The Board as Driver of Sustainable Change

Corporate governance governs the relationships between owners, management, and, in some national forms, other stakeholders. The Board of Directors, as the central body and link between the stakeholders, ensures that the company is correctly and effectively managed in accordance with its purpose. To this end, the Board of Directors plays a decisive role in determining how the company assumes its responsibilities within the market system. In addition to their role as fair and efficient creators of economic value, many companies also see themselves as social value creators, as corporate citizens. This raises the question of what role the Board of Directors should play in this decision-making process.

Two core tasks

Since many corporate citizenship activities, such as charity initiatives, aid projects, or cultural involvement, cannot be justified by established market laws, the management of companies of feels that many of the issues are new when they arise. The character of the new suggests that corporate citizenship should be viewed from an innovation perspective. By social innovation, we, therefore, mean all activities of a company that aims to create social value and are perceived as new by the company at the time of launch (see e.g. Moss Kanter 1999 or Hall & Vredenburg 2003).

From this point of view, the Board of Directors has two central tasks: It must define the role of the company outside the market system in the context of its responsibility to the owners. This requires an assessment of change and, consequently, the degree of innovation. Furthermore, the Board of Directors must ensure that its understanding of social responsibility is implemented, and that the right path of innovation is followed.

Identification of the degree of innovation

The value of social value creation is strongly oriented towards the expectations of society. For the company, this raises the question of how these expectations should be assessed. Social development can be interpreted in three ways: as a fundamental change, as cyclical development, i.e. functional, or as a zeitgeist phenomenon, i.e. a fashion (Walter-Busch 1991).

The interpretation of change defines the necessary degree of innovation. If a change is assessed as fundamental, the aim is to achieve a fundamental anchoring of innovation that fundamentally changes the organization.

If, on the other hand, change is interpreted as a zeitgeist phenomenon, an innovation should rather aim at symbolic anchoring. A cyclically classified change ultimately favors a technical anchoring of innovation.

In the case of social innovations, this interpretation process is particularly accentuated. Since decisions are made outside the market paradigm, fewer constraints but also fewer specifications influence the decision. Rather, the company is offered various assessments, all of which can be conclusive and controversial. Such a decision can therefore only be made by an authority that can handle this freedom: the Board of Directors.

Specification of the innovation path

The Board of Directors must not limit itself to determining the degree of innovation, but must also ensure that social innovations can develop. This requires an understanding of the optimal innovation path. Since Duncan (1976), prominent representatives of innovation research (e.g. Tushman & O’Reilly 2007 or Birkinshaw & Gibson 2004) have propagated the “two-handed” organization as the optimal structure for innovation. This organization aims to give employees freedom for new ideas and at the same time create control structures. However, the decisive factor for successful implementation is understanding when which hand needs to intervene in order to remain in Duncan’s visual language.

Two factors influence the innovation process: external expectations and internal capabilities. The source of many ideas lies outside the organization. External factors also play a role in deciding which innovations to pursue and how they should be developed. Institutional organization theory (e.g. DiMaggio & Powell 1983) explains this behavior by the legal, normative, and cognitive legitimacy pressure (Scott 2001), which can lead to a convergence of organizational behavior. The influence of these factors on the innovation process is therefore strongly dependent on the openness of the organization to external influences.

In addition, the capabilities of an organization also play a decisive role. Both the selection and the further development and diffusion of innovation are influenced by them. The importance of these factors is rooted in the evolutionary school (e.g. Penrose 1959, Wernerfelt 1984, or Winter 1987). In this logic, the company is understood as a learning organization in which routines and knowledge accumulation determine behavior. Success depends primarily on the extent to which the company is able to integrate new innovation into existing structures and routines.

The task of the Board of Directors must be to create the structural and personnel conditions in the organization, depending on the assessment of social change, so that the desired degree of innovation is achieved. In doing so, it must choose between three prototypical innovation paths.

If a social change is classified as zeitgeist and therefore a symbolic diffusion is aimed for, e.g. by establishing an independent company foundation, the emulated innovation path is the most appropriate one. In this case, the company must be open to external influences. The ability to integrate innovation, on the other hand, is of secondary importance.

If the firm sees a cyclical development in change and if a technical innovation anchorage is required as a consequence, e.g. in the case of the introduction of an internal social auditing tool, the exerted innovation path is recommended. It is characterized by a strong orientation towards existing company routines. Openness to external influences is less important in this case.

If a company considers a social innovation to be fundamental on the basis of a fundamental assessment of change, as is the case, for example, with the conquest of new markets that serve both social and economic value creation, the empathized innovation path is the most appropriate one. It presupposes that the company is open to external influences and develops the ability to better anchor innovations internally.

Conclusions

True corporate governance is essential for the smooth functioning of the market system. For boards of directors, an extension of the discourse of responsibility to include corporate citizenship can offer an additional opportunity. The focus should not be on actionism, but on a structured examination of social change. When implementing the chosen approach, it is advisable to understand corporate citizenship as an innovation process. This allows not only to benefit from previous experiences, but also to implement measures in a sustainable manner.

If the Board of Directors addresses issues of social and economic value creation with equal commitment, there is also the opportunity to gain important knowledge that can be successfully transferred to other areas of the company.

Literature

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This article appeared as a book chapter in German in 2008.