The role of business in civil society governance CIES y EMES network
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  • 1. THE ROLE OF BUSINESS IN CIVIL SOCIETY GOVERNANCE By Isabel Vidal Centre for Research on Economics and Society – CIES - Parc Cientific de Barcelona Torre R+I+D Baldiri Reixac 4-8 08028-Barcelona, Spain Phone: +34 934335490 Fax: + 34934034510 Email: ividal@grupcies.com Web site: http://www.grupcies.com Comunication presented at the 4rd EMES International Research Conference on Social Enterprise. “If not for profit, for what? And how?, Panel Title: Governance and Democracy. Thematic Line: Governance of social enterprise, July 1-4, 2013, University of Liege, Belgium.
  • 2. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 2 Summary This chapter describes the development of strategic alliances between civil society organizations and business corporations. Strategy is understood as the determination of basic goals and implementation of policies and action plans to achieve the established objectives. Strategic alliance, in turn, is defined as a long term partnership which each member uses as a tool for implementing strategic plans in their relations with the community. This chapter presents the causes that promote the coordination, the benefits of cooperation as a mechanism to share risks, the resources and the complementary skills as well as the possibility for each individual member of the strategic alliance to more easily achieving its objectives or goals. In addition, the risks related to an alliance are described in comparison to the solitary performance of an organization, e.g. the occurrence of problems related to the compatibility of cultures and objectives (short-term orientation versus long-term, inadequacy of the results to the expectations of each of the members of the alliance). Finally, the impacts of these alliances on the governance of civil society organizations are described. These impacts include greater emphasis on performance measurement and accountability of CSOs, a stronger orientation of CSOs towards fields of interest to business partners, and adoption of corporate governance models by CSOs.
  • 3. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 3 I. Introduction Formal and willing cooperation, as well as networking, are not themselves new. Cooperatives are voluntary associations, very often, of small entrepreneurs that use the cooperative as a tool that serves the sustainability of their own companies. The creation of industrial districts (Marshal, 1890), (Becattini, 1979) or clusters (Porter, 1990 and 1998) are other formal and informal cooperatives in a specific arena and specific time, with a goal to facilitate the viability of private business. This chapter focuses its analysis on the formal and voluntary cooperation between civil social organizations (CSOs) and business corporations. CSOs will be defined as the set of non-profit organizations and social enterprises, sponsored by citizens, whose primary objective supports the general interests of citizens. Business corporations will be defined as those capital associations whose primary objective is the maximization of profits. Civil social organizations and business corporations are similar. They are both organizations that coordinate a set of inputs, which result in goods and services that are intended to maximize the function and objective of each of the organizations. In a market economy that fulfills duties of coordination, the question that arises is why should organizations exist that have coordination as a function, when the market mechanism is already in place? As it is emphasized by Fernandez de Castro and Tugores (1991:2) a market structure characterized by product homogenization, symmetric information and voluntary changes “is not a universal phenomenon”. As a consequence the central coordination emerges. Coase (1937) and Hansmann (1980) justify the presence of the business and the CSO respectively as a consequence of the existence of asymmetric information and transaction fees. Consequently, it is said that the CSO and business corporation are the results of centralized coordination of resources and wills. Easley and O’Hara (1986:85) remark that quite often “economists consider the CSO as economic anomalies and organizations that are outside of the real economic system”. Nevertheless, Weisbroad (1975), Hansmann (1980), Easley and O’Hara (1983) and Avner Ben-Ner (1986) argue that the CSO exists not only for altruist or historic reasons, but also because it represents the optimal organizational form or coordination for the provision of certain goods and services, even more in market situations where asymmetric information and incomplete contracts are present. This theoretical perspective allows us to consider that businesses, public administrations and CSOs have their own function and space within the market economies. The simultaneous occurrence of multiple actions of willful coordination is complemented by the decentralized coordination provided by the different markets. The existence of strategic alliances between the civil social organization (CSO) and the business
  • 4. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 4 corporation is yet another kind of willful and centralized coordination; however, this time between two parties, the business and the CSO. This type of coordination is not new either. Favreu (1990) reminds us of examples of cooperation between businesses and social movements that took place in the 1980’s and 1990’s in the U.S. and Canada, particularly in Quebec, in collaboration with the local administration which resulted in the establishment of community economic development corporations (CEDCO). In modern terminology these would be examples of the public-private partnership (PPP). In the European project, The socio- economic performance of social business in the field of work integration (PERSE)1 , one of the foremost conclusions for the Spanish case was that those CSOs with a primary objective was the social integration of people of difficult employability, should work in a strategic alliance with the business corporation to facilitate the transit of such people to the labor market. Objective and Structure This chapter focuses on two actors, the CSO and the business corporation. The chapter objective is to consider the conditions that should be present so that these two parties choose to formally cooperate with each other. To be able to accomplish this purpose, we start with the conventional analysis of microeconomics, which supposes that the behavior of these two parties always adopts the form of restricted maximization. Each actor must select from a specific group of options, choosing which they think will the one maximize their primary objective. In the case of the CSO, the primary objective could be “to do good”. In the case of the business corporation, it may be the “maximization of profits”. However, the actions that each one of these actors executes will depend upon the opportunities that are present. In the same way, those opportunities frequently depend on the collective actions of other actors. Furthermore, the consequences of each party’s actions depend on the choices made by the other actors involved. Among the actors within this institutional framework of interdependence, the option to cooperate creates an equilibrium between all parties and each party thinks that it has made the best possible decision within the institutional framework. Evidently, the equilibriums are dynamic and evolving. To suppose that the equilibriums evolve signifies changes in the behaviors of the actors and it forces the parties to generate the option of cooperation as an answer. 1 Between 2002 and 2005 the european network of researchers L’Emergene de L’Enterprise Social compleated the project the socio-economic performance of social enterprise in the field of work integration (PERSE). An outcome of this project was the book Nyssen, M. (editor) (2006), Social enterprise. At the crossroad of market, public policies and civil society. Routledge, Studies in the Managment of Voluntary and non profit organizations, London and New York. ISBN 10:0-415-37878-8, 2006 page 335.
  • 5. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 5 This chapter is divided into eight sections. The first section is the introduction. Then, the conditions with which the CSO and business corporation opt to cooperate are analyzed, with a reflection about the advantages and risks of networking. Once the questions of “what for” and “why” cooperation have discussed, attention is focused on the construction of strategic alliances. A definition of cooperation is then given based on an essential condition that each member in the web has its own vision and strategy prior to the alliance, hence, the concept of strategic alliance. The fourth section describes the development process of the different forms of cooperation between the CSO Atzegi and diverse partners, which resulted in the Gureak Business Group. The fifth section relates networking to trust capital and trust capital to social capital. It is maintained that prior to the alliance each member must have accumulated trust capital. The sixth section explains the risks that a CSO takes on when it decides to use alliances as mechanisms for business growth. This article ends with some final thoughts and the last section the bibliography provides. II. Conflict or Cooperation? Conditions for the Cooperation to Occur After a long history of confrontational, parallel and solitary performance, Favreau (1990:6) notes that the popular movement in the Province of Quebec rejected sectarianism and ask quires, “is it a right turn or a new way to do politics?” To answer this question, Favreau describes the social and economic context of the Province of Quebec and Montreal during the 70’s and 80’s in the twentieth century. During this timeframe Quebec and Montreal registered a strong economic decline, manifested in the delocalization of businesses and total abandonment of industrial sectors. The severe recession of economic activity impacted employment, the citizens’ quality of life, and led to the progressive and rapid deterioration of neighborhoods. To Favreau (1990:7) this radical change in the economic and business surroundings is the reason that social movements begin to show interest in social problems and to abandon their ambitions of radical social transformation; “in the eighties there were no ambitions of social radical transformation: there is desire to support good causes, and be open to collaborations”. Hamel (1990) points out that it is within this context of uneasiness in regards to the local development that the partnerships between the public and private sector came to life in Quebec. Hamel (1990) states that in situations where there is social stress it is more likely that the social forces, social movements, businesses, unions, universities and administrations choose cooperation as an efficient instrument to solve the daily problems that are generated by the adverse environment to facilitating social innovation.
  • 6. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 6 Harrisson, Chaari and Comeou-Vallée (2012) explain the confrontational process against collaboration that occurred between the public utility, which produces and supplies energy and the confederation of associations in defense of the consumers in Quebec. The situation began as follows: The electric company cut off the power supply to those citizens that could not pay their bill; in reaction to this, the confederation of associations in the defense of the consumers orchestrated a campaign to protest against the electric company, since what they were doing was affecting those with a greater need. This shows that the first option chosen by both was to confront each other. Nevertheless, Harrisson, Chaari and Comeou-Vallée (2012) show how the alternate option of cooperation proved to be the most satisfactory for both parties, as each one of the actors achieved their goal. Dialogue and the achievement of satisfactory agreements for both parties was possible due to the interrelated actions perpetrated by the public utility and those of the confederation of associations in the defense of consumers. This shows that what one actor achieves as a result of their behavior not only depends on their own strategy but also on the strategy chosen by the other actor as well. The strategic alliances developed among the different actors with distinct primary objectives could be beneficial for everyone. The option to cooperate could be seen as a mechanism to share resources, knowledge, abilities and supplementary skills, which facilitate the achievement of the primary objective of each participant organization. For example, a strength that a CSO has is its capacity to communicate with local people, as they have the respect and the credibility of the citizens that gave it its moral authority. For a business that wishes to create a new market for its products in a socially and culturally unknown surrounding, finding and cooperating with a local CSO will allow it to have access to that new market in an easier and more cost effective manner. Next, the case of Hindustan Unilever Limited is presented. This is an example of success in business related to the bottom of the pyramid (BoP)(Prahalad, 2005). In the Hindustan Unilever Limited case an instrument that facilitated success for the business was the alliance that the business established with the CSO and the local government. Hindustan Unilever Limited argues that if the local CSOs accepted to play the role of the interface between the people, particularly the poor and needy and the business corporation is because the CSOs saw the opportunity for personal hygiene products to be within the reach of the BoP consumers. The CSO utilized collaboration as a supplemental instrument in their primary objective to stimulate and educate the rural population on personal hygiene habits.
  • 7. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 7 The Hindustan Unilever Limited’s case Hindustan Unilever Limited (Hindustan, from here on) is a branch of the Unilever Group in India. Hindustan is considered one of the chief businesses of consumer goods in that country. This branch markets a wide range of food products, drinks, personal care products and detergents. In the fiscal year of 2010, the business showed a net profit of 358 million Euros and revenues of almost 3,000 million Euros. Nowadays, detergents and personal care products represent most of Hindustan’s revenue and are the product lines that provide more profit margins to the business. In 1987 Hindustan decided to introduce a low cost detergent. The population in India is dispersed, located mostly in rural areas, (in 2002 they represented 72%) and lives with a lack of infrastructure. Hindustan developed its business plan. The model was totally centered on the specific needs of the bottom of the pyramid (BoP). The goals of Hindustan’s project in the BoP were to increase the exposure of its products in the rural market (distribution system approach), to change certain attitudes with regards to the use of diverse product categories (product approach) and to catalyze rural prosperity and with that to boost market growth (combining marketing strategy and strategic alliances approach). Shaki Project In the year 2000 through a pilot program in the state of Andhra Pradesh, Hindustan launched the Shaki project with the intention of increasing its presence in the rural markets of the BoP. That project was initially based on the system of access to credit created by Grameen Bank. Using that system Hindustan offered or facilitated the access to credit to relatively small groups of women. From there, Hindustan focused on offering to the receivers of credit the opportunity to collaborate with them marketing their products. During this process Hindustan requested the local CSOs’ collaboration with the idea of facilitating the access to credit to the aforementioned groups. The project that Hindustan proposed posed a major change to the traditional microcredit model. The intermediation or the facilitation of the credit was not the end goal, but to offer the rural population a concrete and real possibility of increasing their income and foster their entrepreneurial spirit. Towards the end of 2009, the Shaki project had 45,000 entrepreneurs, 3 million customers distributed between 100,000 villages. The revenue from the Shaki project was came to about 10% of the total Hindustan rural revenue. Hindustan also developed alliances with governments and local CSO to collaborate with them and promote their entry in the BoP with specific projects. In Manwani in 2007 Hindustan’s
  • 8. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 8 President stated that the best way to enter into markets that have a high social and cultural complexity was through agreements with interested parties. The President concretely noted that the branch of Unilever is a member of the Bhavishya alliance, which is based in different agreements between the private sector, the government and the NGOs with the objective of having a positive impact upon the level of malnutrition in India. A clear example of the importance of the strategic alliances is the theatrical representations that were part of Hindustan’s marketing strategy. Hindustan signed collaboration agreements with UNESCO and with local NGOs interested in promoting hygienic habits among the rural population. Resource: Tomas Tomeo (2011) The relevance of the market of the pyramid base in the world economy. Private businesses and new business models, (mimeo), doctorial theses read in the Economics and Business Faculty in the University of Barcelona, July, 133-168. From the examples we can see that for cooperation exist between the CSOs and the business there should be: a) a strategic interdependence between these two parties: the results that a partner can obtain depends on what the other partner would do b) the chances to easily reach the primary objectives of each of the partners in the network. But, what are the advantages of cooperation between a CSO and a business entity that voluntary opt to work in alliance? New facilities that each of the members obtains for the achievement of their own objectives. Nevertheless, as it is noted by Fernandez de Castro and Tugores (1991:2) synergies and complements are necessary but not sufficient for cooperation to emerge. The value obtained by each party from the cooperation itself should be superior to what it would spend to achieve it on its own. Furthermore, each one of the participants should obtain at least the same result that it could have achieved with the best available alternative, prior to the cooperation agreement to which it is part of. In other words, its opportunity cost. Within this context, the opportunity cost or alternate cost refers to what each of the members of the cooperation is deprived of or what the member renounces when it elects to cooperate.
  • 9. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 9 III. Building of Strategic Alliances Intending to analyze the strategic alliances between businesses insists that the cooperation is an instrument that private, for-profit, non-profit and public organizations have available to them to easily develop their own strategy; this means, as stated by Trigo and Drudis (1999), that before making any decision to cooperate, each partner of the alliance must have its own strategy. Consequently, the cooperation is also called strategic alliance. For Trigo and Drudis (1999) cooperation implies joint work among different partners for a more or less long period of time. Joint work during a specific period of time is not considered an example of cooperation. The success of the cooperation does not depend on its duration; success is determined by the possibilities that it gives each of the members to achieve more efficiency the objectives that each one of them had established for their own organization. When a strategic alliance ends each one of the members must leave stronger than when joined. Definition of Cooperation The meaning that may be given to the term cooperation between one or many CSOs and the business corporations varies greatly and there is no unique definition. One definition may be a relationship between one or many CSOs and one or many businesses or business centers of many businesses located in the same territory and where their members share risks, join in their efforts or develop a new and different structure to achieve a mutual benefit. The particular characteristic that this alliance has is that each one of its components preserves their special identity, except for concrete aspects in which specific resources both human and material become intertwined and shared in a common objective. Definition of Strategy Each cooperating member must design its strategy. There is a vast number of definitions of strategy; Trigo and Drudis (1999) cite different strategy definitions. One is the one given by Chandler (1962:13) who defines strategy as “the determination of long term basic goals and objectives of an organization, and the adoption of courses of action and assignment of necessary resources to achieve those goals”. Cooperation is a mechanism or an instrument that serves the organization strategy. Ultimately, each member of the organization must first have a clear understanding of its primary objective as well as the strategy that will allow it to achieve that objective.
  • 10. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 10 As Tomeo (2011) noted Hindustan had already paved its way for the further expansion of its business in the markets located in the rural villages of India, and understood the value that the collaboration agreements with governments and local CSOs would have. Next, we have the example of the Gureak group located principally in the Basque country, north of Spain whose principal partner is the Atzegi Association, Guipuscoana Asociation in favor of the intellectually disable. The Atzegi Asociation was established in 1960 as a result of the voluntary association of a set of people that had disabled family members. Nowadays, the Atzegi Asociation is the foremost partner with nearly one third of the social capital of the Gureak Group, which in the year 2011 was integrated for about 20 businesses that provided employment to more than 4,000 people. These people were spread among what in Spain is known as employment special centers2 and a foundation that acts as a management agent in the provision of care activities directed to those workers. The employment special centers were first recognized in the 42nd article of the Law 13/1982. The CSO Atzegi was already creating employment before it was formally recognized and had subsequent institutional support. In Spain CSO Atzegi was one of the pioneer entities with the objective of social integration so that people who had recognized disabilities would be able to work. The case of the CSO Atzegi and the Gureak Group In 1960 the Atzegi Association, promoted by the family members of people with disabilities, was established to create stable employment among people with disabilities. In 1975 having created 300 jobs distributed between two production centers, Atzegi decided to create a business structure in collaboration with: the Atzegi Association itself (with a 32.19% of the capital), a local finance entity (19.15% of the capital), two levels of public, province and local administrations, (both with a 23.63% of the capital), the ONCE Foundation (19.88% of the capital) and workers (4.15 % of the capital). The end result was a business group, which legally is a non-for-profit Limited Liability Corporation. Furthermore, the Gureak group has a stable and permanent collaboration agreement for the provision of services with 30 big and medium size businesses that operate in the Basque Country. 2 The Law 137 of 1982 in its 42nd article recognized the special employment centers as businnesses that have an objective to do a productive work regularly participating in the market operations. The final objective of these centers is to reassure the paid employment and the provision of personal and soical services that their employees with disabilities may require. The staff must be made up of at least 70% of people who have a minimum of 33% reduction in their capacity to work.
  • 11. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 11 Collaboration Requirements: Business activities At the beginning there was the industrial subcontracting in the plastic sector of automotive, electronics and injection. Nowadays, these economic activities are located in five businesses of this group giving a total of 20 production centers that employ 2,000 people. This group of businesses makes up what Gureak calls its industrial division, which has five technological areas and their corresponding technical departments I+D+i. As they stated it “This allows us to perform our duties within very high competitive sectors such as the auxiliary automotive industry, renewable industries, industrial lifting, etc”. Starting in the nineties in the XX century they started business in the services sector. Currently, it has business in direct and promotional marketing with more than 700 workers spread among 16 employment centers that in 2010 processed more than 127 million postal deposits. As it is mentioned in their webpage: “A business that counts with the most stringent endorsements in quality and what is even more important, our client’s trust”. At the present time, Gureak Services is made of 12 businesses starting from industrial cleaning and landscaping to hospitality, gestation stations, vending or industrial laundry that employ close to 1,500 workers. As it is also stated in their webpage: “through this diversification we have created synergies inside the Group that have allowed us to offer integral solutions to our clients”. The creation of employment is the result of Atzegui fulfilling its mission, and attaining its vision and by working through its strategy. In 2011 the Gureak Group facilitated employment for 4,286 people distributed as follows:  1.614 (37.66%) people with intellectual disabilities  695 (16.22%) people with mental health illnesses  990 (23.10%) people with physical disabilities  256 (5.97%) people with sensory disabilities and  731 (17.05%) people with no disabilities These jobs were geographically spread throughout Gipuzkoa, Álava and Navarra (areas located in the north of Spain). Source: Information obtained from The Gureak Group and the websites: www.grupogureak.com, www.fundosa.es, www.fundaciones.es, www.once.es, www.kutxa.net.
  • 12. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 12 IV. Employment development, the engine of cooperation Some of the forms of cooperation that are laid out in this paper are:  Continuous, formalized and structured dialogue between businesses and the CSOs  Contractual agreements for the provision of services  Coproduction agreements  The creation of new structures horizontally co-governed by the business and the CSOs Each one of these collaboration options reflects different levels of commitments between organizations that cooperate. The higher the level of congruency of objectives held by collaborating organizations, and the higher the level of complements between resources of both parties, will result in a more intense level of cooperation and formalization of the collaboration. The maximum expression of the collaboration occurs when the parties opt to create a new organization where the partners are members of the new enterprise. However, when we are talking about cooperation we should not always think of creating a new organization where the collaboration takes place. Agreements are also an important manifestation that shows a desire to collaborate. From its establishment, the CSO Atzegi Association had very clear idea of its target functions was the creation of stable and quality employment for people with disabilities. In the first phase, between 1970 and 1975 the association at Atzegi worked by itself to reach its primary objective. However, the strategy of acting on its own requires abundant resources. The resources that this association had available were scarce, not allowing it to expand on its own. As a consequence of this important limitation, in 1975 the Atzegi Association opted to create a strategic alliance with other organizations, both private non-profit and public that would contribute with the financial capital and business; such contributions enable the development of employment among people with disabilities. The combination of different forms of cooperation resulted in the Gureak Group. From that combination we will describe three forms of cooperation. 1. The creation of a new business structure with a multi-stakeholder government 2. Permanent collaboration agreements with the different levels of public administration that have responsibilities in managing public services towards people with a recognized disability
  • 13. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 13 3. Stable collaboration agreements with business corporations that Gureak provide services. Starting in 1975 gradually the CSO Atzegui chose to create a new structure, horizontally co- governed in collaboration with public administrations, corporate foundations and workers, all of which make up the Gureak Group. The formal result is a non-for-profit limited liability corporation whose main stakeholder is the CSO Atzegui. What is the objective of being a non-for- profit organization? The capitalization of a new business structure, as Alkorta (2012) states it , the Counsel Administration president, is “the profit gained that goes to the reserves is the capitalization mechanism that the Gureak Group has available”. In 2011 Gureak Group had available 83,940 thousands € in its own resources, a 7% increase from 2010. Who are the Gureak Group Stakeholders? Powell (1987) affirms that Gureak Group would be a hybrid organization whose social capital was distributed among the following shareholders:  CSO Atzegi is the major shareholder with a third of the social capital and also the lead promoter of the Gureak Group creation in 1975  Floral Deputation of Gipuzkoa owns 20.12% of Gureak Group’s social capital. The Deputation is a territorial level of public administration with competence in the field of social insertion employment, for people with recognized disabilities in the Gipuzkoa province  Donostia Town Hall- San Sebastián, also a public administration that owns 4.5% of Gureak Group’s social capital  Fundosa Group General Partership3 , which is included as a shareholder of the Gureak Group in 1995 and in 2011 owned 19.88% of the social capital  Kutxa Foundation owns 19.15% of the Gureak Group’s social capital and is the managing agent of the relations with the community of a financial entity which principal base of business is found in the Basque country  Workers: some of the Gureak Group workers are shareholders. This group owns 4.15% of its social capital 3 Fundosa Group LLC is the business division created by the ONCE Foundation in 1989 with the objective of generating stable employment for people with disabilities. In 1988 The ONCE foundation was establish to Cooperate and Integrate People with Disabilities. ONCE was established by the Once General Counsel and its objective was to be a cooperation and solidarity instrument for the blind in Spain towards other people with disabilities. The main source of founding for the ONCE Foundation for each fiscal year derives from the 3% of the net income of the lotto sells managed by ONCE. ONCE is a non-profit corporation whose mission is to better the quality of life of the blind or vision impaired in Spain. The Spanish government is the exclusive supervisor through the ONCE’s Protector Counsel constituted by The minister of Public Health, Social policy and equality, work and immigration, Finance and Economy, Interior as well a broad representation of ONCE. To find more information visit the webpage: www.fundaciononce and www.once.es
  • 14. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 14 Legally, the Gureak Group is an association of capital. This signifies that the assembly and the regent counsel, both political decision making bodies of the organization, make the decisions based on the votes that are proportional to the capital that each one of the shareholders owns. Alkorta (2012) distinguishes three key phases in the business growth of the Gureak Group, all related to the development of cooperation agreements. 1975-1982 In 1975 the CSO Atzegui and the Savings Bank Kutxa developed a business structure that took the name, Gureak Group LLC. The Savings Bank Kutxa participates with 20% of the social capital in the new merchant society without taking on any commitment in relation to expenses or the implication of results. The first strategic decisions of the founders were the following a. Hire local directors, as main executives to promote Gureak, who were not directly affected by disability, meaning, business leaders who do not have relatives with disabilities b. Choose professional management with growing autonomy for the directive team c. Have the business management culture ”normalized” d. Create employment for people with disabilities, preferably for those who live in the area of the Gipuzcoa province. From the beginning, the search for self-finance becomes an essential motivator of the duties of the Gureak directors. Stable agreement of collaboration with the Savings Bank Kutxa The Savings Bank Kutxa became a stable client of Gureak. The social department of Kutxa4 hires Gureak’s services to act as an intermediary for labor actions for all types of people with disabilities and risks of exclusion. As time went by, the good performance of Gureak facilitated its recognition as a specialized supplier of specific services, by the remaining financial entities. 4 Saving banks are non-for profit entities where the portion of benefits not reinvested in the financial business are given to philanthropic corporations, which the law calls “social work”.
  • 15. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 15 1982-1992 In Spain, between the time of 1982 and 1986, what are known as autonomous5 communities were established. These autonomous communities are territorial governments that take on growing responsibilities for the provision of social services. In the beginning of the 1980’s, the construction of the welfare state in Spain becomes realizes, which is shown in an increase in revenues and public spending that has as a result that the public administration will take on a public commitment with people with a recognized6 disability. One of the results of taking on public responsibility towards people with disabilities was the signing of an annual collaboration agreement with the social service department of the Gipuzcoa Provincial Deputation. During this period of time, the representatives of the deputation government and the autonomous government of the Basque country came to be part of the administration counsel of the Gureak Group without contributing any capital. In this first phase of institutional participation, the counsel representing the public institutions could be considered stakeholders with a voice and a vote in the administration counsel of Gureak. However, there has been no contribution of capital on their part. The annual collaboration agreement with the social service department of the Gipuzcoa Provincial Deputation establishes in a mutually agreeable manner the growth of target centers and their financing. Gureak Group then commits to the creation of employment opportunities between people with recognized disabilities in an equal way in the whole area. An indication of this objective is that a person should not travel more than 20 kilometers from their home to their place of work. This collaboration agreement, which is still in force in 2012, incorporated two major innovations of different types. These are: Social innovation - in an agreed manner Gureak Group commits to creating employment for other people with difficulties in becoming part of the labor force, such as people who suffer from any type of mental illness. Up until that point the Gureak Group had exclusively focused on the employment creation among people with mental disabilities. Organizational innovation – the Gipuzcoa Deputation gave autonomy to Gureak for the management of a service that was from 1982 a public responsibility; they are goal orientated. This form of stable and goal-orientated collaboration of public 5 In Spain the development of the welfare state model initiated in the eighties in the 20th century. 6 Law 13 of April 7, 1982 of handicapped social integration, BOE nº 103, April 3, 1982.
  • 16. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 16 administration enables Gureak directors to evolve their business model and experiment with new social insertion types in relation to the work force. 1992 until Present In 1992 the Gureak Group organizes a capital expansion, which allows that the Provincial Deputation of Gipuzcoa, Donostia City Counsel (San Sebastian) and Fundosa all become new shareholders. This capital expansion causes CSO Atzegi to lose a percentage of its ownership, but Alkorta (2012) states that Atzegi “…maintains its profile of main shareholders and all its influence in the administration counsel”. From a business point of view this capital expansion implies an important injection of capital that facilitates the financing of a new ambitious investment plan which allows them to increase the production capacities. Collaboration Agreements for the Provision of Services to Business Corporations Through time the Gureak Group also builds other forms of collaboration with businesses preferably of the small and medium sizes, in the areas of Gipuzkoa, Álava and Navarra. Again this collaboration is also based on specific reasons. In Spain the Law 13 of 1982 forces private businesses with 50 or more employees to reserve two percent of jobs for people with disabilities and public entities to reserve five percent. This law allows for alternatives, which are: a) donations or promoting actions to foundations of entities of public utility whose objective is the formation or labor insertion of people with disabilities b) acquisition contracts of products or services to special centers of employment. The production centers that make up the Gureak Group are special employment centers. The Gureak Group facilitates that the business corporation meet its legal obligation through the hiring of the professional services for a market price. It was never in doubt that the main merit of the Gureak Group is to have met its target objective (more than 4,000 people employed in 2011). It must be stated that another merit of the Gureak Group is to have made it possible for the creation of cost-effective and specialized inputs of services that have made it cheaper for business to fulfill the law. The Gureak Group also facilitates the competitiveness of its clients while offering a competitive service in price and quality (Gureak is integrated into the customer value chain).
  • 17. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 17 V. Creating Trust A prerequisite to dialogue, and a stable agreement to work together signifies that both, the CSO and business, separately and toghether have accumulated trust capital, meaning that the businesses trust the CSO and vice versa. The geographic area where the Gureak Group operates is small, where a volume of people with disabilities that work is more than 1 per 100 of the active population. The citizens have developed a strong culture of influence in the community. The behavior of the community influences the way in which the businesses in the area operate. However, it is important to state that those external factors, the small geographic location and the strong sense of belonging among citizens in the community, are positive factors but not sufficient to explain the complex relations that the Gureak Group has been able to make in the network among the businesses throughout its history. What have been the important reasons that can explain this cooperation? Since the establishment of Gureak Group, there are three key elements, including primary function, vision and strategy. Perhaps in a theoretical framework, the primary function of social integration for people with disabilities could be shared with other businesses that also practice such integration. However, the vision of the Atzegi CSO has been that the Gureak Group would be a transitional business for disabled employees. To meet this vision a key factor in the Gureak Group strategy is that it needs to have relations with businesses and mimic the practices of those businesses. Such practices include the delivery of a good product, good service, and the fulfillment of agreements in form and time. Ultimately, the Gureak Group from the beginning had to commit so that all their action would be professional and that its legal orientation in the market would preferably be in the private sector. It is important to emphasize that legally the Gureak Group is a corporation and that the businesses that are part of this group are Limited Liability Corporations (LLC) and the only shareholder is Gureak. From this statement it is important to remark that Gureak uses the legal commercial forms used in the business world as a tool to communicate that the LLC that make up the Gureak Group are a business. The use of the legal commercial forms is not exclusive to the case of Gureak in Spain and it is infrequent among organizations whose objective is integration. Gureak’s professionalism in their businesses and their private market orientation are two characteristics that have allowed other businesses to endorse Gureak as a business group that is respected and highly valued for business reasons. Other businesses think that Gureak does things well, and ultimately, those businesses trust Gureak. The trust that third parties deposit in a CSO should be regarded as a very important asset that is part of the organization’s capital.
  • 18. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 18 If Atzegui was able to create the Gureak Group as a strategic alliance, it was because previously between 1960 and 1975, Atzegui had been accumulating trust capital. For Pérez (2005) trust capital is the nucleus to social capital, which in this case was accumulated by Atzegui and later on by Gureak among its partners or interest groups. Social capital and trust capital are two concepts that the economists have overlooked. To be able to give the concept of social capital its value from an active business view, the traditional economic analysis needs to be modified. As it is stated by Pérez (2005) too often the economic theory analyzes the organizations whether private, lucrative, non-profit, public, as an individual agent. However working in a network, cooperating requires that we go from this individual analysis to an analysis that includes mutual influence among the different agents that cooperate together and the relations of reciprocity. Besides this, the uncertainty effect in the economic decisions and in social relations need to be taken into consideration, as well as the effect of informational asymmetry among the different agents that cooperate with each other. Within the context of working in a network between the CSO and the business corporation, what should be understood as social capital? It is the development of trusting relations and cooperation. Such trusting relations and cooperation should be considered as an intangible asset (Williamson, 1993). The trust in a specific organization from other agents could be defined as the total time that the other interest groups do not spend in verifying the actions of the organization. The strong development of the CSO in providing general interest services reflects the trust that the CSO has been carving out among the business corporations and the public administration. To be able to gain that trust, the CSO must have been professional and transparent. If the business corporation trusts the CSO in its work, this signifies that the corporation thinks that through its association it can gain profits. VI. The Role of Business in Governance The advantages of the option to cooperate have been discussed and its been stated that those advantages could give a CSO instruments to achieve their objective faster. Now is the moment to analyze the possible risks that could fall onto the CSO member of the strategic alliance, as a consequence of having chosen the option to cooperate. The classic literature, which analyzes performance of the strategic alliances among businesses, distinguishes two types of main risks, fiduciary risk and environmental risk. The fiduciary risk refers to the possible non-fulfillment of
  • 19. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 19 expectations of a partner or to the possibility that the internal information of another business member of the network will be released. The environmental risk encompasses three dimensions: i) politics, with the risk of losing property ii) cultural, in two aspects, different kind of culture and different level of risk between the members, iii) technology, relative to the expropriation and disclosure of technological knowledge. In this chapter the analysis of the cooperation between the CSO and business corporations has been fundamentally done based on those two cases.  Shaki Project, collaboration between Hindustan Unilever Limited and other local CSOs based on the coproduction of goods and services provided to the communities in the rural areas of India  Gureak Group, collaboration between the CSO, other public administrations, and business foundations. This collaboration materializes in the formation of a business group whose mission is to create employment among people with disabilities of a working age and that are also inhabitants of Gipuzcoa Province The CSO develops a very different role in each one of these cooperations In the Shaki Project the business corporation leads in the action of cooperation; the CSOs share objectives and provide complementary resources. In the case of Gureak, the CSO is the mother of the new business developed and its name is Gureak Group. The CSO Atzegi leads the cooperation project. The other partners, public administrations, corporate and third-sector foundations, and business corporations are aligned with the target function of creating employment for people with disabilities and providing resources in the form of capital and service contracts. In the case that the cooperation works, such as the case of Gureak, a type of environmental risk would be the loss of property. Then the question that arises is, what is the probability that another shareholder of the Gureak business group will buy the shares of the CSO at Atzegi? As it has been stated in the introduction of this chapter, non-profit businesses exist in our market economy not only because of altruistic and historical reasons, but also because being so gives them comparative advantages in relation to the public sector, and in relation to the business corporation in reference to the provision of services of a social nature. All this means that in this game of complementarities there are three agents that are essential for the functioning of Gureak Group as an instrument of a employment generator. As it was aforementioned, the
  • 20. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 20 cooperation is an instrument that facilitates the achievement of the primary function in a faster and more efficient way than the option to work alone. It is necessary to restate that Atzegi started its work in 1960 taking on the commitment of providing all types of services that a person with disabilities may need in his/her lifespan; one of these services is employment. During the time of 1960 and 1975 Atzegi had created 300 jobs, but in 1975 it opted for indirect management. The Gureak Group constitutes a cooperation with other agents and it specializes in providing different employment services that a person with disabilities may request. From that moment on Atzegi continues to provide care services that a person with disabilities demands such as residential, educational, mobility and leisure, and above all, Atzegi is the political actor in defense of the people with disabilities’ interest in the territory they influence, Gipuzcoa (Atzegi, 2012). Until March of 2012, 1,965 family members, 2,775 people that donated money and 9,073 volunteers, encompassed the associative base of Atzegi. (www.atzegi.org). The sum of these three collectives gives a total of 13,813 families. Atzegi is a very important institution in the defense of the interest of people with disabilities in the territory where they are influential. During the current situation of financial crises, due to the sovereign debt of the public institutions, Atzegi is not worried that other shareholders will buy its shares in the Gureak capital; however, on the contrary, its directors are more concerned for the future ownership of other shareholders in the Gureak group of shareholders. Another case, not related to the strategic alliances, is the function of the administration counsel in a highly professional business group as it is Gureak. There is plenty of normative literature about corporate governance and specifically about the role of the board. There are two main theories, the Agency Theory and the Theory of Administration or partner model. The Agency Theory is considered as the leading model; this theory states that the board’s main function is to control decisions that the group of directors makes (Leys, Opstal van, and Gijselinckx, 2009 for the case of agrarian cooperatives). The Administration Theory or partner’s model supposes that executives and shareholders establish collaborative relations. The role of the counsel is not to control the directors, but on the contrary, the members of the counsel should develop proposals and help the directors achieve excellent performance as an organization. In Cornforth and Edwards (1999) and Cornforth (2004), a third model is mentioned, a model that is too frequently mentioned in the Spanish current situation, a model of “affixing signatures”. A functional analysis of the boards shows that the three theoretical perspectives live within the management of the organization’s governance. (CIES, 2010 for the case of consumer cooperatives in Spain). In Gureak, its shareholders have opted to appoint as the president of the administrative counsel the person who for more than 30 years performed
  • 21. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 21 as the general director. This practice helps to reduce asymmetrical information between the board and the group of directors. This practice allows the board to easier perform its own duties regarding the agency theoretical perspective, and to also collaborate with the current group of directors. VII. Conclusion Too often business corporations and CSOs work in silos. Frequently the analysis that connects businesses and CSOs is limited to the donations of time and money that businesses can give to a CSO through its politics of community relations. The studies related to CSOs are becoming more popular among the academic community, but they lack sufficient empirical and theoretical analysis that is focused on the different expressions of partnerships between the CSO and business. Presumably with more frequency in the future those analyses will focus on a) verification of the existence of the cooperation b) the different forms that such a cooperation takes. The use of network research among businesses could be the first tool to help those economists that are interested in the study of CSO to better understand the economic and financial efficiency and sustainability in these non-profit organizations; all this in an economy dominated by business corporations. The assumption holds that the practices of organizations in the third sector cannot be seen as isolated practices. The growing strength of the entities from the third sector rests in their capacity to build relations and coordinate with private businesses and public administrations. The theoretical perspective that has been used in this chapter is based on the assumption that the development of the strategic alliances between CSOs and business corporations, and ultimately the collaboration among different agents that pursue different objectives, is the result of the division between work and specialization. From the economic analysis it is assumed that if the CSOs and business corporations in a given geographic area and time collaborate it is because each one of these actors hopes that such collaboration will facilitate better transmission of information and better allocation of available resources. As a result they will be able to better meet their own action plans. This is the result of a positive collaborative game where the interdependence of its parts invites them to use the cooperation as a instrument to better achieve the primary function. Prior to opting for cooperation, each member of the network should have its own action plan or strategy, and must be convinced that the cooperation could be a useful instrument for the
  • 22. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 22 achievement of their plan of action in that particular arena. A key element is the selection of partners. A strategic alliance among different players includes ingredients such as credibility, reputation and mutual trust. Since it is impossible to foresee all the contingencies that could affect their relations while the cooperation is active, and even after when such collaboration has ended, these ingredients are necessary. Cooperation does not mean the elimination of the conflict interest between the two groups; however, if it is assumed that at the moment at which one of the two parties voluntarily opts to cooperate, both parties know of the existence of the differences in terms of interest, needs, and limitations. Regardless of these differences, they express their willingness to work in coordination based on a formalized and continuous dialogue that stems from the cooperation. There is also a need to remark that for a cooperation to thrive, each interest group should recognize the value and importance of the contribution that each will make to be able to achieve the desired results and to know what is the place and function of each member in such cooperation. VIII. Bibliography  Ackerman, S-R. (1986), The economics of nonprofit institutions, Oxford University Press.  Becattini, G. (1979), “Del ‘settore’ industriale al ‘distretto industriale’. Alcune considerazioni sull’unità d’indagine dell’economia industriale” en Rivista di economía e política industriale 5:1, pp 7-21.  Ben-Ner, A. (1986) “Nonprofit Organizations: Why Do They Exist in Market Economies? en Ackerman, S-R. (1986), The economics of nonprofit institutions, Oxford University Press, chapter 5, pp 94-113.  Boletín Oficial del Estado (1982), Ley 13/1982 de 7 de abril, de integración social de los minusválidos, nº 103, de 30 de abril del 1982, pp. 11106-11112.  Coase, R.H. (1937) “The nature of the firm”, Economica, nov. pp. 386-405. Reprinted en O.E.Williamson y S.G.Winter (editors) (1991), The nature of the firm: Origin, Evolution, and Development , ed. Oxford University Press.  Chandler, A.D. (1962), Strategy and Structure. Chapters in the History of the Industrial Business, Cambridge, MA: MIT Press, pp. 13. Citado en J. Trigo y A. Drudis (1999), Alianzas estratégicas. Las claves y la práctica de la cooperación entre empresas, ed. Gestión 2000, Barcelona.
  • 23. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 23  Easley, D.,and O’Hara, M. (1983), “The economic role of nonprofit firms, Bell Journal of Economics 14 (Autumm):531-38, citado en D. Easley and M. O’Hara (1986)“Optimal Nonprofit Firms” S-R Ackerman, (1986), The economics of nonprofit institutions, Oxford University Press, chapter 4, pp.85-93.  Easley, D. and O’Hara, M. (1986), )“Optimal Nonprofit Firms” S-R Ackerman, (1986), The economics of nonprofit institutions, Oxford University Press, chapter 4, pp.85-93.  Favreau, L. (1990), “Nouveaux enjeux au sein du mouvement populaire” en Coopératives et Dévelopment, vol 21, nº 2, pp. 5-20.  Fernández de Castro, J. y Tugores, J. (1991), Fundamentos de Microeconomía, segunda edición, McGrawHill, Madrid.  Hamel, P.(1990) « Le dévelopment local en milieu urbain : la nécessité d’un aprtenariat privé-public ? » en Coopératives et Dévelopment, vol 21, nº 2, pp. 29-50.  Hansmann, H.B (1980), « The role of nonprofit business » Yale Law Journal, 89, pp.835- 901, reprinted in Susan Rose Ackerman (editor), The economic of nonprofit institutions, Oxford University Press, pp.57-84.  Harrisson, D. Chaari, N. Comeau-Vallée (2012)“Intersectoral Alliance and social innovations: when corporations meet civil society” Annals of Public and Cooperatives Economics, 83:1:2012, pp. 1-24  Marshall, A. (1890), Principles of Economics, Londres, McMillan.  Nyssen, M. (editor) (2006), Social enterprise. At the crossroad of market, public policies and civil society, Routledge, Studies in the Management of Voluntary and non-profit organizations, Londres y Nueva York, 2006. ISBN 10: 0-415-37878-8, 2006, 335 páginas  Pérez, F. (dir.)(2005), La medición del capital social. Una aproximación económica, ed. Fundación BBVA, Madrid.  Phelps, E., (editor) Altruism, Morality and Economic Theory, New York: Russell Sage Foundation.  Porter, M: (1990), The competitive advantage of Nations, Free Press, New York. La versión en lengua castellana disponible es de 1991: La ventaja competitiva de las naciones, Plaza Janes editores, Barcelona.  Porter, M. (1998) “Clusters and the new economics of competition” , Harvard Business Review, noviembre-diciembre, pp. 77-87.  Tomeo, T. (2011), La relevancia del mercado de la base de la pirámide en la economía mundial. Empresas privadas y nuevos modelos de negocio, (mimeo), doctorial theses read in the Economics and Business Faculty in the University of Barcelona, July.
  • 24. T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e 24  Trigo, J. y Drudis, A. (1999), Alianzas estratégicas. Las claves y la práctica de la cooperación entre empresas, Barcelona: Ediciones Gestión 2000.  Weisbrod, B.A. (1975), Toward a theory of the voluntary nonprofit sector in a three- sector economy, in E. Phelps, (editor) Altruism, Morality and Economic Theory, New York: Russell Sage Foundation, pp.171-195.  Williamson, O. y Winter, S.G. (editors) (1991), The nature of the firm: Origin, Evolution, and Development , ed. Oxford University Press.  Williamson, O. (1993), “Calculativeness, trust and economic organization”, Journal of Law and Economics, 34: 453-502, citado en F. Pérez (dir.) (2005), La medición del capital social. Una aproximación económica, Fundación BBVA, Madrid. Bibliography from the Web  Fundación ONCE: www.fundaciononce.es  Fundosa: www.fundosa.es  Grupo Gureak : www.grupogureak.com  Kutxa: www.kutxa.net  ONCE: www.once.es