Information About Social Corporate Responsibilities

8/8/2019 Information About Social Corporate Responsibilities

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Information about social corporate responsibilities:

Although businesses have become increasingly aware of stakeholder pressure to demonstrate a commitment to their

corporate social responsibilities (CSR), this does not necessarily mean the adoption of an integrated and strategic

approach to CSR. Rather, as Michael Porter (Harvard Business School, Boston) and Mark Kramer (John F Kennedy

School of Government, Massachusetts) have recently argued in the Harvard Business Review (December 2006),

current approaches to CSR are fragmented and disconnected from business goals. This has resulted in disparateand reactive initiatives designed to mollify vocal stakeholders or deflect attention from questionable business

practices, and these have justifiably been criticised as "feel good" marketing campaigns which have failed to generate

bottom line benefits.

Porter and Kramer suggest a new approach to CSR which both (i) acknowledges the interdependence of companies

and the broader community, and (ii) enables companies to develop a tailored, rather than generic, CSR strategy. In

this way, companies will "make the most significant social impact and reap the greatest business benefits". This note

provides a summary of Porter and Kramer's article, giving particular attention to the practical issues of creating a

tailored corporate social agenda.

1.1 Background

Companies which have responded to their CSR have usually done so for one, or a combination, of the following four

reasons/principles - moral obligation, sustainability, compliance or reputation. "Moral obligation" refers to the

compulsion for companies to be "good citizens" and "do the right thing". The sustainability argument emphasises the

need for companies to have regard to the natural environment from which resources are drawn. The compliance or

"licence to operate" argument reflects a pragmatic response to agendas set by Government regulators, and the

reputation impetus is all about creating a positive impression on consumers, staff and shareholders.

Porter and Kramer identify the individual deficiencies of each of these principles as a sufficient justification for CSR

(eg they argue that the sustainability school of thought raises questions about balancing long term objectives against

short term costs, but offers no framework for resolution). Fundamentally however, Porter and Kramer argue that there

is an inherent weakness in all four school of thought, namely they "focus on the tension between business and

society, rather than their interdependence". Further "each strategy creates a generic rationale that is not tied to the

strategy and operations of any specific company or the places in which it operates".

Porter and Kramer argue that the deficiencies in approach to CSR have resulted in unco-ordinated and non-strategic

activities that "neither make any meaningful social impact nor strengthen the firm's long-term competitiveness".

Having set the scene, Porter and Kramer suggest a new approach to CSR to achieve these outcomes.

1.2 A new approach

Porter and Kramer's new approach has two key elements. Firstly, they suggest that a CSR strategy should be

predicated on an acceptance of the interdependence of business and society, ie "successful corporations need a

healthy society" and "a healthy society needs successful companies". Porter and Kramer suggest that the points ofintersection between companies and society are both "inside-out" linkages (ie internal activities which affect the

external environment such as "hiring practices, emissions and waste control") and "outside-in" linkages (ie social

conditions which affect a company's capacity to conduct business, eg rules and regulations, local education and

health supports). This platform of understanding implies that both business decisions and social policy have shared

values, and lifts CSR from a "nice to do" (which is reminiscent of the moral obligation argument or philanthropic

approach to CSR) to the "have to do" (which, although not acknowledged by Porter and Kramer, is an extension of

the sustainability argument).


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Secondly, and this is the real benefit of Porter and Kramer's thesis, they argue that each company should create a

tailored (rather than a generic) corporate social agenda, and provide a practical tool to chart that agenda ie "to

identify those areas of social context with the greatest strategic value".

1.3 The practice of developing a new CSR strategy

Porter and Kramer's practical tool to developing a new CSR strategy encompasses the following steps:

1. Choosing which social issues to address. "The essential test that should guide CSR is not whether the

cause is worthy, but whether it presents an opportunity to create shared value - that is, a meaningful benefit

for society that is also meaningful to the business". Porter and Kramer argue that companies should sort

social issues into three categories - (i) generic social issues which affect all companies; (ii) value chain

social impacts which have a direct affect on the company's ordinary course of business; and (iii) social

dimensions of competitive context which significantly affect the underlying drivers of a company's

competitiveness in a specific location. Once the social issues have been categorised they should be

ranked, ie prioritised, for action.

2. Creating a corporate social agenda. The selected social issues should be identified in an explicit and

affirmative corporate social agenda. This agenda will reflect an approach to CSR which is both responsive

to stakeholder concerns and anticipated risks, and strategic(ie integrates inside-out and outside-in

linkages).

3. Organising for CSR. The corporate social agenda should be integrated into affirmative business practices,

ie to ensure that operating management is engaged in processes that identify and prioritise social issues

based on their "salience to business operations and their importance to the company's competitive

context". Further, Porter and Kramer suggest that measurement of outcomes is critical to the agenda, and

that "value chain and competitive context investments in CSR need to be incorporated into the performance

managers with P&L responsibility". In particular Porter and Kramer argue for the measurement of the CSR

initiatives in terms of social impact (although omit to discuss what those measures might be).

1.4 Conclusion

Porter and Kramer offer a new approach to CSR which focuses on identifying the shared values between a particular

company and its social context, and developing a tailored and strategic response. Using Porter and Kramer's tool to

map social opportunities, and practical steps to identify, develop and organise for CSR, companies now have a new

CSR framework to enhance business and social outcomes. If companies are able to successfully use this model (and

Porter and Kramer's article provides numerous case studies to that effect) then the benefits will be reaped in terms of

both a competitive advantage and social enhancement.


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Corporate Social Responsibility in India is arguably the first comprehensive, well-researched book on the

subject in the country. The author uses Indian examples, case studies and CSR role models from the

Indian industry to explain the gap between Indian business needs and current practices. Practices and

researches in economically developed counties have also been used extensively. As the Indian industry

begins to enter international markets, it is going to be imperative to integrate CSR with business goals

for long-term sustainability and healthy economic, social and environmental impact. The book helps in

understanding the meaning of business beyond financial numbers and tries to explain how even CSR can

be used as a marketing tool and for business benefits. It dwells comprehensively upon the concept of

CSR, from its inception as ph8ilanthropy till its journey to a form where now it is mandatory to be

sensitive about CSR in businesses.This ready reckoner and guide for senior managers, CEOs, CFOs, HR

and taxation officials in INdian and multinational companies, management students and academicians

approaches CSR as a critical business need, not a philosophy. Sanjay K. Agarwal is a Chartered

Accountant working with organized retail business. His areas of interest include Corporate and Factory

Accounts and Direct and Indirect Taxation.

Economic integrations

Q: What is the rationale behind regional economic and financial integration?

[Charles Wyplosz] The general rationale is that when countries integrate themselves, theyprovide "favours" resulting in wider and better opportunities for all and similarly, borrowers can

tap the world pool of savings and they are supposed to benefit from that. That is the theory,though empirically, there is little evidence of these effects.

On the other side, what I believe is the bigger benefit; is that it makes it much more difficult for

governments to trick the domestic financial system to favour particular borrowers, to milk saversthrough variable interest rates and so forth. The general theory that integration is good for better

allocation of resources is not the big thing, the big thing is that it makes it harder forgovernments to play with financial markets.

Looking at welfare and competitiveness, indirectly the theory of integration says that firms are

able to borrow on better terms, access better investment opportunities, and these shouldeventually show as "faster growth" that is the first-principles argument, but there is little

evidence this has happened to any great degree.

On Trade:

Q: What is the case for free trade to exist? And how can an integrated economic regionbalance the needs of individual participants and the overall system?

[Charles Wyplosz] The case for free trade is much stronger than the case for free capital

movement. The case for free capital movement is weak, because financial markets suffer fromvery serious failures (right now is a nice example of that). Financial markets do not operate like

the textbooks say they should. The case for free trade assumes that the goods market operateswell, and the fact is that they do, in practice, operate like that unless governments tinker with


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them. The evidence that free-trade boosts growth and raises income levels around the world isvery strong. In fact, every country that has managed to raise its standards of living has somehow

integrated itself commercially with the rest of the world, it's probably a necessary condition.

The allocation of resources across a region depends on a financial-system. This is not only a

free-trade issue. If the financial system was working well, then it would support free-trade. Itdoes not work too badly, but it is crisis prone, and sometime stands in the way of properresource-allocation. I don't see a big problem in this area, and in keeping resources in line with

the requirements of trade.

Q: What are your views on protectionism?

[Charles Wyplosz] I have not seen a good case for this (protectionism). There are military and

strategic issues that are clearly not economic, and we cannot really comment on these as whenthe military says "we need this" that is the end of the argument. I have never seen a good case for

protectionism, but I can see a case for slowing down trade integration because it can be highlydisruptive to domestic firms, markets and people's income in the short-run; and therefore we

cannot do 'shock therapy' trade opening but I don't see any case for companies to act withspecial-needs.

I think the USA is pretty open. There is protectionism there, like anywhere else, so some

industries have managed to get some protection, but by and large the US is open. China hasintegrated itself pretty fast in the world economy, and has been rewarded with double digit

growth rates in the past two decades or so. They still have some restrictions, largely because ofold-industries who would not be able to swim if dropped in the water of global competition, and

these industries are tied to the military establishment, meaning there are political reasons forChina to go-slow, but by and large they are on their way to becoming increasingly integrated.

It has created some anguish in the US and Europe as Chinese competition is vigorous, but that is

the nature of competition. It hurts the laggards and benefits the smart ones- the smart ones willtake the take the advantages and not say anything, and the laggards will complain.

Q: What is the key rationale behind the WTO and what have the key successes and failures

been of the WTO as an organisation?

[Charles Wyplosz] The GATT which gave way to WTO, was set up as a way of organising

world-negotiations on trade integration. There are over one hundred and eighty countriesinvolved. The principle of trade integration is that you don't have special bilateral regional needs,

but trade becomes a multi-lateral thing which, of course, means very difficult negotiations withso many countries involved!. GATT and the WTO have, though, served the world pretty well,

and trade integration has increased dramatically over the past forty or fifty years, and countriesthat began to integrate themselves took advantage in terms of standards of living. Things do,

though, have to be slow. They cannot happen overnight. Trade integration does modify theeconomic structures of countries so things have to happen slowly and gradually, and that's the


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way GATT has been working, it is a very slow and gradual process.

Looking at the Doha round. We have gone a very long way in terms of trade integration, andwhat has not been integrated yet are the most politically sensitive issues in every country. What

Doha is now doing is getting after the very hardcore of political resistance to integration, which

is exactly why it is not working- every country or group of countries has their favouritechampion and pet industries, and have given up on protecting a big chunk of the rest and now weare down to the bone. It may not succeed, but I am not worried about that as trade integration is

already very deep and developed, and even if we stay where we are, we are doing pretty well.

The view of the WTO is that we have to keep moving forward all the time- and we have got abig part of the way to full integration, and maybe now we have to sit back happily, and wait for

these resistances to be slowly eroded.

On Regionality & Globalisation

Q: Looking at Europe as a case study. What have been the key successes and failures of

Europes economic and financial integration and single currency? What is the future of

Europe?

[Charles Wyplosz] It's hard to be upbeat about Europe, but in fact, I am, at the very least about

what has been done so far. What is interesting about Europe as a case for integration is that theEuropeans, at the time they began regional integration, went way ahead of GATT. There were

strong political and geo-strategic regions for the Europeans to do that, so they were willing tomake sacrifices to go to complete market integration- it's not one hundred percent, but close.

What this meant was that pressure groups, and interest groups who were fighting for protection,lost to the overarching political objectives of Europe's integration. Once these interest groups

were defeated locally, individuals had nothing to fear from GATT, from world-integration, andthat is why Europe has been pro-GATT and pro-WTO. There are famous exceptions, such as

farmers, but that is not a specific exception to Europe. WTO fans don't like regional integrationbecause they see it as undermining world-integration. That is true in a small way, but when

countries integrate locally they inevitably destroy some pro-protectionist lobbies, and once theyhave done it regionally, it is easier for them to integrate globally- so I don't see regional

integration as a threat to WTO.

Europe has been an extraordinary success story. Many parts of the world (though maybe notrecently), have been thinking of emulating Europe- I have in mind South East Asia and South

America. These regions have, though, simply not been able to do it for various reasons such aspolitics and protectionism. Europe has been able to achieve an incredible degree of trade

integration, less so financial integration, and has been able to create a single currency. The singlecurrency has been an enormous success, it has achieved complete exchange rate stability across

the Euro area (by removing exchange rates!) and we do take it for granted- but the Europeanexperience was one of bruising exchange rate volatility, with recurrent currency crises, and this

is now gone.

The price to pay for having a common currency in Europe has been to do a half-baked job- in thesense that governments have not been, and are still not, willing to give up sovereignty in fiscal


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policy matters. Even before the Euro was launched, we all recognised that there were weaknessesbuilt in the European construction, and that if these were not attended to, they could turn out to

be a big problem. And here we are today! The fiscal indiscipline in a number of countries hascreated the current debt crisis, and we will have to draw lessons and create solutions to prevent it

happen again. While I am not surprised at the debt crisis itself, I am surprised at the political

reactions and policy mistakes which have been made over the past few months which have giventhe Euro area a bad name around the world.

Looking at the addition of more countries to the European integrated zone. Clearly, the morecountries you have, the higher the probability that one of these will misbehave. There is a sense

in which the expansion of the Euro area is making the whole system more fragile, if you like youmay have one link in the chain which becomes weaker- and the longer the chain, the more likely

this is to occur. On the other side of this, we have to consider that the wider the Euro area, themore it protects countries, and the less exchange rate volatility worries occur, and the objective

therefore is to have all countries within the European union within the monetary union, becausethey are all part of the single market. If some countries like the UK and Sweden adamantly

refuse, so be it, we are not going to start a war for them to join the Euro!

Q: Is there a case for Asian Economic Integration? Would it lead to a single Asian

currency?

[Charles Wyplosz] In some ways, South-East Asia is where Europe was two-decades ago;

where we were concerned about exchange rate movements within the single market. The degreeof trade integration within the South-East Asian region is very deep, much more so than Europe

when it was at a similar stage in development. The situation is, though, rather special because ofthe overwhelming size of China. Some of my Asian friends say that, "all the other Asian

countries are just provinces of China" - this is, of course, an exaggeration, but nevertheless thereis a very deep degree of integration. Countries in the region are, though, rocked regularly by

exchange rate fluctuations and therefore they do need to find a way to stabilise their exchangerates. In that sense, Asia is a paradigm of Europe with a need for exchange rate stability. On the

other side, from a political point of view, Asia is nowhere near where Europe was even in 1957at the time of the Treaties of Rome. By then, Europe had deep consensus that it had to quiet-

down national sentiments, for the better common good. We do not see similar noises in South-East Asia. Firstly China has overwhelming size and influence- but even if we put China to one

side, there is not the degree of trust between countries that existed within Europe in the 1950'swhen we started our way. The result is that the Asian's find it very hard to make concessions to

each other and to transfer tiny bits of sovereignty to a common undertaking. It is very clear in thecase of exchange rates. They are trying to pool foreign exchange reserves through the "Chiang

Mai" initiative, for example. It is moving, but at a snail's pace- and the reason is that anytimethey come close to giving up a bit of sovereignty (for example, on foreign exchange reserves)

they pull back politically- so I think that is the big difference between the region and Europe.Eventually, they will move in the right direction, but it will take time, and the more time goes,

the more China will dominate- this of course makes things more complex.

I hope that Asia grows into a benign political power. We don't know for sure as observers, andeven the participants themselves do not know as the regimes are, in general, not open. China is


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not a specific danger at the moment, at least not now, but it is impossible to do anything ofsubstance in South-East Asia without Chinese support, and China is unwilling to take-on the role

of regional leader- in the sense that it would have to give up some of its sovereignty. If Chinawants to be the good mother, it has to behave like a mother and make sacrifices for the kids.

As for whether Asia will have a single currency? not anytime soon. Maybe in the longer run thiscould happen, but given the size of China, the Renminbi just might be the de-facto Asiancurrency.

Q: Is there a case for economic integration for Africa?

[Charles Wyplosz] My understanding of Africa is that there is very limited regional trade

integration, and that most of the trade is with developed countries. In that sense, they are notinterested in regional integration. Of course, if they were, it would be a huge benefit for their

own regional development.

Q: What are your views on the potential successes and failures of the Union of SouthAmerican Nations (USAN)?

[Charles Wyplosz] There are definitely similarities between Africa and Latin America. Until

recently, there was little trade integration, and most of their trade was with the US and Europe,and they were not, therefore, widely excited about trading with each other. There is also deep

political resentment, and the rivalry between Brazil and Argentina is not helpful- and like Africa,there are many countries with a high degree of corruption, so governments are not necessarily

working for the good of their people. On the other side, there are a number of countries in LatinAmerica that have made enormous progress over the past twenty years. Chile and Brazil are the

two shining examples, and may show the route for success to other nations in the region, and thatmight lead the Latin American's to have their own regional integration as they stand to benefit

from that like anyone else.

The lessons they can learn from Europe is that if they have the political will to do thingsregionally, they will invariably break the protectionist interest-groups, which makes it easier for

each country to integrate. That was the secret of Europe's integration, we managed to push-backresistance to integration- both trade and finance, because there was political will to do something

European. For a long time, Europe was a big collective ambition, and now it is a bad word!

Q: Is there a case for global economic integration? And does regionalism work in a highly

globalised business environment?

[Charles Wyplosz] I think we are a long way towards global-integration. GATT and WTO

agreements have given us a very high degree of trade integration, and there has been quite a bitof movement towards financial integration, but various crises have shown that there could be a

worst-case-scenario where financial turmoil would lead to a roll-back of trade integration. Thathasn't happened this time round, but it was a big and real fear.

I feel we are globalised in many respects, and that is certainly for the better of the world,


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although it creates room for contagion when trouble appears- and so there are periods where itseems to hurt, but in the good periods (which are hopefully most of the time) there are huge

benefits to globalisation which accrue to most of the people of the world.

There is this interesting comparison between trade and finance and between the WTO and the

IMF. The case for trade-integration is overwhelming, and we have built the WTO with itstribunal to deal with disputes- which is the first world authority which we have- as the tribunalcan make decisions which are binding on countries. In many respects, countries have given up

some sovereignty to this tribunal, this is a huge and underrated achievement as it is the first andonly case of total reduction of sovereignty and I think it works pretty well. In the financial

markets, we have nothing of the sort. We have the IMF, who act as a "fireman" for countries introuble, but it has no real authority unless countries sign letters of intent which give temporary

authority as and when needed. If we consider a world lender of last resort, this would be nice intheory, but the fact is that a lender of last resort has to commit resources. We currently have

central banks acting in this function, and when a national central bank intervenes, it is the localtax-payers who are on the line- and that is acceptable at a national level, although people are

grumbling. Tax-payers, when they discovered how much the UK spent on bailing out the RoyalBank of Scotland, were understandably upset- but that is tolerable. Having a lender of last resort

which would commit tax-payers from all over the world? that is simply not fathomable. There isno willingness from the average citizen in any country to allow a world lender to spend money

on his or her behalf, and all this discussions which are occurring on a world lender of last resortare totally beside the point to what is really needed.

Looking at the need for a global authority to oversee financial markets. Yes there is a need, but

there are lots of needs that remain unfulfilled- and that specific need will remain unfulfilled too.We were talking before about a global lender of last resort, and if we talk of banking and

financial market regulation, it is exactly the same thing. Every country would have to accept theauthority of a third party which is not a country, and could be just a number faceless bureaucrats-

and that is just not politically possible. To go around that, we have the IMF which intervenes inemergencies, but it has limited means. In the area of regulation- we have the BASEL group on

Banking supervision, and the Financial Stability Board. All of these things have no authoritiesdelegated to them, but they have the power to make proposals- and it is then up-to governments

to accept, but I think that at the current stage of our world's development, this is as far as we cango in this regard.

Q: Can economic & financial integration impact macro topics such as climate change,

conflict, resource competition and population growth?

[Charles Wyplosz] All of these things are issues where we have externalities, and then it wouldbe much better to co-ordinate, than to let each country go it alone. Of course when there are

negotiations, they often fail because countries are not willing to make compromises for thecommon good. The good thing about integration is that it makes us more dependent on each

other- so the fate of any country of the world now, economically, depends on the economic-fateof all the other countries, and therefore it becomes easier to accept, recognise and deal with these

externalities. The more we are integrated, the more we have a common destiny, and the more wehave a common destiny, the more we should be able to compromise with each other, and so


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globalisation is making people gradually citizens of the world, and so maybe their governmentswill recognise that there is a need to give up nationalistic objectives for the common good.

Q: Do you see a need for de-politicisation of resources such as Oil?

[Charles Wyplosz] The problem with the oil market is that it is hugely politicised throughOPEC. Here we have a cartel- one of the grossest words in economic jargon. This cartel has beentrying to manipulate oil prices for the past thirty or forty years which is extremely bad- but

fortunately the power of the cartel is limited- partly because they don't have all the oil producingcountries in their group- and partly because of their own deep internal disagreements- meaning

they rarely manage to speak with one voice. In my view, there is too much politicisation in theoil market, and if we can de-politicise oil, we can make the markets a better place.

Q: By de-politicising such issues, will we help the world's poor develop ?

[Charles Wyplosz] Life is unfair, and the distribution of wealth around the world is unfair. For

decades we thought the solution for that was to channel resources from the privileged to theunder-privileged, it has not been a stunning success- and that's now a big debate around the

world bank, specifically, "how to channel resources in a way that really helps". We haven'tfound the answer yet, and I certainly don't have the answer. Like everybody else, I say that the

inequalities around the world are totally unfair, and unacceptable, but I have a very humble viewof what we can do- as we have now had around fifty years of development policies including aid,

the world-bank's efforts, regional development banks and so forth- and I don't regard them asmuch of a success.

We have the exact same problem at a national level. In every country, you have the divide of rich

and poor, and if you take the richest countries in the world- such as those in Europe and theUSA, they still have a poverty problem. We have alleviated the problem in a very small way-

and we understand now why helping people doesn't help them, so it's exactly the same problemacross the world as within nations. There are some people and some countries that just can't "do

it". And how to make them "do it"- by which I mean, doing what it takes to become reasonablywell-off, is the key, and we have not yet found a solution, and have tried everything we have so

far- which is a failure.

Q: How can integrated economies bear better resilience to recessions and global macro-

events?

[Charles Wyplosz] Regional integration can help global integration when it substitutes for

global integration- insofar as when it does things at a regional level, which cannot be done at aglobal level, for example, we can have a common currency in Europe, but we cannot have it at a

world level, it would make no rational sense. When you can do more regional integration,without reducing integration at the world level, that's ok- the danger, of course, is building

fortresses and undermining the global system- which would be a big step back.

When you are completely isolated, say in the example of North Korea, in many ways you arecompletely independent from the rest of the world- so world trade can go down the drain, and it


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wouldn't do much to North Korea. The problem is that the North Korean population is starvingbecause of their lousy system, and the system is lousy because their economy is so very closed.

If North Korea were integrated in the global system, it would be as rich as South Korea. A

paradigm is buying a car. When you buy a car, you can have a car accident- a pretty nasty one,

and that's part of the deal. Global integration is helping people around the world, most of thetime, but we have to accept that now and again we have accidents which affect all of the world-and that is part of the deal with globalisation. In the same way we decide to take our cars, with a

certain degree of nervousness, while it's good to be globalised- and we should drive carefully!We have organisations like the WTO giving us driving rules for what we can and can't do, and

we have the ambulance coming from the IMF when you have had a crash- so it's pretty much thesame story- you can't have just pure goodness, there will always be drawbacks to everything.

Each crisis is a good lesson about things which were not right, or overlooked, or unknown- andfrom crisis to crisis, we learn.

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We can see, therefore, that by surrendering relatively small amounts of sovereignty, the world

has achieved a deep and powerful level of economic integration which, for most participants, has

created a general increase in standards of living. We can also see, though, the devastating

inequities created for those who are not able to participate in the process (for a variety of

political reasons) and are left in conflict and poverty. Alongside this, we can also clearly see the

weaknesses created within the system as a result of sovereign participants being reluctant to

participate fully, only surrendering enough authority and supremacy to participate for individual

gain- and not enough to bring stability to the overall system.

This weakness is a very deeply rooted and profound stumbling block to true globalisation. Untilthe rationale with which any sovereign nation participates in integration can be aligned with the

greater need of the world economy, the system itself will be fundamentally flawed.

AsNoam Chomsky pointed out, "NAFTA [as it as passed] became an 'investor rights'

agreement, not a 'free trade' agreement- driving the economies of each of the three participating

countries [the US, Canada and Mexico] down towards a kind of low-wage, low-growth

equilibrium. They didn't say it, of course, but it would also be a high-profit equilibrium". The

Labor Advisory Committee (set up by US Congress within the trade act) also observed that

NAFTA would have a devastating effect (in their view) on labour markets in America and

Mexico, along with destructive environmental consequences as NAFTA supersedes state and

federal legislation. They also, though, observed the benefits to American investors, and the fact

that in a normal functioning democracy, issues as significant as this would have been the subject

of intense public consideration and debate (which they were clearly not). These may seem like

extreme criticisms of a generally-applauded free-trade agreement, but if you look at how

sovereign participants engaged themselves in relatively recent history- driving people by force

from land, and enforcing laws giving preferences to certain markets (in the form of subsidies,


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tariffs and preferential prices) you can see they have basis. In a US case, for example, Whirlpool

Corporation were persuaded to build a factory in Tulsa rather than Mexico, because the

Taxpayers of Tulsa County were, indirectly, made to pay 25 percent of the corporation's capital

costs. That is one of the realities of 'free trade' in a global theatre where market participants

(actors- in the form of governments and corporations) have motives which are often not in the

best interest of the theatre itself. Looking at the advent of the US Steel industry, the amount of

Fortune 500 companies who benefit from state-industrial-policies, the global cotton markets and

more, you can find numerous examples which counter free-trade principles.

In this sense, we see that alongside the visible global conflicts using military machinery, there

are numerous severe conflicts occurring behind the scenes using economic and policy weapons.

Fundamentally, though, the case for economic integration is clear and rational. Our levels of

development, technology and mobility now mean that borders have largely become a

phenomenon for mapping rather than serving any functional role in our world. Our civilisation isin the pivotal point of a huge upheaval where we are moving, perhaps too quickly, towards the

ultimate goal of being a unified global market, rather than a number of sovereign markets linked

by complex treaties.

Globalisation in this sense becomes inevitable rather than an option. As Kofi Annan once

commented, "...It has been said that arguing against globalization is like arguing against the

laws of gravity, but I believe we have underestimated its fragility." and as John Sweeney

observed, "In its current form, globalization cannot be sustained. Democratic societies will not

support it. Authoritarian leaders will fear to impose it. From the suites of Davos to the streets of

Seattle, there is a growing consensus that globalization must now be reshaped to reflect valuesbroader than simply the freedom of capital."

For humanity though, the key is that globalisation is finally enabling the overwhelming bulk of

humanity to 'join the conversation' economically, and socially. Franklin D. Roosevelt once

observed that, "True individual freedom cannot exist without economic security and

independence." and we now see those words have grown from being true at a national and

regional level to a global space. As Mr. Wyplosz stated above, "The more we are integrated, the

more we have a common destiny, and the more we have a common destiny, the more we should

be able to compromise with each other, and so globalisation is making people gradually citizens

of the world."


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Leaders

Transformational Leadershipby

Colonel Mark A. Homrig

21 Dec 2001

Clearly the leader who commands compelling causes

has an extraordinary potential influence over followers.James MacGregor Burns

The current research in leadership is overflowing with articles and books describing the virtues

of transformational leadership. Recent authors include Noel Tichy, The Leadership Engine(1997), John Kotter, On What Leaders Really Do (1999), and articles written in the Journal of

Leadership Studies by Dong Jung, Walter Einstein and John Humphreys (2001) to name a few.

James MacGregor Burns coined this term in 1978 to describe the ideal situation between leadersand followers. James Keagen used Burns ideas to build a developmental model of leadershipthat explains further the continuum between transformational and transactional leadership. What

radical new form or fad of leadership is this? What is the difference between transformationalleadership and transactional leadership and which is the most effective? How does a leader get

everyone performing to their potential? Are there any pitfalls with transformationalleadership? What is the relationship between leadership and management? What are the

attributes of the transformational leader? Finally, what conclusions can be drawn about theusefulness of transformational leadership?

After reading Burns, Kotter, Tichy, Jung, Einstein, Humphreys, and the biographies of military

leaders from throughout the ages, the conclusion seems quite clear. Leadership principles aretimeless, while, the models that examine those principles may change. The transformationalmodel offers one of many good ways to examine leadership and the type of leader, and follower,

who are ideally suited for todays and tomorrows strategic environment. This is especially so forthe profession of arms and in particular the Air Force. While all the services and government

agencies espouse leadership principles, this paper more closely examines the Air Force. Nodoubt the similarities and differences between the services and government agencies are very

interesting.

Since Burns coined the terms transformational and transactional leadership, it might be useful tolook at his definitions. Burns wrote, I define leadership as leaders inducing followers to act for

certain goals that represent the values and the motivations-the wants and needs, the aspirationsand expectations-ofboth leaders and followers. [Italics original] The leader is not merely

wielding power, but appealing to the values of the follower. In this sense, values mean, Aprinciple, standard, or quality regarded as worthwhile or desirable , (Websters New Riverside

University Dictionary). Burns insists that for leaders to have the greatest impact on the led,they must motivate followers to action by appealing to shared values and by satisfying the higher

order needs of the led, such as their aspirations and expectations. He said, . . . transforming


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leadership ultimately becomes moral in that it raises the level of human conduct and ethicalaspiration of both leader and the led, and thus it has a transforming effect on both.

Burns and much of the current literature make the point that the way leaders influence followers

is based on their shared sense of what is important, worth doing well, and expending energy on

it. In a sense the more significant the endeavor, the more the undertaking itself takes on animportance greater than either the follower or leader. Such leadership occurs when one or morepersons engage with others in such a way that leaders and followers raise one another to higher

levels of motivation and morality. Their purposes, which might have started out as separate butrelated, as in the case of transactional leadership, become fused. The goals, then, take on a life

of their own. In business, this leads to market domination and profit. In the military, this leads toprofessionals leading inspired subordinates through tough budgets, difficult deployments, the

rigors of combat, and ultimately victory. Burns recognized that transformational leadershipdoes not stand alone in the leadership lexicon. As mentioned, he coined another leadership term,

transactional.

Transactional leadership is based on a transaction or exchange of something of value the leaderpossesses or controls that the follower wants in return for his/her services. The relations of most

leaders and followers are transactional-leaders approach followers with an eye to exchanging onething for another: jobs for votes, or subsidies for campaign contributions. The transactional

style is precisely what happens in a contracting scenario. The contractor provides the specifiedservice purchased. Liontos explains, This only works well when both leader and led understand

and are in agreement about which tasks are important. Transformational leadership andtransactional leadership are not at odds with one another, but complement each other as the

circumstance dictate. There is no magic formula or checklist that dictates when one is morerelevant than the other in any given situation. When to make the transition is an art borne of

experience and education.

Bernard Bass, a disciple of Burns, points out the relationship between transactional and

transformational leadership. The best leadership is both transformational and transactional.Transformational leadership augments the effectiveness of transactional leadership, it does not

replace transactional leadership, (Walsman, Bass, & Yammarino, 1990). Transactioncontinues to be an effective tool, and a necessary tool, for leaders at all levels. Transformational

leaders, whose choice would be to gain agreement by appealing to the values of the followers orpeers, finding the road blocked, may resort to the transactional style. When the transformational

leaders sees himself/herself in a win-lose negotiation he tries to convert it into a win-winproblem solving situation. If this is not possible, then he or she can display the transactional

skills necessary as an effective negotiator, (Walsman, Bass, & Yammarino, 1990). On thesurface it appears that the transactional style provides the basis of most leader-follower

encounters. Why, if the transactional style works, not just stick to the tried and true?

While the transactional style may be the most prevalent, it produces results that may not be ashigh as with the transformational style. To explain this phenomena, Karl Kuhnert and Phillip

Lewis examined R. Kegans six stage developmental theory. Kegans theory is that people maydevelop higher-order leadership traits as they mature. The six stages range from 0-5; Khunert

and Lewis explored stages 2, 3, and 4. They used these stages to examine transactional (stage


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2), higher-order transactional (stage 3), and "transformational (stage 4), leadership traits. Itmay be useful to use Kegans model of these stages to distinguish between the previously

mentioned leadership traits.

A stage 2 leader, for example, is explicitly transactional. What they do for the organization is

done for whatever the organization has promised in return for the persons output. In otherwords, their . . . commitment to the organization is one of reciprocity. A stage 3 leader,however, is the bridge between a stage 2 transactional leader and a stage 4 transformational

leader. The stage 3 leaders are able to operate apart from personal goals and agendas to focus onbeing connected to their followers and even sacrifice their personal goals to maintain those

connections. Trust and respect between leader and follower develop and form the bond betweenthem resulting in mutual support, promises, expectations, obligations, and rewards. This creates a

hazard for a stage 3 leader most easily exacerbated in an ethical dimension. Stage 3 leaders mayfeel torn in situations of conflicting loyalties (e.g., loyalty to the organization versus loyalty to

their subordinates). This feeling of competing loyalties may tempt these leaders to engage insituational leadership to resolve the dilemma of conflicting loyalties.

Stage 3 leaders, while being transactional, do exhibit some of the qualities of a transformational

relationship with their followers. For example, . . . they [the stage 3 leaders] use relational tiesto motivate followers to believe work is more than the performance of certain duties for certain

concrete payoffs. Followers may perform at exemplary levels with little immediate payoff inorder to maintain the respect of their leader. This begins to look like a transformational

relationship, however, a key element is missing for this to be a stage 4 transformationalrelationship. Although followers who are persuaded by higher level transactional leaders may

expend extraordinary effort to maintain a certain level of mutual regard with their leader, theirbeliefs and goals typically have not changed (Bass, 1985). It is this factor that differentiates

transformational leadership from the higher-order transactional style. In the transformationalrelationship, followers integrate the leaders goals and values.

Leaders that are at stage 4 dont have competing loyalties. They have developed an internalcompass of where they are going and why. This is because stage 4 leaders have developed a

subjective frame of reference (organizing process) that defines their selves, not in terms of theirconnections to others (the hallmark of stage 3), but in terms of their internal values or standards;

that is what Burns (1978) called end values. At this stage, leaders are able to take an objectiveview of their goals and commitments; they can operate from a personal value system that

transcends their agendas and loyalties. Transformational leaders have internalized a sense ofcommitment to their goals and articulate this in such a way to their followers so as to convert

their followers to a high level of commitment as well. As stated earlier by Bass, leaders learn touse the best style of leadership for the situation. Sometimes transformational leaders use

transactional methods to lead, but stage 4 leaders have the ability to understand the availableoptions and to act in the manner that is most appropriate to the situation. The military

professional must weigh the pros and cons of these leader/follower relationships to judge whichis best and when. This is by no means an easy task and usually results in a great deal of thought,

for being a leader is work!


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Before we can determine which leadership style most effectively serves the profession of arms, itis necessary to reflect on the kind of leaders and followers who will most likely succeed in a

challenging environment. Business literature has proclaimed their preference, todaysnetworked, interdependent, culturally diverse organizations require transformational leadership

to bring outin followerstheir creativity imagination, and best efforts, (Walsman, Bass, &

Yammarino, 1990). Is this what is desired in senior military leaders? People, who think on theirfeet, are creative, come up with the best solutions, dont need to be closely supervised and dowhat is necessary just because it is the right thing to do? This is exactly the type of leader and

follower who needs nurturing, developing, and rewarding in the Department of Defense. Allpeople, including those not in uniform, are part of the team-ideally this would extend to all

government employees and to all who do business with the government.

To be effective now and in the future, almost all of the leadership literature and the authorspersonal experience agree that, people can not be treated like sheep, blindly herded from place to

place. Their expertise, experience and intuition need to be encouraged, not stifled, if challengingsituations are to be negotiated successfully. Avolio states, What most organizational leaders

agree on, however, is that their organizations must move away from encouraging employees toleave their brains at the door, to systems where employees intellectual capital is nurtured,

developed, and more directly rewarded. For government, military, and Air Force effectiveness,the thrust of this paper asserts that everyone must be treated as and expected to be a valued

member of the team. The Air Force of tomorrow and beyond must encourage individuals to becomfortable with uncertainty and willing to make decisions with less than perfect information.

This would seem to be intuitive. Of course high performing organizations want all their people,leaders and followers, contributing to their maximum potential-to give their all for the good of

the organization. How do you get there from here?

In most organizations there is a transaction process that pays people a salary to perform theirwork. Additionally, in professions the new entrant also begins an enculturation process. This

process ingrains in the individual the goals and values of the profession. For leaders andfollowers to adopt the transformational model, they must all be in tune with the same culture and

share similar values. In the Air Force, initial and subsequent training and education imbues theindividual with core values, encouraging them to conform their behavior to the ethical and moral

standards of the Air Force. Why? The core values serve as a starting point so all understand whatbehaviors and conduct are acceptable and should be emulated. They act as beacons vectoring

people to the path of professional conduct. (Little Blue Book)

. . . [V]alues are internalized so deeply that they define personality and behavior as well as

consciously and unconsciously held attitudes. They have become an expression of bothconscience and consciousness. [Italics original] Hence, holders of values will often follow the

dictates of these values in the absence of incentives, sanctions, or even witnesses . . . .

In the final analysis, transformational leadership, in the military should fuse the leaders vision

so strongly in the follower, that both are motivated by high moral and ethical principles. This

process raises them above self-interest to perform their exacting duties, even to the ultimatesacrifice, for the GOOD of the nation.


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How do leaders develop the bonds necessary to make transformational leadership possible?Bernard Bass has four interrelated components that he views as essential for leaders to move

followers into the transformational style.

y First is idealized influence. He maintains that genuine trust must be built between

leaders and followers. If the leadership is truly transformational, its charisma oridealized influence is characterized by high moral and ethical standards. Trustfor both leader and follower is built on a solid moral and ethical foundation.

y The second component is inspirational motivation. Its [transformationalleaderships] inspirational motivation provides followers with challenges and

meaning for engaging in shared goals and undertakings. The leaders appeal towhat is right and needs to be done provides the impetus for all to move forward.

y Next, is intellectual stimulation, . . . intellectual stimulation helps followers toquestion assumptions and to generate more creative solutions to problems. The

leaders vision provides the framework for followers to see how they connect tothe leader, the organization, each other, and the goal. Once they have this big

picture view and are allowed freedom from convention they can creativelyovercome any obstacles in the way of the mission.

y Lastly, is individual consideration, . . . individual consideration treats eachfollower as an individual and provides coaching, mentoring and growth

opportunities. This approach not only educates the next generation of leaders,but also fulfills the individuals need for self-actualization, self-fulfillment, and

self-worth. It also naturally propels followers to further achievement and growth.

One may get the impression that transformational, participative decision-making is based solelyon the consensus of the leader and follower. This is after all the military, and leader and led often

times can not afford the luxury of debate as to the best course of action in combat. Accordingly,while the transformational style offers a good model for many cases of problem solving, Under

various conditions, directive leadership is more appropriate and acceptable to all concerned thanis participative leadership. Certainly there is a time and place for input to be heard, such as the

planning process where consensus is the leaders goal:

The Transformational leader strives to achieve a true consensus in aligning individual and

organizational interests. In true consensus, the interests of all are fully considered, but the finaldecision reached may fail to please everyone completely. The decision is accepted as the best

under the circumstances even if it means some individual members interests may have to besacrificed.

After the planning phase, it is up to the leader to implement the plan or direct the operation. As

inspiring as this sounds, inevitably there is the however comma.

Most powerful tools are potentially double-edged. Transformational leadership, or pseudo-

transformational leadership has a potential immoral and unethical dimension that could beexploited by an unscrupulous leader inflicted on nave and unsuspecting followers. Bass and

Steidlmeier in their Ethics, Character and Authentic Transformational Leadership, say:Fundamentally, the authentic transformational leader must forge a path of congruence of values


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and interests among stake holders, while avoiding the pseudo-transformational land mines ofdeceit, manipulation, self-aggrandizement and power abuse. Hitler may be viewed as a case

study in transformational leadership gone wrong. He appealed to the values and ethics of theGerman people, but, it could be argued that instead of fulfilling his followers higher order needs

and aspirations he lead them to ruin. He was a powerful, charismatic leader that would probably

fit the definition of a pseudo-transformational leader, because his aim ultimately did not lead tothe betterment of his followers, but rather his own fulfillment through abuse of power. There isyet another argument that warrants attention.

Bass and Steidlmeier gave another warning, Transformational leadership is seen as immoral in

the manner that it moves members to sacrifice their own life plans for the sake of theorganizations needs. There is no moral justification for the vision of the CEO [military leader]

becoming the future sought by the employees. In order to overcome their warning, the leadersagenda must be uplifting and as Burns said, . . . transforming leadership ultimately becomes

moral in that it raises the level of human conduct and ethical aspiration of both leader and theled, and thus it has a transforming effect on both. As stated earlier, transformational leadership

may be double-edged, however, with high moral values as ethics espoused by both leader andled, the dark side is mitigated and the forces for good are championed. Now that up and

downsides of transformational leadership have been explored, how does this relate tomanagement?

When discussing leadership inevitably a discussion of management ensues. So, what if any, is

the relationship between transformational leadership and management? According to Kotter,The fundamental purpose of leadership is to produce change, especially nonincremental change.

The fundamental purpose of management is to keep the current system functioning. So,leadership is distinguished by appealing to the values of the follower by, . . . satisfying the basic

human needs for achievement, a sense of belonging, recognition, self-esteem, a feeling of controlover ones life, and the ability to live up to ones ideals.

Management on the other hand, . . . develops the capacity to achieve its plan [the leaders] byorganizing and staffing[Italics original]-creating an organizational structure and set of jobs for

accomplishing plan requirements, staffing jobs with qualified individuals, communicating theplan to those people, delegating responsibility for carrying out the plan, and devising systems to

monitor implementation. So while leadership works hand in hand with management, their focusis different. Leadership envisions the future course and management builds the administrative

processes to get there, producing orderly results, and maintaining the desired end-state.

At this point it may be useful to list some attributes of transformational leadership that a researchof the current literature has highlighted to further portray the attributes of this leadership style.

y Authentic transformational leadership builds genuine trust between leadersand followers.

y . . . without the continuous commitment, enforcement and modeling ofleadership, standards of business ethics cannot and will not be achieved in

organizationsbadly led businesses wind up doing unethical things.


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y Transformational leaders concentrate on terminal values such as integrityand fairness. They see the responsibility for their organizations

development and impact on society.y They increase the awareness of what is right, good, important, and

beautiful, when they help to elevate followers needs for achievement and

self-actualization, when they foster in followers higher moral maturity,and when they move followers to go beyond their self-interests for thegood of their group, organization, or society.

y The truly transformational leader who is seeking the greatest good for thegreatest number and is concerned about doing what is right and honest is

likely to avoid stretching the truth or going beyond the evidence for he/shewants to set an example to followers about the value of valid and accurate

communication in followers.y There is a moral justification for the transformational leaders efforts to

achieve value-congruence between the leader and the led. When it isachieved, both are more satisfied emotionally. (Meglino, Ravlin &

Adkins, 1989). Much of this congruence results in leaders being seen byfollowers as more considerate, competent, and successful (Weiss, 1978)

and followers are more satisfied with their jobs.y Leadership and followership in transformistic organizations are predicated

less on positional authority and more on interdependent work relationshipscentered on common purposes.

y Kelley (1995) indicates that leadership and followership are equal butdifferent activities often played by the same people at different times.

Individuals who assume leadership roles have sound visioning,interpersonal and organizational skills, and the desire and willingness to

lead. Effective followers are distinguished by their capacity for self-management, strong commitment and courage.

y When organizational participants are empowered to act as effectiveleaders and followers based on core values and a unifying purpose, the

potential for unprecedented advances and exceptional outcomes aregreatly enhanced.

y Transforming leadership is elevating. It is moral but not moralistic.Leaders engage with followers, but from higher levels of morality; in the

enmeshing of goals and values both leaders and followers are raised tomore principled levels of judgement.

The ingredients necessary for transformational leadership to occur may be summarized in a

variety of ways. In the authors mind, it seems obvious that one of the most importantcharacteristics of a great leader is his/her ability to make sound judgements and good decisions

based on their internalized vision. A leader who can make reasoned judgements and decisions inthe context of the ideas embodied in this paper surely would be successful. At the risk of

oversimplification, the below ten tenets may be a useful summation of this paper:

1. Leaders have high moral and ethical values.2. Leaders express genuine interest in followers.


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3. Leaders have an inspirational vision.4. Genuine trust exists between leaders and led.5. Followers share leaders values and vision.6. Leaders and followers perform beyond self-interest.7. Participatory decision-making is the rule.

8. Innovative thinking and action is expected.9. Motivation is to do the right thing.10.Leaders mentor.

Thus, the goal of transformational leaders is to inspire followers to share the leaders values and

connect with the leaders vision. This connection is manifested through the genuine concern theleaders have for their followers and the followers giving their trust in return. Leaders exhort

followers to support the leaders vision by sharing ideas, imagination, talents, and labor to reachagreement and attain virtuous goals for the good of the leaders, followers, and the organization.

Both leaders and followers rise above their self-interests for the betterment of all, and bothachieve genuine satisfaction. Authentic transformational leadership, because of all the reasons

mentioned above, raises leaders above their self-interest and short-circuits pseudo-transformational leadership tendencies. Management in the end codifies the changes and puts in

the administrative structures necessary to solidify their maintenance. But it is through theleaders hard work that followers come to share the leaders goals and values to transcend their

self-interest and accomplish the mission.

In conclusion, the merits of transformational leadership should speak for themselves. In light ofthe ambiguous strategic environment, it would appear to be obvious that most large

organizations, the federal government, the military, and the Air Force require leaders andfollowers steeped in the same core values and energized to tackle the tough issues together.

When transformational leaders are connected with their followers great things can happen. Whenleaders and led are on the same strategic page all their energy is focused to achieve maximum

results with less oversight, because the leader has articulated the target goal so everyoneunderstands the direction to move toward. To put this into the context of combat, below is an

excerpt from an Army officer in Afghanistan. It is an example at the tactical level but the hope isthat it would follow at the strategic level as well:

A Chechen commander was killed. On his body was a diary that compared fighting the US withfighting Russians. He noted that when you take out the Russian leader, the units stops and mills

about, not sure of what to do next. But he added that when you take out a US leader, somebodyalways and quickly takes his place with no loss of momentum. A squad leader goes down, it may

be a private that steps up to the plate before they can iron out the new chain or command. Andthe damn thing is that the private knows what the hell he is doing.

When leader and led values are in sync, followers dont have to be supervised -- they will know

what to do when the time comes, and isnt that the goal of good leadership?


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