BEERG Perspective: Entrepreneurial Freedom and...

This is the first in a series of related discussion papers under the heading: Explorations, in which we in HR Policy Global, along with invited prominent experts, explore issues around “voice”.

By “voice” we mean the set of pressures on business managers from employees and public actors to deliver on social and ethical expectations in their own operations and throughout the global supply chains. HR Policy Global’s Tom Hayes sets the scene in this first paper. 

Exploration I: Entrepreneurialism and Employee & Public Voice

Entrepreneurial freedom lies at the heart of the market economy. 

By entrepreneurial freedom we mean the ability of entrepreneurs to combine capital, land, labour and, increasingly, knowledge to create products and services that people want to buy and that produce a profit for the entrepreneur.

By entrepreneur we do not just mean an isolated individual working away in a garage or attic, though that does describe many entrepreneurs. We also mean companies, collective endeavours, that take risks to bring new products or services to market.

We know that entrepreneurs do not work in a vacuum but are situated within dense social and political ecosystems of physical infrastructure, knowledge institutions, legal systems, business networks and complex supply systems, all of which facilitate their work. 

Entrepreneurs want to be able to work with maximum freedom, with as few constraints as possible on their ability to get things done, in as timely a manner as possible.

But because entrepreneurship is embedded in dense social, legal, and political ecosystems their freedom is always going to be constrained by “voices” that make competing claims on the wealth created, and which want a say in the decision-making processes which determine how and where that wealth is created.

We describe these constraints as the challenge of “employee and public voice”. 

“Employee voice” in internal to the business. “Public voice” is external and refers to all those who perceive themselves to be “stakeholders” in the business, irrespective of whether or not the business sees them as such. Politicians and governments, Non-Governmental Organisations (NGO), community groups, social justice coalitions, investor consortia, and international organisations such as the European Union and the International Labour Organization can all be included under the term “public voice”.

Employee Voice

Entrepreneurs/managers have long been familiar with the concept of employee voice. Such voice traditionally came in multiple organised forms, labour unions being the most recognisable. 

Other forms of employee voice include: employee forums; works councils; board-level participation; European Works Councils. And direct engagement between managers and employees, whether structured or not, which allow individual employees to offer views and opinions.

The institutional mix of such voices differs from country to country and may wax and wane over time as union strength grows or diminishes or changes in the law strengthen or weaken institutional forms of voice. In the legacy market economies of the West (US, Europe, Australia) recent years have seen a continual decline in union membership and the hollowing out of many collective bargaining institutions, such as sectoral bargaining. 

The purpose of organised employee voice is to constrain entrepreneurs to take the interests of employee stakeholders into account when decisions are being made. These decisions can touch on distributional issues, such as pay, working time, benefits, and vacation entitlements, issues which have traditionally been at the heart of collective bargaining.

Classic employee voice has also sought to constrain entrepreneurs over employment and location decisions. These include hiring and dismissal decisions, particularly collective dismissals. The opening and closure of plants, and where new plants are to be located, have also been contested.

We might refer to these issues as “dollar” issues, as many of the demands can be expresses in dollar terms, and, as such, are negotiable. Money can always be sliced and diced. This is what classic labor unions are about and where they feel most comfortable. 

More recently, some employee groups, most often through the use of social media platforms, have started to demand a say over issues such as: what products does the company make or what services does it offer; with whom does it do business; how does its activities impact the environment; what politicians or political causes does the company support; how should the company be socially engaged?

We can describe these demands as “ethical” issues. Which begs the question. How do you negotiate over such issues? You either manufacture a product or you don’t. You offer a service, or you don’t. You can’t half offer a service or a product. There is also the complication of with whom do you actually negotiate?

Further, in politically divided societies, as all Western societies are, how are corporate management to decide on what is “right”? 

A recent article in the Financial Times quotes Johnny C Taylor JN of the US-based Society for Human Resource Management (SHRM) stating that “voice” around ethical issues began to gather traction when “employers started encouraging people to bring their whole selves to work.” 

This resulted, says Taylor, in employees “bringing the language, the clothing and the political biases they once left at home to offices and factories each morning.”

The New York Times asked the question: Red Brands and Blue Brands: Is Hyper-Partisanship Coming to Corporate America?  It posited the scenario:

The year is 2041, and Starbucks has real competition. Black Rifle Coffee Company, the java brand favored by conservatives, has opened thousands of locations around the country.

Starbucks, whose longtime chief executive Howard Schultz pioneered a new wave of liberal corporate activism in the early part of the century, still dominates the coffee scene in college towns and blue-state urban centers. But Black Rifle Coffee, now publicly traded with a $250 billion valuation, is flourishing in suburbs across the country and in cities large and small across the Deep South and Mountain West.

Back in 2008, the American journalist Bill Bishop coined the phrase the “Big Sort” in his seminal book of that name. He argued that the process by which Americans have geographically self-sorted themselves into like-minded communities has consequences for the social fabric of society.

Could the same thing happen with Corporate America? As the NYT article suggests, could there be red and blue brands, with employees going to work for the colour brand of their choice? Of course, it would never be 100% and geography will play a part, a large part, in where people work. But, to take the NYT scenario a step further, would a liberal go to work for Black Rifle Coffee? 

What influence with remote working, growing exponentially following Covid, have on possible “job sorts” if, to some extent, geographical constraints on who I work for are removed? 

The more traditional demands of workers over issues such as pay or plant closures require the creation of institution, such as unions and collective bargaining, or works councils, if the demands are to be delivered on. Leaders emerge, experience is built, the craft of negotiations is learnt. The art of compromise is acquired.

Ethical issues have tended to be articulated through social media. Such articulation is ad-hoc, unorganised, spontaneous, leaderless, emotionally changed, and often seemingly uncompromising. Social media magnifies voices so that a few can be taken as for the many. 

“Dollar” issues require that workers have hard economic leverage if they are to push their agenda. “Ethical” demands aim to trigger guilt, to make leaders shudder as they are hit by waves of critical comment. To borrow from Shakespeare, “… the plays the thing wherein I’ll catch the conscience of the king … “ 

Caught in social media headlights, entrepreneurs can panic and make unwise decisions, anything to make the negative publicity go away.

In 2017, Zeynep Tufekci wrote a book Twitter and Teargas which looked at how social media was used to organise protest movements in places as diverse as Egypt, Turkey and the UK.

Writing recent in the NYT - I Was Wrong about Why Protests Work – Tufekci commented about the Arab Spring wave, and other protests around the same time:

All of them seemed to emerge from nowhere and grow quickly, using the powers of digital technology. Social media amplification allowed movements to bring important but largely ignored issues to the forefront of the public discussion — as, for example, Occupy did for inequality — but it was also crucial for handling the logistics of a big protest: getting the word out, coordinating and pushing back against official narratives and even the disdain and dismissal that often came from traditional media.

But, she adds:

The quickly sprung large movements often floundered for direction once the inevitable pushback came. They didn’t have the tools to navigate the treacherous next phase of politics, because they hadn’t needed to build them to get there.

She came to realise that protests come at the end of a long period of organising. They require, time, teams and structure. Hard graft. The social media driven movements had none of these things.

Voice without organisation is transient. It cannot be sustained. It is like a storm at sea. Terrible while it rages, but eventually it blows itself out. Calmer waters return. The ship may need some repairs but will sail on.

Entrepreneurs long ago learnt how to deal with “dollar” issues and how to engage with unions and works councils, where they exist. They also learnt how to build sophisticated human resource management systems to anticipate “dollar issues” and deal with them in the absence of unions and works councils.

As we said earlier, employee voice comes from within the business. No matter how critical they may be on occasions, employees have a stake in its success. In the end, if they remain unhappy, they can always “exit”, move on, find another job. Contrary to the “bring you whole self to work” mantra a job is not an employee’s whole life. It is just part of their life. 

Good people management demands engagement with employees, listening to what they have to say, no matter how they say it. Social media offers a new channel through which voice can be expressed. Until now, it has been used as we describe above.  

But, we need to think about how best managers can engage with social media voice, how it can be channelled in a constructive direction, in the best interests of both employees and the business.  Here are some initial thoughts on how best to achieve this:

1. Be clear about the business of the business, the products you make, and the services you will offer. These are for the entrepreneur/manager to decide. They are not negotiable. 
2. Make this value proposition clear to all prospective employees. “This is who we are, this is what we do”. Will you be comfortable with this? 
3. Do not be afraid to tell your story when it is necessary to tell it. When change is necessary, explain why you are changing.
4. Learn how to weather a storm. Anticipate and have policies, procedures and people in place who know what to do and when to do it.
5. Don’t negotiate with Twitter. See Point 4.

Public Voice

Increasingly, employee voice is being joined by “public voice”, voices from outside the business that see themselves as having a stake in the business because they represent the communities in which the business is based, they are investors in it, or they claim to speak for interests in its supply chain. Public voice also includes political voice, the pressures that can be brought by politicians and regulators, local, national, and international.

“Corporate Social Responsibility”, however defined, has a long history and dates back to the early days of the market economy. Philanthropy and charitable giving were early signs that businessmen, and they were all men, had a social conscience. Or at least some of the did!

Community chests and United Way in the US come quicky to mind. In the UK, the villages built by Quaker businessmen for their employees, such as Bournville by the Cadbury family, also stand out. 

There is a long, academic literature on the social responsibilities of business. But there is also the well-known remark of Milton Friedman that the only business of business is to maximise profits for shareholders and that anything else undermines capitalism.

More recently, as business went global, criticism of labour standards in supply chains in Global South countries became common. Criticism of companies such as Nike led President Clinton to push for the establishment of the Fair Labor Association (FLA) to monitor labour standards in the apparel and footwear industries. Voluntary corporate social responsibility initiatives became common, and an industry of auditors and consultants took root.

Human rights activists increasingly complained that such voluntary initiatives fell short. Companies were refereeing themselves, it was said. Demands for legal frameworks grew in intensity. In 1976, the OECD Guidelines for Multinational Companies (here) were first adopted and have been updated four times since. 

Predating both the OECD and the UN codes, are the multiple Conventions of the International Labour Organization ranging from the right of workers to unionise and bargain collectively, to the elimination or child and forced labour, and a wide range of health and safety measures. Not to mention the many Conventions on gender equality in the workplace. 

With the support of business and other stakeholders, the UN Global Compact’s governance framework was adopted by then UN Secretary-General Kofi Annan on 12 August 2005, following a year-long international process co-led by Georg Kell, then Executive Director of the UN Global Compact and Professor John Ruggie, then Special Advisor to the Secretary-General.

Ruggie then went on to draft a set of Guiding Principles on Business and Human Rights, which were adopted by the UN in 2011. However, for activists, the OECD Guidelines, the Compact, and the Guiding Principles fell short in that there were all voluntary. The only sanction they carried was “name and shame”. Can anyone recall any company that was ever “named and shamed” out of existence?

The trade unions and the NGO community wanted legal measures that would hold companies to account for labour, social, and environmental standards not only in their own operations, but throughout their global supply chains. Measures with teeth, teeth that would bite hard into the bottom line. The UN is currently considering a Binding Treaty on Business and Human Rights. Progress is slow.

As Wenchao Dong notes in the August 2022 issue of HR Policy Asia-Pacific Update, Japan's Ministry of Economy, Trade and Industry has released draft guidelines for all companies operating in the country, encouraging human rights due diligence within their global supply chain. The guidelines, expected to be finalized in September, call for companies to publish relevant policies and measures. The goal, writes Wen, is to close the gap with the U.S. and Europe on human rights issues and help Japanese companies stay with the trend. 

It is in Europe that demands for legal frameworks have found a response, both in individual Member States and from the European Union. In 2014, the European Union adopted a Directive on Non-Financial Reporting, an EU law which requires certain large companies to disclose information on the way they operate and manage social and environmental challenges. In 2022, the EU updated the 2014 Directive, noting: 

The corporate sustainability reporting directive amends the 2014 non-financial reporting directive. It introduces more detailed reporting requirements and ensures that large companies are required to report on sustainability issues such as environmental rights, social rights, human rights and governance factors.

The CSRD also introduces a certification requirement for sustainability reporting as well as improved accessibility of information, by requiring its publication in a dedicated section of company management reports.

The European Financial Reporting Advisory Group (EFRAG) will be responsible for establishing European standards, following technical advice from a number of European agencies.

In 2015, the UK put the Modern Slavery Act on the statute books. It is designed to combat modern slavery in the UK and consolidates previous offences relating to trafficking and slavery. Details here.  

The 2017 French Corporate Duty of Vigilance Law places the onus on large companies in France to identify and prevent risks to human rights and the environment that could occur as a result of their business activities. These activities can include those of the company itself, of their suppliers or subcontractors, of companies they control and more. The law, in brief, requires companies to create and implement publicly available vigilance plans for which they can be held accountable. 

On January 1, 2023, the Germany Supply Chain Due Diligence Act (SCDDA), becomes operational, mandating companies with offices in Germany to conduct due diligence on their supply chains to protect human rights and the environment. Companies will be hit with fines of up to €800,000 euros in fines and be open to court action form allegedly aggrieved parties.

For the EU, the updating of the Non-Financial Reporting Directive is only the starter. As the French would say, the plat principal is still being prepared. In February, 2022, the EU Commission released a draft Directive - Proposal for a Directive on corporate sustainability due diligence + Annex At the time of writing the Directive is still under discussion.

The proposal applies to businesses located within the EU, their own operations, their subsidiaries and their value chains (direct and indirect established business relationships). In order to comply with the corporate due diligence duty, companies will need to:

• integrate due diligence into policies;
• identify actual or potential adverse human rights and environmental impacts;
• prevent or mitigate potential impacts;
• bring to an end or minimise actual impacts;
• establish and maintain a complaints procedure;
• monitor the effectiveness of the due diligence policy and measures;
• and publicly communicate on due diligence.

National administrative authorities appointed by Member States will be responsible for supervising these new rules and may impose fines in case of non-compliance. In addition, victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.

All of this is a very long way from the idea that “corporate social responsibility” consisted of individual businessmen making donations to charity! It is the “public” demanding a voice in business strategy and decisions through the imposition of legally binding human rights frameworks. 

Back in the 1970s, the US-based Committee for Economic Development (CED), made-up of businesspeople and academics, published a paper Social Responsibilities of Business Corporations. The paper made the critical point that:

‘…business functions by public consent and its basic purpose is to serve constructively the needs of society—to the satisfaction of society’. 

Not, as Friedman argues, simply to maximise profits.

The CED noted that the social contract between business and society was changing in substantial and important ways: Business was being asked to assume broader responsibilities to society than ever before and to serve a wider range of human values. Business enterprises, in effect, were being asked to contribute more to the quality of American life than just supplying quantities of goods and services. Inasmuch as business exists to serve society, its future would depend on the quality of management’s response to the changing expectations of the public. 

In 1971 when the CED paper was published it was assumed that business meetings its social responsibilities would be purely a voluntary matter. And for a long time, it was. 

But, as the years went by, too many public actors - politicians, NGOs, community groups, stakeholder advocates, and (some) investors – concluded that voluntarism was not enough. Left to themselves, companies could not be trusted to “do the right thing”. Tragedies such as Rana Plaza Bangladesh underscored their point.

Which takes us to where we are today heading, to complex legal frameworks that constrain entrepreneurial decision making. 

Conclusions

Our opening comment in this paper was that “Entrepreneurial freedom lies at the heart of the market economy.”  But, as we also noted, entrepreneurs work within the social, cultural, legal, and political frameworks that individual countries, and groups of countries such as the EU, put in place through the political process. Those frameworks can include measures which give employees an institutional voice in the companies for which they work.

Increasingly, they also give the public a voice in what companies do and how they are run. 

While new technologies associated with the internet have helped companies become global and given them the ability to run complex global supply chains, the same technologies have also brought increased transparency. News now travels in a heartbeat. 

What will all this mean for the management of complex corporations? That is what we hope to explore in this Exploration series.