21st Century Challenges Require Deep Transformation of Current Corporate

Governance Concept and CSR Model

Andreja Pavlovi, Miljenko Cimea, Marta Takahashi
andreja.pavlovic@hauska.com
miljenko.cimesa@solcroatia.org
takahashi.marta@gmail.com
Managers are these days predominantly expected to deliver constant and non-restrained
maximization of stakeholder value i.e. rises in the stock prices. This type of short-terminism
behaviour is globally recognized phenomenon, with the CSR still not being able to provide a
platform for resolution of the conflict between short-term preoccupations and long-term
imperative for sustainable development. As a result, companies governed by immediate
concerns are not able to provide adequate responses to unprecedented ecological, economic,
social, political and cultural challenges, global and local. Therefore, the approach based on
assumption that companies can continue performing in an unchanged way has to be
deliberately changed into the new sustainability paradigm. The necessary first step on this
path should be analysis of the factors contributing to the short-termism and corporate social
responsibility activities of the companies. Such analysis will provide a base for proposing a
new integrated management & CSR model, which will require transformation of
organizations. Key agents of this transformation shall be socially responsible leaders, who
will be crucial for changing the underlying short-termism. The authors will be analyzing the
available literature on management, governance, leadership and CSR theory and practice.
The outcome of the paper is presentation of a new integrated management & CSR model,
organizational transformation and development of socially responsible leaders.
Key words: new integrated management & CSR model, short-termism, sustainable
development,
Track: Governance and management towards social responsibility
Word Count: 7767
1. Introduction
In dealing with challenges of the future we usually turn to the past, because as famous English
historian Edward Gibbon reflected there is no way of judging the future, but by the past
(DCDC, 2007a). However, the authors of this paper consider that the nature of the challenges
we are facing today is such that it requires a completely different approach. Although Albert
Einstein's words that we can't solve problems by using the same kind of thinking we used
when we created them resonate like a mantra, majority of organizations continue to use the
same old institutional approaches in facing the challenges. It seems that business-as-usual1 is
truly resilient to real changes. In principle, it is reactive and primarily focused on finding
quick and efficient solutions for often stubborn and persistent problems. In executing
business-as-usual people are reluctant to explore new opportunities and approaches because
1 Oxford Dictionaries defines business-as-usual as an ongoing and unchanging state of affairs
despite difficulties or disturbances

they feel more comfortable when using old methods that functioned well in the past. The key
message of this paper is that the new approach to corporate governance and corporate social
responsibility requires deep transformation and adoption of a new paradigm, which Otto
Scharmer calls Capitalism 4.0
In the first chapter the authors describe some of the key challenges of the 21 st century. In
describing the outstanding features of the emerging future, they are not led by threatening
visions or lack of trust in human capacities, both individual and collective, to adequately
respond to these challenges. However, they emphasize that these challenges are
unprecedented, and call for a new mindset and innovative ideas. The authors are well aware of
the mechanisms that impact individual mental models: how individuals interpret and process
information, how information are accepted or ignored, including information which questions
business-as-usual approach. Deep transformation focused on finding appropriate solutions
requires common understanding and recognition of the fact that our mental models are
frequent cause of short-term orientation of companies. Attention is usually focused on a
single challenge without seeing the full picture and numerous interactions and linkages among
different, but still complementary challenges. In authors view, focusing on short-term, quarter
based results, hinders socially responsible business. These topics are elaborated in more detail
in the second part of the paper. At the end, the authors describe key preconditions for finding
appropriate solutions and recommendations for further research.
2. Are we ready for the 21st century challenges?
At the beginning of the 21st century the world is facing a series of ecological, social and
economic challenges, not to forget technological issues related to the emerging Fourth
Industrial Revolution. Decision-makers are predominantly focused on solving economic
problems, while social, ecological or technology issues come to the spotlight only
occasionally. The underlying causes of the current crisis are still sought in the wrong places
because our mindset is mainly concerned with the symptoms of today's problems. One of the
right places to look for the underlying causes of the current crisis are ecological problems.
The most pressing ones are related to the nine limits of our planets, increase of ecological
footprint and resource depletion. According to the recent findings (Stephen, 2015:1) the four
of nine planetary boundaries have already been crossed 2. In 2009, the group of scientists led
by Johan Rockstrm, director of Stockholm Resilience Centre, identified nine planetary life
support systems that keep our planet hospitable to modern life (Carey, 2015). They then
estimated how much further we can go before our own survival is threatened; beyond these
boundaries there is a risk of irreversible environmental and planetary change. The four
boundaries being crossed are the following:

2 Planetary boundaries represent scientifically determined level of human activities and their impact
on essential global processes within a framework of nine planetary systems. The nine planetary
boundaries are: stratospheric ozone depletion, loss of biosphere integrity (biodiversity loss and
extinctions), chemical pollution and the release of novel entities, climate change, ocean acidification,
freshwater consumption and the global hydrological cycle, land system change, nitrogen and
phosphorus flows to the biosphere and oceans, atmospheric aerosol loading.

1. Climate Change, increase of CO2 concentration in the atmosphere and rise of average
temperature;
2. Loss of biosphere integrity, reflected not only in loss of genetic diversity
(biodiversity), but also in adverse impact on ecosystems functioning;
3. Nitrogen and phosphorus flows to the biosphere and oceans;
4. Land system change, turning free land into agricultural plots or urban areas.
Due to mutual dependence of different boundaries and their interaction, it is difficult to
estimate the consequences of each boundary crossing, or simultaneous crossing of several
boundaries. Yet, scientists determined that climate change and biosphere integrity represent
the two most critical boundaries, so that significant change in any of the two could bring the
earth's system into a new condition (Stockholm Resilience Centre, 2016).
In addition to planet limits, the most recent research indicates that the current ecological
footprint is 1.6. This means that we use 1.6 times more resources than the planet is able to
renew (Ecological Footprint, 2016), or in other words, the Earth needs one year and six
months to renew resources consumed by mankind in one year. Freshwater consumption
illustrates the dynamics of the depletion process: while world population tripled, freshwater
consumption increased seven times (onedrop.org, 2015). If we look into the future, according
to the Development, Concept and Doctrine Centre3 about 3.9 billion people might face water
scarcity by 2045 unless we ease pressure on water resources (DCDC, 2014).
Some of the most pressing challenges of the modern world are also poverty, economic
inequality (within a society or between societies) and involuntary migrations of people. The
Oxfam study (2015:2) reveals that the richest one percent of the population own 48 % of
global wealth, while 99% of global population share the remaining 52% of wealth. Apart from
economic dimension, inequality has strong social dimension particularly in the light of the
forthcoming Fourth Industrial Revolution.
Technology development is not the only, but certainly one of main causes of income decrease
experienced by low qualified workers. Labour market demands highly qualified workforce,
and according to Schwab (Foreign Affairs, 2016) we shouldn't be surprised that so many
workers are disillusioned and fearful that their incomes and even of their children will
continue to stagnate or that middle classes around the world feel dissatisfaction and
unfairness. As the gap between the rich and the poor is likely to grow in the following 30
years, disparity will fuel the feeling of dissatisfaction and injustice, especially among those
whose expectations will not be met. Consequently, DCDC (2007b) in its report assessed that
growing discontent caused by wealth erosion and poverty will increase tensions and
instability, both within and between societies, resulting in disorder, criminality, terrorism and
insurgency.

3 DCDC is UK Ministry of Deference think-thank that regularly reviews and draws up a wider
context for long-term decision making

Economic challenges include financial crises that become more frequent and deeper.
According the study carried out by an independent research agency (Phoenix Capital
Research, 2015) the financial crisis that peaked in 2000 with dot.com bubble was about $10
trillion in size. The Housing Bubble, which triggered the 2008 crisis, was about $30 trillion in
size. The bond bubble today is over $100 trillion and if we include derivates it is $555 trillion.
In short, in only seven years (2008 2015) the size of financial bubble increased 18 times!
Another potential underlying cause of next financial crisis lies in high debt burden. According
to William White, ex-chief economist of the Bank for International Settlements (BIS): "The
situation is worse than it was in 2007(Evans-Pritchard, 2016).
3. Do we understand a real nature of the 21st century challenges?
According to their distinctive features, global scale and potential consequences, the challenges
of the 21st century are essentially different from all previous experiences. The essential
difference lies in the fact that our experiment of infinite and unlimited growth has put at risk
the safety of the planet and its population. Since the early 1900s the world's population
multiplied by four and its economy by more than forty times. For Professor Wright (2004:32)
it is a clear signal that we have reached a stage where we must bring the experiment under rational
control, and guard against present and potential dangers. It's entirely up to us. If we fail, if we blow up
or degrade the biosphere so it can no longer sustain us nature will merely shrug and conclude that
letting apes run the laboratory was fun for a while but in the end a bad idea.

No doubt, these challenges can be categorized as tough problems in order to emphasise their
high resistance to resolution. Generally, it is beyond any individual organization's capacity to
fully understand and address such problems alone. Efforts to find appropriate solutions are
frequently stuck because of different actors perspectives on their causes and possible impacts,
leading to disagreements on the possible viable course of actions (Commonwealth of
Australia, 2007). Kahane (2004:1), who proposed a breakthrough way to address tough
problems, indicated that problems are tough because they are complex in three ways:
-

Social complexity. Individuals and organizations frequently have different perceptions

and views about what is the problem about and how to solve it, which leads to
fragmentation, polarisation and stuckness of problem solving process. Imposing solution
from above will not work in highly complex situations, as well as frequently used
Decide-Announce-Defend' management approach. Solving such problems can only be
dealt in participative way through all key actors will be gathered and their perspectives
shared in order to design workable solutions. As noted by Schwab (Foreign Affairs,
2016:9): A shared understanding of challenges is needed as a base for multistakeholder
collaboration, which has seen increasing recognition as the most effective way to address
global risks and build resilience against them.
Dynamic complexity means that cause and effect are far apart in space and time. For
example, scientific research has proven that CO2 concentration in atmosphere appears 25
years after use of fossil fuels and emissions they produce. This means that we have to seek
systemic solutions focused on identification of system components and their
interrelationships, but also functioning of the system as a whole.

Generative complexity. This means that events evolve in a completely new and unknown
ways. Therefore we cannot project future based on past trends or apply best practices.
Human impact on global biophysical systems by pushing planetary boundaries resulted in
appearance of a new geological epoch Anthropocene (Steffen et al., 2011). This term has
been coined to warn about growing, very likely decisive, human impact on planetary
systems. Anthropocene means that we are going to face uncertain and unpredictable
changes. Solving of generative complex problems requires ability to shift from reacting
against the past to leaning into and presencing an emerging future, and adapt to unfolding
situation.

The first step in tackling tough problems is trying to understand complex reality in all its
dimensions; otherwise, we want be able understanding their underlying causes. One of useful
tools is an iceberg model. According to Scharmer and Kaufer (2013:3) iceberg model includes
following levels: symptoms, structure, mental models and awareness. The challenges we are
facing today reflect a series of symptoms. According to the model, the symptoms represent a
resultant of structural activities. The system structure consists of a series of causal
relationships between various components. For example, modern industrial and agricultural
production is based on intensive use of fossil fuels. This model of economic development
resulted in increased CO2 concentration in atmosphere and greenhouse gas effects.
Greenhouse gases cause rise of global temperature, which in turn causes further domino
effects, one of them are droughts. However, ecological problems are frequently interrelated
with social problems. Kalley et al. (Proceedings of the National Academy of Science, 2015)
indicated in their study how the severe 2007 - 2010 drought contributed to the social and
political conflicts in Syria.
Poor harvests combined with poor management and unsustainable agricultural and
environmental policies, forced about 1.5 million farmers and village people to move to the
peripheries of urban centres that were already overpopulated due to inflow of refugees from
Iraq. From 2002 to 2010 the population in Syria increased from 8.9 to 13.8 million. Such
increase caused additional burden on limited resources. Cumulative effect of these events, in
combination with other circumstances, led to devastating conflicts, which then caused
migration of millions of the people, some towards the European Union. Waves of immigrants
caused serious problems to the EU member countries, partly due to different approaches and
policies in coping with migration problems. These problems imperilled EU's stability and
global partner's trust. Due to that, in a words of American political analyst George Friedman,
EU is increasingly unreliable and unpredictable partner (EurActiv, 2016) Terrorist attacks in
Paris threatened EU's security and fragile economic recovery. The measures that have been
taken could be characterized as fire fighting, because current fight against terrorism
deepened problems instead of solving them, with no real signs of comprehensive solutions
which would tackle the underlying causes, back in Syria and other countries in the regions
struggling with terrorist groups.
Following iceberg model, we come to conclusion that the deepest cause of today's challenges
lies in our awareness. According to Scharmer and Kaufer (2013:141-151), the world is

dominated by ego-system awareness which pays attention to the wellbeing of oneself, shortterm personal interests, privatisation and atomization of decision-making. To a certain extent,
ego-system awareness is kind of an expression of the Victorian ideal of progress that was
concisely described by Pollard: ..assumption that a pattern of change exists in the history of
mankind....that it consists of irreversible changes in the one direction only, and that direction
is towards improvement.. In Wright's opinion (2004), this ideal became a kind of worldly
religion based on belief that human rationality can dominate the nature and achieve unlimited
progress. In this context the market became crucially important for realization of this ideal.
However, Rowe and Bollier (Economics, 2016) noted that for years mainstream thinking has
regarded the market as primary source of material progress. However, it is more like Janus
with two faces looking in opposite direction.
We can easily find examples of human actions from ego-system awareness, there are many of
them around, business and politics alike. During the recent hearing at the US Congress,
Martin Shkreli, former CEO of Turing Pharmaceuticals, refused to answer questions on the
company's drug pricing policy. Actually he mocked the Congress amid inquiry on Turing's
5,000% price increase of a drug, Daraprim, used by many AIDS patients. Such behaviour
caused many reactions by politicians and the public. Elijah Cummings, the top Democrat on
the panel, said during the hearing: I call this money blood money coming out of the
pockets of hardworking Americans. However, it seems it hasn't touched Shkreli. After he
left the hearing he tweeted: Hard to accept that these imbeciles represent the people in our
government. Even more interesting are Shkrelis statements given in an interview with
Forbes reporter Matthew Herper in December 2015 (Forbes, 2015) when he was brutally
honest when saying: Nobody wants to say this, nobody is proud of this, but this is capitalist
society and the system with capitalist rules: my shareholders expect me to make the most
profit. My job isn't making patients better. It's making the most dollars. That's what we've
been taught at MBA4
Similar example of ego-system awareness, on collective level, are major oil companies whose
proven oil reserves are five times higher than possible use of fossil compliance with the fuels
that would not cause global warming exceeding 2C above pre-industrial times. Their target
emissions reduction would mean that 80% of these reserves should remain unrecovered, thus
seriously eroding the value of the companies. Therefore, the leaders of these companies are
unanimous in stating that they are going to continue with business-as-usual as long as they
can (Klein, 2016). However, there are also positive examples showing that it is possible to act
from eco-system awareness that cares about the wellbeing of all. Tex Gunning, former CEO
of Unilever Vlees Groupe Nederland, came to the top management position of this Unilever
arm when performance was poor, and he was confronted with a decision of massive layoffs.
He asked himself if that was really what he was supposed to do to the end of his life
restructure companies, lay off workers, cut costs! He did not want to accept that. Instead, he
started reinventing the company, motivated people to follow his vision, enabled employees to

4 Its worth seeing the entire interview at http://www.forbes.com/sites/dandiamond/2015/12/03/whatmartin-shkreli-says-now-i-shouldve-raised-prices-higher/#25a3a1191964

develop and grow by building the culture of respect, openness and cooperation. In five years
Tex Gunning turned the company around and ensured double digit growth rate.
4. Responsibility for ones impact and neoliberalism
Responsibility for ones impact is the oldest principles of the law that was elaborated by
Roman jurists who also called it the doctrine of the wild animal 5. Drucker similarly argues
(Drucker, 2011) that every organization has impact for which is responsible, it does not matter
whether the organisation is at fault or is negligent. The concept of organization's individual
responsibility was shaped during the 20th century in the context of globalisation and
emergence of sustainable development concept. In this paper, globalisation processes are
considered as a type of normative globalism, or neoliberalism. According to Safranski (2008)
neoliberalism tends to use globalisation as an excuse for liberating capital of any social
obligations, arguing that removal of impediment to capital mobility will make states more
competitive in attracting capital and creating new jobs. The impediments refer to ecological
concerns, trade union activities, social and tax regulations. For Harvey (2005), basic
institutional framework of neoliberalism includes strong ownership rights, rule of law, free
trade and mechanisms that ensure free trade. Neoliberalism gathered momentum and power
when it created public opinion that favoured neoliberalism as an exclusive guarantor of
freedom and individual right, while private entrepreneurship and investments are essential for
innovations and value creation, and continuous growth of productivity will ensure better
standard of living for all.
Neoliberalism assumes that a rising tide lifts all boats and that wealth trickles down, which
can be best achieved by free market and free trade. Political dimension of neoliberalism is
best depicted in the Washington consensus, originally coined in 1990, following the fall the
Berlin Wall when Capitalism triumphed over Communism. As suggested by Savio (2016) the
consensus aimed at dismantling the state as much as possible, privatizing, social costs cutting
and eliminating any barrier to the free market. It also defined set of policies and best
practices for developing countries. After President Reagan came to power, the Washington
consensus policies were implemented by the International Monetary Fund and the World
Bank in a kind of neoliberal missionary campaign as Joseph Stiglitz later described activities
of these financial institutions (Evans, Sewell, undated).
Responsibility for one's impacts concept has subsequently become known and widespread as
corporate social responsibility. It has grown on the wave of (neoliberal) globalisation
processes in the second half of the 20 th century when, for the first time, large international
corporations were accused for their wrong doings in undeveloped and developing countries
where they moved production in order to reduce costs. The practices such as bad working
conditions, child labour, violation of human rights and adverse impact on the environment
came under public scrutiny. For example, in the 1970s Nike attracted a lot of media attention
because of poor working conditions and low wages in the so called sweatshops where they
organized production. In an effort to defend its position, Nike released a series of press
5 If the lion gets out of its cage, the keeper is responsible. It is irrelevant whether the keeper was
careless or the lock was released in any different way.

releases and denials. In 1998 Mark Kasky filed a lawsuit against Nike on the ground of unfair
and deceptive advertising and unfair competition.
The other large corporation involved in legal proceedings was Shell. There were two cases
that aroused large attention by the media and the public. The first was Shell's decision from
1990 to dispose the Brent Spra platform in deep Atlantic waters. It caused fierce reaction by
the activists, particularly Greenpeace, who organized a worldwide, high-profile media
campaign against Shell, with strong boycott across North Europe, particularly Great Britain
and Germany. In another case, Shell was accused of having collaborated in the execution of
Ken Saro-Wiwa and eight other leaders of the Ogoni tribe of southern Nigeria, who initiated
non-violent protests against Shell, blaming the company for the damages caused by oil
exploration and production activities that threatened to destroy the Niger Delta eco-systems.
It was not the first time that international corporations were exposed to public protests or
lawsuits; however, it is considered that the Nike and Shell cases were the ones that instigated
anti-corporation activism because of environmental issues or human rights. These two cases
also showed that responsibility for one's impact can have financial dimension, apart from
reputation dimension. In the case Kasky vs. Nike, after the Supreme Court's ruling in 2003,
Nike had to pay $ 1.5 million to the fund that will be used for improvement of working
conditions (Business Human Rights Resource Centre, 2016). After 13-year-long litigation,
Shell accepted the settlement which obliged it to pay $15.5 million, which is considered one
of the highest value settlements ruled in a lawsuit against a corporation for violating human
rights (The Guardian, 2009).
In parallel to neoliberal globalization, another type of globalization has been developed. It
appeared as a kind of counterpoint to already evident effects of neoliberalism, i.e.
commodification of nature and growing inequalities. Primarily, this refers to excessive use of
non-renewable resources for the purpose of maximisation of private interests and to
externalities or situations when prices do not capture all costs. Helbing (2012) noted that they
happen when companies make decisions based on direct costs and returns, without taking into
consideration indirect costs of externalities. Therefore, there are differences between private
returns or costs and the costs or returns to society as a whole. Depletion of common resources,
as water for example, or fish in seas or oceans, means that such resources will not be available
to future generations. These problems call for serious considerations and collective
responsibility so that we would not look from the space at the poor planet Earth at risk to be
devastated because of our careless and irresponsible behaviour (Safranski, 2008). No matter
how these warning tones may sound exalted and doomsday waiting, scientists have prepared
over the years compelling evidence on risk and consequences of careless and irresponsible
behaviour. The first wakeup call came from a group of scientists that prepared extensive
research and analyses for the Club of Rome in 1972. The book Limits of Growth (Meadow,
1974) was published in 1974. The scenarios based on computer simulations produced by the
scientists in the study ordered by the Club of Rome, indicated clearly that business-as-usual is
unsustainable and can only lead to stagnation. The warning was unambiguous: if we continue
with business as usual we can expect stagnation and decline of living standards. In such a

case, more and more capital will have to be directed to mitigating adverse effects of growth:
degradation of soil, depletion of resources and unbearable pollution (Karlin, 2010).
The warning sent by the Club of Rome was reiterated in 2009 by Johan Rockstrm and his
group or scientists from Stockholm Resilience Centre that identified nine planetary
boundaries. The key challenges outlined in the studies produced by the Club of Rome and
Johan Rockstrm and his colleagues scientists, are reflected in the two large documents issued
by the end of 2015, in the UN document Transforming our world: the 2030 Agenda for
Sustainable Development, and COP21 Paris Agreement. The seventeen goals outlined in the
Agenda, and the Paris Agreement provisions by which the parties accepted curbing of global
warming below 2C relative to pre-industrial time, with endeavour to reach even 1.5C target,
will have far-reaching effects on corporate social responsibility, and on the way in which it is
predominantly pursued by the companies. There is no doubt that the responsibility for one's
impacts essentially gains a new dimension. Furthermore, in the light of these developments
the classical Bowens question what responsibilities to society may businessmen reasonably
be expected to assume? (SAGE Publications, 2012:3), looks for the answer in contemporary
discussions of corporate governance.
5. The search for the Holy Grail
Disputes which follow corporate governance have their origin in the 80s 6 of the last century,
when, according to Chang (2014) the Holy Grail of capitalism was discovered - maximization
of shareholder value. Shareholder value means that the companies must have performed
dramatically better, which, according to Mintzberg (2003), takes on a whole new meaning: the
performance no longer means better products or improving service quality for customers and
innovative products, but the growth in stock prices. It is important to get the attention of
journalists, and to create positive expectations of analysts and shareholders with regard to the
future growth of shareholder value. Therefore management urges the introduction of new
products on the market, consumers are exploited, investments in research are reduced and
employees are fired. Numbers must look good from quarter to quarter because the attention of
shareholders is primarily focused on the short-term results. The imperative is constant and
non-restrained growth in short-term earnings as the purpose of the economic system. Barton
(2011) describes it as quarterly capitalism that is, according to Ivanov and Santini (2007),
increasingly prevalent in the world. "Companies are too managed with a view on quarterly
earnings instead of the long-term benefit of the organization, its employees and the economy"
(Roe, 2015).
In order to identify themselves more closely with the interests of shareholders, professional
managers started to receive generous prizes, bonuses. "Common sense" 7 dictates that the
interest of shareholders should be long-term benefit of the company, securing its long term
survival. Because, according to the free market ideology, if the company does not operate
6 More or less in the same period when the drive towards neoliberalization started
7 According to Gramsci, "common sense" (views that are common to all) is not the same as "correct
judgment" (critical reflection of reality that surrounds us at a given time), so that "common sense" can
go deep deceiving, it can obscure and hide the real problems.

well, shareholders will lose everything, and other stakeholders will get at least something. In
addition, the profit maximization based on underlying concern for pursuing of self-interests
does not necessarily have to be bad. On the contrary, Jessua (2008) argues that mutual
competition greatly contributes to achieving overall satisfactory results that will benefit
everyone, not just shareholder and managers. However, if we remove ideologically colored
glasses we will see the harsh reality: under limited liability scheme shareholders can withdraw
from the company fast and easy so they usually care the least about the long-term prospects of
the company (Chang, 2014), while managers running from business to business, industry to
industry do not stay long enough to see the consequences of their mismanagement
(Mintzberg, 2005). As a result, the Holy Grail of capitalism, shareholder value maximization,
produced professional managers who get generous bonuses regardless of any impact they may
have, and shareholders who are not really interested in the long-term prospects of the
company.
If the quarterly earnings are in the forefront of the majority of shareholders, and generous
rewards of the most of professional managers are linked to the raises in stock prices, one may
wonder how come that corporate social responsibility (CSR) blossomed as an idea in the
recent years. The focus on shareholder value maximization, without paying attention to
anything else, makes companies actually insincere when they claim to be socially responsible.
In short, critics denounce CSR as an oxymoron the human face that CSR applies to
capitalism goes on each morning, gets increasingly smeared by day and washes off at night, as
pointed out in the Economist editorial The Good Company (2005). In such a washing off, as
noted by awniczaks (awniczak, awniczak, undated), capitalism is largely helped by public
relations because they incapacitated society for deeper understanding of the real reasons and
motives of the companies pursuing CSR, primarily their need for improving reputation and at
the same time continuing with business-as-usual.
The prevailing neoliberal context8 in which CSR was developed over the recent years, leads to
significant flaws in its implementation. It's no wonder there is no unambiguous understanding
of the (definition) of CSR, but a multitude of different definitions and interpretations, as well
as different ways of its implementation. There is however no dispute that CSR is primarily a
voluntary concept whereby companies integrate social and environmental concerns in their
business operations and in their interaction with their stakeholders (EUbusiness, 2006). CSR
is, as evidenced by the frequency of certain definitions of CSR, focused on five dimensions:
environment, society, economy, stakeholder relations and voluntary aspect of CSR. The
ethical dimension is often mentioned, and more recently the strategic aspect of CSR in the
pursuit of enlightened self-interest, whereby the focus is on the ability of CSR to support and
advance the company's profitability via reputation enhancement or operational improvement
or both (Amaeshi, Osuji, Doh, undated). CSR is frequently accompanied by voluntary
reporting on non-financial aspects. Following the adoption of the EU Directive on nonfinancial reporting about 6,000 companies with more than 500 employees and public interest
companies within the EU will start reporting as of their financial year 2017 on their social,
8 And even Western European companies that otherwise belong to the so called Rhine corporate
governance model

environmental and labor impacts, along with anti-corruption, bribery, and respect for human
rights.
CSR, inasmuch as sustainability reporting, is marked by constant criticism for mambo jumbo,
highlighting only the positive side of business, ignoring the impact of externalities, or
neglecting the underlying causes of the growing global challenges. There is no doubt that
CSR is dead, at least in the form in which it has so far prospered in the companies. Robert
Reich, who has for many years preached that social responsibility and profits converge over
the long term claims nowadays that companies cannot be socially responsible, at least not to
any significant extent, at least not in supercapitalism 9 (The Economist, 2007). By analogy,
we can conclude that to the extent to which the maximization of shareholder value is kind of a
Holy Grail of capitalism, to a similar extent the CSR is the Holy Grail of quarterly
management. It should therefore come as no surprise that theory and practice of corporate
governance focuses only on one relationship, the one between the principal and the agent,
who is considered the most important. In The Survey of Corporate Governance, Shleifer and
Vishny describe this relationship throughout the following question: "How investors can
ensure that their managers return their money?" (Shleifer, Vishny, 1997:738). If the
responsibility of management is reserved only for one group, the shareholders, then the
question is of who is responsible for other social groups, who is responsible for the society as
a whole, who is serving the common good? Should managers also take some other
responsibilities in addition to their first responsibility towards shareholders value
maximization? Who will take responsibility for the externalities, for which neither the
management nor the companies still dont have the pay their full costs?
The research The Insider's View on Coporate Governance (Erismann-Peyer, Steger,
Salzmann, 2008) conducted among the worlds top companies in Western Europe and the
United States in the period from 2005 to 2007 also indicates that these questions are generally
not on the agenda of the management boards. It brings a deeper insight into the corporate
governance, especially after the dot.com bubble which led to a series of bankruptcies and
criminal charges. The survey showed that the main drivers for a companys approach to
corporate governance are domestic regulation (at least in EU) and stock exchange listings,
while public pressure is perceived as less important. The authors explain that the fact that
public pressure leads to legal changes over time and self-regulated industry standards, so
companies normally respond to them rather than direct public pressure. However, the most
important insight relates to the everyday tasks and responsibilities of 60 company secretaries
in supporting board meetings. It clearly indicates that there is no visible concern for society
and the environment in interaction with companys stakeholders, at least not during the board
meetings. Out of 15 tasks and responsibilities the most of them relate to legal and regulatory
duties and requirements as a consequence of growing complexity. In terms of their
importance, the formulation of codes of conduct and ethics and protection of
"whistleblowers were ranked relatively low, being more important for listed than non-listed
companies (see table 1).
9 Supercapitalism is a term with which Reich describes capitalism that invaded democracy. Under
supercapitalism, the long term is the present value of future earnings, measured by share price.

Supporting board mee tings (task importance )

Supporting board meetings

4.68

Contributing to annual general meeting

4.51

Contributing to annual report

4.23

Supporting board committees

4.21

Continuously informing board members

3.92

Defining governance structure and approach

3.91

Taking legal responsibilites

3.89

Reporting on management transactions

3.70

Formulating codes of conduct and ethics

3.63

Supporting management meetings

3.45

Supporting board evaluation

3.35

Whistle-blowing

3.16

Engaging in corporate communications

3.14

Generating visions and ideas

3.01

Continuously informing key shareholders

0.00

2.92
1.00

2.00

3.00

4.00

5.00

(1 - Not at all to 5 - Very important)

Table 1. Supporting board meetings (task importance)

We cannot draw universal conclusions out of one research, nor can one research fully depict
everyday management practices in all companies. However, it may be concluded that the
management still does not attempt to see the company and its environment as a whole system,
taking into account the interests and expectations of stakeholders in decision-making.
Although this is the essence of stakeholder theory, Santini (2007) explains that it requires the
"internal control mechanism" which is by nature much more complex than the one focused on
maximizing shareholder value and legal and regulatory duties and requirements. Stakeholder
theory, especially the current legal and administrative corporate governance framework, do
not provide clear guidance on how these mechanisms should look like. It does not defines
what corporate governance mechanism is needed to allow for the maximising the creation of
shared value for companies owners/shareholders and for companies other stakeholders and
society at large (European Commission, 2011), or for future generations that are currently
discriminated against simply because they exist in the future and do not currently have
political or economic influence (Oxford Martin School, 2013).
The prevailing models of analysis of corporate governance are generally focused on the legalfinancial and administrative aspects of decision-making. However, the complexity of the
problems requires a multidisciplinary and holistic approach. A multidisciplinary approach is
required for understanding the nuances of corporate governance. There is no doubt that there
are different methodological approaches for identification of stakeholders that can be
important in decision-making. But even if management uses any of the available
methodology, it is still disputable in which way contemporary decision-making can outgrow

the principal - agent model. It is the very reason why the implementation of the CSR in reality
of prevailing quarterly management is deeply questionable. However, a kind of guideline can
give us an analysis of corporate governance in accordance with the theory of the hierarchical
systems (Meadows, 2008: 82). We will see that the corporate governance system is based
inside nested systems (see figure 1).

Environment
Cultural
framework
Stage of socioRegulation
economic
Tradedevelopment
Unions
Customer
Employees
s
Suppliers
Competitors
General
Assembly
Management
Board
Purpose &
Strategy
Culture
Structure
Vision
Mental models &
Awareness
CG standards

Figure 1. Corporate governance in nested systems

The systems theory suggests that the hierarchical system evolves from bottom up. This means
that the environmental problems, such as climate changes, are consequence of action of
individuals and organizations, and of humanity as a whole. At the moment, climate change
has increasingly negative inverse impact on smaller systems. In other words, the fight against
climate change has underlined the need for the reaching the Climate Agreement in Paris.
Implementation of the Agreement directs behaviour of narrower systems, i.e. drives
formulation and adoption of national goals and policies and industry standards for reducing
CO2 emissions. New goals and policies will, over time, lead to the (re)definition of strategic
business objectives, and ultimately to possible changes in the views of management and
shareholders, and their awareness of the need to take responsibility for their impact of on the
wider systems such as environment, as in the case of already mentioned oil companies.
6. Conclusions and Recommendations
At the beginning of the 21st century we are facing the unprecedented challenges in the history
of human society. Due to their magnitude and complexity the companies will need to adopt

and favour interdisciplinary, holistic approach and cooperation with a number of stakeholders.
In addition, they will need to develop competences needed for continuous identification of
key sustainability problems, and more than ever design and refinement of fundamental
solutions.
In line with the approach of pragmatic idealism, companies will need to use the symptomatic
(or so-called quick fix) and fundamental solutions. Although symptomatic solutions allow
only alleviation or elimination of symptoms, their use is necessary because it enables quick
wins, which somewhat buys some time for the discovery and design of fundamental solutions,
without which it won't be possible to successfully respond to challenges of the 21st century.
In accordance with the analysis of the key underlining causes of the current challenges,
fundamental solutions should be reached on the four levels:

Change in awareness: from ego to ecological awareness;

Change in mental models/economic paradigm from neoliberal paradigm and
traditional business model to emerging paradigm of "Capitalism 4.0" and a model of
CSR;
Change in the prevailing model of corporate governance aiming at maximizing
shareholders value;
Changing the way of functioning of corporate governance system.

According to Capra (Capra, 1998: 20), eco awareness observes fundamental interdependence
of all phenomena and recognizes that all of us, individuals and society, are part of the cyclical
processes in nature on which we depend. An integral part of ecological awareness is also
internalisation of the views and interests of other stakeholder in the system, the ability to
perceive the problems from the perspective of others, making decisions that bring benefits to
the whole system - and not just to one part (Scharmer and Kaufer, 2013: 73).
The paradigm of "Capitalism 4.0" has the following features (Scharmer and Kaufer, 2013: 67137):

Nature is eco-system and the common good. Accordingly, it is necessary to redesign

the economic system in accordance with the principles of nature, i.e. by transition
from linear to circular economy model.
Labour is a form of social and business entrepreneurship through which employees
can accomplish their purpose.
Leaders are 'stewards' acting in favour of short-term and long-term interests of
stakeholders.
The purpose of the financial capital and technological development is the common
good of all stakeholders.
Mechanisms of coordination of economic activities ensure alignment of the parts to
the whole.
Ownership rights on common goods are controlled by the owners, stakeholders and
the stewards, with the aim of achieving long-term benefits for all. It is necessary to
harmonize private ownership rights with the welfare of society as a whole.

The joint CSR & GC model assumes that the company is a part of a network of stakeholders,
and that its success depends on the success of the entire network. Accordingly, CSR & GC
model implies taking care of the interests of all stakeholders - as a whole, as well as
individually. Adopting the new model of CSR will have to be necessarily reflected in the
structure and functioning of the corporate governance. With regard to that, following
questions will have to be addressed and answered: how to establish a true dialogue with key
stakeholders, as well as how to include the future generations in the process and ensure the
protection of their interests. There are no definitive answers at this point, but as a basis and
orientation for future we are proposing, modelling and prototyping for fundamental solutions.
The process of discovering and developing fundamental solutions can lead socially
responsible leaders. These are leaders who have developed global eco awareness, holistic
thinking and acting in the interests of all stakeholders, as well as the whole system.
Accordingly, the development of socially responsible leaders is the first and the most
important step in the process of transformation of companies and the global system.

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