the risk country consists of two fundamental factors: the ability of a country to service its debt and the goodwill or predisposition to pay it. Ultimately, the greater the score of a country the lower is its risk. To reflect these components of risk, the ICRG contains 22 variables, divided into three categories of risk: political, financial and economic; and on this basis, publishes an individual index for each of them, as well as a composite index that includes all three previous subcategories (figure 2). Accordingly, the Political risk index consists of 12 subjective variables set by a group of analysts that collect both political and social factors. In addition, the Economic risk index has as its main purpose to indicate the degree of strength or weakness of the economy. And finally, the Financial risk index reflects the ability of a country to finance its debt. Both the economic and the financial sub-indexes contain five objective variables of quantitative data.

5. EMPIRICAL ANALYSIS 5.1. Hypothesis

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According to the above, distinguishing with regard to each index, there are two hypotheses: H1: the value of the Euromoney index and its respective retards, have the capacity for discriminate in advance between countries with crisis and countries without crisis. H2: the value of the ICRG index and its respective retards, have the ability to discriminate in advance between countries with crisis and countries without crisis. Obviously the null hypothesis is that the indexes are incapable of discriminating in advance, that is through their retard values they do not distinguish between countries that have suffered an episode of crisis and countries without crisis. With this in mind, after the empirical analyses are completed, results will show two possibilities. First, if in fact the indexes discriminate between countries with crisis and without crisis in the selected time period, we can not question their ability to provide for economic vulnerabilities and, therefore, to anticipate episodes of crises. Second, if they are not able to discriminate between countries that triggered a crisis episode and countries without crisis, the guesswork on their limited ability to forecast would be corroborated, and we could conclude that they do not anticipate the economic vulnerabilities that triggered episodes of crises. To perform the contrast we apply both discriminant analysis and logistic regression for each of indexes. In particular, to obtain the discriminant function we have selected the stepwise algorithm method27, which includes independent variables within the function, one 26

“Observational” variable means that it can be obtained from statistical information published by relevant institutions. 27 Stepwise method and the entire process can be consulted, inter alia, in George (2006). Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

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.

by one, depending on its discriminatory capacity. The criterion for the selection of variables is the Wilk´s Lambda and the significance of the F statistic is used as both enter and exit criterion28. The discriminant analysis is based on strict assumptions (multivariate normality, homocedastic covariance, absence of collinearity, among others29) that in our case are not verified. Although there is conflicting evidence on the sensitivity of the discriminant analysis to non-compliance of these assumptions30, non-satisfaction can cause slow guarantees on the validity of the results. Here, to check the correctness of conclusions we perform a logistic regression analysis on the same sample, since this does not require the compliance with such severe assumptions. To model the function and contrast its significance the Wald test is selected: this statistic is distributed as a χ2 with q degrees of freedom (Uriel & Aldás, 2005). The function will be built by the forward method that determines which variables are really significant and then only these are included31.

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5.2. Data The sample used in this chapter includes two groups: on the one hand, 13 countries which develop an external crisis during the selected period, that is, between 1994 and 2002 (Riley, et al., 2004); and on the other hand, 50 countries which, in spite of belonging to the same “country risk group” as the first, did not suffer an episode of crisis. We have, therefore, 63 countries and they are all evaluated by the Euromoney and ICRG indexes32. While the possibility of classifying countries into “risk groups” is a supposition commonly used in the literature on country risk measurement (Rodríguez, et al., 2003, 2004, 2006; Ayala, et al., 2000; Doumpos & Zopounidis, 2001; De Smet & Montano, 2004; Yim & Mitchell, 2005) neither the Euromoney index nor the ICRG offer explicitly groups of countries with similar characteristics. To solve this problem, we have used the results of a cluster analysis made by Rodríguez, et al. (2006), in which countries are classified into homogeneous risk groups according to assessments issued by the Euromoney index. In the ICRG, “risk groups” are obtained in a preliminary work performed by the authors.

28

Established critical levels: at least 0.1 to entry and a maximum of 0.15 to exit. Among other authors, Andrews, et al. (1973), Stevens (1980) and Krzanowski (1990) argue that verification of multivariate normality has certain difficulties. In practice, researchers choose to verify univariate normality of each variable and, if met, take the multivariate distribution as normal (Tabachnick & Fidell, 2007). The hypothesis of homogeneity between arrays of variance-covariance for the population of which are extracted groups is usually checked by the Box M test. From a practical point of view, the homocedastic assumption is very severe and rarely met (Lachenbruch, 1975; Stevens, 1980). 30 See, among others, Wahl and Kronmal (1977) and Hair, et al. (1999). 31 The function could be also modeled with Likelihood Ratio (LR) test. Since the results with both tests are identical, we have selected the Wald statistic because it is the most widely used in the empirical literature. With regard to the method of construction, there are no significant differences between the results obtained with the forward and backward methods (Kleinbaum, et al., 1998). 32 Specifically, the initial proposal was to award to each country with crisis two cases without crisis that belong to the same group of risk of Euromoney index and two of the ICRG. However, as the size of the Euromoney index risk groups does not allow making this selection, so as to not unbalance the sample we decided to delete a country without crisis from the ICRG. Finally, we have 13 countries without crisis + 13 x 2 (ICRG) + 13 x 2 (Euromoney) = 65 countries - 2 (1 Euromoney + 1 ICRG) = 63 countries in the sample. 29

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Arturo Rodríguez Castellanos and Nerea San Martín Albizuri The independent variables are33: 





The value of the index in the “t” moment regarding to each country (index_t): the “t” moment shall be fixed in the index observation immediately prior to the moment in which a country declares the suspension of payments or moratorium of its external debt, or if these circumstances do not take place, when the debt is renegotiated, with serious imbalances in the banking system (i.e. banking crises), liquidity crisis or with a devaluation of more than 15 % of the local currency. The value of the index with one and two retards with regard to the t moment (i.e. the value in t-1 and in t-2: index_t-1 and index_t-2): considering that the available data are biannual and we are trying to contrast the capacity of the indexes to anticipate an episode of crisis in the medium term, we choose to include two variables to collect data from both retards. The difference between them (index_t_t-1 and index_t-1_t-2): Apart from the value at a concrete data, two variables are included to capture variations in each one of the indexes, even if they are minimal.

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The dependent variable takes a value of 1 in the case of countries in crisis, and a value of 0 for cases without crisis. With these data, the following figure presents the final sample of cases that are used in this analysis.

Country Mexico Venezuela Rumania Thailand

Countries with crisis Set off data “t” moment December 1993 Dec. 1993 June 1994 Mar. 1994 In the mid 1996 Mar. 1996 July 1997 Mar. 1997

Malaysia Indonesia South Korea Russia

July 1997 August 1997 November 1997

Mar. 1997 Mar. 1997 Sep. 1997

August 1998

Mar. 1998

Brazil Ecuador Turkey Argentina Uruguay

January 1999 August 1999 November 2000 December 2001 July 2002

Sep. 1998 Mar. 1999 Sep. 2000 Sep. 2001 Mar. 2002

Countries without crisis Same group in ICRG Same group in Euromoney Cameroon Algeria Nicaragua Bulgaria Syria Zambia Vietnam Peru Bolivia Guyana Papua Paraguay Trinidad Israel Filipinas Poland & Tobago Libya Kenya India Sudan Iran Honduras Czech Rep. Egypt Saudi Jamaica Greece Hungry Arabia Dem. Rep. Angola Gambia Morocco Congo Oman Malta Colombia Panama Gabon Nigeria El Salvador Ethiopia Latvia Lithuania Slovakia South Africa Croatia Estonia Chile China Zimbabwe Tunisia

Figure 3. Final list of countries with crisis and without crisis. 33

There is a lag with regard to the frequency of available data. The Euromoney index issues its country risk data in March and September (i.e. biannual), while the ICRG provides monthly values. The solution to this temporal conflict is given de facto by the lower frequency of the first of the indexes, so we only select the data that match in time, that is, values published in March and September by both indexes.

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

The Unpredictability of Financial Crises in a Globalised World

Function

Eigenvalue

1

0.097

Canonical correlation 0.298

Wilks´ Lambda 0.911

209

Chi-square

gl

Sig.

5.610

1

0.018

Figure 4. Discriminant function: Eigenvalue, canonical correlation and Wilk´s Lambda.

To contrast the hypotheses mentioned above, that is, to check the success of both indexes in discriminating between the two established groups, a discriminant and logistic regression analysis are performed, first on the Euromoney index and then on the ICRG.

5.4. Euromoney Discriminant Analysis After running a significance test through Wilk´s lambda, it is found that only the value of index_t-2 shows statistically significant differences for each group (sig. = 0.018). On the other hand, according to the Box M test, the null hypothesis of equality of covariance matrix is accepted (sig. = 0.931). Taking note of these preliminary results, we have built the discriminant function, obtaining the following result34:

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D = −2.816 + 0.058 index_t-2 As expected because of the results of the significance test, the only variable that has been included in the discriminant function is index_t-2. Thus, according to the model, the variable that differentiates between countries with crisis and without crisis is the value of the Euromoney index with two retards35 with regard to the approximate start-moment of each episode of crisis. In fact, this variable has the higher discriminant charge, as well as the higher standardised coefficient (with a value equal to the unit for both cases). Its positive sign increases the score of the discriminant function, so that the higher the index value at t-2, the greater probability for a country to belong to the group of countries with crisis (group 1). Obviously, the expected result is that the sign had been negative because a high value in the index means lower country risk and, in principle, less risk of crisis. Likewise, figure 4 shows the eigenvalue of the variable in the function, the canonical correlation, the Wilks Lambda, and its associated significance. As is clear from the low value of the canonical correlation, the function does not respond successfully with regard to discriminate between the groups. In this same way, the Wilk´s Lambda statistic is close to the unit, so it could be possible that the two groups do not differ clearly. Even so, this statistic (transformed into the Bartlett’s χ2 value) is significant, so we can reject the null hypothesis that means values perform the same in the two groups established for the random variable. 34

The sample of cases is normally divided randomly in two groups: an analysis sample and a validation sample. However, in this case and due to the total number of observations, it is not possible to obtain a validation sample. 35 Remember that each retard equals one half year. Therefore, the value with two retards corresponds to the data issued by the index 12 months before the moment t, not of the outbreak of the crisis (in which case it would be as maximum one and a half year).

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Bearing in mind that in the sample the groups are of different sizes (out of 63 countries, 13 belong to group 1, and 50 to group 0), in accordance with the proportional randomness criterion (Hair, et al., 1999), the percentage of correct random classifications is 62.24%. However, for the analysis sample, the effectiveness indicator of the discriminant function takes a value of 82.5%. Thus, the increase over the total correct classification that can be expect from the criterion of randomness is of 15.26%; less than 25 % which is the required level for effectiveness of the model. Moreover, the classification error is exclusively in countries with crisis: from 13 cases included in the analysis, only two are forecasted correctly: Malaysia and South Korea36. At this point, it seems that the hypothesis about the capacity of the Euromoney index, and its retards, to discriminate between established whole countries, (with crisis and without crisis) is rejected. However, the results may have been impacted by not meeting the required assumptions. Therefore, to contrast definitely the raised hypothesis, we have performed a logistic regression analysis on the same sample.

Logistic Regression First, the goodness-of-fit of the model is checked, using the statistics in figure 5. Both the results contained in the figure five and the associated Hosmer-Lemeshow significance test (0.64), indicate that the quality of global fit is appropriate. Therefore, we have performed the logistic regression through the forward stepwise method (Wald test), and it stops at the first step, showing the following model:

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Crisis probabilit y  Step 1

e -3.656  0.044 index_t - 2 1  e -3.656  0.044 index_t - 2

-2 Log Likelihood 58.427

Cox & Snell R2 0.087

Nagelkerke R2 0.136

Figure 5. -2 Log Likelihood, Cox & Snell R2 and Nagelkerke R2.

Step 1

index_t-2 Constant

B 0.044 -3.656

S.E. 0.020 1.143

Wald 5.050 10.231

Sig. 0.025 0.001

Exp(B) 1.045 0.026

Figure 6. Variables in the equation.

Variables Compo_t-2 Compo_t-1 Compo_t Compo_t_t-1 Compo_t-1_t-2

Wilks´ Lambda 0.971 0.973 0.984 0.982 0.997

F 1.851 1.686 1.001 1.104 0.182

Sig. 0.179 0.199 0.321 0.298 0.672

Figure 7. Univariate F-test. 36

Malaysia and South Korea are the two countries with greater value in the Euromoney index (lower country risk) both at t moment and in the two established retards.

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

The Unpredictability of Financial Crises in a Globalised World Step

0

Variables Compo_t-2 Compo_t-1 Compo_t Compo_t_t-1 Compo_t-1_t-2

Tolerance 1 1 1 1 1

Min. Tolerance 1 1 1 1 1

F to enter 1.851 1.686 1.001 1.104 0.182

211

Wilks Lambda 0.971 0.973 0.984 0.982 0.997

Figure 8. Variables not included in the function.

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Figure 6 shows for the variable included in the model (index_t-2), its estimated coefficient (β), the standard error of β (S.E.), the Wald test value, the degrees of freedom (g), the significance level (sig.), and finally the odds ratio (Exp (β)). Similar to the discriminant function, the logistic regression model includes a single variable: the value of the index with two periods of retard. According to the value of the Wald statistic, the variable is significant (individually) in establishing differences between groups of the sample. However, as in discriminant analysis, its sign is not consistent. With β positive and еβ >1, an increase in index_t-2 implies a greater probability of belong to Group 1, that is, as in the case of the discriminant analysis, to the group of countries with crisis. This is not consistent with the previous assumptions, because a large value of the index denotes less risk country and, in theory, less probability to suffer a crisis episode. If we compare the overall percentage of success achieved by the model (82.5 %), with that obtained by applying the proportional randomness approach (67.24 %), the increasing success in the classification is 15.26%. This percentage does not exceed the minimum required increase (25 %) to give by significance the capacity of classification of the regression function. As in the discriminant analysis, the classification error is exclusively in countries with crisis37. This means the H1 hypothesis must be rejected once and for all.

5.5. ICRG Discriminant Analysis In this case, independent or discriminant variables are the values of the composed index at t moment (compo_t), their respective retards (compo_t-1 and compo_t-2) and the difference between them (compo_t_t-1 and compo_t-1_t-2). The composite index has been selected because it presents, jointly and weightily, the information of the other three sub-indices published by the ICRG: economic, financial and political subindex. Once again, the dependent variable takes a value of 1 for countries with crisis, and a value of 0 for cases without crisis. First, we determine if there are significant differences between the mean values of selected variables. As shown by the values of Wilks´ Lambda in figure 7, neither the composed index of ICRG in the t moment, nor its two respective retards, or the differences between them, are significant to establish differences between countries with crisis and without crisis for the selected period.

37

As in the discriminant analysis, only Malaysia and South Korea have been correctly classified by the logistic regression function.

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Obviously, in these circumstances where it seems that no variable is consistent, it can be very difficult to create the discriminant function that achieves distinguishing between the selected groups. In fact, the initially proposed stepwise method is applied and the results shown in figure 8 confirm the forecast. In the first step of the analysis all selected variables have a value less than the minimum entry established by model38. As a result, no variable is suitable for analysis and we cannot find a discriminant function. As a result we can conclude that, a priori, H2 is not corroborated. That is, the value of the composed index of ICRG is not capable of distinguishing among the selected sample of countries that have, or have not, suffered an episode of crisis (during the period from 1994 to 2002). However, in the case of the Euromoney index, the strict assumptions required for discriminant analysis are not met and, therefore, the obtained conclusion may not be entirely consistent. In order to definitively confirm the results, a logistic regression is made on the same sample.

Logistic Regression In applying the forward stepwise method, the process does not display any results39. That is, there is no logistic function able to discriminate between groups defined by the dependent variable. In other words, none of the independent variables selected for analysis is significant and none has capacity to classify (predict). Therefore, we may definitely confirm that the ICRG index is unable to distinguish between countries that developed an episode of crisis and countries with similar political, economic and financial characteristics but without crisis. The results of the empirical analysis clearly reject the two hypotheses formulated. Both discriminant and logistic regression analysis, applied to the same sample during the preestablished period (1994-2002) have empirically shown that neither the Euromoney index values nor the composite index values of ICRG are able to discriminate in advance between countries with crisis and countries without crisis. That is, the values published by Euromoney index and by ICRG seem not to reflect the political, economic and financial vulnerabilities before episodes of crisis and therefore are unable to anticipate them in the medium term. What is more, from a statistical point of view, the results obtained from the ICRG are more negative than those achieved from the Euromoney index. Therefore it seems that, theoretically, the ICRG composite index has less ability to discriminate between countries with episodes of crisis and countries without crisis than the Euromoney index.

CONCLUSION This chapter set out to achieve two closely related objectives. The first was to examine both the Euromoney index and ICRG index and determine if they are capable of predicting crises episodes well in advance. As these two indexes are the most known and used by the international economic community, any inefficiency on their part in detecting the economies vulnerable to a crisis, suggests consequences at all levels: economic, social, political, etc. This 38 39

The partial minimum F to entry established by the model is 3.84 (sig = 0.05). One of the disadvantages of the methods by steps is the possibility of excluding from regressions either theoretical or conceptual variables that have relevance. In this sense, the analysis is also performed through the enter method, whose results confirm that the inconsistency emerging from the logistic regression analysis on ICRG is not due to the modelling method.

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has been tested considering a sample that includes 13 countries that developed a crisis during the period 1994-2002, and 50 countries without crisis, but in the same “country risk group” as the first. Taking this sample as a basis both discriminant and logistic regression analyses have been performed. The results show that the two hypotheses raised in this chapter are rejected. Thus the values of the selected indexes do not reflect in advance (short and medium term) vulnerabilities arising in the political, economic and/or financial context from a particular country that can lead to external crises. In fact, whether this inability to forecast is accepted, the consequences that this might have for public governance should be considered. In this regard is raised the second objective: the need to integrate the aforementioned possibility in new governance models. To achieve this, the new models should surpass the national scope and integrate transnational measures. The globalisation process surges as a link between the two objectives: a number of studies suggest that two of the negative effects of financial globalisation are greater volatility and the major unpredictability of economics events. Ultimately, globalisation seems to raise the number of crisis and their intensity. The global financial crisis of 2008 is a excellent example that highlights this relationship: since the root of the crisis seems to be the inconsistency between financial globalisation and existing public policies and rules. However, as indicated earlier in this chapter, the lack of foresight is a common factor to all external financial crises in the globalisation era, and not only to the current one. And what is more, most of the past crises and the current one were not foreseen, despite the existence of methods that measure the risk of crises, particularly, the above mentioned “country risk indexes”. In the light of these remarks, this chapter suggests two main conclusions: With regard to the obtained empirical evidence, the selected country risk indexes of Euromoney and ICRG may reflect a certain set of economics vulnerabilities, but they do not appear to identify the final combination of factors that triggered the global financial crisis. Thus, it seems that both indexes are not capable of anticipating a crisis and, indeed, do not contribute to avoid or to reduce the unpredictability of those episodes. From the previous conclusion and considering that we have a globalised world, the new governance models must reject the approaches based on the easy predictability of economic events. On the contrary, they must consider the relevance of uncertainty in the analysis and the management of economic reality. In short, assuming that effectively globalisation seems to have increased the unpredictability, it is more important with a view to global governance to: (1) analyse the risk sources, (2) control the economic phenomena whose evolution is unsustainable, and (3) forget prediction models and take more account of the uncertainty.

REFERENCES Amadou, N.R. (2003). Rating the Rating Agencies: Anticipating currency crises or debt crises? IMF Working Paper 03/122, 1-25. Andrews, D.F., Gnanadesikan, R., & Warner, J.L. (1973). Methods for assessing multivariate normality. In P. R. Krishnaiah (Ed.): Multivariate analysis III. New York: Academic Press.

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Chapter 15

THE EFFECTS OF FIRMS' CORPORATE GOVERNANCE AND LEVEL OF GLOBALISATION ON FINANCIAL PERFORMANCE IN THE CONTEXT OF WORLD ECONOMIC CRISIS Jacques-Marie Aurifeille1, Jaime Gil Lafuente2, and Christian Dave3

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1

Franco-Australian Centre for International Research in Management, University of French Polynesia, France 2 Franco-Australian Centre for International Research in Management Universitat de Barcelona, Spain 3 Franco-Australian Centre for International Research in Management, Université de La Réunion, France

ABSTRACT The recent world economic crisis has stressed the importance of governance and the need to define corporate governance rules that could apply across the global economy. However, the existing rules often appear as a heterogeneous set of indicators, with a good deal of ambivalence and inner contradictions. Therefore, their scope is questionable: are they just qualitative considerations, to be interpreted and adapted according to the firms, the men and the politico-economic context? Or, do the governance rules reflect a latent dimension, a common factor along which shareholders and stakeholders can score a firm's goodness of corporate governance? To answer this question a predictive approach is used, with financial performance as the latent dependent variable. Because the globalizing firms are faced with a greater complexity and share a common worldwide perspective, the level of globalization of the firms is added as a co-factor, thus enabling analysis of the conjoint effect of corporate governance and globalization on financial performance.

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Results reveal a latent common dimension of corporate governance, reflected by three indicators: independence of the directors, remuneration committee and governance committee. The resulting factor, called MCG (Multilateral Corporate Control) predicts significantly both forms of financial performance, with a positive effect. The conjoint analysis of corporate governance and globalization suggest that they act conversely in the context of the world economic crisis, with corporate governance acting as a moderator of the economic impact of the crisis.

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1. CORPORATE GOVERNANCE AND GLOBLIZATION The Financial Crisis, started in 2008, and its contagion to the "real economy" have fueled a worldwide call for new rules to improve the coordination of the financial and the industrial resources. At the microeconomic level, the concern refers primarily to what is called corporate governance, meaning the rules designed to optimize the efficiency of the relationship between shareholders and top managers. Actually, corporate governance has become a significant and growing concern decades before the present crisis, reflecting the growing complexity of the economy (Berle & Means, 1932). When the economy becomes more complex, the involvement of the shareholders in the firms decreases and the power of the top managers increases symmetrically. Therefore, to protect the former ones against eventual opportunistic behaviors of the latter ones, corporate governance rules have been sought and increasingly enforced (Shleifer & Vishny, 1997). However, the larger the firm, the larger its capital needs, and the greater the market control of the managers. In this context, the mere existence and publication of corporate governance improvements may also play the symbolic role of reassuring the shareholders. Firms adopting such rules would benefit from larger, cheaper and less volatile capital. Thus, the corporate governance rules could satisfy both the shareholders and the top managers. Unfortunately, multinational firms are faced with a diversity of factors that makes it harder to adopt a relevant set of governance rules. For instance, the shareholder and stakeholder groups of these firms have heterogeneous anticipations and preferences, resulting from different history and cultural traits like the time perspectives and the personal values (Luo, 2007). The governance rules must also account for the laws that change across the borders. For instance, some countries, like Germany, require that executives and workers have elected representatives on the administrative and directory boards. Beyond these considerations, the expansion of the multinational firm often implies hybrid organizations, like joint ventures and subsidiaries, whose capital is more or less owned and controlled by the mother firm. As a result, multiple boards (subsidiaries and subunits) are often involved, and second-tier CEOs may be dealt with (Kim et al., 1998). To sum up, globalized firms have financing needs and impacts on the economy, which compel them to improve their corporate governance rules. At the same time, it is more difficult for them to find relevant and globally agreed rules. However, all these rules have one thing in common: they are all aiming at the best possible goodness of governance. Therefore their selection depends on two validity criteria: convergence and predictivity. Convergent validity implies that the governance rules reflect a few latent factors along which a firm is

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scored and can proceed. Predictive validity implies that the performance expected from good governance is significantly and tightly linked with these latent factors.

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2. THE RULES OF CORPORATE GOVERNANCE The annual reports of the firms give a precise view of the corporate rules they follow and of how they follow them. Some parts of these reports are often specifically dedicated to corporate governance, thus illustrating the importance of the theme for both the firms and the shareholders. Roughly, two sources of corporate governance rules can be identified: (1) the academic ones, which result from well grounded theories like the agency theory or the transaction costs (Jensen & Meckling, 1976), and (2) more empirical rules, that official organizations often prescribe as a complement (eg the French AFAP-MEDEF code of good governance) or that firms spontaneously refer to. As a whole, these rules are not more than 20, thus easing their comparison across the firms. However, only few rules are widely implemented, while the others are considered either ambivalent or contradictory. The rules commonly agreed by academics and managers are sensible ones, for example: “board meetings should be assiduously attended to". However, they often lack precision. The lack of critical level is disturbing with ambivalent rules that require a compromise between two extremes. For example, there should be an optimal number of board meetings. If a board meets too often, unnecessary and sometimes negative discussions could happen, with an undesirable focus on details. On the contrary, too few meetings of boards could leave excessive latitude to the operational managers or delay the making of important decisions. The same fuzziness characterizes the optimal size of the boards. Smaller boards should be easier to coordinate, but can be more easily influenced by their president and generate more agency cost. Conversely, the bigger boards may gather more expertise, but their decision-making could be slower and conflicts could arise more easily among factions (O'Reilly et al., 1989). Similarly, a balance should be found between the preservation of a board's expertise and the introduction of new members likely to provide new ideas. Longer mandates of the board members would leave them more time to understand the perspectives of the firm and to put this experience into practice. They could also generate the feeling of longer continuity of power, which could reassure some stakeholders. Conversely, mandates could hamper selfcriticism and slow decision-making, with particularly dangerous effects in times of economic crisis (Lorsch, 1989). The same dilemma occurs with the inclusion of executives on the board of directors. While such an inclusion may provide valuable competence and communicate the opinion of the personnel of the firm, the independence of these employees could be limited and could restrain their support of decisions that might harm them professionally. Similarly, the independence of the directors has often been presented as a way to improve board's capacity to gauge situations and to provide unbiased advice (Zahra et al., 1989). However, there is little evidence of this advantage, suggesting that complementary factors should be accounted for, such as the value of the shares that the independent directors should own to be actually involved. Some more discrete rules escape this indeterminacy. For example, the required existence of a remuneration committee, or even a governance committee, is an unambiguous rule.

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However, even some binary corporate governance rules are subject to changes that moderate their significance. For example, in some firms, the chairman and the CEO are different persons, while, in other firms, a president combines these two functions. The choice of one rule or another would not be an issue if it reflected lasting conceptions (Baliga et al., 1996) or differences among the firms, such as their sector of activity or the laws and relevant history (eg. in Germany). However, in countries where the administrative choice is not compulsory, some firms have switched more than once between a dual-head and a single-head structure, suggesting that the rule is depending on who is/are the head/s. These rules and the related questions are not specific to multinational firms. However, some governance rules are more frequently adopted by them and commented on their annual reports and commented in the annual report. It is typically the case when they have some foreign directors.

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3. ESTIMATING A FIRM'S GOODNESS OF CORPORATE GOVERNANCE The fuzziness, ambivalence and contradictions of corporate governance rules do not result only from the specific circumstances of firms and nations. They also result from the different goals and priorities referred to when the goodness of governance is discussed. For instance, a small shareholder's opinion could differ from a bigger one's. Similarly, long-term investors could judge governance differently from the more speculative ones. Cultural differences may also bias the evaluation of corporate governance towards more authoritative or consensual rules and influence the rules concerning the age of the board members. Clearly, risk aversion would also influence the choice and the nature of the governance rules. Moreover, the cultural factor is not limited to the stakeholders' conception of good corporate governance; it depends also on their perception of the firm's cultural traits. For example, the same rules may not be evaluated similarly by foreign shareholders when applied within a Japanese or a Chinese firm. For the same reasons, the percentage and the nationality of the foreign directors could influence the perception of a firm's corporate governance. In this multi-faceted perception of governance, the identification of a scale of goodness of governance requires that the aim of the governance be carefully specified.

Figure 1. The general model.

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The primary aim of corporate governance is that the shareholders receive a maximum return on their investments. It is, therefore, a matter of financial performance, with a classical distinction between the valorization of the assets and the dividends distributed to the shareholders. Indeed, the board has to decide yearly how to split them into reserves and dividends, and the decision must be approved by a majority of the shareholders. More generally, the decision to distribute a given amount of dividends reflects the time perspective to which the firm and the shareholders are referring, with a tendency to associate larger dividends with a shorter perspective. In the asset perspective of financial performance, shareholders will classically consider two types of indicators: those considering the financial security of the balance sheet and those considering the short-term profitability of the firms. The financial security of the firm can be estimated by considering its price to book ratio (PBR), that is the division of the stock market capitalization by the net assets of the firm. A higher than 1 PBR could reflect intangible assets not accounted for in the balance sheet. But it could also indicate an excessive - and therefore unstable - market estimation of the firm's assets. On the contrary, a PBR below 1, may give rise to a takeover, with an even greater benefit for the shareholders. Another synthetic view of the financial security can be drawn from the long-term credit worthiness of the firm, as reflected in the ratings of the credit rating agencies (CRA). In the short-term profits perspective, the classical reference is the price-earning ratio (PER) that divides the stock market capitalization by the earnings of the firm. Usually estimated for the two years to follow, the PER gives a more speculative view of the firm financial performance. The resulting model is as in Figure 1:

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4. THE PREDICTOR VARIABLES The number of research works about the dimensions of corporate governance is limited (Luo, 2007). Roughly, these dimensions are identified in a confirmative or in an exploratory way. In the confirmative approach, theoretical dimensions are postulated first, then, a set of indicators reflecting each of these dimensions is sought. For example, in a recent study (Tandelilin et al., 2007), five a priori dimensions were assigned to corporate governance: 





"shareholders rights and responsibilities", referring to the number of meetings per year, the assiduity of the members, the quality and speed of the information transmitted to the shareholders, the actual capacity of the shareholders to raise questions and get replies, etc "corporate governance policies", reflecting the intention of the firm to implement corporate governance: existence of a code of governance or ethic, reference to the corporate governance rules recommended by the government and the main professional groups, etc "corporate governance practices", representing the actual behaviors of the firm in terms of recruitment, remuneration and audit of the performance : existence of governance, compensation and nomination committees, correlation between the performance and the remunerations, amount of bonus and stock-options, etc

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

"disclosure of policies and practices", representing the transparence and availability of the information about the firm's performance and financial situation, not only for the shareholders but also for the entities dealing with the firm (banks, investment analysts), and "quality of the financial reports", accounting for the content of the reports and the reliability of those who make and audit them (independence, competence).

An advantage of the confirmatory approach is to allow design of many indicators for each dimension. In the study above mentioned, there were 101 indicators, that is more than twenty per dimension, on average. Therefore, the resulting scores of the firms on the dimensions may be highly reliable. However, most of the items used depend on the interviewees' perceptions, instead of actual facts extracted from annual reports. Hence, unavoidably, the collected declarations are subjective and raise methodological issues. The main issue is the validity of the sample of interviewed persons. As the population is composed of all the shareholders, it could be difficult to actually interview a representative sample. A shortcoming would consist in interviewing only the shareholders possessing the largest parts of the capital. However, even if they agree to answer the hundreds of questions asked to them, it is likely that they would provide a very positive view of the corporate governance of the firms they own. Otherwise, they would have just changed these rules. Another major problem could result from the excessively detailed indicators. Indeed, a much simpler latent question is underlying the 101 items and the 5 dimensions postulated: "is the respondent satisfied with the corporate governance of the firm?". Therefore, a strong "halo effect", that is a global affective attitude, is very likely to bias all the answers, causing a high multicollinearity of the variables and complex statistical issues about the filtering of this dominant effect. To sum up, it may not be a good idea to adopt a declarative measure of the shareholders' perception of corporate governance, because the causal relationship sought from corporate governance to performance could become a mere affective tautology. The other main approach to the dimensions of corporate governance is exploratory. Rather than designing items from a priori dimensions, it is based on the observation of the rules as reported in the firm’s annual reports. Therefore, the sampling of the respondents is not an issue. Moreover, these official data are less subjective than the declarative data used in the confirmatory approach. However, the exploratory approach uses secondary data, meaning that it does not directly reflect what shareholders think of the firm's corporate governance. Another issue, more technical, is the questionable sampling of the variables. As mentioned earlier, the governance rules used to check across the firms are limited in number, to around 20. Added to the lack of a priori dimensions, this pragmatic sampling could bias the factor analysis of the corporate governance rules. Moreover, as illustrated in a recent work (Dey, 2008), a large number of factors could emerge, thus precluding the concept of a onedimensional measure of goodness of corporate governance. In Dey's study, 7 dimensions are extracted out of 22 rules, thus reflecting the heterogeneity of the corporate governance rules and suggesting that only a few rules would be significantly related to firms' financial results. Contrary to corporate governance, the measure of globalization level has generated numerous research works. Most of these works have been carried at a macroscopic level, by comparing the economic impact of the governments' openness to the world globalization. From a slightly different perspective, a large number of works have been dedicated to measuring a firm's level of internationalization, some of them for analyzing the pros and cons

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of de-internationalization (Benito at al., 1997). Many of these works follow a predictive approach, with financial performance as the goal variable, thus supporting our proposition of a governance/globalization model of financial performance (Stopford et al., 1983, Daniels et al., 1989; Gerringer et al., 1989, Jung, 1991). A large number of indicators were considered: 1) industrial: where does the firm buy its natural resources and produces its products, how does it associate with local producers?), 2) commercial: where does it sell its products and how does it sell them? (Aurifeille et al., 2002), 3) social: what is the percentage and hierarchical importance of the foreign workers? what is the salary spread among them?) and 4) financial: where do the financial resources come from, where is the benefit generated and where are the taxes paid? Finally, this research has been of little help in differentiating the governance of multidomestic firms from those with a global strategy (Asmussen et al., 2007, Bartlett et al., 2000, Yip, 1989). Our approach to this problem is analogous to the one used for globalization: the data should come from the same source as the shareholders are using, meaning the annual report. The corresponding indicators can be clustered into three groups:

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(1) Commercial indicators: foreign sales in total sales, foreign profit in total profit (Sullivan, 1994; Riahi-Belkaoui, 1998) (2) Nationality indicators: number of foreign subsidiaries in the total number of subsidiaries, number of countries where a significant share of the sales is done, (3) Asset indicators: foreign assets owned by the firm in total assets, foreign owned assets in the firm’s total assets Unfortunately, these indicators are biased. First, most depend on a political definition of "foreign", meaning that whatever the geographic and the cultural distance, the existence of a national border suffices to make a relationship "international". However, there are obvious differences between, for example, a Belgian firm selling to France and a Belgian firm selling to Argentina. Even when a large geographic distance separates two countries, there can exist cultural or economic similarities that reduce the global meaning of their business relationship. For example, a New Zealand-United Kingdom relationship might be considered less global than a New Zealand-China relationship. Hence, when the level of globalization of a firm is to be measured, several researchers recommend considering the cultural dispersion of its international operations. Several attempts have been made to cluster world regions using stereotyped perceptions about their culture. Although this perceptual approach of foreign cultures may reflect the prejudices of some decision makers, their purely descriptive approach does not grant them unicity (Gupta et al., 2002, Ronen et al., 1985). Another bias results from the distribution of the activities. Typically, the question may arise whether a firm with 50% of its subsidiaries and sales in a single neighbor country is more global than a firm with 10% of them in each of the 5 continents? A bias may also result from the limited correspondence between the location and the generation of the profits. Indeed, complex internal pricings as well as the optimization of the local taxes tend to blur the statistics. Concerning assets, it is often difficult to make a difference between the strategic and the tactic assets. Small ownership level, below the 10% of the capital, may translate into a strong strategic association, like the exchange of shares between Renault and Daimler. Conversely, larger levels of ownership can reflect a more speculative approach.

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Figure 2. The tested model.

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The consideration of the data easily accessible from the shareholders was further limited with the selection of those reflecting a global strategy rather than a multi-domestic strategy (Asmussen et al., 2007). The resulting selection of the governance and the globalization indicators is recapitulated in the next section (Table 1). Once presented the latent factors, the relationships linking them must be specified. Among the dependent variables, a significant effect may be hypothesized from security to profitability. Indeed, a sound balance sheet can be considered as a primary condition for profit. Otherwise, the financing of the firm would be more expensive, and profit would not be supported. Because of its main objective of maximizing the shareholders' return on investment, the structure of the corporate governance should have a positive effect on both the balance sheet structure (security) and the profit level (profitability). Globalization is more specifically related to large investments and a long-term strategy. Therefore, financial security should mediate its effect on profitability. The resulting model is illustrated in Figure 2.

5. THE DATA As indicated in the previous section, all the data comes from the annual reports of firms engaged to some extent into a globalization process. The data should be consistent enough across the annual reports, so that missing information is extremely limited. Therefore, the firms should belong to a country whose laws impose to give detailed and accessible information on their corporate structure and on the indicators needed to measure their degree of globalization. However, the country's law should not be so normative that important variables become constants. For example, in countries like Germany, the laws applicable to the big firms exclude the possibility of a single board (Schneider-Lenné, 1992). Similarly, the rules applied to estimate the number of independent board members had to be consistent across the firms, meaning that official norms have to exist and be followed. In some other cases, regulation acts as a limit to the analysis of the firms' corporate governance, for instance of the countries where legal restrictions are put to the communication of the annual reports or part of these reports to people who are not shareholders. In other cases, like Japan, the power of the boards is traditionally limited by historical and traditional factors that privilege workers' stability over shareholders' revenues

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(Allen & Gale, 2000). Finally, among the countries meeting the requirements of availability and consistency of the data, France was chosen because it had the largest number of global firms and it has an intermediate position in the scale of corporate governance attitude ranging from the USA to Japan (Allen & Gale, 2000). All the French firms belonging to the SRD, that is eligible for the deferred settlement service, were studied. These 134 firms have a market capitalization exceeding 1 billion euro and a daily trading volume greater than 1 million euro. The reference period of the study was also important to decide. There were two possibilities: either a longitudinal study or a single year one. Theoretically, a longitudinal study would be more reliable; however, by covering evolving rules and levels of globalization, it would have made the study extremely complex and reduced its validity. On the contrary, a single year study would provide a more contingent view of the matter. Facing this dilemma, the option was taken of choosing a single year when globalization would be particularly concerned. This chosen year is the 2008-2009 fiscal year, meaning a period completely embedded in the world economic crisis. Although, it may be too specific, this year offers unique insight into the way a firm's corporate governance structure and level of globalization enable facing the world economic crisis. Table 1. The indicators of the latent factors Latent factor

Indicator

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Academic Rules (4)

IND (board independence): proportion of "inside" directors versus the "outside" ones. REM: existence of a remuneration committee. HEAD: the CEO is also the board directors’ chairperson. SIZE: Size of the board

Governance Structure

Empiric Rules (6) Level of Globalization

Financial Performance

Geographic (2) Security (2) Profitability (3)

MEET: number of board meetings ASID: assiduity to the board meetings GOV: existence of a governance committee MAND: length of the director’s mandate FGN: percentage of board members from other countries EMP: percentage of employees’ in the board SUB: number of foreign subsidiaries in the total number of subsidiaries MAR: number of foreign countries where sales are specified in the annual report PBR: price book ratio CCR: corporate credit ratings of Moody's, Standard and Poor, Fitch PER: price earning ratios of 2009, 2010 and 2011

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The 17 items whose documentation enabled a consistent study of the firms are recapitulated in Table 1.

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6. ANALYSIS The structural equation model schematized in Figure 2 was estimated using a reflective approach and the maximum likelihood estimator. Since the variables were of various types: binary, ordinal or continuous, the structure of their polychoric correlations was fitted. The information drawn from the annual reports had less than 1% of missing values. Conversely, the ratings of credit worthiness by the three agencies had many more missing values. It was due to the fact that only a few firms chose to be rated by all three agencies. In all the cases, the missing values were treated pair-wise. The factor analysis of the governance structure reflected a reasonably adequate sampling of the variables. Indeed, with a KMO lower than 10-5, it can be said that the governance structure items form a consistent sample. However, two variables, HEAD and MEET had a measure of sampling adequacy close to 0.5. The idea that all these items reflect a single dimension of corporate governance cannot be strongly rejected, as indicated by the positive probability of the chi-square (0.041) and the passable values of the RMSEA (0,058) and the AGFI (0,090). However, only three indicators had a strong convergent validity: GOV ( =0,75), IND ( =0.56) and EMP ( =0.55). The rest of the indicators had significant correlation coefficients ranging from 0.44 to 0.08. Attempts to extract more dimensions of corporate governance did not improve the fit, thus suggesting that, indeed, there were only one dimension in the corporate governance structure of the considered firms. Consequently, only the three indicators GOV, IND and EMP with the largest convergent validity were used to reflect corporate governance in the causal model. The more specific name that could be given to this latent factor is discussed in the next section. The factor analysis of financial performance revealed that the PER of the current year (2009) did not discriminate validly the two dimensions of "Security" and "Profitability". Quite likely, there is a convergence between the current PER and the ongoing balance sheet structure. After removing the present PER indicator, the two hypothesized dimensions of Financial Performance were validly discriminated:  

the CCRs in order of decreasing quality and the PBR were positively correlated, reflecting "Security" the 2010 and 2011 PER reflected "Profitability".

Based on these measurement results, the causal effect of Governance on Financial Performance was tested. The resulting fit was good, with a 0.23 probability of no difference between the observed and estimated structures, as well as a RMSEA equal to 0.044. As hypothesized, governance had a positive effect on both the financial Security and Profitability, with a slightly stronger effect on the latter. However, the secondary hypothesis of a causal relationship from financial Security to Profitability was not confirmed. These results are commented on and discussed in the next section.

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Figure 3. The complete causal model.

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Finally, the complete model was tested including the level of globalization as a cofactor of the effect of governance on financial performance. The resulting fit was not acceptable, with a probability of the chi-square equal to 0,00 and a RMSEA equal to 0.27. Therefore, figure 3, below, should be considered carefully and only at the level of the bivariate parameters. The results are commented on and discussed in the next section.

7. COMMENTS AND DISCUSSION An important finding of this research is the dimensionality of the corporate governance structure. Only one factor emerges from the 10 indicators, with three significant indicators: existence of a governance committee, independence of the board, and percentage of employees in the board. This factor means a "multilateral corporate governance" (MCG) with three welldifferentiated powers co-acting: the formal power of the committee, the economic independence of the directors and the operational competence of the employees. There are two possible interpretations of this result. Following the agency theory of the struggle between managers and shareholders for the control of earnings (Jensen, 1986; Hart & Moore, 1989), the MCG restricts possible abuse from the CEO. However, conversely, it could be argued that MCG brings more competence by balancing the power of the major shareholders (Allen & Gale, 2000). A further analysis, including the ownership concentration, revealed that corporate governance and ownership concentration had a strong negative correlation, thus indicating that (1) ownership concentration does not favor multilateral corporate governance and (2) would bring less financial performance. It seems, therefore, that Allen and Gale’s (2000) conception is applied best to the case.

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Another result of the analysis concerns the positive correlation between the independence of the board and the presence of employees on the board. Though, by definition, the employees are less independent than some outside members, it appears that a positive level of board independence is compatible with the membership of some employees. Thus, the legal approach in Germany, where the boards of the large firms must comprise a given percentage of employees, seems validated. The positive impact of MCG on financial performance is almost equally shared between security and profitability, thus indicating a balanced conception of financial performance. More precisely, the absence of the hypothesized link from security to profitability, suggests that the balance is in the form of a share of influence, between the parties seeking profitability and those who are more concerned with financial security. The question arises, then, of which party in the MCG acts in favor of security or profitability. For instance, employees could be thought to have a positive bias towards security, because credit worthiness protects from bankruptcy and the loss of jobs. However, a low PBR can encourage a take-over with negative consequences on jobs and on the contract between the employees and the owners (Shleifer & Summers, 1988). Because globalization is a factor of organizational complexity and requires a larger capital, the importance of MCG should increase with the level of globalization, thus confirming the hypothesis that corporate governance and globalization are co-factors of financial performance. Unfortunately, this global model could not be validated. Instead a negative correlation was observed between the MCG corporate governance and the level of globalization. At the parameters' level, it appears that, when the globalization level is introduced into the model, there is no effect significant, direct or indirect, from governance to profitability. Thus, with all precaution due to the lack of fit of the complete model, the effect of the globalization level on the financial performance appears to moderate a large part of the effect of governance, in particular in what concerns profitability. Many reasons could explain this mixed result, ranging from the possibility of a nonlinear effect of the globalization level (Riahi-Belkaoui, 1998), to the indeterminacy of the globalization concept itself. However, given the context of world economic crisis in which the study was done, it is quite plausible that the negative effect of the globalization level on performance was due to the fact that the tested firms were less exposed on their domestic market (France) than on the international one. Thus, contrary to some opinions about globalization, a multilateral conception of corporate governance could play a stabilizing role in times of economic crisis.

CONCLUSION The research of a factor for scoring firms' goodness of corporate governance was made in the context of global firms and a world economic crisis. The analysis was made focusing exclusively on the information the shareholders can easily have and share: the annual reports. Although reductive, this approach reveals that a common factor exists within the corporate governance structure of the largest firms, which make for a better level of financial performance. The indicators of this goodness of governance factor reflect the interest of having a multiparty board, associating directors who are independent with employees' representatives and committees.

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Addition to this model of a level of globalization provided blurred results, with a contradictory effect between the corporate governance factor and the level of globalization. As titled in a recent paper, "40 years of research on internationalization and firm performance: More questions than answers" (Glaum et al., 2007), globalization is likely to keep raising many questions in the future. In contrast, corporate governance appears to be a more delimited field, with actual and symbolic effects that may satisfy the owners, the top managers and the market. Of course, these results are essentially exploratory. They should be tested in other countries and less critical periods of time. Research on the way MCG actually influences security and profitability could be useful. Another research track would consist in using a clusterwise regression approach, analogous to the one used by Aurifeille and Medlin to analyze partnership governance (Chapter 8). Several corporate governance styles could emerge, with more governance rules involved and a deeper understanding of why countries and firms whose corporate governance differ greatly are achieving good economic performance.

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REFERENCES Allen, F., & Gale, D. (2000). Corporate governance and competition. In X. Vives (Ed.), Corporate Governance: Theoretical and Empirical Perspectives (pp. 23-94). Cambridge: Cambridge University Press. Asmussen, C.G., Pedersen, T., & Petersen, B. (2007). How do we capture ‘Global specialization’ when measuring firms’ degree of globalization? Management International Review, 47, 6, 791-813. Aurifeille, J-M., Quester, P., Lockshin, L., & Spawton, T. (2002). Global vs international involvement-based segmentation: A cross-national exploratory study, International Marketing Review, 19, 4, 369-386. Baliga, B.R., Moyer, R.C., & Rao, R.S. (1996). CEO duality and firm performance: What's the fuss?, Strategic Management Journal, 17, 41-53. Bartlett, C.A. & Ghoshal, S. (2000). Transnational Management. Boston: Irwin/McGrawHill. Benito, G.R.G., & Welch, L.S. (1997). De-internationalization, Management International Review, 37, 2, 7–25. Berle, A., & Gardiner, M. (1932). The Modern Corporation and Private Property. New York, Chicago: Commerce Clearing House, Inc. Daniels, J.D., & Bracker, J. (1989). Profit performance: Do foreign operations make a difference?, Management International Review, 29, 46-56. Dey, A. (2008). Corporate governance and agency conflicts, Journal of Accounting Research, 46, 5, 1143-1181. Geringer, M.J., Beamish, P.W., & Da Costa, R.C. (1989). Diversification strategy and internationalization: Implications for MNE performance, Strategic Management Journal, 10, 109-119.

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Glaum, M., & Oesterle, M.J. (2007). 40 years of research on internationalization and firm performance: More questions than answers, Management International Review, 47, 3, 307-317. Gupta, V., Hanges, P.J., & Dorfman, P. (2002). Cultural clusters: methodology and findings, Journal of World Business, 37, 1, 11-15. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3, 305-60. Jung, Y. (1981). Multinationality and profitability, Journal of Business Research, 23, 179187. Kim, K., & Limpaphayom, P. (1998). A test of the two-tier corporate governance structure: the case of the Japanese keiretsu, Journal of Financial Research, 21 (1), 37-52. Lorsch, J. (1989). Pawns and Potentates: The Reality of America's Corporate Boards. Boston: Harvard Business School Press. Luo, Y. (2007). Global Dimensions of Corporate Governance. USA: Blackwell Publishing. O'Reilly, C.A., Caldwell, D., & Barnett, W. (1989). Work group demography, social interaction and turnover, Administrative Science Quarterly, 34, 21-37. Riahi-Belkaoui, A. (1998). The effects of the degree of internationalization on firm performance, International Business Review, 7, 3, 315-321. Ronen, S., & Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review and synthesis, The Academy of Management Review, 10, 435-454. Ruigrock, W., & Wagner, H. (2003). Internationalization and performance: an organizational learning perspective, Management International Review, 43, 1, 63–83. Shleifer, A., & Summers, L. (1988). Breach of trust in hostile takeovers. In A. Auerbach (Ed.), Corporate Takeovers: Causes and Consequences (pp. 33-56). Chicago: University of Chicago Press. Shleifer, A., & Vishny, R.W. (1997). A survey of corporate governance, Journal of Finance 52, 737-783. Schneider-Lenné, E. (1992). Corporate control in Germany, Oxford Review of Economic Policy, 8, 11-23. Stopford, J.M., & Dunning, J.H. (1983). Multinationals: company performance and global trends, London: Palgrave Macmillan. Sullivan, D. (1994). Measuring the degree of internationalization of a firm, Journal of International Business Studies, 25, 325-342. Tandelilin, E.T., Hermeindito, K., Putu Anom, M., & Supriyatna. (2007). Corporate governance, risk management, and bank performance: Does type of ownership matter? East Asian Development Network (EADN), Working paper 37, 91. Yip, G.S. (1989). Global strategy in a world of nations?, Sloan Management Review 31, 2941. Zahra, S.A., & Pearce, J.A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15, 291-334.

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In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 16

A NEW MODEL TO VALUE EMPLOYEE STOCK OPTIONS (ESO) AND THE EFFECTS OF ESO PLAN ON ESO HOLDERS, STOCKHOLDERS AND BONDHOLDERS Robert Trommsdorff Franco-Australian Centre for International Research in Management University of La Réunion, France

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ABSTRACT A new model of employee stock option (ESO) valuation is introduced within the contingent claim framework of Black and Scholes (1973) and Geske (1979). The new model is consistent with empirical research on the subject. Furthermore, the new model highlights the link between ESO holders, stockholders and bondholders wealth. In the first part of this research, the studies on ESO plan and the literature on ESO valuation are presented. The new model and its background are next presented. Finally, the effects of ESO plans on ESO holders, stockholders and bondholders are considered through an example.

1. INTRODUCTION Motivated by recent recommendations by both European and American accounting standards boards (FASB 1995 and 2004) that executive stock options be accounted for in firms' statements, I provide a new employee stock option (ESO) valuation framework which accounts for the vesting period, American style options, volatility and dilution effects of an ESO plan. This model highlights the interactions among ESO holders, stockholders and bondholders.

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According to Wikipedia, the definition of an employee stock option (ESO) is: “a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option (such as vesting and limited transferability) attempt to align the holder's interest with those of the business' shareholders”. The main reason to grant a stock option plan is that they give executives a greater incentive to act in the interests of shareholders by providing a direct link between realized compensation and company stock price performance. Executive stock option plans have been identified as a mean of reducing the agency problems, which exist between managers and stockholders and have now become a major component of managerial compensation packages. The remuneration of company directors by stock options is a highly controversial issue both from macroeconomic and microeconomic perspectives. In macro-economics, the recent financial scandals of the early 2000s and the financial and economic crisis of 2008 calls into question the liberalization of financial practices. Indeed, the 2008 crisis is the result of financial globalization since the sub-prime crisis, which originated in the United States, has spread worldwide through securitization. In order to limit the adverse effects of the liberalization of financial practices, governments throughout the world seek to regulate the entire financial sphere. A very important aspect of financial regulation concerns the compensation of executives of major companies and bank traders. Moreover, on a microeconomic scale, stock option plans are one of the major problems in corporate governance. The problem is how to determine compensation for executives in a way that also serves the interests of shareholders and therefore the company. Stock option plans covers two essential aspects for the company - on the one hand, it is a cost because it provides the leaders with potential substantial earnings and on the other hand it is one of the methods to motivate executives to improve the course of action of the company, which is the main objective for shareholders. But for a long time, these plans have not been subject to evaluation because they were not recorded in the accounts of the company. Even now, companies using the intrinsic value of stock options (i.e. the difference between share price and the exercise price of stock options) show no cost in their accounts, which has the effect of underestimating the cost of a stock option plan. Similarly, the gains resulting from the exercise of stock options may seem unjustified as in the case of Oracle chief executive officer Larry Ellison who gained US$701 million from the exercise of his stock options in 2001. Moreover, accounting scandals at Enron, WorldCom, Global Crossing and other companies have been linked to excessive risk taking and a fixation on stock prices, both caused by an escalation in option grants (Hall & Murphy, 2003). Moreover, these scandals have focused attention on problems with current accounting practices, which in turn have opened an international debate on the accounting treatment of employee stock options. According to the International Financial Reporting Standard (IFRS), all types of share-based payment transactions including employee share based payment, should require a fair value measurement method to be applied (http://www.iasb.org). I aim at providing a theoretically consistent framework which improves valuations of ESO and which encompasses empirical research on the subject. Furthermore, the new model highlights the link between ESO holders, stockholders and bondholders wealth. Valuing employee stock options can help chief executive officers, finance directors as well as analysts, consultants, and accountants to understand the implications and applications of valuing employee stock options in the light of today’s ever changing financial rules and regulations.

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The first part of this research briefly presents studies on ESO plans and the literature on ESO valuation. In the second part, a new model is presented outlining the background and the effects of ESO plans on ESO holders, stockholders and bondholders using an example.

2. EMPIRICAL STUDIES AND EXISTING EVALUATION MODELS ON STOCK OPTIONS In this section, I present first of all the main themes of empirical studies of the ESO plan, and then the literature on ESO valuation is outlined.

2.1. Empirical Studies In analyzing the effects of the granting of stock options, empirical studies have been concerned with the following themes:     

Performance incentives provided by option-based remuneration contracts, The price effect, The volatility effect, Wealth transfer effect, The moneyness effect.

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Yermack (1995) shows that it is difficult to identify an appropriate measure of the performance of option-based remuneration contracts, so one cannot unequivocally ascribe changes in corporate performance to the granting of ESO. This is the most controversial theme in ESO studies. Hence, this article focuses on the remaining themes.

2.1.1. The Price Effect The price effect is about the positive abnormal stock price returns observed following the announcement of executive options and other incentive plans. According to the price effect, stock prices will respond positively to an unexpected announcement of the granting of stock options (i.e. the granting of executive stock options schemes), due to reduced agency costs from improved incentives, favorable signals of future performance, and shared taxation benefits (Brookfiels & Ormrod , 2000). 2.1.2. The Volatility Effect The volatility effect is about stock price returns, which exhibit greater volatility following the approval of an executive stock option scheme. The identification of a volatility effect, is an old subject and studies relating to option granting and volatility are numerous (e.g. Amihud & Lev, 1981; Agrawal & Mandelker, 1987; De Fusco et al., 1990; John & John, 1993; Mehran, 1995). This effect is based on the idea that agency costs are created by the excessive risk-aversion of managers compared to stockholders (Amihud & Lev, 1981). Hence, managers’ exposure to risk is altered by ESOs because of the asymmetrical payoffs, which provide down-side protection for managers so inducing them to undertake riskier projects. This follows from the Black and Scholes (1973) option pricing model, which states

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that the value of call options increases as stock price volatility increases. In the context of an ESO, this would provide an incentive for managers to increase the volatility of stock returns either by accepting riskier projects and/or by increasing the level of financial leverage of the company.

2.1.3. Wealth Transfer Effect The wealth transfer effect describes the shift in wealth from bondholders to stockholders. Jensen and Meckling (1976) explain the consequences of such risk-inducing contracts, which can provide managers with an incentive to shift wealth from bondholders to stockholders. The main reason for the wealth transfer effect is explained by the option-pricing model of Black and Scholes (1973), given that stockholders and debt holders’ wealth can be analyzed using the contingent claims approach of options theory. The contingent claims analysis is discussed in the second part of this chapter. 2.1.4. ESO Plan and Moneyness Effect Brookfiels and Ormrod (2000) examine the impact of option moneyness on managerial behavior over time. They argue that manager with deep-in-the-money options will become more risk-averse. Therefore, the volatility effect depends on the moneyness of the ESO plan. It means that if the options granted are out-of-the money the volatility effect will be greater than otherwise (options in-the-money or at-the-money). The main reason for this effect is due to the asymmetrical nature of the payoffs from executive options.

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2.2. The Literature on ESO Valuation A large literature exists on the subject attempts to value ESO (see Ammann & Seiz, 2004 and Liao & Lyuu, 2009 for a literature review on ESO valuation). I will only focus on the following four models:    

SFAS No. 123, Hull-White Model (2004), Utility maximization models, Liao-Lyuu Model (2009).

2.2.1. SFAS No. 123 Under the Statement of Financial Accounting Standard (SFAS) Board (FASB, 1995, 2004) No. 123 “Share-Based Payment” (revised 2004), U.S. public companies are required to account for the cost of ESOs at their fair values. According to SFAS No. 123, a tree model or a “closed-form model” meets the criteria to obtain a fair value of employee stock options. In particular, the fair value is estimated either by the Black–Scholes (1973) model or by the Cox, Ross, and Rubinstein (1979) binomial tree model (CRR). Hence, many U.S firms use existing options models such as the Black and Scholes (1973) formula or the binomial tree of CRR (1979) to value ESOs. But option pricing models cannot be used to determine the value of employee stock options (See Hull & White, 2004). Vesting conditions (both time- and performance- based), forfeiture of unvested and out-of-the money options when employees

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leave the company, non-tradability of ESO (usually resulting in earlier, sub-optimal, exercise by employees), blackout periods, and other considerations, making ESO valuation more complex than standard option valuation. Furthermore, only the CRR (1979) model is able to account for early exercise of ESOs.

2.2.2. Hull-White Model (2004) The Hull–White model extends the SFAS 123 model by taking into account the possibility that employees may leave their company after the vesting period of the ESO plan. It also explicitly incorporates employees early exercise strategy by assuming that all vested options are exercised early when the stock price is a multiple of the exercise price (Hull & White, 2004). Hence, the option is exercised as soon as the stock price reaches this certain multiple of the exercise price and this may lead to a sub-optimal exercise strategy.

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2.2.3. Utility Maximization Model The utility maximization model of Marcus and Kulatilaka (1994) or Rubinstein (1995) maximizes employees’ utilities. The vested option is exercised if the expected utility derived from exercising the option is greater than the utility from holding it. The utility maximization model needs specific parameters of the utility function which are very difficult to assess, such as the employee’s risk-aversion or the expected stock return. Hence, the main drawback of this model lies in the fact that it depends on a specific utility function. 2.2.4. Liao-Lyuu Model (2009) The Liao-Lyuu model (2009) introduces three modifications to the CRR binomial tree model: the dilution factor, the exercise pattern of employees, and a state dependent employee forfeiture rate. The dilution effect occurs by exercising employee stock options that lead to issuance of new shares, which increase the number of outstanding shares. The Liao-Lyuu model is the first model, which includes the dilution effect of ESO. Furthermore, The LiaoLyuu model incorporates the exercise pattern of the options through the help of a theoretical 2 distribution. In the Lia-Lyuu model, the forfeiture rate is adjusted so that it is state dependent. The main drawback of the Liao-Lyuu model is that it assumes a theoretical distribution of the exercise pattern, which should capture the aggregate exercise behavior of employees. In contrast, the new model presented in this chapter does not rely on a theoretical distribution of exercise pattern, nor does it use a specific utility function. The new model accommodates the main features of ESO such as the dilution effect, early exercise and vesting period. Moreover, the model encompasses the effects mentioned in the summary of empirical studies such as the price effect, the volatility effect, the wealth transfer effect and the moneyness effect.

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3. BACKGROUND ABOUT A NEW MODEL TO VALUE EMPLOYEE STOCK OPTIONS AND THE EFFECTS OF ESO PLANS A new model to value employee stock options is presented. This new model is based on the theoretical value of the stock as a call option on the value of the firm and its developed within this compound-option framework of Black and Scholes (1973) and Geske (1979).

3.1. The Contingent Claims Approach of a Firm Created by Black and Scholes (1973) and Geske (1979) and its extEnSion for Employee Stock Options

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Geske (1979) provide an analytical formula for the price of compound options within the Black-Scholes framework. ESO is a call option on the stock so it can be analyzed as a compound option, but the Geske formula cannot be applied because it does not account for the vesting period and American style option of ESO. Hence, a better method is to extend the Black and Scholes and Geske approach by simple modifications of the CRR model, as for the Lia-Lyuu model (2009). In order to understand the new model, each of the Black and Scholes framework, CRR (1979) model and the Geske compound option model are elaborated here. In the final section of this part, the modifications of the CRR model for the valuation of ESO are described. A complete description of the new model, in a two period case, is presented in the appendix to this chapter.

3.1.1. Black and Scholes Model The Black and Scholes (1973) model was the first to analyze the balance sheet of a firm as involving contingent claims. The new model of ESO derives directly from their perspective. The Black and Scholes framework states that the equity in a firm is a residual claim, i.e., equity holders lay claim to all cash-flows left over after other financial claimholders (debt is a zero coupon bond) have been satisfied. If a firm is liquidated, the same principle applies, with equity investors receiving whatever is left over in the firm after all outstanding debts and other financial claims are paid off. The principle of limited liability, however, protects equity investors in publicly traded firms if the value of the firm is less than the value of the outstanding debt, and they cannot lose more than their investment in the firm. Hence, the equity can be seen as a call option on the value of corporate assets. The position of the stockholders is equivalent to that of an investor holding a call option, where the underlying asset is not the stock, but rather, the assets of the firm. The stockholders have the implicit right to exercise their option, which they do if the assets are worth more than they owe on the debt. In that case, they pay the face value of the debt, which is like the exercise price, and claim the residual value. If the face value of the debt is worth more than the value of the assets, the stockholders default, thereby allowing their option to expire worthless. Thus, the stock is a call option, with a strike price equal to the payoff price of debt at maturity. The maturity is the time until debt due, while the risk free rate is the interest rate on debt. The volatility is the instability of corporate value. Equity can thus be viewed as a call option on the firm value, where exercising the option requires that the firm be liquidated and the face value of the debt (which corresponds to the exercise price) paid off.

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The market value of the bonds can also be expressed in terms of contingent claims. Since by definition, the market value of the debt is the market value of the assets minus the market value of the stock. Due to the put call parity, a bond that is subject to default is equivalent to a risk-free bond and a short put. This means that the bondholders hold a risk-free bond with risk added by selling the stockholders a put. The stockholders, therefore, own a put option, which reflects their limited liability. It is their right to discharge fully their debt to the bondholders by simply turning over the assets to the bondholders. They will do this if the value of the assets is worth less than the face value of the debt when the debt matures. The next section deals with the Cox, Ross and Rubinstein binomial tree model (1979) which provides a discrete time approximation to the continuous process underlying the BlackScholes model.

3.1.2. Cox, Ross and Rubinstein Binomial Tree The binomial options pricing model provides a numerical method for the valuation of contingent claims. The binomial model was first proposed by Cox, Ross and Rubinstein in 1979. The model uses a "discrete-time" model of the varying price over time of the underlying asset. The binomial options pricing model approach is widely used as it is able to handle a variety of conditions to which other models cannot easily be applied. This is largely because the CRR model is based on the description of an underlying asset over a period of time, rather than a single point. As a consequence, it is used to value American options that are exercisable at any time in a given interval as well for ESOs as in the Liao-Lyuu model (2009). This model is categorized as a lattice model or tree model because of the graphical representation of the stock price and option price over the large number of intervals or steps, during the period from valuation to expiration, which are used in computing the option price. At each step, the stock price will either move up, or down, with a probability defined by the volatility of the stock. This option-pricing model is particularly suited for ESO valuation because it uses all of the factors that are recommended by the Financial Accounting Standards Board (FASB), including the exercise price of the option, the expected term of the option, the current expected dividends on the underlying share, and the risk-free interest rate. This model can also use information such as the early exercise behaviour of employees, if that piece of information is available. The new model extends the CRR model for ESO valuation, but the new modification differs completely from the Liao-Lyuu model (2009). In the next section, the Geske compound option model (1979) is presented because it is the “cornerstone” of the new model. 3.1.3. Geske Compound Option Model The pricing of many contingent claims can be modeled as compound options (Trigeorgis, 1996). By visualizing the underlying stock as an option on the firm’s value, an option on stock of a levered firm that expires earlier than the maturity date of the debt issued by the firm can be regarded as a compound option on the firm’s value (Geske, 1979). On the expiration of the option (the first expiration date of the compound option), the holder chooses to acquire the stock or otherwise. The decision depends on whether the stock as a call on the firm’s value is more valuable than the strike price. Basically, the procedure consists of the following two steps: at first the underlying option is priced according to the Black-Scholes method; then, the compound option is priced as an option on this security whose value has already been found in the first step.

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The Geske (1979) model cannot directly be used to value ESO because it does not account for the vesting period, American style options and the dilution effect of ESO plan. The dilution effect breaks the Geske (1979) compound option framework because the stock price (the option) is no more independent from the compound option exercise. Furthermore, ESO are American types of options (early exercise is possible). To encompass these two features, a new ESO valuation model is presented based on a discrete-time stochastic dynamic programming approach. The new model extends Geske’s (1979) compound option valuation by incorporating a dilution effect and the American nature of ESO. In the next section, the assumptions of the new model are described. A full description of the model in the two period case is given in the appendix.

3.1.4. Assumptions of the New Model The assumptions of the new model are very similar to those in the Black and Scholes (1973) framework. However, the modifications of the CRR (1979) are very different from the Liao-Lyuu model (2009). The modifications in the new model are much simpler because they do not rely on any theoretical distribution for the exercise pattern nor do is the employees’ risk-aversion assessed nor the stock return. The assumptions for the new model are:

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   

Black and Scholes (1973) assumptions (with a few exceptions), ESO holders are risk neutral, The discrete-time framework of Cox, Ross and Rubinstein (1979), Volatility of the underlying asset changes with the dilution ratio and the ESO plan’s moneyness.

There are two exceptions to the Black and Scholes model (1973) to account for ESO plan which are:  

Vesting period for the ESO plan, American style option (after vesting time until option maturity).

In their original article, Black and Scholes (1973) derive the option pricing formula without making any assumption about the option holder risk-aversion, because their formula is derived using an arbitrage free valuation method. In the new model the risk-neutral assumption for employees to establish their exercise pattern is applied. In making this assumption, there is no need to specify the risk-aversion of employees or their stock return. The discrete-time framework of the CRR model (1979) allows for the vesting period and American style option as in the Lia-Lyuu model (2009). The last assumption is about the volatility of the underlying asset. As in the Black and Scholes (1973) approach, the CRR (1979) and the Geske (1979) models, the variance is known and does not change over the life of the option. By applying the Black and Scholes (1973) and Geske (1979) framework, the underlying asset for the stock is the firm’s value and the stock is the underlying asset for the ESO. Hence, stock volatility is derived from the assets' volatility. This is the main difference of the new model compared to existing models on ESO valuation. In the new model the stock value dynamics are endogenously derived by

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obtaining the stock values as a call option on the firm’s assets. In the new model, the volatility of the underlying asset change with the dilution ratio and ESO plan’s moneyness, to cope with all the effects mentioned in empirical studies. It is assumed that the assets' volatility A change at the announcement of the ESO plan by a multiple h (the volatility factor) of the firms’ value V (volatility of the assets just before the ESO plan):

 A  h. V

(1)

It is proposed that the volatility factor (h) is a linear function of the dilution ratio and the ESO plan moneyness. More precisely, the volatility factor is equal to:

 

h

N  M X  So  N S0 (2)

With:    

N : The number of outstanding shares, M : The number of newly issued shares of the ESO plan, X : Exercise price of the ESO, S0 : Current stock price before the ESO plan.

The first part of the volatility factor is the inverse of the dilution ratio:

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N N M

(3)

The second part of the volatility factor is the moneyness of the ESO plan:

X  S0 S0

(4)

As can be seen from Equation 2, the volatility factor can be greater than 1 or under 1. It means that if the volatility factor is greater (lower) than 1 the assets' volatility increases (decreases) with an ESO plan. The volatility factor is an increasing function of M so that the more issued shares are granted, the more the managers are willing to launch riskier projects. Moreover, the volatility factor depends on the moneyness of the ESO plan, so that the more the options granted are out-of-the money, the more the managers are willing to take riskier projects. Since the ESO is an option on an option (compound option as in the Geske model, 1979), evaluation is possible using a dynamic programming method. The ESO valuation problem can be viewed as an optimization problem where each state of nature (in a binomial tree like the CRR model, 1979) is like a sub problem (exercising the option or not in the period after the vesting time until maturity) that can be nested recursively inside a larger problem. To

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evaluate the ESO by the dynamic programming method, one can easily use the Bellman algorithm (details in the appendix for the ESO valuation). In the next section, an example is presented of ESO valuation to illustrate how the new model is able to take into account the features of an ESO plan (vesting period, American style options and dilution effect) and the effects described in the first part of this chapter.

3.2. Effects of an ESO Plan Illustrated by a Very Simple Example To illustrate the effect of an ESO plan using the new model, a comparison is undertaken of assets and stocks dynamics before and after an ESO plan. In a final part the consequences of an ESO plan for stockholders and bondholders is presented. The parameters of the example, including the ESO plan, are summarized in Chart 1. To be as clear as possible only a two-period tree, one-year vesting period and two years for the maturity of the ESO, is considered. Furthermore, the assumption is made that the debt maturity matches the ESO maturity. While this is not realistic, one can easily extend the number of periods, the vesting time and the maturity by using the procedure explained in the appendix. The start is made with the CRR model to assess the dynamics of the assets value and the value of the shares before introducing an ESO plan.

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3.2.1. CRR Model and the Assets Value and Stock Price Dynamics Without an ESO plan, the CRR model (1979) can be used to value the stocks in a Black and Scholes (1973) framework, where a stock is like a call option on the firm’s assets. According to the CRR model (1979), one can generate the assets’ movements (V) in a binomial tree as demonstrated in Figure 1. Chart 1. Description of the example and ESO plan features Variable

Value

V : Assets

100

V : Assets’ volatility

30%

D : Debt Due (at maturity)

60

N (or n) : Number of shares

100

M (or m): Number of shares granted

4

X : Strike price for ESO plan

0.2

R : risk-free rate

5%

Vesting period

1

T : maturity of ESO

2

N : number of period

2

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Figure 1. Assets’ movements in the CRR model.

The time step is:

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t 

N 1 T

(5)

The upward multiple is:

u  e v

t

 1.35

(6)

The downward multiple is:

d

1  0.74 u

(7)

The risk neutral probability is:

p

e rt  d  34.55% ud

Hence, the probabilities for each state of the nature can be described by Figure 2.

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Robert Trommsdorff 12% 35% 100%

45% 65% 43%

Figure 2. Probabilities without ESO plan.

Figure 3 gives the numerical values of asset prices according to the CRR model.

182.21 134.99 100.00

100.00 74.08 54.88

Figure 3. Asset prices without ESO plan.

The next objective is to describe the dynamics of the stock prices. Given that a stock is an option on the firms’ assets, one can use the CRR to evaluate this option. The evaluation procedure is shown in Figure 4. Figure 4 indicates the following:

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Stock price at node 11 (first node in one year)

Figure 4. Stock prices movements.

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1.22 0.65 0.30

0.40 0.13 0.00

Figure 5. Stock prices without ESO plan.

S11  e rt  pS21  1  p S22 

(9)

Stock price at node 12 (second node in one year)

S12  e  rt  pS 22  1  p S 23 

(10)

Stock price at node 0 (the current stock price)

S 0  e  rt  pS11  1  p S12 

(11)

It can be seen from Figure 5 that in node 23 (third state of nature in two years), the stock price is 0 because the assets’ value is less than the debt due at maturity, so there is nothing left for the stockholders. It is interesting to evaluate in the option theory framework an ESO without the main features of an ESO plan. This provides a benchmark to be able to compare with the new model valuation. If the following features of the ESO plan are not taken into account:

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    

American style option (ESO can be exercised in one year, hence one year is the maturity and it is a European style option) Dilution effect, Price effect, Volatility effect, Moneyness effect.

This allows evaluation of an employee stock option as a simple European call option on a call option (compound option) using the Geske framework (1979) in a discrete-time as shown in Figure 6. With the current employee stock option value

CC 0  e  rt  pCC11  1  p CC12  the numerical values are given in Figure 7.

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Figure 6. Compound option valuation in a binomial tree.

Notice that at node 12 (second state of nature in one year) the ESO is zero because the stock price at node 12 (0.13) is less than the ESO strike price (0.2).

3.2.2. ESO Plan and the Value of Assets and Stock Price Dynamics Now the new model is applied to evaluate numerically the example of the ESO plan according to the algorithm described in the appendix. First, one has to assess the new volatility of the firm’s assets. The dilution ratio is (see Equation 13):  

N  0.96 N M

(13)

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Moneyness is (see Equation 14):

  X  S0

S0

 0.32 (14)

Hence, the volatility factor (h) (Equation 15) is:

 

h

N  M X  So   1.36 S0 N

(15)

So there is an increase of the assets' volatility of 36%. The new assets' volatility is therefore (see Equation 16):

0.45 0.15 0.00 Figure 7. ESO values in a binomial tree.

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12% 34% 45%

100% 66%

43% Figure 8. Probabilities with ESO plan.

  A  h. V  41%

(16)

Given the new underlying assets' volatility, it is possible to assess the upward multiple (Equation 6), downward multiple (Equation 7), and the new risk neutral probability (Equation 8). Figure 8 gives the new probabilities of each state of nature. Using the upward and downward multiples, the firm’s asset dynamics are shown in Figure 9.

226.63 150.54 100.00

100.00 66.43 44.13

Figure 9. Asset prices with ESO plan.

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According to the algorithm in the appendix, stock price movements follow the pattern shown in Figure 10.

1.67 0.79 0.34

0.40 0.13 0.00

Figure 10. Stock prices with ESO plan.

1.40 0.57 0.22

0.18 0.06 0.00

Figure 11. ESO values in a binomial tree according to the new model.

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Yes No No

Yes No No

Figure 12. Exercise behavior (yes = exercise, no = no exercise).

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Finally, it is possible to describe the ESO valuation at each state of the nature in the twoperiod binomial tree in the way explained in the appendix. Figure 11 shows the numerical values of the ESO in the binomial tree. This ESO valuation gives a 0.22 value of the ESO, which is much more than the preceding valuation of 0.15. Thus ignoring the main features of an ESO plan can lead to erroneous valuation. In addition to providing ESO valuation, the new model is able to determine the optimal exercise behavior for employees. Figure 12 gives the optimal exercise behavior for a riskneutral employee. As can be seen, the ESO will be exercised only at nodes 21 and 22. At node 23, there is no exercise, because the stock price is less than the strike price of the ESO plan. At nodes 11 and 12, there are no early exercises because it is not optimal.

3.2.3. ESO Plan and Wealth Transfer Chart 2 summarizes the values found in the two preceding sections (without ESO plan then with the ESO plan). Before commenting on Chart 2, an explanation is required of the meaning of the current bond value and the stock volatility. The current bond price is the difference between the asset value and the stock value (the market value of the debt is equal to the firm’s asset value minus share value). The stock volatility (s) can be gauged using Equation 6 of the CRR model (1979). In the case of the stock as the underlying instrument, the stock volatility is:  

S 

s  1 ln 11  t  S 0 

(17)

Chart 2. Values before and after the ESO plan. Current

No ESO plan

ESO plan

Asset value

100.00

100.00

Assets volatility

30%

41%

Stocks

29.57

33.82

Bonds

70.43

66.18

ESO

-

0.22

Stock volatility

79%

85%

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Chart 2 shows that the ESO plan changes the following values:    

Assets’ volatility, Stock volatility, Stock value, Bond value.

The assets' volatility increased by 36% due to the volatility factor in the new model. More interesting is the fact that the ESO plan increased stock volatility by 8% (from 79% to 85%), in accordance with the volatility effect. An important remark is that the stock price volatility is obtained endogenously in the new model. Another observation is that the stock price value increases by 14% (from 29.57 to 33.82). This increase in the stock value is in accordance with the price effect. This phenomenon is easy to understand if the stock is considered as an option on the firm’s assets. It is known from option theory that an increase in the underlying volatility of the value of stocks leads to an increase in the option value. Hence, according to the new framework the price effect is just a simple consequence of the volatility effect. One of the main lessons of the new model is about the wealth transfer from bondholders to shareholders due to the ESO plan. Chart 2 shows that the bond price decreases by –6% (from 70.43 to 66.18). This decrease is due to the price effect, with the share price increasing and the value of assets remained the same.

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CONCLUSION The new model is not only able to comply with the main features of an ESO plan like the vesting period or the American style option, but is also consistent with empirical effects reported in the literature. The Black and Scholes (1973) and Geske (1979) framework is a very interesting framework because it is easy to understand the various effects of an ESO plan, more specifically the wealth transfer effect. The new model has some limitations. The first one is the assumption that employees are risk neutral, which is unrealistic. However, on the other hand, if risk neutrality is not assumed then it is necessary to specify the utility function and its parameters (risk aversion, stock return...) or use a theoretical distribution for the exercise pattern as in the Lia-Lyuu model (2009). An interesting extension of the new model will be to incorporate a dividend paying stock. Another extension to the new model would be to assume coupon bonds instead of a zero coupon bond. The new model allows one to understand how a stock option plan may increase the risk of a company. Problems associated with ‘excessive’ risk-taking by firms as a result of globalization of finance and corporate governance have led to calls for this risk-taking to be regulated. The new model could serve as an instrument of financial regulation at the enterprise level and specifically for executive compensation.

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Figure 13. Global ESO valuation tree and sub-trees.

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APPENDIX: AN EXAMPLE OF A DYNAMIC PROGRAMMING VALUATION OF AN ESO Valuation is performed iteratively, starting at each final node and then working backwards through the tree towards the first node. The optimal substructure of the ESO valuation problem means that the solution to the ESO valuation optimization problem can be obtained by the combination of optimal solutions to its sub problems. Hence, the global optimization problem (all of the binomial tree in Figure 13) can be solved by solving the subtrees (1, 2 and 3). The algorithm is as follows:   

Calculate the new volatility of the assets using equation 1, Calculate the upward multiple (Equation 6), the downward multiple (Equation 7) and the risk neutral probability (Equation 8), Calculate the payoffs of the stocks’ value and the payoffs of the ESO value at each node of the tree by starting from the end and then working backwards trough the tree towards the first node (valuation date) using the algorithm explain in Figures 13, 14 and 15

The payoffs for Tree 1 and Tree 3 are described in figure 14 and 15 respectively. Tree 2 is the same as Tree 1 (see figure 14).

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Figure 14. Description of the payoffs for Tree 1.

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At node P21 in Figure 14:

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At node P11 in Figure 14:

Figure 15. Description of the payoffs for Tree 3. Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

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REFERENCES Agrawal, A., & Mandelker, G. (1987). Managerial incentives and corporate investment and financing decisions. Journal of Financial Economics, 42, 823–837. Amihud,Y., & Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. Bell Journal of Economy, 12, 605–617. Amman, M., & Seiz, R. (2004). Valuing employee stock options: Does the model matter? Financial Analysts' Journal, 60, 21–37. Black, F., & Scholes, M.S. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81, 3, 637–654. Brookfield, D., & Ormrod, P. (2000). Executive stock options: volatility, managerial decisions and agency costs. Journal of Multinational Financial Management, 10, 275295. Cox, J., Ross, S.A., & Rubinstein, M. (1979). Option pricing: A simplified approach. Journal of Financial Economics, 7, 229–263. De Fusco, R., Johnson, R., & Zorn, T. (1990). The effect of executive stock option plans on stockholders and bondholders. Journal of Finance, 45, 617–617. FASB. (1995). FASB 123: Accounting for stock-based compensation. Financial Accounting Standard Board. FASB. (2004). Statement of Financial Accounting Standard No 123 (revised 2004), sharebased payment. Financial Accounting Standard Board. Geske, R. (1979). The valuation of compound options. Journal of Financial Economics, 7, 3– 81. Hall, B.J., & Murphy, K.J. (2003). The trouble with stock options. Journal of Economic Perspectives, 17 (3), 49-70. Hull, J., & White, A. (2004). How to value employee stock options. Financial Analysts Journal, 60, 14–119. Jensen, M., & Meckling, W. (1976). Theory of the firm: managerial behaviour, agency costs and ownership Structure. Journal of Financial Economics, October, 305–360. John, T.A., & John, K. (1993). Top management compensation and capital structure. Journal of Finance, 48, 949–974. Liao, F. Y., & Lyuu, Y. D. (2009). An Expanded Model for the Valuation of Employee Stock Options. The Journal of Futures Markets, 29, No. 8, 713–735 Mehran, H., (1995). Executive compensation structure, ownership, and firm performance. Journal of Financial Economics, 38, 163–184. Marcus, A., & Kulatilaka, N. (1994). Valuing employee stock options. Financial analysts' Journal, 50, 46-56. Rubinstein, M. (1995). On the accounting of employee stock options. Journal of Derivatives, 3, 8-24. Trigeorgis, G. (1996). Real Options. MIT Press. Yermack, D. (1995). Do corporations award CEO stock options effectively? Journal of Financial Economics, 39, 237–269.

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PART VI ETHICAL AND SOCIAL ISSUES

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

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Chapter 17

ETHICS AND GLOBALISATION Lorenzo Gascón Royal Academy of Economic and Financial Sciences, Spain

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ABSTRACT Many consequences of globalisation are raising alarm signals about the present weakness of economic governance. We are enduring deep changes in government, the markets, corporate behaviour and the handling of information. We strongly need guidelines to help and to set us on the right path. Trust has to be restored in corporations. Transparency and making the inner work visible has to be the way of all. When a company manipulates or inflates its figures, everyone suffers: investors, financial markets and employees. The whole world is a closed economy and so measures and stimuli won’t work without coordination. More than money and politics, ideas are the core of the possible solutions. And these mainly have to be based in ethics in this crowded planet with a common fate. Ethics is the key word and good governance and the personal example are the right tools

1. INTRODUCTION In the twenty-second edition of the latest Dictionary of the Spanish Language, the Royal Academy defines ethics as “the set of moral rules that govern human conduct and morals as the science that deals with goodness in general”. Likewise it defines governance as “the art or manner of governing that is proposed as the objective for the attainment of a lasting economic, social or institutional development, by promoting a healthy balance between the State, society and the economic market”. Today, anybody who attempts to say something on globalisation cannot avoid coming up against the existing crisis, which includes not only the economy, but also the moral values on which are based the normal functioning of society. An essential condition in human relations is credibility. Without wanting to offend any of the politicians in the global society in which we live, it is very easy to see the extent to which

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personal and institutional authority is undermined when the citizen is defrauded in his or her expectations. In overcoming the crisis, the first step is always the most difficult. Once visible success of the first step has been attained and experienced, then confidence and credibility increases in one’s own efforts and in the feeling of security in those who direct society. The second step is now easier and the principle of overcoming the crisis is now a fact. With all the hope that is entailed, the Greek origin of the word “crisis” has to a greater degree its cause in the lack of moral virtues. Above all else the cardinal virtues: prudence, justice, moral fibre and restraint. Very recently the Dalai Lama (2009) stated that in our globalised human society, negative things are taking place. However, a new and honest society cannot arise through government regulations, but from the heart of the family, from each individual with a healthy and calm mind and a correct vision. Much has been said on the symptoms of historical crises. The lack of undertakings based on the guidelines of values contribute both to the symptoms of a crisis and the loss of prestige of the established authority. In history, every time that doubts have been voiced on the recognised authority – and this is also valid both for the Roman consuls as for the Pope at the end of the Middle Ages, as well as for the King on the eve of the French Revolution – society has become submerged in a general crisis. Currently, in this globalised world in which we live, it would be of particular interest to find the source or cause and distinguish from the effect. Put in a simpler manner, is it the weakness at the top (for example, in a democracy, the arrogance observed after a long period of permanence in power) that provokes the lifting of the foundations, or is it the constant critical aggression of the foundations, which slowly paralyses the exercise of authority? It seems unlikely that it is possible to find a valid and categorical answer because, as always occurs in history, there can be no single cause, but a very complex system of different causes that it is difficult to distinguish. What is certain in the current crisis is that in a good measure, irregular and fraudulent practices have been discovered. Their consequences are for all to see in the stock exchanges, in the confidence of investors, in the reduction of the consumption of citizens, a great part of whose very savings have vaporised in the global economy. Time in its editorial of July 8, 2002, “Loosing faith in Corporate America”, asserted that each new case of “creative” accounting and fictitious profit and loss accounting, dealt another blow to the credibility of “Corporate America”. This statement was made six years prior to the generation of the crisis of 2008. Nobody could imagine then what has now occurred with the cases of Lehman, Madoff or USB, just to mention a few emblematic fiascos. North Americans have always taken their political constitution very seriously, but they have not done so with the setting up of their campaigns and the responsibility of those who direct and finance. Societies have been considered as mere vehicles for the expression of the rights of private property and, consequently as such, untouchable. Private property was very nearly like a secret garden in which the State should not appear. It may regulate the results of business ethics, but never its internal processes. The divorce between property and control is very evident. And here we must again consider the reference of the crisis in vales in which we currently live: in what has become known as globalisation. Michael Elliot, in the World Economic Forum held in Davos at the beginning of 2009, said that global economy today offers an unappetising panorama (Elliot, 2009). One of its principle manifestations is the crisis in ethics. Ethics, as with logic, is a philosophical subject. But contrary to the latter,

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ethics has an eminently humanistic character. What immediately comes to light is how to objectively distinguish good from evil. What then should be the criterion for judging good and evil? Richard Von Weizsäcker (1995), Ex-President of the Federal German Republic and ExMayor of Berlin, on the occasion of receiving the “Premi International Catalunya”, said that “Solon defined politics as the function of balancing the divergent interests of the citizens. And designated ethics as the objective of the constitution” And added, “ we require ethics in order to satisfy this elemental need of the person, that is justice”. However, there are those who believe that moral rules are not fixed and change in time. The dilemma, for many, is that moral rules are a question of custom or necessities that change over time, with the place and with people. The culmination today is the indifference towards every moral rule. Saint Thomas Aquinas stated that moral law is best portrayed as an “ordering of reason promulgated for the common good by those who take care of the community”. It is quite obvious that what is needed is that the current world, and particularly by the ruling class, is to delve deeper into the teachings and procedures that can be derived from ethics. Pope Benedict XV in the Encyclical Caritas in veritate published in July of 2009, says that “faced with the crisis suffered by global economics, the Church has no technical proposals to offer but it does recommend ethical solutions” (Benedict XVI, 2009). “The State We’re In”, by Will Hutton (1995), has been one of the political-economic works, which has sold the most during a whole generation. Hutton’s most significant following work, The World We’re In (2002), is a truly beneficial work for understanding the global economy. It is the opinion of Hutton that during the last thirty years conservative forces have reached such supremacy that they have almost eliminated liberalism. The results are there for all to see. The Unites States is the largest economic and military power in the world. But America is today a weaker and more fragmented society than it used to be, and their power no longer rests on credibility. Over seven years ago, in the editorial of Business Week of the 13th of May, 2002, it was stated that: “Wall Street’s corruption is an American crisis”. The editorial states among other things:   

Transparency should pressure companies in order for their actions to be clean. An open culture in order for employees of companies to be able to bring to light any ethical lapses and incorrect practices. Remuneration for executives is nowadays way out of control and should be reconsidered in order to create a sense of clarity.

Likewise, Harry M. Jansen Kraemer Jr., President of Baxter, stated: “I do not know if we need more laws. What we do need are people who direct corporations with a very high degree of integrity. And we require current laws and regulations to be duly complied with”(Jansen Kraemer Jr, 2002). The Economist in its editorial of June 8, 2002 pragmatically stated: “trust, but verify”. Consequent upon this panorama, not only have critical voices been raised but there are now strong currents of opinion arising against “free business”. The excuse is the fight against globalisation. Thus, what has appeared is a growing spectrum of economic nationalism.

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A few multi-nationals, who dominate the economy, and dictate to politician what they should do, counter this nationalism. Their slogan is: “Greed is good”. On the whole, this way of acting and this power occurs in some large corporations in certain strategic sectors such as for example, banking, power and energy, aeronautics, telecommunications, the arms industry, etc. The arrogance of these companies makes possible not only actions on a world scale of an unacceptable nature from the moral point of view of the majority of humanity. The arrogance also results in the nebulousness of their management, and the lack of control of their organs of power leads to actions and situations that are reprehensible such as those we are seeing and living with today. Having said the above, it remains quite clear that the search for legitimate profit involves nothing at all that is immoral. It constitutes an economic necessity. Without profit there can be no technical and social progress. Company profits, even before dividend distribution, serve in the first place for financing investments, for increasing productivity, for creating new work places and in a certain manner, for satisfying the financial needs of the State. The high productivity of the liberal economy, in those countries that have adopted an open economy, has increased extraordinarily the standard of living of large sectors of society. However, this is no reason to silence or dissimulate the defects of the system. There are risks, but being outspoken concerning the weaknesses is worth much more than simply accepting the collective systems, as such systems have promised so much and yet only provided a little to many individuals. Dieter Hundt, President of the Federal Confederation of Associations of German Businessmen (BDA) in the Business Conference held in Berlin on the 4th of November 2008, asserted that “all those responsible in politics, in economy and in society are called upon to defend and maintain the capacity of attraction of our free social and economic order” (Hundt, 2009). The priority of search for profit at any cost is not the most important goal of business. Long-term; a good working atmosphere, a transparent relationship with shareholders and so sound economic growth are the essential pillars of any healthy business. In this respect, Professor Dr. Santiago Garcia Echevarría, of the University of Alcalá de Henares states that all ethical behaviour in relationships between humans always requires transparency (Garcia Echevarría, 1994). Lack of transparency generates uncertainty in the conduct of those people involved in the different economic and social relations. What we are concerned with is to ensure the right to have reliable information. In this way, we will give an opportunity to discuss at general assemblies issues raised by this data, which is data that is not manipulated. Ethics facilitates relations between persons and particularly, creates institutions. Institutions require confidence. At the very time that the conditions of “capital-confidence” do not exist, the company does not exist. Ethics in the economy is naturally supported, in the first place by the values of the individuals who direct businesses and institutions. To conclude, let me say that in this globalised world in which we are living ethics should not only preside over all our acts, but we should also do what is required for it to be the guideline for others, in order for the others not to impose undesirable practices on us. In this way, Professor Koslowski (1988) understands, “ethics as the corrective for the failures of the economy, that is to say, as a corrective for economic rationality”. Economic rationality, as such, represents rationality free of the realities of ethics, that is, it is purely and simply based on economic gain. In any event, and this is the positive message, we are left with the capacity and the force of “example”. At least this we do have.

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REFERENCES

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Benedicto XVI (2009). Caritas in Veritate. Madrid: Edice. Dalai Lama (2009). Cuadernos de Budismo. Alicante: Dharma. Elliott, M. (2009). World Economic Forum. Davos. García Echevarría, S. (1994). La ética en la nueva concepción institucional de la empresa. Universidad de Alcalá de Henares, Cátedra de Política Económica, nº 219. Havel, V., Pujol, J., & von Weizsäcker, R. (1995). L'ètica and la política. Barcelona: Proa. Hundt, D. (2009). Instituto de Dirección y Organización de Empresas, Documentos a debate, IDOE-Instituto de Dirección y Organización de Empresas, Universidad de Alcalá, Nº25, Marzo, http://dspace.uah.es/jspui/bitstream/10017/3490/1/Documento%20a%20Debate% 20N%c2%ba25.pdf. Hutton, W. (2002). The World We’re In. London: Little Brown. Hutton, W. (1995). The State We’re In. London: Jonathan Cape. Jansen Kraemer Jr., H. (2002). Too many rotten apples, Business Week, July 15, 70-72. Koslowski, P. (1988). Prinzipien der Ethischen Ökonomie. Tübingen: Grundlegung de Wirtschaftsethik. Von Weizsäcker, R. (1995) Acceptance speech on receiving the “Premi International Catalunya”. Accessed 20th November 2009, http://www.gencat.cat/

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In: Globalisation, Governance and Ethics Editors: J. M. Aurifeille, C. J. Medlin et al.

ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 18

IMPLICATIONS FOR ORGANIZATION GOVERNANCE OF ADVANCES IN NEUROSCIENCE AND BIOLOGY Bernard Roullet1, Olivier Droulers1, and Marie-Pierre Pinto2 1

Université de Bretagne Sud, France 2 Université de Limoges, France

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ABSTRACT In a subtle and inconspicuous way, the invention and the growing practice of functional brain imaging (fMRI) in the early 1990s has revolutionized the approach to cognition in living organisms. Far from only focusing on biology and physiology, advances in cognitive and affective neurosciences have slowly but heavily pervaded the humanities and social sciences (HSS). Today, a researcher in HSS, particularly in political science, sociology, education science or public governance, cannot overlook some achievements of neuroscience, which are profoundly altering our vision of the human being and her relations with her next of kin, without running the risk of being disconnected from the research leading edge. Today, neuroscience provides new paradigms to renew, refresh and transform the theories that have prevailed until now for nearly a century or more. Considering the decision making process (in situations of uncertainty or not), the risk aversion, the pursuit of power, the correlates of attitudes and beliefs, the foundations of leadership (or followership), the process of persuasion or conversion, the phenomena of burnout and resilience, requires bearing in mind works of neuroscientists who bring insights that are very complementary to conventional approaches in HSS. Any public organization which has authority over any aspect of social policy (justice, education, law enforcement, ethics, citizenship and so forth) could enrich its reflection, its judgment and its developing projects, in taking into consideration the neuroscientific breakthroughs that confirm or on the contrary refute social dogmas or doctrines. Some authors thus advocate an epistemological pluralism that could benefit the different stakeholders. The authors propose to outline the recent growth of brain sciences and to replace contextually their contributions to various disciplines of HSS, but also suggest the main

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Bernard Roullet, Olivier Droulers, and Marie-Pierre Pinto venues of research which will prove essential in the future, in the study of organizational governance.

1. INTRODUCTION The achievements of cognitive science over the past two decades allow for the first time in our history to advance scientifically testable and plausible explanations for the occurrence of mental processes. We think that governance won’t be very long in a position to overlook such knowledge to guide, orient and satisfy people and these processes will quickly spread across the globe. We propose to present here the fundamentals of governance, as apprehended by managers and marketers, and indicate the promises and expectations raised by the cognitive revolution, but also the reasons for the oppositions and hostilities still present in some disciplines of Humanities and Social Sciences (HSS). Then we introduce and present some examples to illustrate the growing dissemination of the neuroscientific concepts throughout HSS. In a final section, we discuss the limitations of new practices that renew the vision of the living world.

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2. GOVERNANCE AND ITS FOUNDATIONS Corporate governance, i.e. “an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity”, (O’Donovan, 2003), effectively requires knowledge, understanding of fellow employees, or even to foresee or predict their behaviors and expectations. Therefore, as classical authors (e.g. Chinese or Florentine) demonstrated, government and management imply a mastery of human psychology. Based on this belief, managers, strategists and other managers of the twenty-first century will necessarily experience increasing attention in respect to cognitive and affective neuroscience. Governments have begun to show some interest in cognitive science since the 1980s. The emergence of imaging techniques for the noninvasive study of the brain in vivo has reinforced this interest in a more specific and concrete way. In addition, awareness of the aging population in industrialized countries, accompanied by mental disorders and diseases that life expectancy – in the past more limited – obscured, is no stranger to the issue. In France, some experts believe that the amount of senior population exhibiting mental disorders or dementia exceeds one million people. On July 17, 1990, "the Decade of the Brain", was announced in the U.S. by the then President, George Bush Sr., inaugurating a series of multiple initiatives, grants and funding of research centers across the country. Foundations were created to raise people awareness and initiate new research programs. The increasing accessibility of brain imaging techniques, its mastering by emerging countries, the exponential growth of world scientific publications have led to some neuroscience preeminence among the other life sciences.

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3. A FIERCE RESISTANCE (BUT MASS CONVERSIONS TO COME?) The scientific study of the human mind can generate irrational reactions similar to those caused by the breaking of a taboo. To lower Man to the rank of animals in a biological and evolutionary logic, indeed means denying her any specificity, any single character justifying a superiority complex and a wide complacency. However, less than 30,000 years ago, Homo sapiens co-existed with other species of hominids (three to four human species are believed to have co-existed). The distrust and sometimes rejection of biology in the HSS to understand the human and social phenomena, comes from the standard model of the Social Sciences (SSSM) still widespread today (Pinker, 2006). The Harvard scholar strongly disputes this model, which relies essentially, according to him, on three doctrines which are fallacies:

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(1) the primacy of nurture which posits that learning is the essential source of all knowledge and behavior, (2) the inherently peaceful nature of man who is only corrupted by social institutions, (3) the dualistic epistemology that implicitly assumes that physiological and psychological phenomena are distinct, although possibly associated (for a development: Roullet & Droulers, 2010). Arising from these three tenets and from the common reluctance for naturalization, a fierce opposition between social and natural sciences results. Scholarly publications in increasing numbers nevertheless contradict or at least put in perspective these tenets which are however, still perennial in some disciplines of HSS. As for the first assumption, we know that the human genome contains several temperamental and behavioral predispositions (usually conditioned by the occurrence of suitable environmental factors), that we find early in newborns (e.g. apprehension of physical laws and arithmetic). This was confirmed by longitudinal studies of identical twins. As far as the second assumption is concerned, some researchers (zoologists or ethnologists) from the evolutionary psychology school consider that nature is neither good nor bad per se. Species are known to adapt or vanish, and to do so, they must sometimes make "altruistic” choices for their conspecifics, but "selfish" or "cruel" ones for other competing species present in the same ecological niches. Finally, the third dualist postulate has been battered by cognitive psychology and neuroscience, which have amassed two decades of corroborating evidence that would indicate a strong identity of body and mind, both in pathological (or traumatic) or normal contexts. Given the progress made in 20 years in the field of cognitive science, could we expect massive epistemological conversions, especially among researchers in HSS? Currently, an espousal of neuroscientific techniques and reasoning involves a radical shift in epistemology, or philosophy. The term "conversion" can be properly used here because the proponents of neuroscience are largely materialistic and monistic and their epistemology is rather neo-positivistic, while researchers in HSS are sometimes dualists, often holists and constructivists (Roullet, 2005). Despite the scientific evidence cited above, firm opponents of neuroscience do not give any credit to the neuroscientific approach in the field of HSS and even less so in the field of social, civic and political life (Parlebas, 2007). These somehow dogmatic postures suggest a

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certain ignorance of neuroscientific publications (today hundreds of academic journals publish each year thousands of articles pertaining to cognitive processes or imaging work), as well as their epistemological impact and their spectacular advances over the past 20 years. Why would neuroscience become the new manna of humanities? Briefly, we can say that cognitive and affective neuroscience offers HSS theoretical frameworks, i.e. explanatory and predictive models, which are part of an evolutionary logic, verifiable, and refutable. More specifically, current functional brain imaging techniques might provide an answer to the objective measurement problem (without disturbance of the observer or instrumentation), ascertained in other disciplines, including particularly marketing and management science (Droulers & Roullet, 2007). It is nevertheless necessary to clarify this approach, which is to espouse or adopt a new paradigm. As we have written elsewhere, “we believe that the importation / adoption of the neuroscience paradigm in management science, generates more benefits than constraints for the researcher. More specifically, research in consumer behavior, would greatly benefit by mutating into a consumer neuroscience, which would have both the ambition to describe and explain the mental (emotional and cognitive) consumer processes, that is to say, the individual placed in contexts of evaluation and commercial decisions, and also to contribute to the general advancement of social cognitive (neuro)sciences” (Roullet & Droulers, 2009). So, any “cherry-picking” or just random “nibbling” of neuroscientific terminology or concepts is definitely unwarranted and it should not be used to simply renew managerial trappings. This practice would be inept and therefore condemnable, as were the exposed and condemned previous excesses of culturalism or sociology of science (Sokal & Bricmont, 1997). We therefore think it useful to evoke in the next section, for the logical continuation of the argument, which elements, factors or beliefs do found the neurosciences and their paradigm.

4. NEW THEORETICAL INSIGHTS AND PERSPECTIVES The paradigm of neuroscience is based on some fundamental concepts that we will briefly outline. Indeed, the mere acceptance of the theoretical neuroscientific framework and its associated brain imaging techniques implies, by pure epistemological consistency, the full support of its main postulates. We will briefly highlight the following points that were underscored earlier by Ilardi and Feldman (2001): (a) our brain and its associated cognitions are the product of a phylogenetic evolution, a shaping of tens of millions of years. The human cognitive functions or abilities can only be fully understood in an evolutionary context, (b) there is an identity between psychological events and neural events, and any psychological event occurs as a result of a neural processing of information; consciousness emerges from a complex interaction between the brain and the rest of the body whose states are neurally represented, (c) all explicit human behavior is the result of intentionality, generated in the central nervous system: there is no "mental causation" as an ultimate antecedent; the information processing in the central nervous system occurs through neural networks, hierarchically organized and interconnected, and

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(d) the human genome (approximately 20,000 coding genes) seems to retain the "blueprints" of a neuronal pre-wiring for large neural cognitive modules controlling affective and cognitive functions. The genes seem to preside over certain predispositions (both temperamental and behavioral), however conditioned by the occurrence (or not) of environmental factors. The increasing dissemination of the above-mentioned paradigms in the HSS is even more understandable given that cognitive and affective neurosciences have actually produced in recent years a whole body of new knowledge that corrects, refutes, or validates existing theories. We will present below (without pursuing a total comprehensiveness, which would require more space) some brief examples from different disciplines.

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4.1. GENERAL PSYCHOLOGY In a filial kind of way, psychology was revitalized with cognitive psychology and especially cognitive neuroscience. Examples of adoption for revisited concepts would be numerous. All major higher-level cognitions were revisited: perception and categorization, language, memory, time perception, evaluation and decision-making etc. Thus, mental phenomena seemingly as disparate as filial love, religious faith, empathy, altruism or morality (all once considered impregnable) have been approached and treated scientifically in the recent past. Significantly, the emergence of neuroscience and its techniques also allowed the careful re-examination of affective phenomena, long neglected by cognitive functionalism, the dominant posture in neo-classical economic theories, but also in marketing and consumer behavior research. Today, affective neuroscience constitutes a discipline per se and significantly contributes to the understanding of human complexity. Various specific brain regions are involved in emotional experiences: the orbitofrontal (prefrontal) cortex, the insula, the anterior cingulum, the posterior cingulate and the amygdala. The prefrontal cortex corresponds to the voluntary control of behavior while the insula provides information relating to the contemporary state of the body (viscera, muscles, joints and tendons). The cingulate cortex is involved in the awareness of body condition (and error detection), while the amygdala nuclei link the current perception to automatic memories and emotional response schemata. But neuroscience has initiated the revisit of several concepts or constructs, still considered as the true pillars of a centenary psychology. Examples include the concepts of belief (Goldman, 2005), cognitive dissonance (Sharot, et al., 2009), recall or oblivion in memory (Wixted, 2004), body image (Holmes & Spence, 2004), intentionality or metacognition (Uddin, et al., 2007).

4.2. EDUCATION SCIENCE An illustration of a positive neuroscientific contribution to education science is the recent supply of elements encouraging the debate on the mastery of writing or calculus in elementary schools. It is known that dyslexia and dyscalculia have cerebral origins (neuronal /

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synaptic dysfunction of genetic and / or epigenetic origin). Understanding biological mechanisms of language or numeracy (either exact or approximate) is actually increasing, which gives some hope for issuing new recommendations pertaining to the appropriateness of various learning methods. Provided that, however (as highlighted by Varma, McCandliss & Schwartz, 2008), genuine collaboration takes place between the two disciplines and that precise themes of study can be jointly defined. For instance, the influence of educational tools [i.e. cultural elements] on learning and understanding of numbers in the addition calculus: young Chinese activate their motor areas during the addition, while their English counterparts activate their language areas. The fact of learning calculus either on an abacus or on a sheet of paper may explain some of the differences observed (Tang, et al., 2006).

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4.3. CHILD PSYCHIATRY Psychiatry has long distinguished (and partitioned) psychological mental illnesses (intangible) and neurological disorders (biological). It has recently evolved into a neuropsychiatry, which holistically apprehends the brain dysfunctions, underlying disorders of both psyche and cognition. Some mental disorders seem to have a biological basis, resulting from causes incorporating genetic, epigenetic and environmental origins. This is the case of schizophrenia, major depression, bipolar syndrome (formerly “manic depression”) or autism. Child psychiatry, for instance, has changed some of its postures on autism. Controversy marred most of the debates of these last twenty years on the subject of this developmental disorder (arising from the strong antagonism between biological and psychoanalytic theories). This affliction is now rather designated as autistic spectrum disorder (ASD), so covering varied deficits. Guilé (2006) recently concluded in his paper, addressing the contribution of neuroscience to child psychiatry, that recent advances in developmental neurobiology, behavioral genetics, functional brain imaging and cognitive science, all applied to the field of child psychiatry, may increase our understanding of anxiety disorders related to stress and might contribute to extend the therapeutic spectrum, now available for attention disorders.

4.4. CRIMINOLOGY AND CRIMINAL LAW We are aware that the public and the media resent the increasing prison population and even more, its overrepresentation of certain minority groups. Less noted was the serious overrepresentation of psychiatric or mental disorders among this same population. For example, statistics indicate that 50% of inmates have at least one psychiatric disorder. Naturally, one should ensure that the cause is not an outcome (i.e. that imprisonment does not produce the disorder). Studies suggest that complex interactions - all involving the central nervous system - cause behavioral problems or antisocial behavior. Psychopathy, sociopathy, various addictions, and transgressions of social norms are now reviewed in neuroscientific and genetic terms. Imaging studies have revealed either structural (anatomical) abnormalities or physiological dysfunctioning involving neurotransmitters and/or (neuro-) hormones. Recently, U.S. and Indian courts of justice have relied on neuroscientific data (from EEG or

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fMRI scans) to unmask or exonerate defendants of serious crimes (Sapolski, 2004; Rosen, 2007; Tovino, 2007; Moriarty, 2008). Thus, brain imaging results are used in some U.S. courts as admissible evidence, both by the defense and by the prosecution 40. Similarly, an Indian woman in Mumbai was condemned in 2008 for murder by poisoning, after a brain test (evoked-potentials EEG) was applied, revealing brain activity correlating positively with memories of incriminating details (Girighadaras, 2008). Eventually, the U.S. Department of Homeland Security has begun evaluation tests for a “lie or anxiety detector”. Indeed, functional brain imaging techniques (either electroencephalogram or metabolic) can detect lies or concealments (which require more cognitive resources) with a relatively high-rate (87.5%) of success (Langleben, et al., 2002). However, prominent researchers 41 - believing that practice goes way faster than research – appear more than skeptical about the absolute reliability of these techniques.

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4.5. SOCIOLOGY AND SOCIAL PSYCHOLOGY Classical sociology has not lived yet its cognitive revolution, like general psychology did in the late 1950s: it remains close to behaviorism, which considers that only the environment forges cultures through social learning in the absence of any pre-existing skill. This still dominant position – culture is ontologically distinct and independent from the biological realm – is now challenged by some researchers because this position supports increasingly disputable arguments. Since Durkheim, scholars in sociology consider there is indeed an unbridgeable discontinuity between the psychological (the biological today) and the social realm, just as in the nineteenth century an insurmountable barrier existed between the living and the inanimate (Bronner, 2006). The analogy with organic chemistry unable to explain life - the "argument of incompetence" (Bronner 2006, p.333) - is however not fully acceptable today and this discontinuity (“the determinants of any social fact must be sought among antecedent social facts and not among individual states of consciousness” (Durkheim, 1919, p.135) seems more difficult to justify, without referring to some immaterial entities that sometimes seem just to boil down to animism, and often to “biophobia” as some sociologists have recently deplored (Freese, Allen Li & Wade, 2003). But this epistemological stance, which posits that reducing man to a brain is a reductive "individuation" (Andrieu, 1999) and therefore, a loss of meaning, is actually similar to an implicit dualism, even a quest for transcendence (Poirel, 2005). In a monistic materialist stance, a "person" is his/her brain (s/he is the social actor), while retaining the full richness and complexity of his/herself. Sociology is the place of sometimes-heated debates where emblematic concepts are reviewed in the light of other paradigms. Thus, Freese, Allen Li and Wade (2003) in their annual review of the discipline, tried to make their colleagues conscious of the challenge by reminding of the epistemological foundations that would renew the sociological approach: the evolutionary past of man, the reality of genetic differences between individuals, and the faint influence of biological factors (studied by neurophysiology and neuroendocrinology) on cognition and 40

On March 5, 2001, on first hearing Judge Tim O'Grady (Pottawattamie County, Iowa District Court) ruled that "brain fingerprinting" testing (Brain Fingerprinting ®) were admitted in court. 41 Particularly Michael Gazzaniga, professor of psychology at the University of California, Santa Barbara, where he heads the new SAGE Center for the Study of the Mind. He also heads the MacArthur Foundation for the Law and Neuroscience Project to study the convergence points between law and neuroscience.

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behavior. Their colleagues in social psychology do not say otherwise, adding that brainimaging resources can be valuable assets for their disciplinary thinking, without being the only source of progress (Willingham & Dunn, 2003).

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4.6. POLITICAL SCIENCES Political science and neuroscience have been associated in the media, when brain imaging studies were conducted in the US with Republican or Democrat militants as subjects who were shown pictures of candidates defending or not their political beliefs. The term « neuropolitics » was quickly devised (Connolly, 2002). More generally, political decisions are being examined in vivo with (volunteering) citizens scrutinized in fMRI scanners (Tingley, 2006). First attempts were conducted in 2004 in a context of cooperation between a market research firm (FKF Applied Research) and an American college laboratory (Ahmanson-Lovelace Brain Mapping Center at UCLA). During the primary campaign of the last U.S. presidential election, brain activity of voters was recorded while viewing TV political commercials, featuring Hillary Clinton or Barack Obama. Emotional reactions were analyzed according to each topic to assess its intrinsic political value. Soon, researchers understood the possible enrichment of their discipline, especially in considering affect (emotional states), which was previously considerably overlooked in models of rational decision (McDermott, 2004; Knutson, et al., 2006). Rose McDermott, a professor in political science at Brown University developed the idea of a collaboration between two disciplines, noting that “many of the substantive topics drawing current interest in cognitive neuroscience and behavior genetics are familiar to political scientists, revolving around issues of race bias, voting, cooperation and conflict, aggression, coalition formation and maintenance, dominance and status hierarchies, the impact of emotion on decision making, and the origins of social and political attitudes and behaviors” (McDermott, 2009, p.571).

4.7. PHILOSOPHY AND ETHICS Neurophilosophy, as such, was founded about two decades ago (Churchland, 1989) whereas neuroethics appeared more recently. Neurophilosophy refers to two distinct and complementary methodological approaches: (a) to solve problems of philosophy of mind using the neuroscience paradigm, and (b) to clarify and interpret neuroscientific results in terms of philosophy of science. Cognitive science may have a role to play in bringing together these sometimes aloof disciplines (Tiberghien, 2007). The term neuroethics was proposed a few years ago (Farah, 2002; Foster, Wolpe & Caplan, 2003) and it may take several meanings. An acceptance of neuroethics signifies the application of ethics in neuroscience, namely the moral questioning about the use, interpretation and manipulation of neuroscientific techniques and data. Three main themes are likely to be addressed by neuroethics: (a) the use of pharmacological stimulants (vegetative or cognitive functions), (b) the judiciary interventions such as legal rulings based on cerebral responses or the nature of court injunctions for therapeutic treatment, and finally (c) the "brain reading” techniques, i.e.

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the decoding and interpretation of mental phenomena by means of functional brain imaging techniques. The latter part naturally concerns HSS as a whole and raises somehow all the concerns. Decoding and interpretation here mean the ability to identify in real-time the nature of cognitions occurring in a subject: thinking about one’s special other thing, imagining a face or a manufactured object, imagining a technical movement, etc. New MRI signal-processing statistical techniques permit the quick learning, then spotting and decoding of cerebral activity patterns denoting such or such processing (Grill-Spector & Sayres, 2008). Should technological and computer progress continue to grow at a fast rate, political and ethical authorities would have to address this issue.

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4.8. CORPORATE AND HUMAN RESOURCES MANAGEMENT In any organization, good governance includes the pursuit of well-being of individuals and preventing the causes that may affect this well-being. Human resources managers use the precepts of general psychology and social psychology to optimize social relations within the organization, promoting cohesion- and solidarity-wise behaviors and discouraging openly individualistic tendencies, through the promotion of organizational values or beliefs, supposedly shared by all its members. Some researchers in management have been attempting for a long time to explain why some individuals did manifest leadership, while some others simply prefer to follow leaders. Some individuals seek power when others are fleeing it. Trait, learning and contingency theories tried to explain such qualities. Emotional intelligence and empathy skills are likely to appear in the short list of a leader’s qualities (Goleman & Boyatzis, 2008). But, it also appears that higher rates of testosterone reinforce tendencies to dominance, while a better resistance to stress (i.e. cortisol) is a key factor in resilience. In recent years, corporate "followers" or even "whistle-blowers” have also been studied (Schafer, 2009) in their personal involvement and morality within an organization. A recent study suggests that some individuals prefer hierarchical structures to strictly egalitarian ones as they showed more skills - identified neurally - on sociability, compassion and empathy for others (Chiao, et al., 2009). A major theme in applied neuroscience is decision neuroscience (Shiv, et al., 2005), which seeks to understand and explain the biological mechanisms that underlie decision making in situations of risk or uncertainty. Researchers have studied the neural substrates of economical concepts, such as expected utility (Padoa-Schioppa & Assad, 2006), which orient the nature of final choice (Preuschoff, et al., 2006). Knutson and his colleagues recently demonstrated that the outcome of a mental deliberation - the choice of taking a particular decision – is based on a subtle imbalance between activities of two cortical structures, one encoding the appetence of expected utility (reward circuit) and the other encoding the aversive level of consequences associated with a possible wrong decision. The superior activation of one in comparison to the other predicts the subject’s final decision (Knutson, et al., 2007). In a context of greater economic globalization, with its stress-laden corollaries and uncertainty about the future, resented by a number of employees and echoed by the media, a neuroscientific understanding could provide additional reflection, in a general concern to find palliatives if not lasting solutions to these occupational disorders. Human resource management could effectively gain from

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neuroscientific insights regarding: corporate learning and under-performance associated to the level of stress (Gilkey & Kilts, 2007), specific situations of stress (Anderson, 2008), key positive resilience factors or key negative factors involved in the burnout syndrome (cognitive and intellectual exhaustion syndrome) (Eriksson & Wallin, 2004).

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4.9. NEUROMARKETING AND CONSUMER NEUROSCIENCE Like their colleagues in neuroeconomics, marketing scholars who attempt to describe, explain and predict consumers’ attitudes and behaviors have found new and fruitful avenues for inspiration and investigation (Droulers & Roullet, 2007). As developed elsewhere, many areas of investigation are likely to be revisited: time perception, decision processes, the aesthetic judgment of a product, the affordance (or ergonomic potential) of a product, the process of memorization and recall, the emotional impact of advertising, the selective detection of a brand logo on a prominent shelf display, crowding and interference feeling in peripersonal space, the implicit memory of peripheral and incidental stimuli, price evaluation, the degree of trust granted to a seller, the degree of affiliation with a brand, etc. Each of these themes - and the list is far from being comprehensive - is likely to be studied and rediscovered through recent neuroscientific discoveries. Already, the neuroscientific approach has helped to advance thinking on several marketing issues. One could cite among others: (a) brand equity can modulate the objective gustatory judgment (McClure, et al., 2004), (b) apparently shared opinions on brands conceal antagonist cognitive processing modes (Quartz & Asp, 2005), (c) a preferred brand is exposed to less executive control than a less known brand (Schaefer & Rotte, 2007), (d) the strongest activation between reward and disgust “decides” on final decision (Knutson, et al., 2007), (e) peripheral elements have an implicit influence on credibility or aesthetics judgments (Deppe, et al., 2007), (f) the mere exposure to a brand facilitates its subsequent visual cognitive processing, but also its perceived familiarity and preference (Krawczyk, et al., 2007).

5. INHERENT LIMITS IN ANY PARADIGMATIC REVOLUTION Neuroscience can shed a new light on the foundations and substrates of human behavior in society and the corporate organization. “Brain science, in its relevance with behavior, with mental life, and emotional life, deeply permeates Humanities and Social Sciences” (Jeannerod, 2002). One can occasionally see in some contexts that only “biological” approaches (i.e. based on the study of a naturalized human cognition) allow the explanation of findings or abnormalities, or the circumvention of paradoxes, found for example in finance or corporate governance (Charreaux, 2005). Such an approach, undertaken by some researchers, can get insights from “three schools of thought: neuroscience, organizational learning and behavioral economics” (Charreaux, 2005, p 216). In addition, the great rediscovery of affect as a mediator of cognition has allowed for a less "rational" reading of strategic or managerial behavior and decisions and has inserted human emotion - although ubiquitous - in the agency relationships (economic theory of agency) observed in organizations or financial (or commodities) markets.

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However, following the growth of scientific publications based on functional brain imaging, some science historians and philosophers of science were concerned about the interpretations of such images and their societal impact. Special reports issued by more or less specialized scientific journals reflect a growing popularity among the general public in Europe and in the U.S. (e.g. French Cerveau & Psycho, US Scientific American Mind, or German Gehirn und Geist). In addition to the purely ethical or philosophical interrogations (do we have the right to know the innermost thoughts of anybody?), the techniques discussed above may raise questions about the future use of brain scans. Although it is not possible here to unfold this point, we may mention current questions that deal with unexpected medical discoveries, the very interpretation of images extracted from a complex biological processing, and the property of brain images and its afferent copyright. More concrete limits would still temper the optimism of researchers: the sometimes-limited access to medical equipment, financial costs, complex methodologies, biological hazards, the need for multidisciplinary teams, the administrative or legal constraints, all are as much hindrances to be overcome. One belief remains - shared by some marketers or managers - that further theoretical, methodological and technological breakthroughs in this field, naturally trans-disciplinary, will render the neuroscientific approach in the mid-term, accessible, controllable and incomparably rich in results.

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CONCLUSION Most governments of industrial and emerging countries have realized the importance of challenges and issues raised by brain sciences, both in an academic and an economic context, but also in a political and a geostrategic context. The National Institute of Mental Health and the National Science Foundation (and its specialized division Behavioral and Neural Sciences) in the United States, the RIKEN Institute in Japan, the research directorate in the European Union and others, including the People’s Republic of China and the Indian Union, all significantly invest or promote significant funding in laboratories, equipment and personnel dedicated to brain sciences. An obvious leverage is under way and its results should be the doubling of scientific publications that currently reach an annual trend of 2,500 peerreviewed articles, devoted solely to functional imaging of cognitive or affective functions. At a more philosophical level, one might infer that the intimate knowledge of the human being and her consciousness may contribute to the provision of more truth and reality in the grasping of social reality, of more justice (taking into account the deficiencies or skills of everyone) and therefore more solidarity and equity, concepts which appear to be governance’s cornerstones. Finally, at a time when religions, ideologies or ethnic groups are opposed and clash, a better understanding of the human brain will only show more vividly the uniqueness of mankind and the universality of his/her affects and cognitions, his/her hopes and his/her compassion. Our belief is that in the coming years, HSS and governance, considered as applied psychology ventures in social or organizational contexts, will evolve towards a greater naturalization of their constructs and paradigms and with global consequences.

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Baba, S., Bechara, A., Levin, I., Alba, J.W., Bettman, J.R., Dube, L., Isen, A., Mellers, B., Smidts, A., & Grant, S.J. (2005). Decision neuroscience. Marketing Letters, 16 (3/4), 375-386. Sokal, A. & Bricmont J. (1997). Impostures Intellectuelles. Paris : Editions Odile Jacob. Tang, Y., Zhang, W., Chen, K., Feng, S., Ji, Y., Shen, J., Reiman, E.M., & Liu, Y. (2006). Arithmetic processing in the brain shaped by cultures. Proceedings of the National Academy of Sciences of USA, 103 (28), 10775-10780. Tiberghien, G. (2007). Entre neurosciences et neurophilosophie : la psychologie cognitive et les sciences cognitives, Psychologie Française, 52, 279-297. Tingley, D. (2006). Neurological imaging as evidence in political science: a review, critique and guiding Assessment. Social Science Information, 45 (1), 5-33. Tovino, S. A. (2007). Functional neuroimaging and the law: trends and directions for future scholarship. The American Journal of Bioethics, 7 (9), 44-56. Uddin, L. Q., Iacoboni M., Lange C. & Keenan J.P. (2007). The self and social cognition: the role of cortical midline structures and mirror neurons, Trends in Cognitive Sciences, 11 (4), 153-157. Varma, S., McCandliss, B. D. & Schwartz D.L. (2008). Scientific and pragmatic challenges for bridging education & neuroscience. Educational Researcher, 37 (3), 140-152. Wixted, J. T. (2004). The psychology and neuroscience of forgetting. Annual Review of Psychology, 55, 235-269.

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ISBN: 978-1-62257-578-7 © 2012 Nova Science Publishers, Inc.

Chapter 19

PERSPECTIVES ON GLOBALISATION, GOVERNANCE AND ETHICS: VIEWPOINTS PRESENTED IN A FORUM OF THE ROYAL SPANISH ACADEMY Chapter editor:

Jaime Gil Lafuente Facirem, University of Barcelona, Spain Forum Participants:

Ricardo Díez Hochleitner Honorary President of the Club of Rome, Spain

Maya Simionescu Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Academy of Romania, Romania

Evanghelos A. Moutsopoulpos The University of Athens, Greece

Alessandro Bianchi The University of the Mediterranean Studies of Reggio Calabria, Italy

Eugen Simion The National Science Foundation and Art of Romania, Romania

ABSTRACT This chapter presents the results of a forum held in November 2009 at the “Royal Academy of Economic and Financial Science” as a part of the fourth workshop of the Franco-Australian Centre for International Research in Economics and Management (FACIREM). The chapter begins with an overview of the purpose of the forum, and then presents the papers given by a range of stateswomen and men who have grappled with the practical concepts of governance in global contexts. The chapter concludes with a brief synopsis of the forum discussions.

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1. INTRODUCTION In November 2009 the “Royal Academy of Economic and Financial Science” hosted the fourth workshop of the Franco-Australian Centre for International Research in Economics and Management (FACIREM) in Barcelona. This workshop presented the opportunity to bring together, apart from academics with a wide range of viewpoints, a group of stateswomen and men who have grappled with the practical concepts of governance in global contexts. These esteemed individuals brought to the discussion their professions, their interests, but also an understanding of working with individuals within private firms, not-forprofit organizations and government entities (from the not so powerful to the very powerful), and on issues with a wholly local focus to matters of global concern. Discussing and critically analyzing the concept of “good governance” in a globalising world presented the opportunity to envisage how humanity could move forward, especially when contrasted against the costs and damage to the world economy resulting from the 2008 Global Financial Crisis (GFC). Globalisation, which is fostered by economic change and new scientific technologies and which brings new technology developed through scientific endeavour to ever-wider groups of humanity, presents individuals and States with continuing change that is usually observed as complex and uncontrollable because of the distance in time and space from the revolutionizing source. This chapter offers the thoughts of a select few respected individuals on the problems of creating good governance in a global world. The chapter finishes with a brief conclusion, which summarizes the discussion and argument that followed these presentations.

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2. GLOBAL CHALLENGE Presentation by Ricardo Díez Hochleitner, Honorary President of the Club of Rome, Chairman of the Civic Panel Hundred, Board Member of the Bertelsmann Foundation A retrospective glance at the history of Humanity will no doubt show the undoubtedly great material and cultural achievements attained during difficult times over centuries. Nevertheless, it will also show how many times these have been seriously damaged due to ignorance, egotism, and of the lowest instincts in a world that is overloaded with interests in conflict. And now, more specifically, we are faced with a future that is announcing, in a very perceptible manner, the end of an era and the beginning of a new culture with still uncertain profiles. In fact we are not only facing a serious dilemma due to the very difficult financial crisis we are immersed in and which is still very active, but we are facing a new political, economic, social and cultural situation of a very widespread scope. Also and very probably, we are being faced with the most ambitious and difficult transition towards an interdependent society, oriented towards an inexorable globalisation on all levels. Consequently and thanks to the increasingly easy access to information, the basis of all knowledge, fortunately there commences to exist a growing consciousness on the part of citizens on this new reality. Nevertheless, at the same time is can also be observed that there is a renewed search for real

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identity as well as greater resistance to so many changes (Díez Hochleitner, 1998, 2010; Díez Hochleitner & Ikeda, 2008) Recognition of globalisation or worldliness of the most diverse phenomena, as well the sense of responsibility towards the future have become generalised and are the key to the search of a new humanism that is capable of bringing about a “real utopia” which feeds a moral authority in order to be able to speak in the name of the most noble of the spirit of man. With reference to culture, its current globalisation occurs in a preponderant manner in science and technology. It is also true to say that the way is being opened up to a civilisation of the universal, above all from western uses and customs. Nevertheless, this globalisation process of culture is still dramatically lacking the necessary vision and integrating practice of sciences with humanism, as well as with the economy within a more universal viewpoint. In the XVIII century, Diderot, along with a group of his friends and associates, had the intention of putting into writing, in a series of volumes, nothing less than the whole of human knowledge. Today, on the other hand, even the most erudite know that they have to self limit themselves to a certain specific sphere of knowledge, although from a point of view that is as wide and global as possible. This conditions the manner of thinking on the specific and local from the intertwined and interdependence within the framework of what is global. This specialised knowledge has an influence, of course, on our way of seeing the world and from this it is why we frequently talk about things global and globalisation, although to be quite honest we do not dominate nor comprehend it as we should and we would like to do so. Cultural pluralism constitutes therefore and in every case, a culture in itself and surely it is the best expression of the political, social and economic reality of the major part of modern states. However, tolerance is essential in this pluralism because it allows for understanding and placing oneself in the place of others. Faced with this reality, education must increasingly play a determining role in favour of tolerance and peace thanks to the socialisation and cultural formation of each individual. Formation for tolerance and for solidarity is a priority in education for this third millennium, which has already commenced, contributing to the globalisation of the best of the diverse cultural identities in benefit of a common cultural base for all peoples desirous of peace. That peace between nations, cultures, ideologies and beliefs requires, of course, the power of the word, of literature, the outstanding works of humanity. However, much attention must be paid to the words we choose and use, in whatever language. Each word can be distinguished and is strengthened by its form, although the most important is its content, commencing with its etymology, which advances us it’s meaning in its soul. And whilst on the subject of languages, since the renaissance there have been projects that are worthy of admiration for creating international languages. Esperanto was the brightest star for some time. We do not need to select a single global language, although we now use English in the way of “a worldwide international Esperanto”. To my way of thinking, the only and ultimate acceptable universal language are the Fine Arts, in general, and music in particular, which talks to us all with its messages, which go direct to the brain and above all else to the heart. What we do need to do is to learn other languages in order to obtain a greater sensitivity and comprehension towards other cultures and their peoples and, since all schools should become islands of peace, the teaching programmes should include at least a second language and training for coexistence from the respect towards the rest of the cultures of the world. In view of all that has been said, I feel that institutions and businesses in the XXI century will be, above all else, what their executives want them to be and they will reflect to a greater

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degree the respective vision, will, capacity and values of those men and women placed in their management positions. Therefore and from their particular part, businesses must have more solidarity with the future outcome of men in their local or global dimension. And if this were not enough, businesses of the future will not only tend more to expansion within their own countries of origin till they reach the necessary “critical mass” of the market, but they will also tend towards internationalisation. They will convert into transnational businesses based on similar cultural spheres, complementary markets or alliances between competitors and suppliers, even more so before the phenomenon of the growing globalisation that is underway and the new technologies of information which facilitate finances, shared information, commerce and even industrial management, all of which offers an extraordinary potential for development but also requires, for the same reason, a much more than ever demanding management faced with the complexity and frequent uncertainty surrounding prospects for the future. A sustainable business, faced by the future, must learn to live in harmony with the “landscape and the people” of its surroundings, that is to say, the stakeholders, as well as the shareholders. The evolution of the economy of the free market has shown us over recent decades that the success of a business cannot now be measured only by commercial results, in spite of the fact that these are very important. The serious financial crisis of our days, with its consequences such as the public deficit and growing unemployment, obliges us to take another look at formation or training along with an urgent recycling of business managers as well as with the members of the Board of Directors of companies, in such a way that the desirable Corporative Government can be established with the object that those companies are converted not only into motors of the economy and vital nuclei of a material, social prosperity and democratic coexistence, but also in bearers of justice and social protection, as well as the humanisation of work, solidarity, cooperation, technological progress, human knowledge and freedom in democracy. All of this requires even more so when faced with the current irreversible globalisation, unfortunately centred still on the networks of large multi-national companies, whilst true globalisation of a day soon to come should be highly beneficial for attaining a Humanity that is truly supportive from several and numerous values and common goals, with a growing respect for ethnic differences and the respective cultural roots. What this is in essence is precisely that all businessmen should be transformed into true business leaders with a social, cultural, innovative, technological and ecological sense, impregnated with ethical values, in such a way as to guarantee the future and the profitability of their respective business in the long run, even more so in the current difficult situation. These are, in my opinion, and speaking very broadly, some of the more important objectives to which we should aspire as profound reasons for solid hope in the future in the extent to which top directors of businesses as well as the members of the boards of directors are fully conscious of their duty and great possibilities of successfully exercising the social responsibility in the company. Therefore, in these difficult times it is essential to attain among all the transition towards an Economy steeped in Humanity as the maximum guarantee for leading us to a future of optimum economic and social development that is truly sustainable. In this sense, private foundations, paradigmatic expression of the best of a sense of responsibility and cooperation of businesses with society are, increasingly, instruments in the service of globalisation in the most diverse fields. Here also may arise very soon the desirable trilogy for cooperation between governments, businesses and civil society in their multiple institutional expressions. This should contribute both to the governability of the world as well

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as to put a stop to poverty, a task that should be a priority in our time, among the many urgent problems of a global scope. Given the worrying economic disparities that are on the increase between countries as well as in the interior of these countries. What is certain is that we still have a long way to go before the current society of information becomes the society of knowledge, which with not a little petulance many consider that we have become converted into, to say nothing of how much we are missing to come closer to the society of wisdom, solidarity and cooperation for a sustainable development to which we must always aspire as the ultimate goal. In sum: Business cannot now consider itself as an isolated entity, with its back towards the vicissitudes that are being undergone by society as a whole. For that very self same reason neither is it possible to separate what pertains to business from what pertains to education, science, technology, culture and society. These activities have to form a part of the desirable new business culture, thanks to which the legitimate objectives of production, commerce and progress are attained, that contributes to reinforcing civil society in all its facets. Such is the duty of consciousness and the opportunity to exercise a leadership in the government of sustainable and highly profitable businesses for the good of all. Businesses are, should be and are going to be, increasingly, agents of global economic and social change; the platform of the necessary dialogue of cultures (from the diversity of cultural identities and convictions), in a climate of tolerance and solidarity that banishes terrorism and promotes peace and development. Such is the best way to insert businesses in a positive manner into the inexorable process of globalisation, which is underway, and to convert themselves, in consequence, into outstanding carriers of the hope that is required by the world. I, for one, wish today to render my most sincere tribute of admiration, affection and thanks to those executives and business managers who are outstanding through their work as citizens and businessmen, as creators of wealth in the service of a sustainable development that is increasingly more human and social, which will place their businesses among the most profitable, socially more efficient and respected by the citizens of the whole world. To finish I am finally recurring to the inspired words of Charles Dickens: “This is the worst of eras, although it is also the best; It is the time of madness, but it is also the time of lucidity. It is the winter of desperation and at the same time, the spring of hope; we have nothing before us and, nevertheless, we have it all before us”.

3. GLOBALISATION, GOVERNANCE AND SCIENCE Presentation by Maya Simionescu, Vice-President of Romanian Academy, Director of the Institute of Cellular Biology and Pathology “N. Simionescu” of Bucharest, President of “Romanian Society for Cell Biology”

3.1. Introduction The modern society, with its great achievements, is confronted nowadays with a plethora of new problems: on the one hand the globalisation process with its advantages and on the

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other hand the economical, financial and health crisis. To face this new stage in the development of our society, new approaches and instruments are to be globally applied. I will refer, in particular, to the need and the role of science in these days and age of our world. The history showed that while civilisations come and go, science grows steadily onward. In the last years, the development of mobile phones, the Internet, and the advances in healthcare have changed our lives in ways that we would never have imagined. New areas of science and technology such as brain science, computing, genetics, and biotechnology will shape our future. The modern society depends increasingly on new technologies, the result of which may be an improvement of our life, or quite the opposite, with worry and denial. In this respect, governance has a major role in educating people in such a way as to adjust to all changes that may occur.

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3.2. Governance should Support Science Education and Prepare Individuals for the Modern Society In this time of fast development of discoveries and innovations, only the individuals with a solid basic education and a sound science culture will be able to absorb and use the new scientific facts that ultimately should conduct to their life improvement. The educated individuals will be able to recognise the truth and real facts from the untruth, fiction and fabrications. For example, an educated person will understand better the health risks of the polluted environment and will not consider as "acceptable" something that in fact is objectionable and offensive for the society. A lack of science culture will lead people to readily accept simplistic answers to complicated problems or answers that deny scientific facts and common sense, an approach often promoted by journals, magazines, or talk-shows. Due to the rapid advances in science, governance should consider education as a lifespan process and provide various and multiple means for continuous education of people, such as the media, museums, community-based programs or science centres. In turn, governance will profit by having individuals with an increased ability to reason, to argue intelligently, think creatively and logically, to take suitable decisions, and decipher and resolve problems.

3.3. Science Has no Country but Every Country Needs Science Science is a world-wide enterprise. Science can correct the social problems and economical issues and limitations. Science has no boundary; it is a universal endeavour of humankind to understand the world around and within us. The quest for knowledge is a never-ending adventure because, in fact, science is infinite and the researchers have moved from being observers of nature to being its designers and choreographs. The achievements in science should be or become the property of the world population. As an example, after some discussions, it was accepted that the deciphering of human genome should become public information, for the benefit of each and all countries, for the benefit of the global advancement of science. But, to take advantage of the newest discoveries, each country needs science. The great and novel achievements in research cannot be imported, or if

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so, they have to find prepared minds, in order to apply and extend the new breakthroughs and inventions. It is the responsibility of each government to prepare the proper climate and insure the funding for the advancement of science in its country, and thus to contribute to the thesaurus of knowledge of the world.

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3.4. The Cross-talk between Governance and Science Many problems occurring in our complex world are global issues. For example, the impact of particular greenhouse gases on global climate change, the impact of pollution on human health and the widespread major diseases that cause the high mortality of today’s society such as cardiovascular disease, diabetes, HIV infection, obesity, and others. Scientists can raise these issues and governments should take decisions for protecting health as well as for maintaining the safety of our increasingly vulnerable natural environment. A new relationship between science and governance is appropriate and timely. The progress in life sciences, the uncovering of new biological processes and the developments of new technologies such as in-vitro fertilisation, genetically engineered plants, the fast expansion of information and communication technology need to be understood and regulated globally. The impact of these new innovations could have long-term, unpredictable, and possibly irreversible effects. To face the challenges of the 21st century, science and governance should keep a close interaction and a permanent cross-talk in order to contribute to a new dimension in solving problems. Science can improve policy decisions and governments can improve science. The new globalised governance should keep pace with the novel discoveries and synchronise decisions on an international scale. To this purpose, there is an increased need for a scientific input into the policy decision and the appropriate governmental mechanisms for finding suitable solutions. Scientist should envision emerging global problems or those related to the new technologies and discoveries and inform properly the governments. Governments should listen to scientists and take suitable decisions to confront any new problems and up-coming crisis that may affect the entire population. As an example, the priorities for health research have become a politically sensitive issue. The main cause and rate of mortality in developed countries are from maladies of the cardiovascular system. In Europe, 48% of the causes of death are from cardiovascular diseases; in addition there are already 48 millions diabetics and obesity is on the rise. From the economic perspective the societal cost of these diseases is extremely high (e.g. Euro 192 million per annum in Europe alone). Based on these data, governments must decide urgently all possible opportunities for the funding of health services and biomedical research. Screening programs to identify people susceptible to cardiovascular disease, diabetes, breast cancer, and Alzheimer's are required. Preventive medicine, based on science, to reduce the high cost imposed by these maladies to the society is the best approach.

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3.5. Global Crises Need Globalised Solutions and Decisions Many countries around the world are confronted with similar problems, which may come and change continuously. Thus, countries and governments can learn from each other and take appropriate decisions based on the experience of the others. Scientific approaches need to be applied to the management of all crises, including economical and health crisis. Science should provide continuous advice and support, reviewing decisions in the light of recent advances in knowledge. Strengthening the relationship between science and decision-making may allow governments to reduce significantly the sufferance and major difficulties encountered by of people. Furthermore, prospective activities that may anticipate the coming societal problems and the key scientific and technological trends may have a great impact in a government taking quickly the correct decisions for the benefit of the entire world. In this time of globalisation, the human society, in general, and in each country in particular, will benefit from the continuous dialogue between science and governance. Globalised crises need globalised solutions and the lack of worldwide decisions may affect each and all countries. Functioning together, governments and scientists can definitely contribute to the fundamental rights of citizens of the planet to high-quality health and a respectable life.

4. GOVERNANCE FACING VALUES IN AN ERA OF GLOBALISATION

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Presentation by Evangelos A. Moutsopoulos, Member of the Atherns Academy of Sciences, President of the Foundation for Research and Publishing Neo Hellenic Philosophy, Honorary member of numerous National and International Academies In a long series of papers (cf Moutsopoulos, 1997, 1981), I have tried to transcend the classical controversy between axiological subjectivism and objectivism by alleging that values emerge from human consciousness under the aspect of desires needing to be filled, before they are expanded instead, by being projected on an objective background where from they irradiate to meet homologous aspirations of other consciences, thus reaching the statuses of both objectivity and inter-subjectivity. In this context, the system of values, having acquired the condition of a reality widely accepted and wished for, has imposed itself as the moving power for the assessment of moral law within consciences and even societies. Since ancient times the classical value system has been built on three cardinal values: the True, the Beautiful and the Good (cf Moutsopoulos, 1960, 1974). Each one of them has admitted several secondary meanings according to the particular era and the society by which it has been experienced. One may thus consider the system of values as a threefold musical theme implying an indefinite number of variations (Moutsopoulos, 1996), which nevertheless respect the theme’s fundamental structure. Any attempt to seriously deviate from this structure would inevitably lead to the decline and, finally, to the crumbling of the structure itself. This may grow particularly probable in times of abrupt shifts in the course of societies. Such shifts have already been experienced along the history of mankind (Moutsopoulos, 1991a). Almost all of them relate to invasions of new ideas from outside into extant societies

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that, however, successfully resisted by developing proper defence systems. For example, Sophists invaded Athens during the 5th century B.C., mainly from Magna Graecia, to be combated by Socrates and his major school (Moutsopoulos, 1991b). During the subsequent imperial eras, Hellenistic and Roman as well, both of which lasted for several centuries, the Stoic and Christian cosmopolitanisms sealed the death of the ancient city-states and marked a kind of globalisation within the limits of late Antiquity (Moutsopoulos, 1967), at least in the West, before they were overrun by the installation of a strict feudal society due to the shock of barbarian invasions. The exodus of Greek scholars to the West initially instigated, then whipped the movement of the Renaissance whose spirit, although fainting, remains still alive (Moutsopoulos, 2003). The direct effect of the 19th century industrial revolution has been a lasting confusion in the realm of values, whose impact remains visible through the traces it has left upon our societies. Not only has it evolved towards other kinds of revolutions such as economic, technological and even temporarily political, but it has also extended its influence to the domain of culture as well. For example, where new conceptions of beauty and new techniques seem to definitely prevail, independently of their deviation from classical rules and precepts (Moutsopoulos, 2008). In every cultural field the unusual is searched after, in order to flabbergast. On the other hand, in societies where the principle of equal chances really dominates, people of lower culture and taste tend to favour lower forms of art, thus encouraging low-lying, though impressive, artistic productions (Moutsopoulos, 2009). The value of Truth is highly cultivated in our days by scientists, thanks to spectacular technological performances, although philosophers and other thinkers are unable to take advantage of them. Progress, though not spectacular, has been achieved in economics and bioethics. The latter fields also relate to the value of the Good, which unfortunately is suffering of gradually deteriorating conditions of respect. Parallel to the official proclamation of human rights, our globalised societies experience their everyday violation by every kind of corruption due to the acquisition of excessive power and, hence, to oppressive practices: geopolitical, such as genocides plus destructive ecological and financial activities as well, like the periodical crises which shake the whole world. It seems that the present crisis was prepared at the end of the year 2000 thanks to the adoption of a Bill that enabled the finance and trust institutions to freely operate without being subdued to any control. This turned out to be a deplorable decision of the legislative power, which is part of the State in democratic countries. Globalisation is an economic theory; in addition, a kind of ideology, and of course, a praxis, which is being tested on the grounds of its efficiency. The high risks its adoption could entail had been denounced early enough. It is the duty of each well-educated governance team, cognizant and conscious of its task, to look after the world situation in order to prevent administrative dysfunctions ranging from mere transgressions of law to catastrophic conducts. Impeccable governance presupposes an adequate preparation of the citizens destined to exert it. The classical ideal of kalokagathia (Moutsopoulos, 1995), that is, cultural competence and moral integrity is still valid today. Plato, after Damon of Oa, who lived one whole century before him, clearly indicated educational norms and methods to be followed and respected in order to make this ideal accessible to all citizens. The continuous attempt to reach such an ideal could become a guarantee not only for the quality and skill of future governances, but for the sake of globalisation and, ultimately, of the future of mankind.

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5. THE GOVERNANCE OF THE CITIES IN THE AGE OF GLOBALISATION Presentation by Alessandro Bianchi, Former Minister of Transport of the Government of Romano Prodi, Former Rector of the University of Mediterranean Studies of Reggio Calabria, Former Secretary General of the Intalian Conference of Rectors CRUI

5.1. At Present the City Lives the Third Life City life began about 5000 years ago in a country called Mesopotamia, where happened the so called “Urban Revolution” and the first city, presumably Uruk, came into the world. This new model of human settlement spread all in the World and survived until the second part of 18th century; when happened another great event, the “Industrial Revolution”, and came into the world the modern city. But a third revolution started from the second part of 19th century - the “lnformatic evolution”, so giving birth to the “postmodern city”. The main character of this new devolution is the “globalisation”, that is to say all the phenomena have a world-wide dimension.

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5.2. The Huge Increase of Population At the beginning of Modern Age (1750) there were in the World 770 million inhabitants. Only 200 years later (1950) they were 2.5 billion; at the present they are 7.0 billion and we can expect that in 2050 they will be 9.3 billion. This very enormous increase will place oneself in a different way among the various countries and will concentrate particularly on the developing countries. Summing up, in the 2050 the population will spread as follows: Asia: 58%; Africa: 21%; Latin America: 8.6%; Europe: 6.5%; North America: 4.7%. It’s a quite evident that this different distribution will involve important consequences in the economic and social relationship between the various countries of the world.

5.3. The Urban Population In the meantime also the urban population has increased very quickly. We can say the last 60 years has seen the greatest urbanisation in the world history. At present this population is already about 50% (3.5 billion) of total world population, but in 2050 urbanisation will be 70% of about 6.0 billion world inhabitants. Remaining at present time, there are 27 great metropolitan areas that have plus 10 million inhabitants. The greatest are in Asia and South America: the Great Area of Tokyo (34 million), Mexico City (23 million), San Paolo (21 million), Mumbai (20 million), Seoul (20 million), Osaka-Kobe-Kyoto (18.5 million), and New Delhi (18 million). In North America there are two: New York (18.7 million) and Los Angeles (18 million). In Europe there are four: Moscow (14 million), London (12.6 million), Ruhr (11.8 million), and Paris (11.8 million). In addition there are 40 urban areas where live more than 5 million inhabitants and another 70 where live more than 3 millions.

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5.4. Problems of Postmodern Cities This very great and quickly increasing urbansation has deeply modified the functioning and the form of the city, and given birth to many problems of governance. The principals problems are as follows: (a) Traffic congestion that involves loss of time, pollution and more costs, (b) Energy consumption: water, electric, gas, petroleum; and the resultant pollution of air, water, and soil, (c) The forma urbis, that is to say the loss of a recognisable form of the city owing to the phenomenon of urban sprawl. (d) But probably the gravest problem is the formation of boundless suburbs around the great metropolitan areas, particularly in South America and Asia. All of these issues require new forms of governance (Bianchi, 1996a, 1996b, 1998, 2001, 2003).

6. GLOBALISATION AND “GOOD GOVERNMENT”

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Presntation by Eugen Simion, President of the National Science Foundation and Art of Romania, Former President of the Romanian Academy The relationship between good governance and globalisation is one that concerns us all: economists, philosophers, politicians, authors, scientists. In order for the equation to be complete, we should discuss another element: the crisis we are going through. A crisis, principally economic, but also moral. Economists and also “futurologists” are warning us that after we get out of this financial and economic crisis (but when will it end and at what sacrifice? – nobody can tell us this) there will be another even more difficult crises: a food crisis, and after that a water crisis and lastly, a climatic crisis – even more dangerous than any of the others. Observing all these (dark) predictions, I feel that we can return to write the subject of our debate as follows: Globalisation and good government in times of multiple and extended crises… What to do? It would appear that there are ways of getting out of the economic crisis and these seem quite fruitful. A few days ago I attended an international seminar organised by our friend, Thierry de Montbrial, Founding Director of the French International Relations Institute of Marrakech …. A seminar in which participated renowned economists from all around the world, previous Heads of State and Prime Ministers, Sociologists, Press, etc. As a man of letters, I could do nothing less than listen with much attention. The news, communicated by these specialists, was not particularly optimistic. It would appear that postmodernity is not an oasis of peace and well being. We have entered, according to the sceptics, a world of uncertainty. A world, “according to a physicist and philosopher of dissipative systems”, broken down in all spheres, including in the mind. It is not for me (that is to say, I do not consider myself competent at such a level) to judge all these forms that comprise the global crisis. Since we are really talking about a global crisis

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which our planet is going through. I could say something on the crisis that is going through my field of activity (i.e. humanist culture, or, as it was called centuries ago, the “humaniorae”) and, perhaps, something on the moral crisis which is affecting us all, independently of where we live and with whom we are dealing. A crisis, above all else, of traditional values (from the family right up to the “social contract”), a crisis of human relationships, in fact a crisis of what has become to be known as: the values of the European spirit. Politics itself (the destiny of modern people) causes a crisis and has been capable of increasing the lack of confidence in the capacity to adequately manage the political aspects of society. Once again: what should we do? How can we construct “good government”? What should politicians do and, above all else, what should they not do so as to not bring in “a new dictatorship” in the world (i.e. a media dictatorship, the economic dictatorship of consumerism), a dictatorship that leads to marginalization and isolation (more so than at present) of man? To be honest right up to the end, I must say that I do not know. I do not know what we should do in order to prevent and, wherever possible, eliminate the evil that has overtaken the world. Malraux, was wont to say some decades ago that the function of a responsible intellectual is to ask questions and not give replies. Are we humanists living in a world of discussion? It is certain to say, that a well-asked question can move the world, a good question can inspire a positive solution. The only problem is that today the world (the postmodern world, post-historical – as it is commonly known – the world of “cognitive capitalism” or the world of “interpretation” – as it is commonly called by certain French sociologists) is in a hurry, it is wanting efficient solutions, stable social justice, access to high yielding technologies and, at the same time, respect for the personality of the individual, in fact, what it wants is that the process of globalisation does not identify itself with the process of normalisation… All of these normal aspirations require a “good government” on our continent and, in general, in the whole world. It is difficult to say what the face of a good government is and who would be capable of constructing the same. At this point, each one to his own “utopia”, the utopia of ideal governance. I, man of letters, also repeat my own utopia. But before doing so, let me recall a phrase from the Eulogy of Madness. Erasmus contradicted Plato with respect to ideal governance: the Republic directed by philosophers. You do remember, don’t you? I am citing again: We are going to lease the well known maxim of Plato: “The Republics will be content when the governors are philosophers or when the philosophers are governors”. If we consult history, we will see that the worst governance was, inevitably, the governance carried out by those men related to philosophy or literature. “If we think of Seneca, advisor to Nero, we have nothing further to add. The scepticism of Erasmus of Rotterdam was fully justified. Very often philosophers have become drowned in ridicule in politics. Nevertheless, before being in agreement with Erasmus, I believe that there have been capable philosopher-Ministers. Was not Malraux a Minister of De Gaulle? The condition is that the governor of the philosopher is not a mad dictator. That is to say that the philosopher must have the good fortune of being, at least, alongside an illuminated-Sovereign, if not a republican with a democratic mentality. But let us forget for a moment, this ancient utopia (the utopia of consultant philosophers!) and let us construct our own utopia of good governance in the era of information. This is how I imagine it:

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1. Good government is today, that government that ensures the prolongation and perfecting of the new construction of European policies (and this is so because we are, above all, Europeans and/or the product of the European spirit). 2. Good government should act in such a way that it can prevent world conflicts and regional conflicts, independently of their nature, those that are of a religious character are increasingly dangerous because inevitable they become irrational and, because of this, uncontrollable (this is what is happening in Iraq, Afghanistan, Kosovo). 3. It must defend human rights and guarantee the right to free thinking, of travel and criticism and, as was said by Eugene Ionesco, contradict itself. 4. An illuminated government must respect the religion of people and, at the same time, dissuade any form of intolerance. An “active tolerance”, this is the social morale that a good government must promote. 5. It must respect women and give them the same rights as men, so that women cannot be considered – as is the current slogan – “neither prostitute nor submissive”. 6. We all hope from a good government, both in the East and West, North and South that the power (politics) is just, that it be controlled by the institutions of the State and by civil associations so that it does not slide into a dictatorship including, I repeat, the dictatorship supported by the industry of the media... 7. That it accepts the idea that it is not history that is always right (neither the idea that dominates totalitarian systems, the right or the left) but man (the individual). 8. The idea that humanity takes preference over the individual is also not correct. All the abuses of a totalitarian system (for example, that in which I have lived for 50 years) are based on the mystification of the relationship between the individual and society (history), the individual and humanity. I tend to be in agreement with the author who said that if a revolution kills an innocent man, this death is against that revolution. 9. No society is good and no form of government is acceptable if it does not support culture and does not lean towards constructing a cultural nation. All we can be certain of is that nations (even Empires) that have no culture disappear in history. The danger today is the irreversible process of globalisation, which could destroy national cultures. Our national cultures are today the differences that enrich and express our identities. To end, I ask once again: what type of governance do we expect? There are many sociologists, scientists, politicians, anthropologists who are bringing new debate on the model of the European Illustration, which although defined and proposed by encyclopaedists; Kant, Hume, Voltaire, Rousseau, etc., is a model that the revolution of 1789 experimented with and deviated. Like the thinking of the aforementioned philosophers, this model represents the ideal of cultured and free man, a model of existence, where the spiritual power and temporal realism fight, and watch each other and then become allied within the framework of a “social contract”, the model for a State which is placed at the disposal of the citizens and not to the contrary, in fact, a philosophy of existence in which moralism, scientism, individualism and radical realism find themselves within the framework of the good education of the person, that they come into conflict and then finally find harmony… the Europe of today is, when all is said and done, the work of the Illustration and if this model has given rise to the excesses

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of Jacobinism (and later to the escalation of the totalitarian systems of the XXth century), it should be taken into account when talking of good governance in the Internet era. Is it possible to rehabilitate this? Can this contribute – in its current form – the happiness that man continues to hope for in spite of having passed and continuing to pass through many tragedies? But then this is altogether another subject… (Simion, 1993, 1994, 1995, 1997, 1998, 1999, 2000).

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CONCLUSION Globalisation will continue, as a result of economic reforms and the improvement in technologies that allow instant communication and transfer of intellectual knowledge across the globe (Aurifeille, Svizzero & Tisdell, 2007; Aurifeille, Medlin & Tisdell, 2009). Scientific progress is in the hands of the few, those researchers at the forefront of scientific research and the entrepreneurs and firms that support them. Thus, provided there are personal and social benefits of implementing a new technology, and social acceptance or grasping of the technology, change and globalisation will continue. Thus, the continuing development of governance structures and rules is required. Broadly, and as an important outcome of the discussions at the final forum to the FACIREM workshop, the tensions between globalisation and governance appear as a continuing need to discuss, debate and also practice and implement economic change and scientific developments with a concern for individuals. Absolutism and the search for a final solution to governance appear as a mirage. Each individual and their society, based on their values of “the True, the Beautiful and the Good”, are in a constant dance following a “musical theme [with] an indefinite number of variations, which nevertheless respect the theme’s fundamental structure” (Moutsopoulos this chapter). Governance structures, rules and insights are destined to continual adaptation and re-arrangement. Globalisation is concerned with the mobilization of resources, which remain limited, especially relative to needs. This is strongly implied by Bianchi’s presentation, as documented in this chapter. Tisdell (Chapter 3) elaborates the many reasons why resource scarcity and globalisation, especially the differentiation of structures such as firms, governments and global regions, continue to lead to practical and ethical dilemmas for managers, consumers and governments, and so why governance mechanisms must necessarily continue to adjust into the future. Globalisation leads again and again to confrontation between individuals, social groups and States over resource access and access to new technologies to resolve problems. Self and collective interests collide as broader and larger constituencies are considered. Even within the confines of a single business relationship, self and collective interest are deeply intertwined, with “no firm an island” (Håkansson & Snehota, 1989), such that self-interest requires the pursuit of collective goals (Medlin, 2006). While globalisation would appear to separate self-interest from a broader collective interest, the global nature of communication increasingly makes this separation less possible. For example an international firm’s profit motive has been known to drive untoward application of technology, however over time a wide dissemination of knowledge concerning such action has led eventually to social

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criticism and economic damage for the firm. Today, more than ever and as a result of global communication, guarding reputation can reduce the potential for crisis. Simionescu, in this chapter, believes that scientific and objective discourse can lead to good governance, able to resolve the dilemmas of continuous scientific discovery and shape the outcomes of science to benefit all people. Díez Hochleitner, also in this chapter, sees a need for “an Economy steeped in Humanity”, where individuals are educated with an understanding of human frailty so that they can make informed decisions about accepting, or not, or partially, the fruits of globalization. Science as an objective common language and education necessarily embedded within a local culture are the only means individuals and societies have for creating and changing governance, as a way to organize how globalisation influences their culture. The role of individuals and the responsibility of government in providing access to sound education are paramount for dealing with the crises that will come.

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REFERENCES Aurifeille, J-M., Medlin, C.J. & Tisdell, C. (2009) “Trust and Globalisation : an overview”, in Trust, Globalisation and Market Expansion, Nova Science Publishers, 1-6. Aurifeille, J-M., Svizzero, S. & Tisdell, C. (2007) “Globalisation and partnerships”, in Globalisation and Partnerships: Features of Business Alliances and International Cooperation, pp. 3-7. Bianchi, A. (1996a) “Alla ricerca del Piano Regolatore perduto, in AA.VV. Le nuove forme di piano”, Icaro no. 7, April. Bianchi, A. (1996a) “Verso una nuova domanda di pianificazione del territorio”, in Urbanistica Informazioni. Bianchi, A. (1998) “Frammenti. Sulla città, l’urbonistica a dintoni”, Rubbettino Bianchi, A. (2001) “Piccola biblioteca di urbanistica”. Cento libri per sapere di urbanistica. Rubbettino. Bianchi, A. (2003) “Lineamenti di un progetto territorio”, Dossier di Urbanistica Informazioni. Díez Hochleitner, R. (1998) “Aprender para el futuro: Nuevo marco de la tarea docente” Editorial Santillana. Díez Hochleitner, R. (2010) “Un educador con visión mundial: La educación, de la utopía a la realidad. Gabriel Betancur Mejía, “Elogio póstumo al fundador del ICETEX”. ICETEX, Bogotá (Colombia). Díez Hochleitner, R., Ikeda, D. (2008) “Un diálogo entre Oriente y Occidente: En busca de la revolución humana”. Círculo de Lectores S.A. Galaxia Gutenberg, 2009. Edición original en Japón, 2005. Edición en inglés: “A Dialogue between East and West”. I,B. Tauris, Londres. Håkansson, H. & Snehota, I. 1989. No Business is an Island: The Network Concept of Business Strategy. Scandinavian Journal of Management, 5 (3): 187-200. Medlin, C.J. (2006). Self and Collective Interest in Business Relationships. Journal of Business Research, 59 (7): 858-865. Moutsopoulos, E. (1960) Le problème du beau, Aix-en-Provence, Ophrys.

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Moutsopoulos, E. (1967) Creed and Reason. Roots and Development of Medieval Philosophy. Thessaloniki: Gartaganis. Moutsopoulos, E. (1977) The Itinerary of Mind, Vol. 3: Values, Athens: Hermes, Phenomenology of Values, 2nd Ed., Athens, Univ. of Athens, 1981. Moutsopoulos, E. (1974) Le problème du beau, Aix-en-Provence, Ophrys, 1960; P. BrailasArmenis, New York: Twayne. Moutsopouloss, E. (1981) Phenomenology of Values, 2nd Ed., Athens, University of Athens. Moutsopoulos, E. (1991a) Kairos. La mise et l’enjeu. Paris: Vrin. Moutsopoulos, E. (1991b) Philosophers of the Aegean. Athens: The Aegean Foundation. Moutsopoulos, E. (1995) L’idée de kalokagathia et sa fonction éthique et esthétique en Occident, Les enjeux actuels de l’éthique, Entretiens de l’Institut International de Philosophie, Tokyo, Centre International pour l’Étude Comparée de la Philosophie et de l’Esthétique, 21-34. Moutsopoulos, E. (1996) Aesthetic Categories. Athens: Arsenides. Moutsopoulos, E. (2003) Pléthon, Proceedings of the International Congress on Pletho and his Time, (Mystra) Athens. Moutsopoulos, E. (2008) Recent Processes of Creation in Contemporary Art? Philosophia (Athens) 38, 60-64. Moutsopoulos, E. (2009) Aesthetics of Ethics, Athens: Academy of Athens. Simion, E. (1993) "Moartea lui Mercutio" (Mercutio's Death). Bucarest: Editura Nemira. Simion, E. (1994) "Convorbiri cu Petru Dumitriu" (Talks with Petru Dumitriu). Editura Moldavia. Simion, E. (1995). "Mircea Eliade, un spirit al amplitudinii” (Mircea Eliade, a Spirit of Ampleness). Bucarest: Editura Demiurg. Simion, E. (1997) "Fragmente critice I. Scriitura publicã, scriitura taciturnã" (Critical Fragments. Public Writing, Taciturn Writing). Bucarest: Editura Grai y Suflet-Cultura naţională. Simion, E. (1998) "Fragmente critice II. Demonul teoriei a obosit" (Critical Fragments. The Demon of Theory is Tired). Bucarest: Fundaţia Scrisul Românesc. Simion, E. (1999) "Fragmente critice" – III” (Critical Fragments – III). Bucarest: Fundaţia Scrisul Românesc y Editura Univers Enciclopedic. Simion, E. (2000) "Fragmente critice" – IV” (Critical Fragments – IV). Bucarest: Editura Univers Enciclopedic. Tisdell, C., (2011) “Environmental Governance, Globalisation and Economic Performance”, In Globalisation: Governance and Ethics, Aurifeille, J-M., Medlin, C.J., Tisdell, C., Gil Lafuente, J. & Gil Aluja, J. (Eds), New York: Nova Science, Ch.3.

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INDEX

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A access, 33, 36, 45, 56, 60, 74, 126, 127, 129, 131, 273, 278, 288, 290, 291 accountability, 10, 20, 44, 45, 46, 47, 74, 77, 123, 205 accounting, 31, 37, 48, 137, 224, 233, 234, 253, 258 activism, 42, 86 adaptability, 108, 109, 130 adaptation, 43, 73, 109, 174, 290 advancement, 266, 282, 283 adverse effects, 234 advertisements, 150 advocacy, 69, 70 aesthetics, 272 affective reactions, 148, 149 affirming, 54, 88 Afghanistan, 289 Africa, 56, 168, 286 agencies, 46, 79, 165, 183, 204, 223, 228 aggression, 258, 270 aging population, 264 algorithm, 137, 206, 214, 242, 246, 247, 250 allocative efficiency, 27 altruism, 120, 267 ambivalence, 8, 56, 219, 222 amygdala, 267 antagonism, 268 anthropogenic global warming, 17 anthropologists, 55, 289 antisocial behavior, 268 anxiety, 268, 269 applied psychology, 94, 273 arbitrage, 240 Argentina, 42, 208, 225 arithmetic, 265 arrow of time, 129 Asia, 36, 37, 168, 175, 215, 286, 287

assessment, 23, 121, 146, 147, 148, 157, 158, 183, 215, 284 assets, 223, 225, 238, 239, 240, 241, 242, 244, 245, 246, 247, 249, 250, 270 asymmetric information, 201 asymmetry, 7, 85, 89 atmosphere, 16, 28, 31, 32, 36, 38, 260 attribution, 104, 108 audit, 47, 86, 223, 224 authorities, 86, 114, 183, 192, 204, 271 authority, 6, 26, 43, 54, 62, 87, 88, 91, 100, 101, 104, 115, 119, 123, 183, 203, 258, 263, 279 autism, 268 automobiles, 133, 161, 162 Automotive Trade Journal Co., Inc. (ATJC), 133 autonomy, 44, 59, 65, 131 aversion, 235, 237, 240 awareness, 35, 45, 154, 155, 168, 188, 264, 267

B balance sheet, 223, 226, 228, 238 Bank of England, 217 banking, 43, 208, 214, 215, 217, 260 bankruptcy, 230 banks, 133, 136, 215, 224 bargaining, 35, 94, 171, 172 basic education, 282 behavioral dimension, 185 behavioral genetics, 268 behavioral problems, 268 behaviorism, 269 behaviors, 44, 72, 73, 83, 193, 220, 223, 264, 270, 271, 272 Belgium, 189, 190 beneficiaries, 69, 73, 114 benefits, 2, 3, 8, 9, 16, 34, 35, 101, 103, 115, 117, 118, 127, 147, 158, 235, 266

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bias, 150, 222, 224, 225, 230, 270 biodiesel, 28 biodiversity, 25, 26, 28, 31, 33, 36, 39 bioethics, 285 biofuel, 36 biological processes, 283 biotechnology, 282 board members, 48, 114, 173, 221, 222, 226, 227 body schema, 274 bondholders, 8, 233, 234, 235, 236, 239, 242, 249, 253 bonds, 67, 68, 72, 239, 249 bonuses, 8, 89 brain, 263, 264, 266, 267, 268, 269, 270, 273, 274, 275, 276, 279, 282 brand image, 147, 149, 152, 153, 154, 157, 159, 160 brand perception, 149, 157 Brazil, 20, 42, 208 breast cancer, 283 Brundtland Report, 26 Bulgaria, 208 burnout, 263, 272, 274 business cycle, 217 business environment, 15 business ethics, 258 businesses, ix, 10, 15, 16, 17, 21, 28, 29, 43, 68, 69, 71, 72, 74, 76, 182, 186, 260, 279, 280, 281 buyers, 27, 29, 171

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C calculus, 267 Cameroon, 208 campaigns, 258 candidates, 270 capital expenditure, 173 capital flows, 201 capital markets, 215 capitalism, 28, 288 carbon, 17, 36 cardinal value, 284 cardiovascular disease, 283 cardiovascular system, 283 case study, 102 cash, 234, 238 causal relationship, 224, 228 causation, 266 Central Asia, 32 central nervous system, 266, 268 centralisation, 54, 124 certification, 15, 16, 19, 20 challenges, 9, 10, 41, 43, 46, 48, 63, 77, 163, 167, 273, 276, 283

changing environment, 150 Chicago, 38, 112, 142, 231, 232 Chile, 208, 214 China, 31, 32, 36, 42, 164, 165, 171, 189, 190, 208, 225, 273 circulation, 41 citizens, 34, 46, 76, 115, 270, 278, 281, 284, 285, 289 citizenship, 16, 60, 61, 263 civil society, 41, 42, 43, 44, 45, 48, 78, 280, 281 classification, 54, 69, 210, 211 clean energy, 17 climate, 15, 16, 21, 23, 31, 76, 121, 192, 281, 283 climate change, 15, 16, 21, 23, 31 clinical psychology, 275 closed economy, 257 clothing, 165, 173, 187 cluster analysis, 207 CO2, 16, 30 coal, 17 coercion, 87 cognition, 148, 263, 268, 269, 272, 274 cognitive dissonance, 267 cognitive function, 266, 267, 270 cognitive process, 266, 272 cognitive processing, 272 cognitive psychology, 265, 267 cognitive science, 264, 265, 268 coherence, 44, 47, 62 collaboration, 65, 268, 270 Colombia, 208, 291 colonial powers, 5, 58 colonisation, 53, 54, 56, 61 commerce, ix, 181, 182, 183, 192, 194, 280, 281 commercial, 7, 60, 72, 78, 125, 127, 131, 132, 225, 266, 280 commodity, 27, 28, 29 Common Market, 43 communication, x, 6, 7, 43, 89, 108, 150, 167, 226, 283, 290 community, 1, 5, 20, 21, 28, 38, 42, 44, 45, 54, 55, 58, 59, 60, 61, 62, 70, 71, 73, 74, 77, 80, 81, 113, 114, 115, 122, 183, 212, 259, 282 comparative analysis, 69 Comparative Fit Index, 111 compensation, 59, 223, 234, 249, 253 competition, 11, 27, 28, 29, 38, 100, 101, 105, 123, 127, 128, 164, 170, 171, 172, 176, 231 competitive advantage, 74 competitiveness, 20, 130, 164 competitors, 164, 171, 280 complement, 6, 102, 221 complex interactions, 202, 268

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Index complexity, 1, 43, 44, 46, 47, 72, 108, 164, 185, 219, 220, 230, 267, 269, 280 compliance, 17, 22, 36, 45, 101, 207 comprehension, 279 computer, 6, 152, 167, 271 conception, 8, 55, 56, 57, 62, 66, 222, 229, 230 conceptualization, 176 conciliation, 59 conflict, 2, 11, 39, 42, 47, 59, 83, 84, 205, 208, 270, 278, 289 Congo, 208 Congress, 77, 275, 292 congruence, 86, 147 consciousness, 62, 266, 269, 273, 278, 281, 284 consensus, 21, 22, 27, 45, 184, 185, 201, 203 conservation, 32, 39 consolidation, 47, 179 construction, 15, 59, 207, 289 consumer choice, 193 consumer protection, 20 consumers, ix, 7, 10, 21, 23, 28, 117, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 156, 157, 158, 159, 165, 166, 172, 177, 181, 182, 183, 184, 185, 187, 188, 191, 192, 193, 272, 290 consumption, 3, 4, 23, 44, 48, 49, 165, 182, 184, 258, 287 controversial, 20, 21, 234, 235 Convention on Biological Diversity (CBD), 33 Convention on International Trade in Endangered Species (CITES), 33 convergence, 43, 47, 57, 92, 220, 228, 269 conviction, 78, 173 cooperation, 2, 31, 85, 91, 104, 128, 186, 200, 203, 204, 270, 280, 281 coordination, 3, 6, 31, 45, 78, 88, 99, 100, 101, 102, 104, 105, 106, 107, 108, 109, 116, 131, 169, 174, 220, 257 corporate governance, 6, 8, 46, 47, 48, 83, 84, 85, 86, 90, 92, 93, 113, 114, 116, 119, 122, 124, 172, 175, 219, 220, 221, 222, 223, 224, 226, 227, 228, 229, 230, 231, 232, 234, 249, 272, 275 correlation, 106, 125, 132, 137, 138, 139, 209, 223, 228, 229, 230 corruption, 17, 29, 46, 259, 285 cortex, 267, 275 cortisol, 271 cost, x, 35, 46, 71, 100, 101, 102, 109, 117, 118, 151, 152, 166, 168, 221, 234, 236, 260, 283 costs of compliance, 22 country of origin, 61, 171, 174 credit rating, 216, 223, 227

295

crises, ix, x, 2, 3, 8, 10, 46, 49, 199, 200, 201, 202, 203, 206, 208, 212, 213, 214, 215, 216, 217, 258, 284, 285, 287, 291 critical analysis, 6 critical period, 231 criticism, 62, 63, 102, 221, 289, 291 cross-ownership, 6 CRR, 236, 237, 238, 239, 240, 241, 242, 243, 244, 248 cultural differences, 166, 169, 174 culture, 1, 29, 41, 44, 46, 55, 58, 61, 62, 63, 66, 69, 73, 79, 166, 187, 225, 259, 269, 275, 278, 279, 281, 282, 285, 288, 289, 291 currency, 208, 213, 216 current account, 202, 234 Customary Law, 60 customer loyalty, 184 customers, 45, 100, 119, 120, 127, 128, 129, 145, 186

D Dalai Lama, 258, 261 damages, 27, 31, 34, 117 danger, 7, 289 data, 126, 133, 141, 182 debt service, 205 decentralisation, 44 decision makers, 3, 115, 225 decision-making process, 117, 150 decoding, 271 defendants, 269 deficiencies, 273 deforestation, 36 degradation, 70 dementia, 264 democracy, 43, 46, 56, 61, 78, 80, 258, 280 Democrat, 270 demography, 232 demonstrations, 71 Department of Homeland Security, 269 dependent variable, 105, 107, 208, 211, 212, 219, 226 Depletion of shared water resources, 32 depression, 268 destiny, 288 detection, 272 devaluation, 208 developed countries, 36, 151, 174, 283 developing countries, 22, 31, 36, 44, 151, 216, 286 development assistance, 62 development policy, 124 developmental disorder, 268

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Index

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devolution, 286 diabetes, 283 diffusion, 48, 165, 170 digital divide, 43 dignity, 115, 122 dimensionality, 229 diminishing returns, 118 direction control, 7 directors, 3, 47, 83, 86, 89, 91, 122, 170, 172, 173, 220, 221, 222, 227, 229, 230, 232, 234, 280 disclosure, 16, 224 discriminant analysis, 206, 207, 211, 212, 217 discrimination, 59 diseases, 264, 283 disequilibrium, 76 dispersion, 225 disposition, 119, 139 distortions, 200, 201, 202 distress, 215 distribution, 9, 17, 43, 86, 115, 117, 164, 165, 168, 190, 225, 237, 240, 249, 260, 286 distribution of income, 86 diversity, 7, 8, 26, 42, 43, 53, 54, 59, 62, 69, 78, 220, 281 domestic factors, 214 dominance, 270, 271 dominant firm, 103 donations, 69, 72, 73 donors, 5, 60 duality, 62, 231 dyslexia, 267

E early warning, 204, 214, 215, 216, 217 earnings, 223, 229, 234 East Asia, 175, 214, 216, 232 Eastern Europe, 175 e-commerce, 182, 183, 184, 187, 192 economic activity, 3, 25, 28, 31, 33, 38, 46 economic change, 278, 290 economic crisis, 43, 68, 76, 150, 151, 219, 220, 221, 227, 230, 234, 287 economic damage, 291 economic development, 4, 15, 16, 21, 25, 68, 81, 193 economic efficiency, 72 economic fundamentals, 200 economic globalisation, 11, 25, 26, 27, 30, 31, 33, 35, 38, 39, 43, 201 economic growth, 25, 26, 30, 31, 33, 35, 38, 42, 260 economic independence, 229 economic performance, 26, 27, 72, 231 economic reform, 290

economic systems, 2, 4, 27, 28 economic theory, 124, 272, 285 economic welfare, 34, 38 economics, 34, 39, 101, 120, 185, 213, 234, 259, 272, 285 economies of scale, 168 ecosystem, 80 Ecuador, 208 education, 10, 59, 69, 263, 267, 276, 279, 281, 282, 289, 291 egalitarianism, 274 Egypt, 172, 208 El Salvador, 208 election, 37, 270 electroencephalogram, 269 electronic trade, 7 elementary school, 267 emission, 31, 32, 37 emitters, 31 emotional state, 150, 270 empathy, 267, 271 empirical studies, 235, 237, 241 employee stock option (ESO), 233, 234 employees, 2, 45, 46, 93, 114, 115, 117, 118, 119, 120, 121, 122, 221, 227, 229, 230, 236, 237, 239, 240, 248, 249, 257, 259, 264, 271 employment, 44, 67, 117, 118 energy, 17, 44, 46, 48, 49, 260 enforcement, 26, 36, 62, 107, 183 entrepreneurs, 67, 68, 71, 73, 74, 76, 77, 78, 120, 122, 290 environment, 2, 3, 4, 11, 16, 20, 22, 30, 31, 47, 48, 62, 63, 69, 70, 77, 120, 126, 148, 174, 181, 182, 183, 185, 186, 187, 192, 269, 282, 283 environmental conditions, 15, 38 environmental factors, 265, 267 environmental impact, 21, 34 environmental issues, 25, 33, 114, 166 environmental protection, 16, 42 equality, 57, 59, 78, 209 equilibrium, 54, 59, 120 equipment, 126, 127, 147, 273 equity, 45, 68, 123, 238, 272, 273 error detection, 267 Employee Stock Option (ESO), vi, 8, 233, 234, 235, 236, 237, 238, 239, 240, 241, 242, 244, 245, 246, 247, 248, 249, 250 Estonia, 208 ethics, 3, 9, 115, 122, 123, 124, 257, 258, 259, 260, 263, 270 ethnic groups, 273 ethnicity, 187

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Index Euromoney index, 199, 200, 204, 205, 206, 207, 208, 209, 210, 212 Europe, 36, 65, 150, 151, 168, 174, 181, 187, 273, 283, 286, 289 European Commission, 44 European style, 245 European Union (EU), 1, 6, 37, 42, 43, 50, 114, 165, 273 evidence, 3, 31, 102, 105, 109, 136, 145, 176, 177, 207, 213, 217, 221, 265, 269, 275, 276 evil, 115, 259, 288 evolution, ix, 20, 43, 45, 54, 68, 71, 73, 146, 151, 154, 155, 175, 201, 203, 213, 266, 280, 286 exercise, 26, 29, 45, 56, 119, 234, 237, 238, 239, 240, 248, 249, 258, 281 expertise, 87, 221 exploitation, 2, 11, 33 exposure, 235, 272 external environment, 34 external growth, 146 externalities, 28, 34 extrinsic motivation, 120

297

fixation, 234 fixed costs, 168 flexibility, 36, 44 folklore, 178 food, 44, 167, 177, 178, 179, 287 force, 21, 31, 33, 37, 49, 58, 62, 67, 78, 90, 139, 260 foreign investment, 16 formation, 6, 150, 270, 279, 280, 287 formula, 236, 238, 240 foundations, 16, 77, 122, 123, 124, 258, 263, 269, 272, 280 framing, 16, 132, 274 France, 1, 7, 8, 9, 20, 42, 46, 53, 56, 67, 83, 99, 145, 151, 158, 163, 165, 181, 182, 219, 225, 227, 230, 233, 263, 264, 275 franchise, 165, 172, 176 freedom, 43, 61, 92, 106, 122, 183, 190, 207, 211, 280 fruits, 291 full employment, 38 functional imaging, 273 funding, 264, 273, 283 fundraising, 74

F

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G FACIREM (Franco-Australian Centre for International Research in Economics and Management), ix factor analysis, 224, 228 faith, 77, 258, 267 families, 74, 115 fascia, 171 feelings, 35, 90, 92 financial capital, 201 financial community, 204 financial crisis, 49, 201, 202, 213, 214, 215, 216, 278, 280 financial institutions, 46, 133, 136, 202 financial intermediaries, 133, 136 financial liberalisation, 201 financial markets, 29, 199, 200, 201, 202, 217, 257 financial performance, 8, 10, 219, 220, 223, 225, 228, 229, 230, 232 financial regulation, 214, 234, 249 financial resources, 74, 133, 225 Financial Services Authority, 217 financial stability, 203 financial system, 8, 77, 202, 203, 204, 214 financial vulnerability, 215 firm value, 173, 238 fiscal policy, 203 fishing, 32 fitness, 274

General Motors, 147 genes, 267 genetics, 270, 282 geographical mobility, 30 geography, 41, 43 Germany, 20, 46, 171, 214, 220, 222, 226, 230, 232 global climate change, 283 Global Compact, 16, 23 global competition, 145 global consequences, 273 global economy, 44, 123, 199, 200, 219, 258, 259 Global Financial Crisis (GFC), 3, 278 global scale, 42, 43, 150, 152 global warming, 17, 26, 31, 37 globalised world, 3, 10, 42, 169, 200, 213, 258, 260 globalization, 68, 71, 76, 177, 178, 216, 219, 220, 224, 225, 226, 227, 229, 230, 231, 234, 249, 271, 291 goods and services, 70, 118, 181 government intervention, 33 government spending, 46 governments, 1, 4, 9, 10, 17, 20, 26, 28, 33, 42, 43, 61, 67, 68, 73, 74, 76, 77, 78, 80, 224, 234, 273, 280, 283, 284, 290 governor, 288 grants, 72, 74, 234, 264 graph, 6, 126, 132, 133

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grassroots, 67, 71, 74, 78, 79, 80 gravity, 54, 59 Great Depression, 76 Greece, 208, 277 Green Paper, 16, 17, 22 greenhouse, 25, 28, 31, 35, 36, 37, 38, 283 gross domestic product (GDP), 17, 30, 150, 205 growth, 10, 25, 26, 27, 30, 31, 38, 84, 90, 91, 92, 109, 117, 132, 150, 202, 205, 263, 264, 273 guidelines, 15, 16, 19, 20, 47, 257, 258 Guinea, 63 Guyana, 208

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H happiness, 290 harmonization, 25 harmony, 16, 22, 280, 289 harvesting, 32 hazards, 100, 126, 130, 273 health, 44, 69, 70, 78, 184, 282, 283, 284 health insurance, 78 health risks, 282 health services, 283 heterogeneity, 8, 68, 181, 186, 224 history, 5, 187, 190, 220, 222, 258, 264, 278, 282, 284, 286, 288, 289 HIV, 283 hominids, 265 homogeneity, 207 Honduras, 208 hormones, 268 host, 165, 174 hostilities, 264 housing, 69, 202 human activity, 25 human behavior, 3, 102, 266, 272 human capital, 1 human cognition, 272 human development, 20 human genome, 265, 267, 282 human health, 283 human interactions, 42 human psychology, 264 human resources, 71, 72 human rights, 16, 20, 45, 59, 285, 289 human welfare, 9, 25 humanism, 279 hybrid, 21, 44, 102, 220 hypothesis, 83, 85, 87, 120, 132, 137, 138, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158, 191, 207, 210, 211, 228, 230, 274

I ideal, 6, 34, 57, 59, 99, 100, 102, 104, 105, 107, 108, 285, 288, 289 identical twins, 265 identification, 100, 120, 122, 126, 130, 222, 235 identity, 43, 58, 59, 62, 63, 265, 266, 279 ideology, 77, 178, 285 idiosyncratic, 89 image, 20, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158, 171, 184 imbalances, 48, 49, 199, 200, 202, 208 immigrants, 46, 48 imports, 36, 37 improvements, 163, 165, 170, 174, 220 in transition, 123 in vivo, 264, 270 income, 38, 72, 74, 119 increased competition, 9 independence, 5, 47, 59, 63, 72, 74, 78, 220, 221, 224, 227, 229, 230 independent variable, 206, 208, 212 India, 31, 36, 42, 173, 176, 208, 274 individual action, 114, 116 individualism, 90, 289 individuation, 269 Indonesia, 28, 32, 42, 123, 208 industrial revolution, 285 industrialisation, 44 industrialized countries, 264 industry, 6, 21, 127, 150, 260, 289 inefficiency, 212 inequality, 59, 78, 215 infection, 283 inflation, 202, 203, 205, 214 information processing, 266 information sharing, 125 information technology, 167, 176, 177, 186 infrastructure, 166, 190 inheritance, 58 institutional change, 76 institutions, ix, 11, 15, 16, 20, 21, 22, 43, 45, 46, 49, 55, 57, 61, 68, 73, 76, 77, 79, 101, 102, 113, 114, 115, 122, 133, 136, 204, 206, 217, 260, 279, 285, 289 integration, 16, 41, 42, 43, 201 integrity, 186, 259, 264, 285 intelligence, 271, 274 intentionality, 266, 267 Inter-American Development Bank, 45 interdependence, x, 15, 27, 42, 44, 68, 88, 127, 131, 201, 279 interest groups, 36

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Index

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interest rates, 202 interference, 272 Intergovernmental Panel Climate Change (IPCC), 17 internal consistency, 152 internal processes, 258 internalization, 121, 175 international financial institutions, 203 International Labour Organisation, 20 International Monetary Fund (IMF), 59, 183, 43, 201, 202, 203, 215, 216 international relations, 42 international shared water resources, 32 International smoke haze and drift of particulate matter, 32 international trade, 33, 194 International transmission of acid rains, 32 internationalization, 175, 224, 231, 232 interpersonal interactions, 84 interrogations, 273 intervention, 34, 42, 44 intrinsic motivation, 121 intrinsic value, 234 investment(s), 16, 29, 30, 83, 85, 114, 127, 129, 174, 194, 201, 202, 217, 222, 224, 226, 238, 253, 260 Iran, 208 Iraq, 289 iron, 73 islands, 53, 56, 60, 279 isolation, 58, 288 Israel, 20, 208 Italy, 20, 42, 277

J Jamaica, 208 Japan, 20, 32, 42, 125, 132, 133, 141, 169, 226, 273 Japan Automotive Parts Industries Association (JAPIA), 133 job satisfaction, 120 joint ventures, 146, 172, 220 jurisdiction, 47, 183, 192 justification, 63, 192

K keiretsu, 126, 132, 133, 137, 138, 139, 141, 232 Kenya, 208 Korea, 32, 177 Kosovo, 289 Kyoto Protocol, 16, 23, 31, 36

299

L labor market, 44 lack of confidence, 288 lack of control, 260 land tenure, 60 landscape, 179, 280 languages, 58, 279 Latin America, 286 law(s), 3, 5, 7, 9, 10, 21, 26, 28, 45, 54, 55, 56, 57, 58, 59, 63, 77, 113, 114, 183, 220, 222, 226, 259, 263 lawyers, 55 lead, 2, 16, 36, 49, 69, 84, 89, 91, 105, 109, 114, 118, 121, 128, 131, 132, 138, 159, 163, 173, 201, 213, 237, 248, 282, 284, 290, 291 leadership, 2, 47, 77, 79, 80, 104, 263, 271, 274, 281 learning, 116, 117, 118, 119, 122, 169, 265, 268, 271, 272 Lebanon, 172 legal protection, 183 legislation, 54, 56, 62, 170 lending, 46, 202, 205, 216 liberalisation, 30, 169, 170, 172, 201, 234 liberalism, 63, 259 life expectancy, 264 life sciences, 264, 283 limited liability, 238, 239 linear function, 241 liquidity, 205, 208 Lithuania, 208 livestock, 26 local authorities, 56, 57 local conditions, 10, 166, 169, 174 logistics, 168, 174 longitudinal study, 227 love, 267 loyalty, 28, 121, 186, 195 Luo, 220, 223, 232

M macroeconomics, 215 magnetic resonance, 275 major depression, 268 Malaysia, 28, 105, 208, 210, 211 management, 4, 10, 15, 16, 17, 20, 21, 26, 28, 29, 30, 41, 42, 43, 44, 46, 47, 70, 71, 72, 79, 80, 83, 84, 86, 92, 94, 100, 101, 108, 113, 114, 119, 124, 163, 164, 165, 168, 172, 173, 174, 175, 177, 200, 213, 214, 253, 260, 264, 266, 271, 275, 280, 284 manic, 268

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

300

Index

manufacturing, 132, 174 marginal external cost, 34 marginalization, 288 market access, 127 market capitalization, 223, 227 market economy, 45 market failure, 26, 35, 114, 202 market position, 170 market segment, 174 market share, 186 market structure, 35 marketing, 71, 72, 73, 131, 146, 148, 149, 150, 151, 152, 157, 158, 160, 162, 166, 168, 185, 266, 267, 272, 275 mass, 42, 165, 182, 280 material resources, 119 matrix, 106, 133, 209 Mauritius, 189, 190 measurement, 3, 8, 105, 106, 135, 147, 162, 164, 167, 202, 207, 228, 234, 266 media, 214, 268, 270, 271, 282, 288, 289 Mediterranean, 194, 277, 286 Mekong River Basin, 32 membership, 38, 230 memory, 60, 157, 267 mental disorder, 264, 268 mental health, 274 mental illness, 268 mental life, 272 mental processes, 264 merchandise, 183, 187 MERCOSUR, 43 mergers, 146, 253 Mesopotamia, 286 messages, 148, 192, 279 meta-analysis, 186 methodological procedures, 150 methodology, 126, 159, 182, 201, 232 metropolitan areas, 286, 287 Mexico, 23, 189, 190, 208, 286 military, 42, 259 Minneapolis, 274 minorities, 45, 67 minority groups, 268 mobile phone, 282 modelling, 3, 10, 212 models, 8, 10, 21, 44, 55, 65, 71, 85, 94, 159, 163, 200, 213, 215, 217, 236, 239, 240, 266, 270 Modern Age, 286 modern economies, 27, 38 modern society, 68, 281, 282 modernisation, 53 modernity, 287

Moldavia, 292 monetary policy, 202, 203 monopoly, 57 Montreal Protocol, 23, 32 moral hazard, 201 morale, 289 morality, 267, 271 Morocco, 208 mortality, 283 Moscow, 286 motivation, 116, 118, 120, 121, 124 MRI, 271 multidimensional, 20, 186 multilateralism, 42, 46 multinational companies, 10, 16, 204 multinational corporations, 9 multinational firms, 220, 222 multiple factors, 62 multivariate analysis, 216, 217 multivariate distribution, 207 multivariate statistics, 217 murder, 269 muscles, 267 museums, 282

N NAFTA, 43 national borders, 32 national culture, 177, 289 national identity, 59 National Institute of Mental Health, 273 nationalism, 259, 260 natural disasters, 5 natural resources, 26, 29, 30, 33, 225 natural sciences, 10, 265 negative consequences, 20, 28, 145, 146, 147, 148, 149, 153, 154, 159, 184, 200, 230 negative effects, 26, 213 negative relation, 191, 192 nervous system, 266 Netherlands, 217 network members, 127, 129 neural networks, 217, 266 neurobiology, 268, 274 neurogenesis, 274 neuroimaging, 275, 276 neurophysiology, 269 neuropsychiatry, 268 neuroscience, 9, 263, 264, 265, 266, 267, 268, 269, 270, 271, 272, 274, 275, 276 neurotransmitters, 268 New Zealand, 5, 53, 59, 61, 65, 105, 225

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Index Non-government organizations (NGOs), 10, 46, 71 Nigeria, 208 Nile, 32 Niue, 61 nodes, 126, 136, 248 non-profit organizations (NPOs), 67 North American Free Trade Agreement, 43 nuclei, 267, 280 null hypothesis, 206, 209

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O Obama, 76, 77, 78, 270 obesity, 283 objectivity, 57, 264, 284 obstacles, 173 oil, 17, 36, 39, 49 one dimension, 122, 228 opacity, 202 Opel, 147 open economy, 260 openness, 44, 224 operations, 4, 16, 26, 27, 117, 119, 164, 173, 225, 231 opportunism, 85, 90, 102 opportunities, 10, 39, 61, 63, 75, 91, 283 optimization, 225, 241, 250 organizational learning, 232, 272 outsourcing, 101, 194 ownership, 7, 29, 30, 42, 61, 94, 125, 135, 137, 138, 139, 140, 175, 225, 229, 232, 253 ozone, 25, 32

P Pacific, 5, 53, 56, 57, 58, 59, 60, 61, 62, 63, 65, 66, 194 palm oil, 28, 36, 37 paradigm shift, 45, 48, 49, 94 Paraguay, 208 participants, 2, 9, 68, 86, 201 peace, 59, 279, 281, 287 Pearson correlations, 190 perfectly competitive markets, 27 performance indicator, 132 permit, 68, 74, 89, 271 personal contact, 115 personal goals, 88 personal values, 115, 220 persuasion, 186, 263 Peru, 208 petroleum, 287

301

physical laws, 265 physiology, 263 piracy, 43 plant growth, 32 plants, 6, 48, 283 platform, 17, 43, 281 Plato, 285, 288 pluralism, 9, 53, 54, 55, 57, 58, 59, 62, 63, 263, 274, 279 pluralist society, 56 pluralistic law, 5 Poland, 208 polarization, 215 policy, 17, 42, 63, 70, 77, 94, 165, 167, 202, 203, 215, 283 political aspects, 288 political leaders, 17, 62, 78 political legitimacy, 49 political parties, 71 political power, 42, 63 political system, 25, 63 politics, 44, 50, 69, 77, 205, 257, 259, 260, 288, 289 pollution, 30, 31, 33, 34, 35, 283, 287 popular support, 46 population, 17, 48, 61, 67, 182, 207, 224, 264, 268, 282, 283, 286 positive correlation, 230 positive relationship, 191, 192 potential Paretian improvement, 34, 35 poverty, 41, 46, 70, 78, 281 power generation, 49 power relations, 42, 45, 48, 87, 88, 92, 93 predictability, 8, 200, 213 prediction models, 213 prefrontal cortex, 267 President, 9, 38, 77, 259, 260, 264, 277, 278, 281, 284, 287 price effect, 235, 237, 249 price stability, 203 primacy, 265 principles, 15, 16, 43, 44, 47, 48, 56, 79, 114, 115 priori dimensions, 223, 224 private firms, 278 probability, 106, 138, 186, 209, 211, 228, 229, 239, 243, 247, 250 producers, 34, 36, 48, 49, 54, 225 production costs, 74 production technology, 127 productivity growth, 175 profit, v, 1, 2, 5, 28, 29, 34, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 99, 100, 102, 104, 107, 108, 109, 111, 116, 118, 120, 126, 127, 130,

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

302

Index

132, 137, 138, 139, 167, 186, 225, 226, 258, 260, 278, 282, 290 profitability, 6, 8, 30, 117, 118, 122, 125, 130, 131, 132, 164, 223, 226, 230, 231, 232, 280 programming, 240, 241 project, 56, 69, 71, 78 property rights, 33, 39, 84, 90 proposition, 6, 168, 170, 175, 225 prosperity, 16, 21, 203, 280 protection, 41, 49, 62, 70, 90, 191, 235, 280 prudential regulation, 204 pseudo-pluralism, 55 psychiatry, 268, 274 psychoanalytic theories, 268 psychology, 28, 185, 265, 267, 269, 271, 276 public administration, 42 public affairs, 41, 44 public corporations, 30 public goods, 26, 33 public policy, 165, 203 public sector, 69, 71, 72 public service, 70 publishing, 132

Q

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quality of life, 16, 21 Quartz, 272, 275 quasi-government, 1 questioning, 84, 270

R race, 270 racism, 70 radiation, 32 rape, 59 rationality, 128, 260, 275 raw materials, 127, 133 reactions, 122, 147, 148, 265, 270 reading, 270, 272 real estate, 202 real time, 44 realism, 122, 289 reality, 23, 43, 47, 59, 128, 200, 213, 269, 273, 278, 279, 284 reasoning, 87, 90, 119, 265 recall, 42, 267, 272, 288 recession, 76, 145, 214 reciprocity, 88, 90, 123 recognition, 54, 55, 56, 59, 63, 129, 192, 274 recommendations, 16, 47, 233, 268

recycling, 280 reductionism, 57 reform, 17, 36, 46, 76, 78, 203, 216 regional integration, 43 regions of the world, 26, 42 regression, 106, 199, 200, 206, 207, 209, 210, 211, 212, 213, 216, 231 regulations, 34, 37, 41, 43, 77, 170, 171, 172, 174, 181, 186, 234, 258 regulatory framework, 46, 202 regulatory requirements, 20 relationship maintenance, 107 relevance, 21, 44, 73, 76, 91, 200, 212, 213, 272 reliability, 224, 269 religion, 69, 187, 289 religious beliefs, 189 REM, 227 renaissance, 279 renewable energy, 49 reproduction, 65 reputation, 17, 147, 151, 291 requirements, 3, 20, 47, 89, 90, 118, 227 researchers, ix, 163, 166, 167, 186, 207, 215, 225, 265, 269, 270, 271, 272, 273, 282, 290 reserves, 223 resilience, 172, 263, 271, 272 resistance, 68, 73, 172, 271, 279 resolution, 4, 16, 35, 55, 107, 108, 109 resource(s), 1, 3, 11, 22, 29, 30, 32, 33, 39, 48, 49, 61, 65, 67, 68, 72, 73, 74, 87, 89, 100, 101, 102, 104, 108, 117, 126, 127, 128, 129, 130, 131, 133, 186, 201, 220, 269, 270, 271, 290 response, 58, 79, 90, 92, 105, 116, 165, 173, 217, 267 restrictions, 36, 37, 59, 226 restructuring, 175 retail, 7, 163, 164, 165, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179 rhetoric, 62 rights, 20, 55, 56, 57, 58, 60, 61, 62, 84, 85, 86, 114, 115, 122, 173, 176, 223, 258, 284, 289 risk assessment, 214, 217 risk aversion, 222, 249, 263 risk management, 232 risk perception, 185 risk-taking, 249 RMSEA, 106, 152, 190, 228, 229 Romania, 277, 287 Rouleau, 86, 95 Royal Academy of Economic and Financial Sciences, ix, 1, 38, 41, 257 rule of law, 114

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Index rules, 1, 7, 9, 20, 22, 25, 26, 42, 43, 44, 47, 54, 55, 57, 59, 73, 74, 76, 88, 100, 115, 122, 172, 183, 186, 192, 202, 213, 219, 220, 221, 222, 223, 224, 226, 227, 231, 234, 257, 259, 285, 290 Russia, 42, 46, 208

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S safety, 43, 283 Samoa, 60 sanctions, 36 Saudi Arabia, 42, 208 savings, 258 scale economies, 177 Scandinavia, 274 scarcity, 26, 60, 290 schemata, 267 schizophrenia, 268 school, 265, 272, 279, 285 science, x, 10, 94, 100, 257, 263, 266, 267, 270, 272, 273, 275, 276, 279, 281, 282, 283, 284, 291 scientific progress, 9 scientific publications, 264, 273 sea-level, 31 second language, 279 securitisation, 215 security, 3, 8, 20, 60, 61, 223, 226, 230, 231, 239, 258 seed, 77 self-control, 121 self-discipline, 202 self-esteem, 184 self-interest, 2, 4, 107, 127, 130, 131, 290 self-regulation, 45 sensitivity, 45, 207, 279 sexual assaults, 59 shareholders, 2, 5, 10, 30, 45, 46, 47, 83, 84, 85, 86, 87, 89, 90, 91, 92, 93, 118, 145, 146, 173, 219, 220, 221, 222, 223, 224, 225, 226, 229, 230, 234, 249, 260, 264, 280 signals, 173, 187, 235, 257 significance level, 211 Singapore, 32, 39, 105 single market, 105 skin cancer, 32 Slovakia, 208 sociability, 271 social acceptance, 290 social behavior, 55, 120, 123 social benefits, 290 social capital, 70, 73, 74, 79, 80 social change, 80, 281 social class, 63

303

social cognition, 276 social consequences, 28, 38 social contract, 288, 289 social development, 20, 280 social group, 11, 28, 54, 55, 59, 122, 290 social hierarchy, 274 social institutions, 74, 265 social interactions, 186 social justice, 288 social learning, 269 social network, 42, 89 social norms, 73, 268 social order, 54, 56, 115 social organization, 79 social phenomena, 265 social problems, 67, 72, 282 social psychology, 28, 120, 270, 271 social relations, 260, 271, 286 social responsibility, 17, 20, 28, 280 social sciences, 263 society, 17, 21, 41, 42, 45, 46, 48, 49, 54, 55, 57, 59, 61, 62, 63, 67, 68, 70, 71, 72, 73, 75, 114, 115, 122, 139, 257, 258, 259, 260, 272, 278, 280, 281, 282, 283, 284, 285, 288, 289, 290 sociology, 55, 120, 263, 266, 269 Socrates, 285 solidarity, 68, 70, 78, 271, 273, 279, 280, 281 Solomon I, 63 solution, 11, 26, 35, 49, 86, 90, 119, 203, 208, 250, 288, 290 South Africa, 208 South America, 286, 287 South Korea, 169, 170, 208, 210, 211 South Pacific, v, 5, 53, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65 Southeast Asia, 32, 36, 37 sovereignty, 36, 43, 55, 65, 203 Spain, ix, 1, 4, 8, 9, 15, 21, 41, 43, 46, 47, 113, 199, 219, 257, 277 specialization, 54, 231 species, 28, 32, 33, 265 speech, 77, 261 spillover effects, 215 spillovers, 28, 33, 35 stability, 42, 54, 147, 155, 157, 186, 205, 214, 217, 226 stakeholders, 2, 6, 10, 15, 16, 47, 73, 74, 78, 90, 114, 117, 118, 119, 120, 121, 122, 219, 221, 222, 263, 264, 280 standard of living, 260 state laws, 58 statistics, 152, 167, 181, 210, 225, 268 stock exchange, 89, 90, 258

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

304

Index

stock price, 234, 235, 237, 239, 240, 241, 244, 245, 246, 247, 248, 249 stock value, 240, 248, 249 stockholders, 8, 233, 234, 235, 236, 238, 239, 242, 245, 253 strategic planning, 71 strategic position, 128 stress, 10, 184, 268, 271, 274 structural changes, 200, 203 structure, 3, 38, 42, 69, 84, 101, 106, 119, 122, 125, 126, 127, 128, 129, 135, 139, 164, 182, 187, 222, 226, 227, 228, 229, 230, 232, 253, 284, 290 style, 48, 49, 187, 233, 238, 240, 242, 245, 249 supervision, 47, 83, 86, 90, 92, 93, 201 supervisors, 199, 200, 202, 204 suppliers, 45, 114, 117, 119, 120, 122, 133, 136, 137, 164, 168, 171, 172, 280 supply chain, 29, 164, 168, 172, 174, 177 surveillance, 10, 84, 92, 204 survival, 28, 58, 61, 117, 118, 124, 192 sustainability, 4, 15, 16, 17, 18, 19, 20, 21, 22, 38, 39, 41, 46, 47, 67, 78 sustainable development, 15, 16, 17, 21, 22, 26, 42, 45, 71, 115, 281 sustainable economic growth, 26 syndrome, 7, 268, 272 synthesis, 54, 204, 232 Syria, 208 systemic risk, 201, 202, 203, 215

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T tax system, 203 taxation, 235 taxes, 33, 225 technical efficiency, 74 techniques, 21, 72, 107, 168, 203, 204, 217, 264, 265, 266, 267, 269, 270, 271, 273, 285 technological progress, 280 technology(ies), 2, 4, 41, 43, 125, 167, 278, 279, 281, 282, 283, 290 telecommunications, 43, 260 telephone, 105 tendons, 267 tension(s), 5, 9, 48, 49, 58, 60, 71, 205, 290 territorial, 32, 33, 43, 50, 56, 59, 113 territory, 42, 57, 58, 59, 60 terrorism, 281 testing, 8, 145, 189, 269 testosterone, 271 Thailand, 208 theoretical approaches, 164 thesaurus, 283

threats, 148, 165, 171 time frame, 240 time series, 139 total factor productivity, 176 Toyota, 6, 11, 125, 126, 132, 133, 134, 135, 136, 137, 138, 139, 141 tradable permits, 33 trade, 33, 36, 44, 62, 118, 165, 177, 187, 188, 201 trading partners, 183 traditional views, 166 traditions, 62, 187, 189 training, 279, 280 traits, 181, 220, 222 transaction costs, 85, 101, 126, 187, 221 transactions, 101, 102, 104, 126, 181, 182, 183, 185, 187, 234 transformation(s), 48, 50, 176 transparency, 45, 46, 47, 114, 260 transplantation, 275 treatment, 21, 54, 234, 270 Trinidad, 208 trustworthiness, 192 Turkey, 42, 208

U unification, 62 unions, 69 United Kingdom (UK), 12, 20, 32, 39, , 42, 46, 80, 141, 163, 167, 175, 177, 178, 202, 214 United Nations (UN), 1, 16, 20, 23, 24, 31, 33, 38, 45, 46 United Nations Conference on Environment and Development (UNCED), 16 United Nations Framework Convention on Climate Change (UNFCC), 31 Universal Declaration of Human Rights, 20 universality, 62, 273 University of Caen Basse-Normandie, 7, 145 urban, 57, 80, 286, 287 urbanisation, 286 US, 12, 31, 39, 56, 67, 216, 227, 232, 276 USSR, 42

V Valencia, 50 validation, 8, 149, 209 valuation, 8, 233, 235, 236, 237, 238, 239, 240, 241, 242, 245, 246, 248, 250, 253 Vanuatu, 63, 64 variations, 10, 128, 129, 131, 147, 208, 284, 290

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,

Index vegetable oil, 28 Venezuela, 208 vertical integration, 101 Vietnam, 208 vision(s), 73, 76, 78, 84, 86, 90, 93, 258, 263, 264, 279, 280 volatility, 200, 201, 202, 203, 213, 233, 235, 236, 237, 238, 239, 240, 241, 242, 246, 247, 248, 249, 250, 253 voluntarism, 69 voting, 270 vulnerability, 185, 186, 201, 204, 215

working conditions, 17, 20 working hours, 167, 170 working memory, 275 World Bank, 26, 39, 203, 214 World Commission on Environment and Development (WCED), 26, 39 World Trade Organization (WTO), 26, 39, 43, 60, 165, 203 World War I, 4, 42 world war two, 67 worldwide, 4, 9, 15, 20, 21, 25, 41, 150, 181, 219, 220, 234, 279, 284

W

Y Yves-Louis Sage of the University, 5

Z Zimbabwe, 208

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wages, 74 water, 32, 287 weakness, 59, 206, 257, 258 wealth, 26, 38, 86, 233, 234, 236, 237, 249, 281 web, 105, 123, 187, 192 welfare, 2, 34, 45, 109 well-being, 120, 271 workers, 69, 70, 220, 225, 226

305

Aurifeille, Jacques-Marie. Globalisation, Governance and Ethics : New Managerial and Economic Insights, edited by Christopher J. Medlin, et al.,