Supply Chain Structure Incentives for Corporate Social Responsibility: An Incomplete Contracting Analysis

Abstract

Downstream firms increasingly recognize the importance of integrating social and environmental concerns with their businesses. As a consequence, they urge to create incentives for their suppliers to invest in corporate social responsibility (CSR) activities. Contracts to provide these incentives are rarely observed in practice. If not totally absent, contracts may be incomplete, in that unforeseen contingencies or some CSR attributes that are difficult to measure may not be included in the contract. We show that incentives for CSR investments can also be provided through the supply chain structure, which consists of the distribution of ownership rights over the firms' assets of production, and involves horizontal and/or vertical alliances among supply chain members. Motivated by examples in agricultural contexts, this study adopts the property rights approach to study the impact of supply chain structures on the adoption of CSR activities. We show that the structure that best incentivizes CSR investments depends on the interaction between CSR vertical synergy, free‐riding, and countervailing power. One of the main findings is that the alliance between suppliers is beneficial only if the revenues generated by a downstream investment are sufficiently high. In fact, only in this case, the suppliers can appropriate a sufficiently large stake of the revenues generated downstream, thanks to their countervailing power. When the upstream investment costs become high, however, the suppliers will invest in CSR only if the downstream distributor is vertically integrated. The resulting structure of a cooperative will best incentivize CSR investments only if the CSR vertical synergy between the two tiers of the supply chain is sufficiently high.

Multinational enterprise buyers’ choices for extending corporate social responsibility practices to suppliers in emerging countries: A multi‐method study

“…Second, this study contributes knowledge to the growing amount research on the importance of coordination between MNEs and suppliers in CSR management (Huq et al, 2016; Letizia and Hendrikse, 2016; Pedersen and Andersen, 2006) and the critical role of regulators in promoting and monitoring CSR (Arya and Mittendorf, 2015; Atasu et al, 2008; Dhanorkar et al, 2017). Previous studies have considered whether and how MNEs should extend CSR to their supplier partners and the boundary conditions under which the extended CSR would benefit MNEs (Boström, 2015; Huq et al, 2016; Letizia and Hendrikse, 2016). This study proposes a framework for how MNE buyers extend CSR to upstream suppliers through a coordinated relationship with suppliers in emerging countries in dynamic environments.…”

“…Scholars have noted that “CSR is conceptualized as a complex phenomenon that is contextual and multimodal and often initiated in collaboration with others inside and outside the corporation” (Jamali and Karam, 2016, p.13). Emerging research has urged the extension of CSR from buying firms to their suppliers through coordination between the two (Bendixen and Abratt, 2007; Boström, 2015; Letizia and Hendrikse, 2016; Plambeck and Taylor, 2015). This is particularly crucial for MNE buyers that source from emerging countries where CSR implementation by upstream suppliers is relatively primitive.…”

“…Plambeck and Taylor (2015) used a mathematical modeling approach to investigate the conditions under which a buyer can hinder the extension of CSR to suppliers, and suggested approaches such as auditing, publicizing negative audit reports, and providing loans to suppliers to increase the likelihood that suppliers will hide information to pass the buyer's audit. For contractual designs specifying payments with reference to CSR performance, Letizia and Hendrikse (2016) examined the impact of supply chain structure (supplier–buyer relationship) on suppliers' CSR investments. The researchers' findings offer managerial insights into how buyers can effectively extend CSR to suppliers.…”

“…To increase market acceptance and secure business legitimacy, MNEs tend to extend CSR to suppliers in emerging countries to better monitor and control suppliers' CSR levels. A stream of research has been conducted on how buyer and supplier firms manage CSR in a coordinated fashion, showing that buyers can use different strategies to extend CSR to supplier partners, including increasing buyer‐initiated auditing, providing loans to suppliers, and establishing a buyer–consortium audit with other stakeholders (Rezaei et al, 2016; Letizia and Hendrikse, 2016; Plambeck and Taylor, 2015). More recently, Huq et al (2016) argued that “collaboration capabilities” between MNE buyer firms and their suppliers are helpful for more effectively extending CSR to suppliers in emerging countries.…”

Supply Contract Design with Asymmetric Corporate Social Responsibility Cost Information in Service Supply Chain

“…Nowadays, sustainable supply chain management is highly valued by practitioners and researchers. As an impartible part of sustainability, corporate social responsibility is an important aspect to conduct sustainable supply chain management [1,2]. Corporate social responsibility (CSR) describes the obligations of companies to the stakeholders that are outside the company's shareholders [1].…”