Making the banks reputable (again) : an analysis of corporate strategies of banks regarding corporate social responsibility

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Making the banks reputable (again)

An analysis of corporate strategies of banks regarding corporate social

responsibility

Student: Supervisor:

Anne Poolman Geoffrey Underhill

10410880 Word Count: 25.000 Master Thesis Political Science Specialization Political Economy Faculty of Social and Behavioural Sciences

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Chapter I: Introduction

2008 was economically one of the most turbulent years of this century so far. After a relatively long period of rapid credit growth, a financial crisis of

unprecedented scale in the post-‐war economic history hit the global economy (European Commission, 2009). The credit-‐problems, which started in the United States, quickly spread to both financial sectors and real economies across the globe. Banks, pension funds, companies and individuals suffered from major losses on their assets and governments had to take action to keep the banking system run smoothly. According to the 2016 Financial Stability Report of the Bank of England, governments worldwide have pledged more that $7 trillion in loans, guarantees, capital injections, and other assistance to support the financial system. The global financial crisis shocked the world and while financial sectors struggled, consumer trust in financial institutions plunged (Eisenegger, Künstle, 2011). The 2009 G20 meeting in London reported: “we face the greatest

challenge in the world in modern times . . . major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system” (G20, 2009).

Trust is thus a crucial part of finance, successful business, growth and development (Gurria, 2009). In response of the so-‐called confidence crisis, banks and other financial institutions have attempted to redefine their position in society and enhance reputation. One way to improve trust and reputation is by focusing on corporate social responsibility. By embracing a more sustainable and socially engaging way of doing business, organizations can take responsibility for the negative externalities caused by their actions. This trend is coined as

corporate social responsibility (CSR). Dimensions generally associated with CSR are environment, society, economic, stakeholders and voluntariness (Dahlsrud, 2008).

1.1 Research question

Accelerated by the financial crisis, financial institutions – in particular banks – have come under increasing pressure to take a more long-‐term view of their stakeholders’ interests and to acknowledge and respond to their obligations to

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society (Jizi, Salama, Dixon, Stratling, 2014). As financial services are seen as a central pillar of modern capitalist economies -‐ performing core functions that facilitate economic activity -‐ they play a fundamental role in determining the economic fortunes, stability and sustainability of modern economies (Decker, Sale, 2009). While the financial sector does not directly affect the environment and society by emissions or waste management, the 2008 financial crisis showed the potential negative external effects that the financial sector could impose on society. Financial institutions were often blamed for the crisis by media, NGO’s and other stakeholders as they failed to protect the interest of their stakeholders. This has resulted in a loss of trust and reputation of banks (Peloza, 2005). CSR arguably increases the value of corporate reputation and can help with repairing reputation damage after a crisis (Barton, 2001; Klein, Dawar, 2004; Fombrun, van Riel, 2004, Cooms, Holladay, 2006, Dell’Atti, Iannuzzi, 2016).

The primary research question of this thesis is: “What has been the response of large commercial banks in The Netherlands, Belgium and United Kingdom with regard to reputational damage caused by the 2008 financial crisis?” In order to answer this question I will turn to the CSR activity of banks and answer the sub-‐question: “Has a deepened CSR strategy mitigated the reputation damage of banks The Netherlands, Belgium and United Kingdom?” These questions are largely descriptive in order to provide information on how we might account for the differences across banks in terms of CSR strategies.

1.2 Case selection

This study will focus on the banking sector as the banking system plays an important role in economic development because its safety and soundness create several external benefits to society (Wu, Shen, 2013, p. 3530). Banks exert a dominating influence on the economy, society and sustainable development by means of their financial activities and investments (Scholten, 2009). Mehran, Morrison and Shapiro (2011) distinguish two key differences between the governance of banks and that of non-‐financial firms. Most importantly, banks have more stakeholders than non-‐financial firms. Beyond shareholders,

stakeholders at banks include customers and depositors, regulators, investors, taxpayers, politicians and the directors and staff of banks. As banks use

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the community more than other industry. For example, when banks are in distress it may rely on governments to bail them out in the expense of taxpayers (Wu, Shen, 2013). Therefore, as banks employ public resources paid for by society, they are highly scrutinized by the large number of stakeholders regarding their activities, including CSR. This is specifically true for the post-‐ crisis period.

The research will specifically focus on the banking sectors in The

Netherlands, Belgium and United Kingdom. All of which have relatively large and advanced financial sectors, which endured significant losses as a result of the financial crisis (OECD, 2017). Additionally, The United Kingdom and The Netherlands are leaders in public policy with respect to socially responsible investment (Steurer, Margula and Martinuzzi, 2008). In each country three to four banks will be studied. These banks together represent the majority of the banking sector in each of the countries. Additionally, in the sample at least one bank in each country is included that has received state-‐aid. As mismanaged banks are rescued, it could simultaneously create a moral hazard problem: the bank does not bear the responsibility for its own inefficiencies, which could lead to negative incentives for banks to adjust their business strategy (Kim, Filos, 2012, p. 27). Thus both banks that have and banks that have not received state-‐ aid during the financial crisis are included in this research in order test whether this variable might influence the CSR strategies of banks.

1.3 Relevance

This analysis is of interest for two reasons. First, it complements the existing literature that has focus so far mainly on determinants of general trust (Knell, Stix, 2009). Secondly, this analysis enables us to find out whether on the one hand there are country specific differences in the way banks focus on CSR as a response to the crisis. And on the other hand, shows what the influence of state intervention (nationalization) has been on the integration of CSR policy.

1.4 Analytical framework

Research on CSR has become more widespread in recent years. Traditionally the economists’ view of how society should be organized rests on two pillars, namely the idea that the invisible hand of the market connects the pursuit of self-‐

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interest to the pursuit of efficiency. And secondly, the state corrects market failures whenever externalities stand in the way of efficiency (Benabou, Tirole, 2010). In this respect, the firm’s sole responsibility is to maximize shareholder value and profits (Friedman, 1970; Jensen, 1972). But in the last two decades the relationship between firms and society has begun to shift markedly (Van Tulder, Van der Zwart, 2003; Kemper, Martin, 2010). Stakeholders turn to firms, rather than governments, to address enduring environmental and social problems (Auld, Bernstein, Cashore, 2008).

Two models will be used as analytical model in order to comprehend and rank the CSR strategies of the banks over time. The Visser-‐model is a more general model outlining motives for firms to focus on CSR. The ENMEM-‐model is a model specifically designed to show the progression of CSR commitments of banks in the last two decades. The combination of the two models ensures that an accurate model is used to rank the CSR strategies of the banks in this sample.

1.5 Argument

The aim of this study is to complement and extent the above discussion to the financial crisis. It will explore whether banks in The Netherlands, Belgium and United Kingdom have indeed altered their post-‐crisis business strategies by emphasizing CSR activities in order to regain public trust and reputation. Additionally, as CSR is often criticized for being solely a marketing tool, this study will attempt to determine whether banks that have fully integrated CSR strategies throughout their business activities are more successful in restoring reputation. Lastly, it will include the variable ‘nationalization’ to determine its effect on the CSR strategy of banks.

1.6 Findings

The rankings based on the two analytical frameworks shows that in general the banks have enhanced their CSR commitments since the pre-‐crisis period. Over the span of about ten years banks de-‐emphasized issues such as internal sustainability and philanthropy and increasingly adopted polices that target macro-‐issues of sustainability. Additionally, banks have more and more integrate CSR considerations in their core business strategy. The banks take a more

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solely limiting economic and reputational risks, towards a more pro-‐active approach regarding both stakeholders and sustainability issues. Banks thus see CSR more as a business opportunity, rather than an aspect of risk management.

The direct relationship between reputation damage and CSR strategy development cannot be found based on the evidence of this research. Whereas the relevance of the financial crisis for CSR strategy is emphasized, the data is too limited to show a causal relationship.

1.7 Structure

The article is organized as follows. Chapter II will start by outlining relevant literature on CSR and corporate governance. Subsequently, after a discussion of the methodology and sources, chapter IV will a more detailed background on the financial crisis will be discussed as well as the change in reputation of banks in the three countries. Thereafter will chapter V will outline the CSR strategies of the banks in the different periods. Section IV is focused around four hypotheses. This sector includes a discussion on the relationship between CSR strategy and reputation damage. Do we observe that banks that already had a more integrated CSR policy prior to the crisis are less affected by reputation loss? And do these banks seem to recover more quickly from the reputation damage? And what about banks that changed their CSR strategy during the crisis? The emphasis in this part of the research is on the interviews with relevant actors in the financial sector.

Chapter II: Theory discussion

2.1 Corporate Social Responsibility

In the contemporary world corporate social responsibility (CSR) has become a hot topic in both public and academic debate. From the 1990s onwards the number of articles published on CSR doubled every year (Aguinis, Glavas, 2012). This reflects the fact that an increasing number of organizations around the world are “adopting a variety of so-‐called voluntary initiatives that aim to improve their social, environmental, and human rights records” (Utting, 2005). This trend of increased focus on CSR has been the result of pressures from a wide array of stakeholders that turned to firms, rather than governments, to

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address enduring environmental and social problems (Auld, Bernstein, Cashore, 2008).

In spite of, or perhaps because of the exponentially growing interest and integration of CSR in the internal culture of firms, the concept of CSR remains ill defined and confusing. Academics have not been able to offer a clear and

generally accepted framework for how and why firms focus on CSR (Souto, 2009). There is extensive literature on what the definition of CSR is, and there are perhaps even more scholars that argue that there is no one satisfactory definition of CSR. Whereas the lack of a widely accepted definition for CSR concept remains a significant challenge for theorizing CSR, Dahlsrud (2008) has compared a large number of definitions of CSR and found that there are five keywords that occur repeatedly, namely environment, society, economy, stakeholders and voluntariness.

Frynas and Stephens (2015) propose a simple, but adequate definition.

The authors thus emphasize the voluntary character of CSR. Hopkins (2002) also stresses the importance of the voluntary character of CSR. Hopkins claims that when CSR is being regulated (by the government) the interaction between society and companies will fall away, discouraging companies to do more with respect to sustainability than is imposed on them.

2.1.1 Development of CSR strategies

As businesses have increased the adoption of CSR practices, managers face increasing pressure to justify the allocation of scarce firm resources. This has led to a wealth of empirical research examining the relationship between CSR and corporate financial performance, resulting in contradictory positions (Mahon, Griffin, 1999; Margolis, Walls, 2003; Peloza, 2005; Schnietz, Epstein, 2005;

Box 1: Corporate Social Responsibility

An umbrella term for a variety of concepts and practices, all of which recognize that companies have a [voluntary] responsibility for their

impact on society and the natural environment, often beyond legal compliance and the liability of individuals

(Frynas, Stephens, 2015, p. 485).

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Barnett, Salomon, 2006; Njoroge, 2009; Ducassay, 2013). Some scholars argue that “any discretionary expenditure on social betterment unnecessarily raises costs for a firm, thereby putting it at an economic disadvantage in the

competitive market” (Barnett, Salomon, 2006, p. 415), while others argue that a firm’s better social performance makes it easier for firms to attract resources and mitigate financial risk (Klein, Dawar (2004); Benabou,Tirole, 2010). Margolis and Walsh (2003) have compared 127 empirical studies that looked into the relationship between CSR and FP. Around 40% of the studies found a positive relationship, while 28% of the studies found an insignificant

relationship. Wu and Shen (213) argue that the conflicting results may be attributed to the different motives that corporations have in conducting CSR.

Visser (2014) has distinguished five stages of CSR. In these five stages different motives for investment are CSR are present:

1. Defensive CSR: all corporate sustainability and responsibility practices – which are typically limited – are undertaken only if and when it can be shown that shareholder value will be protected as a result. This stage of CSR is based on the theory of Friedman (1962), which states that the sole responsibility of a firm is to create wealth. Garringa and Mele (2004) call this way of thinking ‘instrumental theories’ of CSR. CSR in this respect is only seen as a strategic tool. An example of defensive CSR is a defensive expenditure in for example pollution control in order to fend of

regulations or fines (Visser, 2014, p. 9).

An important concept for defensive or instrumental CSR is rent seeking. Rent seeking is one’s attempt to increase wealth by using political influence (Krueger, 1974). As the traditional domestic political process has extended to a model where business firms contribute to global regulation and providing public goods (Schrerer, Palazzo, 2011, p. 901), firms will try to affect and shape regulatory initiatives in a way that will serve their own interest (Peltzman, 1989; Underhill, 2016). If the sole responsibility of firms is to create wealth for shareholders, firms will most likely seek to limit CSR regulations imposed by governments.

2. Charitable CSR: this stage includes the sharing the fruits of success, irrespective of the path taken to achieve that success. “It is the idea of post-‐wealth generosity, of making lots of money first and then dedicating

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oneself to the task of how best to distribute it, by way of leaving a legacy” (Visser, 2014, p. 11). Charitable CSR is not solely the donation of funds to NGO’s and other charitable organizations, but could also include

employee involvement initiatives. In the 1980’s, a number of companies involved their employees in community work (Staples, 2004, p. 156). 3. Promotional CSR: in this stage firms use marketing spins to create an

image of responsibility, while failing to change the underlying negative impacts. Due to the proven ability of CSR to strengthen organization and brand image, CSR is a fundamental part of corporate marketing strategy (Mele, Debeljuh, Arruda, 2006). More and more companies attempt to present themselves as “social agents whose leading goal is to contribute to the sustainable development of society through the commitment to its most basic needs” (Perez, Del Bosque, 2012, p. 147). This has led to a massive increase in CSR communication. Snider, Hill and Martin (2003) point to the considerable growth in corporate communication “with CSR reports filling web pages and brochures, mainly in reaction to stakeholder demands” (Jahdi, Acikdilli, 2009, p. 105). The rising social pressure to incorporate CSR and the massive increase in CSR communication has raised question about the intentions of companies to implement these policies and the sincere incorporation of CSR into corporate identity (Perez, Del Bosque, 2012). In their 2006 report, Corporate Watch calls CSR the “hot corporate strategy of our era” (Coporate Watch, 2006). The point here is that some companies have a gap between PR claims with regard to CSR and actual performance (Visser, 2014, p. 13). This concept is sometimes referred to as ‘green washing’: disinformation disseminated by an organization, so as to present an environmentally responsible public image; a public image of environmental responsibility promulgated by or for an

organization, but perceived as being unfounded or intentionally misleading (Oxford English Dictionary, 1999).

4. Strategic CSR: in this stage CSR activities are related to the company’s core business, often through adherence to CSR codes and implementation of social and environmental management systems, which typically involve cycles of CSR policy development, goal and target setting, program

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implementation, auditing and reporting (Visser, 2014, p. 13). Strategic CSR is focused at the micro level. It focuses on supporting social and environmental issues that happen to align with a company’s strategy (Visser, 2011, p. 9).

5. Transformative CSR or CSR 2.0: according to Visser, this is the stage of CSR that companies should strive for. Here CSR activities are focused on identifying and tackling the root causes of present unsustainability and irresponsibility, typically through innovating business models,

revolutionizing their processes, products and services and lobbying for progressive national and international policies. Transformative CSR differs from strategic CSR as is focuses on the macro level – firms try to optimize outcomes for the larger human and ecological system (Visser, 2014, p. 15).

There are thus different motives for firms to focus on CSR. The first three stages of CSR can be referred to as ‘negative CSR’. In these stages, firms mainly focus on CSR in order to limit risks, while the actual CSR activity is episodic and programs are undeveloped. Castello and Lozano (2009) state that collaboration with stakeholders in this phase is often limited to one-‐way interaction for a limited number of issues. Policies and practices are often centred on compliance with laws and the management of compliance is usually assigned to departments such as human resources. The last two stages of CSR focus on ‘doing good’ rather than limiting risks. This can be referred to as ‘positive CSR’. Firms accept that they have a role in addressing social issues and transform their organization’s business model accordingly.

2.1.2 The integrative approach

While these stages in the Visser-‐model give a good overview of general CSR motives, one important point is missing. External pressure coming from private actors – such as social activists and NGO’s –may force firms to produce public goods or curtail public bads via targeted campaigns. Garringa and Mele (2004) state that this so-‐called ‘integrative theory’ includes the sort of corporate social performance in which firms seek social legitimacy, with processes for giving appropriate response. Firms try to fulfil society’s increasing expectations. This includes changing the business model to include new social and environmental

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responsibilities (Castello, Lozano, 2009). This idea is similar to the idea of a ‘contestable management’: “anticipated threats of (endogenous) social protest can effectively discipline a firm’s behaviour and induce CSR decisions” (Crifo, Forget, 2015, p. 116). In this context, the stakeholder theory is used to provide a basis to explain the relationship between stakeholders and CSR strategy (Darus,

et al, 2015, p. 185). Freeman (1984, p. 46) refers to stakeholders as “any group

or individual who can affect or is affected by the achievements of the organisation’s objectives”. Freeman (1983) stated that as the power of

stakeholders increase the responsibility of management to meet such demand would also increase. Thus in the ‘integrative stage’ organizations do take social demands in account and integrate them in such a way that the business operates in accordance with social values (Garringa, Mele, 2004, p. 57). Castello and Lozano, 2009 argue that the motivation of firms to increasingly integrate social demands could be gaining a competitive advantage.

The integrative approach differs from the ‘promotional CSR stage’ as it does include the implementation of CSR policies in corporate strategy.

Additionally, it differs from the ‘strategic CSR phase’ as stakeholder pressure could lead to the integration of issues that were previously not in line with the company’s strategy. Stakeholders in this respect are thus seen as more than solely economic actors. In the contemporary world where society’s

consciousness of the effects of organization’s behaviour has risen (Vartiak, 2015), the importance of external-‐stakeholder pressure on the CSR policy of a company in different phases should thus not be forgotten.

In sum, companies can have different motives to implement CSR policies. These motives do influence the extent and efficiency of CSR policy. The model of Visser (2014) has outlined five stages of CSR strategy, ranging from the use of CSR as a strategic tool to increase shareholder value, to the creation of

innovative business models in order to tackle macro-‐level social and

environmental problems. An additional phase to the Visser-‐model is proposed, namely the ‘integrative stage’. This stage entails the implementation of

stakeholder pressure in the CSR strategy of a company. Table 1 outlines the ‘updated’ Visser-‐model.

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CSR stages Definition

Defensive CSR CSR practices are based on increasing

shareholder value.

Charitable CSR Sharing the fruits of success through a number of ‘charitable’ initiatives, without changing the (potentially unsustainable) business strategy.

Promotional CSR Create the image of being sustainable, for example through increased CSR reporting, without changing the underlying negative impacts.

Strategic CSR CSR activities that are closely related to the company’s core business are integrated in the business strategy.

Integrative CSR Resulting from social protests, a company integrates CSR practices – potentially on a wide range of topics -‐ in its corporate strategy.

Transformative CSR The CSR strategy of a company is focussed on identifying and tackling the root causes of unsustainability and irresponsibility.

Table 1 ‘Updated’ Visser-‐model on Stages of CSR strategies. Source: Visser (2014)

2.1.3 CSR in the banking sector

CSR activities differ from industry to industry, location to location and from time to time (Welford, Chan & Man, 2008). Jeucken and Bouma (1999) argue that banks have been relatively slow in adapting CSR pressures, compared to other industry sectors. Analysing corporate non-‐ financial reporting in different sectors, Kolk (2002) finds that whereas in general reports that include social issues have increased considerably between 1998 and 2001, sustainability reporting in the banking sector is still completely absent in 2001. It its argued

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that one of the reasons for this initial relatively slow adoption of CSR practices is because the financial sector often sees itself as non-‐polluting and producing low-‐ cost externalities (Schmidheiny, Zorraquin, 1996; Jeucken, 2001). The

intermediary role of banks in society means that, on the contrary, banks most likely have a huge effect on sustainability policies. By providing capital, banks decide which investments go forward and which do not (Scholtens, 2009). By performing this function, banks have a huge impact on both the economy

(Levine, 2004) as well as on sustainable development (Scholtens, 2006). But this connection is not nearly as direct as for example the environmental externalities of a coal-‐fired power factory.

This initial reluctant position of the banking sector towards CSR seems to be changing. Many banks and financial institutions have already adopted policies and practices that reflect CSR. Some have gone even further and fully

incorporated Environmental, Social and Governance (ESG) principles into their regular operations (Earhart, et al, 2010, p. 4). Laidroo and Sokolove (2015) look at CSR disclosure of 35 international banks across the globe and find a significant increase between 2005 and 2013 (see box 1).

Similarly, looking at membership of the Equator Principles, a stable increase is observed since the founding in 2003 (figure 1). The membership of the Equator Principles is criticized by several organizations with regards to its CSR

commitment. Watchman (2005) for example stated that the principles are not going far enough in the direction of achieving sustainable development. In

Box 1: increase in bank CSR disclosure 2005-‐ 2013

Source: Laidroo, Sokolova (2015, p. 293)

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addition, BankTrack (2005) stated that the principles are being used to ‘greenwash’ bank operation in developing countries.

Scholtens and Dam (2007) investigated the commitment of banks that have signed up for the Equator Principles and found financial institutions that adopted the Equator Principles are rated significantly higher with respect to CSR commitment than those of financial institutions that did not sign up. The

increase in Equator Principles members thus seems to signal an increase in the commitment of banks with respect to CSR.

Figure 1 Increase in Equator Principles membership, years 2003 – April 2017. Own calculations. Source: Equator Principles.

0 10 20 30 40 50 60 70 80 90 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 N u m er o f M em b er s

Equator Principles Members Growth

Box 2: The Equator Principles

The Equator Principles (EP) is a risk management framework, which can be adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and project related

finance. Created in 2003, 89 financial institutions have since then officially adopted the EP’s (Equator Principles, 2017).

The Equator Principles aim to reduce, mitigate, and/or compensate appropriately for damage to communities and environment caused through financing of projects (Equator Principles, 2017). The creation of the principles has been the result of pressure from the activist group

Rainforest Action Network. Most banks have signed a number of codes of conducts, guidelines and agreements over the years.

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Thus whereas it was argued that initially banks were relatively slow in embracing CSR policies, the increase in both CSR reporting of banks and in sector-‐wide CSR initiatives, seems to point to a change of CSR attitudes of banks.

2.1.3 The ENMEM framework

So far we have discussed the definition of CSR as well as different strategies of firms regarding CSR. Next, the general CSR strategy of banks has been discussed. If we look more specifically at how the CSR strategy of banks has changed in recent years, the ENMEN-‐framework can be employed. Starovic (2016) has developed a framework, which outlines the development of CSR in the banking sector (see table 2). This framework gives an overview of the development of CSR commitments in the banking sector in the last two decades. In this research the models of Visser and Starovic will be combined in order to classify the CSR strategies of the banks in The Netherlands, United Kingdom and Belgium. Table 3 (page 26) gives an overview of the combined models that are used for the

analysis.

CSR Typology Periods Description

Embryonic 1997-‐2003 Very light dedication globally.

Nascent 2003-‐2008 Boom of CSR activity. Still light, however CSR concept is more spread across the industry in comparison to the previous period.

Maturing 2008-‐2010 Significant push from CEO level to change the practices and be more socially responsible. Expectancy 2010-‐2015 Significant public pressure results in CSR

activities being expected by the society.

Mandatory 2015-‐ CSR principles becoming formalized and more

and more incorporated into business strategy of the banks given the increasing social demand. Table 2 The ENMEM framework: the classification of CSR periods. Source: Starovic (2016, p. 90)

In the ENMEM framework the ‘embryonic’ period is characterized mostly by philanthropic activities or charitable activities on the individual level. Besides,

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cost-‐effective motives seem to have formed the basis for banks to become more sustainable (Jeucken, Bouma, 1999; Weber, 2005). Decreasing costs by reducing the use of energy, water and material could lead to huge energy savings. NatWest for example saved US$50 million in energy costs between 1991 and 1995

(Jeucken, Bouma, 1999). This stage is very similar to both ‘defensive CSR’ as well as ‘charitable CSR’ in the Visser-‐model.

In the ‘nascent’ period, which is prior to the financial crisis, a CSR activity ‘boom’ emerged in the banking sector. Besides philanthropic and internal CSR initiatives, banks focuses more on collective initiatives. In this period we do see the foundation of initiatives such as the Equator Principles. Though the CSR commitment is still sporadic and not integrated with business strategy. This stage is very similar to the ‘promotional CSR’ phase distinguished by Visser.

Next, Starovic states that in general the CSR strategies of banks shifted to the ‘maturing’ phase during the financial crisis. “The crisis outbreak in the banking industry throughout the years of 2007 and 2008 brought new emphasis on CSR commitment” (Starovic, 2016, p. 89). In this ‘maturing phase’ there seems to be an increase in commitment at the corporate level although CSR is not yet formalized at the institutional level. This phase is relatively similar to the

strategic CSR in the Visser-‐model in the way both stages emphasis the increased social pressure. The difference between the two stages is that the ‘strategic CSR stage’ places more emphasis on the integration of CSR commitments at the institutional level compared to the ‘maturing phase’ in the ENMEN-‐model.

As bank action came under widespread public scrutiny, in the ‘expectancy phase’ banks seem to start committing at the institutional level. Increased public pressure results in broad range of CSR activities. The emphasis on the way public pressure can shape corporate strategy is in line with the integrative CSR stage that was added to the Visser-‐model.

Lastly, Starovic finds that recently banks have started to compete and mirror each other’s CSR activity, leading to a leap forward of CSR commitment of banks. This so-‐called ‘mandatory phase’ is relatively similar to the strategic CSR phase as outlined by Visser (2010), in the sense that CSR principles become more and more formalized and integrated in corporate strategy.

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The ENMEM-‐model thus provides a useful model specifically focussing on banks and the change of corporate strategies with respect to CSR. When

comparing the model to the previously discussed model of Visser, which outlined more broad CSR motives, we see that the stages are fairly similar. The models can therefore relatively be combined and used for the analysis of this paper. The question that remains is how corporate strategies change. Thus what drives change from one stage to another? In order to answer this question, we will turn to the changed relationship between society and firms and the impact this has on the corporate governance of banks.

2.2 Corporate Governance at banks

The ENMEM-‐framework indicates that banks are increasingly adopting CSR policies in their corporate strategies. As banks have struggled over the past two decades to become, or at least appear as socially responsible, the Visser-‐

framework shows that different motivations may underlie bankers’ CSR commitments. But what are the factors that provoke corporate strategies to change in favour of CSR? What incites banks to increasingly integrate sustainability policies in their core business strategy?

Berle and Means (1932) were the first ones to observe that owners of companies no longer directed the fates of most large corporations. Instead a number of stakeholders, both inside and inside the firm, may try to influence the corporate strategy. This process is referred to as corporate governance: the effort of firms to balance the interests of different stakeholders (Freeman, et al, 1983). More specifically, Baron (1995) argues that the business environment is composed of both market components -‐ interactions between the firm and other parties that are intermediated by markets or private agreements – and

nonmarket components – interactions that are intermediated by the public, stakeholders, government, the media and public institutions. The economic activity of a firm is thus affected by both public politics – groups that attempt to influence public officeholders to the benefit of their group -‐ as well as private politics -‐ interest and activist groups who attempt to influence economic activity directly without reliance on public institutions or officeholders (Baron, 2001). Corporate strategies are therefore more than just ‘economic’ and profit-‐ seeking.

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Instead corporate strategies consist of social, political, and legal arrangements that structure the firm’s interactions outside of markets (Baron, 1995, p. 48). Visser (2014) underlines the influence of stakeholder pressure on CSR strategies of firms. He does so by distinguishing ‘old CSR’, or CSR 1.0, and ‘CSR 2.0’. The author states that most companies were stuck in the philanthropic or promotional CSR mode. The companies did not have the deliberate intention to mislead, but “supported by a system of narrow institutional performance incentives, short-‐term market pressures and perverse economic measures of progress, financial profitability was regarded as more important than ethical standards” (Visser, 2014, p. 10). Visser states that CSR 1.0 in this respect was a vehicle for companies to establish relationships with communities, channel philanthropic contributions and manage their image. Though now with the shifting relationship between business and society, organizations employ

innovative partnerships and a wide array of stakeholder involvement initiatives in order to tackle global challenges. Lastly, Visser predicts that as the world becomes more connected and global challenges like climate change and poverty loom ever larger, businesses that still practice CSR 1.0 will be rapidly left behind. “Highly conscious and networked stakeholders will expose them and gradually withdraw their social license to operate” (Visser, 2014, p. 15).

Thus the new relationship between business and society is argued to have changed the way in which corporation balance different interests when forming their corporate strategy. Increased stakeholder pressure is argued to be an important factor behind rupturing the equilibrium in a corporate strategy towards more CSR. The next step is identifying what the drives behind the expanded stakeholder pressure for CSR are.

2.2.1 Trust and Reputation

Whereas different motives may underlie CSR strategies at different banks, there is one crucial aspect of corporate governance that all banks have to deal with, which is trust. Banks are unique in many ways – from the retail services they provide to the role in enabling economic activity for corporations. But above all, banks differ from other sectors as their business relies to a large extent on trust. In order to retain customers, grow business, and reassure (potential) customers that it will keep their money and investments safe; banks have to establish a

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reputation of being trustworthy. The financial contracts that bankers execute are characterized by information asymmetry and uncertainty, which makes trust (and reputation) a necessary condition for doing business (Decker, Sale, 2009). “While trust is fundamental to all trade and investment, it is particularly

important in financial markets, where people depart with their money in

exchange for promises. Promises that aren’t worth the paper they’re written on if there is no trust” (Sapienza, Zingales 2009, p. 2).

When trust is undermined, lenders and investors lose their appetite for risk, and shareholders offload their equity, resulting in lost value and reduced availability of capital (Witherell, 2002, p. 8). Evidence for this can be found in Calderon et al (2002) who find that trust is correlated to the depth and efficiency of financial sectors. More specifically, Guiso, et al (2000) find that in regions with high levels of trust, households hold less cash, have higher stock investments, use more checks, have more access to credit, and have less use of informal markets. In contrast, in regions where trust is low, households and shareholders will thus be more inclined to hold on to capital. Thus for banks it is crucial to manage trust in order to work efficiently.

2.2.2 Trust

For banks -‐ as a central pillar of modern capitalist economies – trust is thus a crucial issue of corporate strategy (Decker, Sale, 2009). Olsen (2008) states that while there might not be complete consensus in the literature on the nature and the function of trust, there is a widespread agreement that trust is the bedrock of most interpersonal transactions. For example, Fukuyama (1995) -‐ a renowned author in the field -‐ sees trust as a substitute for transaction costs: in societies where people expect honest, cooperative behaviour, society will be better able to organize effectively since the high degree of trust will permit a wide variety of social relationships to emerge. Similarly, Eisenegger (2009) argues that it is trust – not power or wealth – that is the most important operational resource in society, as it cements existing relations and at the same time acts as a magnet for future relations.

Making the banks reputable (again) : an analysis of corporate strategies of banks regarding corporate social responsibility