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Institutional Pressures, Corporate Reputation, And Voluntary Codes Of Conduct: An Examination Of The Equator Principles

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Institutional Pressures,

Corporate Reputation, and

Voluntary Codes of Conduct:

An Examination of the

Equator Principles



n recent years, changing public expectations have increasingly

induced firms to publicly declare their commitments to integrating

a wide variety of public interest concerns into their corporate

practices. In the United States and elsewhere, demands for firms

to demonstrate sound management and social awareness have

intensified after a series of corporate governance scandals that

invited greater regulatory scrutiny and brought business ethics to

the fore of public policy.


Firms often seek to demonstrate their ethical

credentials and intentions by declaring support for industrywide

codes of conduct, defined as “written statements of principle

or policy intended to serve as the expression of a commitment to a

particular enterprise conduct.”


Generally, these codes formulate

high-level normative principles and define how adopting companies

should interpret and implement these in the context of their business



In the international project finance market, such a code referred

to as the Equator Principles recently emerged, which stipulates why

and how financial institutions should consider environmental and

Christopher Wright is with the Department of International Relations, London School of

Economics and Political Science, London. Alexis Rwabizambuga is with the Department of

Geography and Environment, London School of Economics and Political Science, London.


social issues in their project finance operations. The paper argues

that codes of conduct are primarily adopted by firms as signaling

devices for demonstrating positive credentials, with the aim of

strengthening corporate reputation and organizational legitimacy

more generally. Drawing on extant research on corporate sustainability,

corporate reputation, and industry-wide voluntary codes of

conduct, the paper will contribute to the discussion of plausible

explanations for why firms decide to adopt voluntary codes of


It will use institutional theory as a conceptual framework for

explaining adoption, which is premised on the notion that in highly

institutional environments, firm structures are shaped by

responses to formal pressure from other organizations or by conformity

to normative standards established by external institutions.


These institutions specify rules, procedures, and structures for

organizations as a condition of conferring organizational legitimacy,

which can be defined as “a generalized perception or assumption

that the actions of an entity [the firm] are desirable, proper, and

appropriate within some socially constructed system of norms,

values, beliefs, and definitions.”


In turn, firms are rewarded with

enhanced legitimacy and reputation if they develop internal structures

“isomorphic” with external institutional pressures.


In an analysis of the current financial institutions that have

publicly declared a commitment to the Equator Principles (Equator

banks hereafter) relative to those that have not, the paper observes

that a large majority are headquartered in Western Europe and

North America. It suggests that the higher rate of adoption among

Western European and North American banks relative to financial

institutions based in other regions illustrates how codes of conduct

primarily function as tools for maintaining or enhancing corporate

reputation in institutional environments where it is threatened.

Where environmental and social responsibility does not significantly

impact corporate reputation, the strategic motivations for adopting

a code of conduct are reduced.

As such, the paper is principally concerned with incentives

financial institutions face for adopting voluntary codes of conduct

stipulating what constitutes legitimate environmental and social

behavior, and not why they “go green” per se.


Specifically, while

having adopted a code of conduct may indicate a strong environmental



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