Chapter 2 The Firm 2023 PDF

Roles of the Firm 3 Key Roles of the Firm The Firm plays 3 key roles 1) The Firm plays a critical Economic Role – As an economic agent, the firm transforms inputs (capital, labor) into valued outputs. It provides income to employees via jobs. The firm is a cornerstone in the good...

Roles of the Firm 3 Key Roles of the Firm The Firm plays 3 key roles 1) The Firm plays a critical Economic Role – As an economic agent, the firm transforms inputs (capital, labor) into valued outputs. It provides income to employees via jobs. The firm is a cornerstone in the goods market, the financial market and the labour market. In this role, the fir also distributes wealth across stakeholders? 2) The Firm plays a key Social Role – A large amount of our lives are spent in the workplace. The social interactions created in the firm provide critical human interaction, a sense of belonging, social status, learning, sense of accomplishment and self worth. 3) The Firm plays a Societal role – Modern firms look beyond profit as a sole goal. Today firms take an active role in improving society. The emergence of B-Corps is a good example of this. Companies are balancing profit with societal impact. The Economic Role of the Firm A simplified model of the economic role firms play is the circular flow model. It pictures the economy as consisting of two groups—households and firms—that interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees. Firms produce and sell goods and services to households in the market for goods and services (or product market). Arrow “A” indicates this. Households pay for goods and services, which becomes the revenues to firms. Arrow “B” indicates this. Arrows A and B represent the two sides of the product market. Where do households obtain the income to buy goods and services? They provide the labor and other resources (e.g. land, capital, raw materials) firms need to produce goods and services in the market for inputs (or factors of production). Arrow “C” indicates this. In return, firms pay for the inputs (or resources) they use in the form of wages and other factor payments. Arrow “D” indicates this. Arrows “C” and “D” represent the two sides of the factor market. Of course, in the real world, there are many different markets for goods and services and markets for many different types of labor. The circular flow diagram simplifies this to make the picture easier to grasp. In the diagram, firms produce goods and services, which they sell to households in return for revenues. The outer circle shows this, and represents the two sides of the product market (for example, the market for goods and services) in which households demand and firms supply. Households sell their labor as workers to firms in return for wages, salaries, and benefits. The inner 1 circle shows this and represents the two sides of the labor market in which households supply and firms demand. This version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and labor markets work in the economy. We could easily add details to this basic model if we wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports). Organizations are hard to see. We see outcroppings, such as a tall building, a computer workstation, or a friendly employee, but the whole organization is vague and abstract and may be scattered among several locations, even around the world. We know organizations are there because they touch us every day. Indeed, they are so common that we take them for granted. We hardly notice that we are born in a hospital, have our birth records registered in a government agency, are educated in schools and universities, are raised on food produced on corporate farms, are treated by doctors engaged in a joint practice, buy a house built by a construction company and sold by a real estate agency, borrow money from a bank, turn to police and fire departments when trouble erupts, use moving companies to change residences, and receive an array of benefits from various government agencies. Most of us spend many of our waking hours working in an organization of one type or another. The Firm as Producer The activity of production goes beyond manufacturing (i.e., making things). It includes any process or service that creates value, including transportation, distribution, wholesale and retail sales. Production involves a number of important decisions that define a firm's behavior. These decisions include, but are not limited to:  What product or products should the firm produce?  How should the firm produce the products (i.e., what production process should the firm use)?  How much output should the firm produce?  What price should the firm charge for its products?  How much labor should the firm employ? The answers to these questions depend on the production and cost conditions facing each firm. The answers also depend on the market structure for the product(s) in question. Market structure is a multidimensional concept that involves how competitive the industry is. We want to explore the relationship between the quantity of output a firm produces, and the cost of producing that output. The cost of the product depends on how many inputs are required to produce the product and what those inputs cost. Production is the process (or processes) a firm uses to transform inputs (e.g. labor, capital, raw materials) into outputs, i.e. the goods or services the firm wishes to sell. Consider pizza making. The pizzaiolo (pizza maker) takes flour, water, and yeast to make dough. Similarly, the pizzaiolo may take tomatoes, spices, and water to make pizza sauce. The cook rolls out the dough, brushes on the pizza sauce, and adds cheese and other toppings. The pizzaiolo uses a peel—the shovel-like wooden tool— to put the pizza into the oven to cook. Once baked, the pizza goes into a box (if it’s for takeout) and the customer pays for the good. What are the inputs (or factors of production) in the production process for this pizza? 2 Economists divide factors of production into several categories: Intermediate Goods and Services (IGS) - The ingredients for the pizza are raw materials. These include the flour, yeast, and water for the dough, the tomatoes, herbs, and water for the sauce, the cheese, and the toppings. If the pizza place uses a wood-burning oven, we would include the wood as a raw material. If the establishment heats the oven with natural gas, we would count this as a raw material. Don’t forget electricity for lights. If, instead of pizza, we were looking at an agricultural product, like wheat, we would include the land the farmer used for crops here. Labor (L) – When we talk about production, labor means human effort, both physical and mental. The pizzaiolo was the primary example of labor here. He or she needs to be strong enough to roll out the dough and to insert and retrieve the pizza from the oven, but he or she also needs to know how to make the pizza, how long it cooks in the oven and a myriad of other aspects of pizza-making. The business may also have one or more people to work the counter, take orders, and receive payment. Capital (K) – When economists uses the term capital, they do not mean financial capital (money); rather, they mean physical capital, the machines, equipment, and buildings that one uses to produce the product. In the case of pizza, the capital includes the peel, the oven, the building, and any other necessary equipment (for example, tables and chairs). Residual Factors (RF) – Residual factors include technology and know-how. Production involves many decisions and much knowledge, even for something as simple as pizza. Who makes those decisions? Ultimately, it is the entrepreneur, the person who creates the business, whose idea it is to combine the inputs to produce the outputs. Technology refers to the process or processes for producing the product. How does the pizzaiolo combine ingredients to make pizza? How hot should the oven be? How long should the pizza cook? What is the best oven to use? The cost of producing pizza (or any output) depends on the amount of labor capital, intermediate goods, and other inputs required and the price of each input to the entrepreneur. Let’s explore these ideas in more detail. We can summarize the ideas so far in terms of a production function, a mathematical expression or equation that explains the engineering relationship between inputs and outputs: Q=f(L,K,IGS,RF) The production function gives the answer to the question, how much output can the firm produce given different amounts of inputs? Production functions are specific to the product. Different products have different production functions. Firms in the same industry may have somewhat different production functions, since each firm may produce a little differently. One pizza restaurant may make its own dough and sauce, while another may buy those pre-made. A sit-down pizza restaurant probably uses more labor (to handle table service) than a purely take-out restaurant. We can describe inputs as either fixed or variable. Fixed inputs are those that can’t easily be increased or decreased in a short period of time. In the pizza example, the building is a fixed input. Once the entrepreneur signs the lease, he or she is stuck in the building until the lease expires. Fixed inputs define the firm’s maximum output capacity. Variable inputs are those that can easily be increased or decreased in a short-period of time. The pizzaiolo can order more ingredients with a phone call, so ingredients would be variable inputs. The owner could hire a new person to work the counter pretty quickly as well. 3 Economists often use a short-hand form for the production function: Q=f[L,K], where L represents all the variable inputs, and K represents all the fixed inputs. Economists differentiate between short and long run production. The short run is the period of time during which at least some factors of production are fixed. During the period of the pizza restaurant lease, the pizza restaurant is operating in the short run, because it is limited to using the current building—the owner can’t choose a larger or smaller building. The long run is the period of time during which all factors are variable. Once the lease expires for the pizza restaurant, the shop owner can move to a larger or smaller place. Marginal Product Let’s explore production in the short run using a specific example: tree cutting (for lumber) with a two- person crosscut saw. We have ONE SAW (a fixed input) and we can hire as many lumberjacks as we want (a variable input) As the amount of Capital is fixed, any change in output is attributed uniquely to the number of lumberjacks. Here is the result of the production as the number of lumberjacks (L) change. Number of Saws (K) 1 1 1 1 1 Number of Lumberjacks (L) 1 2 3 4 5 Trees Cut (TP) 4 10 12 13 13 Marginal Product (MP) 4 6 2 1 0 Note that we have introduced some new language. We also call Output (Q) Total Product (TP), which means the amount of output produced with a given amount of labor and a fixed amount of capital. In this example, one lumberjack using a two-person saw can cut down four trees in an hour. Two lumberjacks using a two-person saw can cut down ten trees in an hour. We should also introduce a critical concept: marginal product. Marginal product is the additional output of one more worker. Mathematically, Marginal Product is the change in total product divided by the change in labor: MP=ΔTP/ΔL In the table above, since 0 workers produce 0 trees, the marginal product of the first worker is four trees per day, but the marginal product of the second worker is six trees per day. Why might that be 4 the case? It’s because of the nature of the capital the workers are using. A two-person saw works much better with two persons than with one. Suppose we add a third lumberjack to the story. What will that person’s marginal product be? What will that person contribute to the team? Perhaps he or she can oil the saw's teeth to keep it sawing smoothly or he or she could bring water to the two people sawing. What you see in the table is a critically important conclusion about production in the short run: It may be that as we add workers, the marginal product increases at first, but sooner or later additional workers will have decreasing marginal product. In fact, there may eventually be no effect or a negative effect on output. This is called the Law of Diminishing Marginal Product and it’s a characteristic of production in the short run. Why does diminishing marginal productivity occur? It’s because of fixed capital. We will see this more clearly when we discuss production in the long run. In general the relationship looks like the following: Short-Term Costs The firm’s production function tells us how much output the firm will produce with given amounts of inputs. However, if we think about that backwards, it tells us how many inputs the firm needs to produce a given quantity of output, which is the first thing we need to determine total cost. For every factor of production (or input), there is an associated factor payment. Factor payments are what the firm pays for the use of the factors of production. From the firm’s perspective, factor payments are costs. From the owner of each factor’s perspective, factor payments are income. Factor payments include:  Raw materials prices for raw materials  Rent for land or buildings  Wages and salaries for labor  Interest and dividends for the use of financial capital (loans and equity investments 5 Suppose we are producing “widgets”. A fictional good. No capital is required. Our production function in the short run provides the following information: We can simply “invert” the function to start with. Now focus on the whole number quantities of output. Suppose widget workers receive $10 per hour. We can now calculate the cost of production per unit (for 1, 2 3 or 4 widgets). We can measure costs in a variety of ways. Each way provides its own insight into costs. Sometimes firms need to look at their cost per unit of output, not just their total cost. There are two ways to measure per unit costs. The most intuitive way is average cost. Average cost is the cost on average of producing a given quantity. We define average cost as total cost divided by the quantity of output produced. AC=TC/Q If producing two widgets costs a total of $44, the average cost per widget is $44/2=$22 per widget. The other way of measuring cost per unit is marginal cost. If average cost is the cost of the average unit of output produced, marginal cost is the cost of each individual unit produced. More formally, marginal cost is the cost of producing one more unit of output. Mathematically, marginal cost is the change in total cost divided by the change in output: MC=ΔTC/ΔQ If the cost of the first widget is $32.50 and the cost of two widgets is $44, the marginal cost of the second widget is $44−$32.50=$11.50. 6 We can see the Widget Cost table redrawn below with average and marginal cost added. We can decompose costs into fixed and variable costs. Fixed costs are the costs of the fixed inputs (e.g. capital). Because fixed inputs do not change in the short run, fixed costs are expenditures that do not change regardless of the level of production. Whether you produce a great deal or a little, the fixed costs are the same. One example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease expires. Fixed costs can take many other forms: for example, the cost of machinery or equipment to produce the product, research and development costs to develop new products, even an expense like advertising to popularize a brand name. The amount of fixed costs varies according to the specific line of business: for instance, manufacturing computer chips requires an expensive factory, but a local moving and hauling business can get by with almost no fixed costs at all if it rents trucks by the day when needed. Variable costs are the costs of the variable inputs (e.g. labor). The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output. We treat labor as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials. Total costs are the sum of fixed plus variable costs. Let's look at another example. Consider a barber shop. The data for output and costs are below. The fixed costs of operating the barber shop, including the space and equipment, are $160 per day. The variable costs are the costs of hiring barbers, which in our example is $80 per barber each day. The first two columns of the table show the quantity of haircuts the barbershop can produce as it hires additional barbers. The third column shows the fixed costs, which do not change regardless of the level of production. The fourth column shows the variable costs at each level of output. We calculate these by taking the amount of labor hired and multiplying by the wage. For example, two barbers cost: 2 × $80 = $160. Adding together the fixed costs in the third column and the variable costs in the fourth column produces the total costs in the fifth column. For example, with two barbers the total cost is: $160 + $160 = $320. 7 The breakdown of total costs into fixed and variable costs can provide a basis for other insights as well. The first five columns of the next table duplicate the previous table, but the last three columns show average total costs, average variable costs, and marginal costs. These new measures analyze costs on a per-unit (rather than a total) basis and are reflected in the curves. 8 Long-Run Production and Cost Consider a secretarial firm that does typing for hire using typists for labor and personal computers for capital. To start, the firm has just enough business for one typist and one PC to keep busy for a day. Say that’s five documents. Now suppose the firm receives a rush order from a good customer for 10 documents tomorrow. Ideally, the firm would like to use two typists and two PCs to produce twice their normal output of five documents. However, in the short turn, the firm has fixed capital, i.e. only one PC. This is the top half of the table below. Suppose the firm’s demand increases to 15 documents per day. What might the firm do to operate more efficiently? If demand has tripled, the firm could acquire two more PCs, which would give us a new short run production function (bottom half of table). With more capital, the firm can hire three workers before diminishing productivity comes into effect. More generally, because all factors are variable, the long run production function shows the most efficient way of producing any level of output. The long run is the period of time when all costs are variable. The long run depends on the specifics of the firm in question—it is not a precise period of time. If you have a one-year lease on your factory, then the long run is any period longer than a year, since after a year you are no longer bound by the lease. No costs are fixed in the long run. A firm can build new factories and purchase new machinery, or it can close existing facilities. In planning for the long run, the firm will compare alternative production technologies (or processes). 9 In this context, technology refers to all alternative methods of combining inputs to produce outputs. It does not refer to a specific new invention like the tablet computer. The firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. After all, lower costs lead to higher profits—at least if total revenues remain unchanged. Moreover, each firm must fear that if it does not seek out the lowest-cost methods of production, then it may lose sales to competitor firms that find a way to produce and sell for less. A firm can perform many tasks with a range of combinations of labor and physical capital. For example, a firm can have human beings answering phones and taking messages, or it can invest in an automated voicemail system. A firm can hire file clerks and secretaries to manage a system of paper folders and file cabinets, or it can invest in a computerized recordkeeping system that will require fewer employees. A firm can hire workers to push supplies around a factory on rolling carts, it can invest in motorized vehicles, or it can invest in robots that carry materials without a driver. Firms often face a choice between buying a many small machines, which need a worker to run each one, or buying one larger and more expensive machine, which requires only one or two workers to operate it. In short, physical capital and labor can often substitute for each other. Consider the example of local governments hiring a private firm to clean up public parks. Three different combinations of labor and physical capital for cleaning up a single average-sized park are presented below. The first production technology is heavy on workers and light on machines, while the next two technologies substitute machines for workers. Since all three of these production methods produce the same thing—one cleaned-up park—a profit-seeking firm will choose the production technology that is least expensive, given the prices of labor and machines. The choice of production will need to be defined using the cost of each type of input. As the cost of labor rises from example A to B to C, the firm will choose to substitute away from labor and use more machinery. 10 Economies of Scale Once a firm has determined the least costly production technology, it can consider the optimal scale of production, or quantity of output to produce. Many industries experience economies of scale. Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. This is the idea behind “warehouse stores” like Costco or Walmart. In everyday language: a larger factory can produce at a lower average cost than a smaller factory. The economies of scale curve is a long-run average cost curve, because it allows all factors of production to change. While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve. Thus, the long-run average cost (LRAC) curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will be the least expensive average cost curve for any level of output. Figure 7.10 shows how we build the long-run average cost curve from a group of short-run average cost curves. Five short-run-average cost curves appear on the diagram. Each SRAC curve represents a different level of fixed costs. For example, you can imagine SRAC1 as a small factory, SRAC2 as a medium factory, SRAC3 as a large factory, and SRAC4 and SRAC5 as very large and ultra- large. Although this diagram shows only five SRAC curves, presumably there are an infinite number of other SRAC curves between the ones that we show. Value Added Value added means the difference between value of output produced by a firm in a period, and the value of inputs purchased in producing outputs. In the simple orange juice production process, final orange juice is delivered to the consumer via four different producers: the farmer who grows the oranges, the manufacturer who takes the oranges and makes orange juice, the distributor who takes the orange juice and puts it on store shelves, and the grocery store that gets the juice into the hands (or mouth) of the consumer. At each stage, there is a positive value added, since each producer in the supply chain is able to create output that has a higher market value than its inputs to production. 11 To calculate the total value created in the economy we can look at the total Value Added or Production approach OR the Expenditure on the Final Good ($3.50). Value added is the wealth created by the business during a particular period of time and wealth which is distribute among different stakeholders who created it. Value added includes wages, salaries, interest, depreciation, rent, taxes and profit. So, the firm plays a key role in how income is distributed in the economy and how it is more or less equal. The GINI coefficient provides a measure of income inequality. He higher the value, the more unequal income distribution is. 12 This distribution of wealth can be a source of conflicts between the different actors:  Between wages and profits  Between manager and shareholders  Between the different categories of staff In companies we have seen CEO compensation grow to large amounts – signalling a large discrepency between CEO and average employees. 13 The Social Role of the Firm The company is not only an economic actor focused uniquely on profit. It is also an organization with its own dynamics, a team called upon to make decisions to achieve common goals. The company is a social entity bringing together individuals linked by a set of relationships (in particular hierarchical). It therefore constitutes a network circulates not only goods and services, but also information, influences and feelings. With respect to employees, the firm allows employees to be active, to communicate, to feel useful, to use their capacities (physical and intellectual).It allows its employees to have social status. The business is the core of social life: it is the meeting point for men and women who devote to their work a time comparable to that of their private and family life. It trains and ensures the development of staff in the workplace (job security, promotion, improvement of working conditions, career management, etc.). The social role and the social benefits provided by the firm are becoming increasingly important in attracting in retaining talent. Employer branding is critical. Employer brand is branding and marketing the entirety of the employment experience. It describes an employer's reputation as a place to work, and their employee value proposition. When young graduates are questioned about what attracts them to join a future employer there are some critical factors that stand out. Interest value, assesses the extent to which an individual is attracted to an employer that provides an exciting work environment, novel work practices and that makes use of its employee’s creativity to produce high-quality, innovative products and services. Social value, assesses the extent to which an individual is attracted to an employer that provides a working environment that is fun, happy, provides good collegial relationships and a team atmosphere. Economic value, assesses the extent to which an individual is attracted to an employer that provides above-average salary, compensation package, job security and promotional opportunities. Development value, assesses the extent to which an individual is attracted to an employer that provides recognition, self-worth and confidence, coupled with a career-enhancing experience and a springboard to future employment. Application value, assesses the extent to which an individual is attracted to an employer that provides an opportunity for the employee to apply what they have learned and to teach others, in an environment that is both customer orientated and humanitarian. While all 5 factors are important, when students were asked if they would like to work for a particular company, Social Value, Development Value and Application Value appeared to be more significant. Building engagement It is known that engaged workers increase productivity. A study of 50,000 employees found that the most engaged and committed perform 20 percent better than their colleagues. Disengaged workers however, cost the US economy about $300 billion in 2004. Disengagement can be driven by many factors :  Job insecurity: fear of job loss is particularly likely during a recession.  Unfairness, particularly in reward and pay systems.  Jobs with no space (repetitive work with short cycle times such as call centre) 14   Work with very short call times.  Highly stressful jobs with very little flexibility or autonomy  Poor line management behaviour and bullying.  Working for long periods of time without a break. So what can the firm do to engage people? Typical factors include  Job satisfaction  Feeling Valued and Involved  Equality of opportunity  Health and Safety  Ethnicity  Communication  Cooperation Again, we see that the firm offers more than just a salary – and the social elements add to engagement and thus productivity. For Robinson, engagement reflects ‘a positive attitude held by the employee towards the organisation and its values. An engaged employee is aware of business context and works with colleagues to improve performance within the job for the benefit of the organisation. The organisation must work to develop and nurture engagement which requires a two‐way relationship between employer and employee’. For Towers Perrin consulting engagement reflects how employees are “connected” with the company. Connection is measured in 3 ways  Rational: How well employees understand their roles and responsibilities (the “thinking” part of the equation)  Emotional: How much passion and energy they bring to their work (the “feeling” part of the equation)  Motivational: How well they perform in their roles (the “acting” part of the equation). Employees can be defined in 4 groups  Engaged: Those giving full discretionary effort, with high scores on all three dimensions.  Enrolled: The partly engaged, with higher scores on the rational and motivational dimensions, but less connected emotionally.  Disenchanted: The partly disengaged, with lower scores on all three components of engagement, especially the emotional connection.  Disengaged: Those who have disconnected rationally, emotionally and motivationally. Statistics in 2008 showed that almost four out of five workers are not living up to their full potential or doing what it takes to help their organizations succeed. 15 Not surprisingly we also see a connection between engagement and retention. While 51% of engaged employees have no plans to leave, 39% would consider another offer. More surprising is that 50% of DISENGAGED are not seeking to leave the company. To boost engagement, 10 drivers were identified:  Senior management sincerely interested in employee well-being  Improved my skills and capabilities over the last year  Organization’s reputation for social responsibility  Input into decision making in my department  Organization quickly resolves customer concerns  Set high personal standards  Have excellent career advancement opportunities  Enjoy challenging work assignments that broaden skills  Good relationship with supervisor  Organization encourages innovative thinking The attractiveness drivers of a company can vary by culture. 16 Finally, the most known measure of engagement is that proposed by Gallup (the Q12 survey). Once again, we see the importance of non-economic factors. Factors Survey Questions Basic Needs 1. Do you know what is expected of you at work? 2. Do you have the materials and equipment to do your work right? Support 3. At work, do you have the opportunity to do what you do best every day? 4. In the last seven days, have you received recognition or praise for doing good work? 5. Does your supervisor, or someone at work, seem to care about you as a person? 6. Is there someone at work who encourages your development? Teamwork 7. At work, do your opinions seem to count? 8. Does the mission/purpose of your company make you feel your job is important? 9. Are your associates (fellow employees) committed to doing quality work? 10. Do you have a best friend at work? Development 11. In the last six months, has someone at work talked to you about your progress? 12. In the last year, have you had opportunities to learn and grow? The Societal Role of the Firm Companies must not only ensure economic performance but also societal performance, that is to say respect for certain values shared by the community (such as respect for human rights and the environment). It is recognized today that the enterprise has a responsibility towards society and must take responsibility for the general interest and well being:  Funding of collective works  Respect for the social and natural environment  Respect for an ethics charter The concept of corporate social responsibility (CSR) or organizational social responsibility (OSR) expresses these new missions. Not surprisingly, company adherence to CSR principles also impacts engagement of employees. According to a survey in 2007, 86 percent of employees who are satisfied with their organisation’s CSR commitment have high levels of engagement and have positive views of their employer’s sense of direction, integrity, and interest in employee well‐being among others. When employees were sceptical of the organisation’s commitment to CSR, only 37 per cent were engaged. When organisations demonstrate a commitment to ‘improving the human or environmental condition, it creates meaning and value for employees, customers, and shareholders alike’ 17 It is the voluntary integration of the social and ecological concerns of companies into their business activities and into their relations with all stakeholders. CSR means that the company must be concerned with:  Its profitability and financial results  Environmental and social impacts of its activities  The expectations of its stakeholders: employees, shareholders, customers, suppliers, civil society (NGOs, etc.). The notion of CSR stems from the application to companies of the concept of sustainable development. Reminder: sustainable development revolves around 3 pillars (1987, Bruntland Report, "Our common future"):  The economy: Developing and sustaining economic growth and efficiency to encourage the creation of wealth for all, through sustainable modes of production and consumption.  Social: Satisfying human needs (in terms of health, housing, social integration, consumption, education, etc.) and working towards social justice objectives.  The environment: Preserving, improving and valuing the environment and natural resources in the long term. A practical example of CSR is Triple Bottom Line Accounting. Triple bottom line (TBL) accounting expands the traditional reporting framework to take into account social and environmental performance in addition to financial performance. 3 Ps : People (Social Equity), Planet (Environmental), Profit (economic bottom line) The concept of TBL demands that a company's responsibility lies with stakeholders rather than shareholders. An example is Ben and Jerry’s Ice Cream 18 The CSR reporting obligation was introduced in France by article 116 of the 2001 law on new economic regulations (NRE). This obligation originally only concerned companies listed on the stock exchange. Since the Grenelle 2 law of 2011, the extra-financial reporting obligation has been extended to:  public limited companies (SA), limited partnerships with shares (SCA) and European companies (SE) whose securities (shares or bonds) are admitted to trading on a regulated market;  other SA, SCA and SE whose balance sheet total or turnover and the number of employees exceed certain thresholds: turnover of € 100 million and 500 employees;  other forms of entities such as mutual insurance companies, agricultural cooperatives, credit institutions, etc. Frameworks There are numerous CSR frameworks. Some of the most well known are : ISO 26000 : In 2010, the International Organization for Standardization (ISO) released ISO 26000, a set of voluntary standards (non-certifiable) meant to help companies implement corporate social responsibility. ISO 26000 clarifies what social responsibility is and helps organizations translate CSR principles into practical actions. ISO14001 : ISO 14001 is the international standard that specifies requirements for an effective environmental management system (EMS). It provides a framework that an organization can follow, rather than establishing environmental performance requirements. United Nations Global Compact : The United Nations Global Compact is a non-binding United Nations pact to encourage businesses and firms worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The UN Global Compact is a principle-based framework for businesses, stating ten principles in the areas of human rights, labor, the environment and anti-corruption. Human Rights 1) Businesses should support and respect the protection of internationally proclaimed human rights; and 2) Make sure that they are not complicit in human rights abuses. Labour 3) Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; 4) The elimination of all forms of forced and compulsory labour; 5) The effective abolition of child labour; and 6) The elimination of discrimination in respect of employment and occupation. Environment 7) Businesses should support a precautionary approach to environmental challenges; 8) Undertake initiatives to promote greater environmental responsibility; and 9) Encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption 10) Businesses should work against corruption in all its forms, including extortion and bribery. 19 EMAS : European EMAS standards (Eco-Management and Audit Scheme). EMAS looks at management and company performance. The Eco-Management and Audit Scheme (EMAS) is a voluntary environmental management instrument, which was developed in 1993 by the European Commission. It enables organizations to assess, manage and continuously improve their environmental performance. BCorp and Société à Mission In the United States, a benefit corporation (B-Corp) is a type of for-profit corporate entity, authorized by 35 U.S. states and the District of Columbia that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals, in that the definition of "best interest of the corporation" is specified to include those impacts. Traditional C corporation law does not specify the definition of "best interest of the corporation" which has led to profit motivations being used as the main driver for best interests. In France, the Pacte law introduced a new form for companies (Société à mission) allowing a company to declare its raison d'être through several social and environmental objectives. 20