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Austrian economics as an alternative perspective

Recent attempts to construct a multilevel theory for explaining CSR
strategies focused mainly on stakeholder theory and institutional
theory and were guided by the idea that social and environmental
strategies are externally driven, with the role of managers confined
largely to adapting to external demands (Aguilera et al. 2007;
Campbell 2007). However, this exclusive emphasis on adaptation
to external pressures fails to allow for active managerial choices about
the direction of the social and environmental strategies and does not
account for entrepreneurial opportunities arising from social and
environmental issues.
A number of important studies have argued that firms can obtain
major business opportunities from social and environmental strategies
(Mackey et al. 2007; Margolis and Walsh 2003; Porter and Kramer
2006), and “ most crucially “ that these can constitute firm-specific
competitive advantages (Hart 1995; McWilliams et al. 2002).
Studies linking economic theory to CSR (in particular, the theory
of the firm) have previously suggested that CSR can be conceived as a
function of supply of/demand for social and environmental activities
The logic of CSR strategies 19

in the marketplace and that strategic CSR can be an integral part of a
firm™s differentiation strategy (Baron 2001; McWilliams and Siegel
2001). In addition, studies linking strategic management to CSR (in
particular, the resource-based view) have previously suggested that
specialised skills or capabilities related to investment in CSR can lead
to firm-specific competitive advantages (Hart 1995; Russo and Fouts
1997). This literature implies that companies can be proactive in
terms of searching for CSR-related business opportunities, in marked
contrast to the reactive view presented by stakeholder theory and
institutional theory.
Insights from economics and strategic management suggest that
the level of CSR strategy in a firm should be viewed as an investment
decision and a means towards achieving a competitive advantage, in
the same manner that any other investment decisions would be
taken. However, current studies with an economic or strategic focus
continue to regard stakeholder relationships as the determinants of
managerial decision-making and fail to consider social and environ-
mental entrepreneurship. This book suggests therefore that we
require a fresh approach to understanding active decision-making in
the setting of social and environmental strategies. So-called Austrian
economics can provide us with new insights.
Austrian economics was established by nineteenth- and twentieth-
century economists who developed a particular line of theoretical
reasoning.2 In contrast to current approaches to CSR, Austrian
economics regards human action “ not external constraints “ as
fundamental to decision-making (Mises 1963). While this perspective
stresses the importance of consumer demand as an external con-
straint, it suggests that human action can shape the environment

There are a number of important distinctions between different strands of Austrian

economics, which need not be recounted here (Screpanti and Zamagni 1993;
Whelan 2008). The account in this chapter leans on ˜rational™ Austrian economics
based on the work of Ludwig von Mises, which arguably presents various advan-
tages for organisational scholarship (Whelan 2008).
20 Beyond Corporate Social Responsibility

too. As Mises (1940, 212) put it, ˜one acts because there is change and
acting itself is always change™ (author™s own translation from
German). This line of thought is underpinned by the Austrian view
that the only acceptable research propositions are those relating to
individual actions and that all motivations of agents and institutions
arise from individual behaviour (Mises 1963, chapter 2). By extension,
entrepreneurs can choose different courses of action, and leading
firms can consciously and successfully shape or change institutional
structures (cf. Whelan 2008).
Furthermore, in contrast to the emphasis on current demand, the
Austrian perspective emphasises future opportunities and active
entrepreneurship in identifying future investments (Mises 1969;
Rothbard 1962). According to this perspective, uncertainty about
future market conditions is crucial and ˜bestows a speculative char-
acter on entrepreneurship™ (author™s own translation). Uncertainty
about the future leads directly to entrepreneurial profits and losses
(Mises 1940, 265). The main characteristic of successful ˜capitalist
entrepreneurs™ is thus not their ability to react to or ˜discover™ external
demand, but rather ˜their ability to make successful judgments about
the future™ (quoted in Whelan 2008).
The Austrian view has previously been applied to environmental
economics (Cordato 2004; Faber et al. 1999), although no link has
been made between entrepreneurial strategies and firm-specific com-
petitive advantages. Yet a number of authors have suggested that the
Austrian perspective can be readily applied to explain the strategic
actions and competitive advantages at the firm level (Lewin and
Phelan 1999; Roberts and Eisenhardt 2003), and the author of this
book believes that it can be useful in explaining CSR strategies.
Going beyond current approaches to CSR, a firm-level Austrian
perspective can explain strategic choices and outcomes on the basis of
divergence of perceptions or expectations (asymmetric expectations)
among economic actors, recognising that information is interpreted
differently by different actors (Lewin and Phelan 1999). Indeed, one
The logic of CSR strategies 21

would expect CSR strategies to be driven by entrepreneurial foresight
and for them to be significantly different between firms, based on
divergent future expectations among decision-makers. Different
interpretations of the future could explain, for instance, why some
companies have been quicker than others in developing new social
and environmental products, introducing policies on climate change
or partnering with non-governmental organisations.
Given that a number of authors have recently pointed to the
importance of entrepreneurship in CSR strategy (Baron 2007; Dixon
and Clifford 2007; Spear 2006), the Austrian perspective can provide a
missing link in constructing a multilevel theory of CSR strategy.

CSR strategies in the oil and gas sector

The above discussion of theoretical perspectives can help to guide us
in studying to what extent CSR is driven by stakeholder demands,
institutions or entrepreneurial activity. The purpose of this inquiry is
not to determine which perspective is correct “ each perspective can
add interesting insights; rather, the purpose is to determine under
what circumstances companies have acted in particular ways.
This chapter looks at CSR strategies within two different groups of
companies: multinational oil companies from the UK and the United
States (Shell, BP, Exxon and Chevron) and international oil com-
panies from emerging economies (Petrobras of Brazil, Indian Oil,
PDVSA of Venezuela and Kuwait Petroleum). Table 2.3 provides
an overview of these eight companies.

Multinational oil companies

Shell and BP have been seen as pioneers of CSR within the oil and
gas sector, and the role of stakeholders can to a large extent help to
explain the birth of CSR in this sector. A series of crises led to
strategic shifts in the two companies.
22 Beyond Corporate Social Responsibility

table 2.3: Key data on analysed oil companies

State ownership 2006 revenues 2006 profits
Headquarters (per cent) (US$ billion) (US$ billion)
Shell Netherlands/ 0 319 25.4
BP UK 0 274 22.0
Exxon USA 0 347 39.5
Chevron USA 0 201 17.1
Petrobras Brazil 57 72 12.8
Indian Oil India 80 45 1.7
PDVSA* Venezuela 100 102 4.8
Kuwait Kuwait n/a n/a
* PDVSA figures from Latin Business Chronicle (25 February 2008).
Source: Fortune Global 500 (23 July 2007).

In 1995, Shell was attacked by Greenpeace for the planned sinking
of the Brent Spar, a floating oil storage facility in the North Sea. For
almost two months, the Brent Spar issue dominated media reporting
in the UK and many other countries. While Greenpeace occupied
the Brent Spar in the North Sea, public protests took place in many
countries. Finally, in June 1995, Shell announced a reversal of its
decision to sink the Brent Spar. Greenpeace claimed victory and
the protests stopped (Rice and Owen 1999; Zyglidopoulos 2002). In
the same year, Shell faced renewed criticism over its operations in the
Ogoni area of Nigeria. For a number of years, the Ogonis (an ethnic
minority of some 500,000 people) had complained about the environ-
mental damage caused by Shell, and they demanded greater benefits
from oil operations for the local people. After local protests led by the
Movement for the Survival of the Ogoni People (MOSOP), Shell
withdrew from the Ogoni area in 1993. But, in November 1995, the
Nigerian Government executed the prominent Ogoni leader and
The logic of CSR strategies 23

chief Shell critic Ken Saro-Wiwa and eight others. This galvanised
non-governmental organisations into supporting the Ogoni cause
and new anti-Shell protests erupted around the world (Frynas 2000,
As a result of these two crises, Shell underwent a major process of
transformation. As Moody-Stuart, Chairman of the Committee of
Managing Directors, wrote: ˜Shell is undergoing fundamental
change ¦ We have learned the hard way that we must listen, engage
and respond to our stakeholder groups™ (Frynas 2003a). In 1996, the
company initiated the ˜Society™s Changing Expectations™ project, a
sophisticated audit of the views of the company™s stakeholders. The
Shell Group™s Statement of General Business Principles was revised to
include statements in support of fundamental human rights and sustain-
able development. Shell engaged in a process of dialogue with a number
of stakeholders, including human rights organisations (Frynas 2003a).
BP faced stakeholder pressures in 1996 over complicity in human
rights abuses in Colombia. It was revealed that the company had paid
millions of dollars to the Colombian army and had provided the army
with photographs and other information about anti-oil protesters,
which allegedly led to intimidation, beatings and disappearances
(Anonymous 1997). As one interviewee said: ˜Colombia should not
be overrated, but BP got the message eventually.™ A senior BP man-
ager “ David Rice “ admitted a number of years later:
We™ve learned from our mistakes, not least because we™ve been chal-
lenged by NGOs. In Colombia we were accused of getting too close to
the army and police in order to protect our operations. We listened,
approached Human Rights Watch for advice, and then organised new
security arrangements. (Rice 2002, 135)

BP initially reacted slowly to the unfolding crisis, but eventually a
combination of the Colombia experience and the realisation of
the rising importance of external stakeholder pressures led BP to
rethink its social and environmental strategies. Like Shell, BP initi-
ated substantial stakeholder engagement with non-governmental
24 Beyond Corporate Social Responsibility

organisations, made public commitments on human rights and
became actively involved in CSR initiatives such as the United
Nations Global Compact.
Exxon™s main societal crisis came in 1989 with the Exxon Valdez
oil spill, when a tanker called Exxon Valdez ran aground off the coast
of Alaska, spilling 11 million gallons of oil along hundreds of miles
of coastline. Subsequently, Exxon spent some US$2.2 billion on
clean-up costs and US$1.3 billion on legal settlements and penalties
(Raeburn 1999). In addition, Exxon faced stakeholder pressures over
its policy on climate change from the mid-1990s. However, the
company challenged the scientific findings of environmental groups
that criticised the company (with regard to both Exxon Valdez and
climate change) and chose to combat its critics rather than to engage
with them.
With regard to Exxon™s lack of engagement with stakeholders,
stakeholder theory can still explain Exxon™s actions. The stakeholders
who criticised Exxon were simply not powerful enough. While envi-
ronmental groups protested against Exxon, the American oil and gas
sector was able to successfully lobby the US Government (a key
stakeholder) in the 1990s and 2000s to amend its policies to the
benefit of companies (e.g., the defeat of President Clinton™s 1993
climate change tax proposal; the 1997 US Senate resolution against
ratification of the Kyoto Treaty). Indeed, it was noted that American
oil companies spent more money lobbying the State of Alaska than
Alaska™s Department of Environmental Conservation was given to
regulate the industry in 1987 (two years before the Exxon Valdez spill)
(quoted in Bowen and Power 1993).
Unlike the companies above, Chevron did not face a defining
crisis, although the company also faced some stakeholder pressures.
At the company™s annual meeting in 1999, 28 per cent of share-
holders supported a motion for Chevron to document greenhouse
gas emissions, and this may have played a part in influencing the
company™s shift on climate change. However, with the support of
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