The role of the corporation

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The Debate over CSR
This question was hotly debated for decades.
The Economist

(2005/2008): “The CSR movement [has] won the battle of ideas… Clearly CSR has arrived.”

What is the corporation’s purpose and what are its responsibilities?

Maximize Shareholder Value
(Exclusively)

Serve the Broader Interests of Society (Beyond Profits)

Vs.

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The Debate over CSR Today
From a dichotomy to a continuum.
The

question now is not “Whether” but “How?” (or “How much?”) (Smith, 2003)

What is the corporation’s purpose and what are its responsibilities?

Maximize Shareholder Value
(Exclusively)

Serve the Broader Interests of Society (Beyond Profits)

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The Debate over CSR Today
World-wide diffusion: From a mostly US-based debate

to a global concern.
Chinese government/CPC signals importance of CSR beginning in 2006.

Largest SOEs encouraged to publish annual SOE reports since 2008.
Shanghai and Shenzhen stock exchanges make it mandatory for some firms.

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Corporate Social Responsibility
What is CSR?
How has the concept evolved over time?
How

and why have conceptualizations of CSR and attitudes toward it changed over time?
Why do companies engage in it?

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Definitions
Corporate social responsibility:
“The firm’s consideration of, and response to, issues beyond

the narrow economic, technical, and legal requirements of the firm.” (Davis, 1973)
“Actions that appear to further some social good, beyond the interests of the firm and that which is required by law.” (McWilliam & Siegel, 2001)
“Includes the economic, legal, ethical and philanthropic expectations placed on organizations by society at a given point in time.” (Carroll & Buchholtz, 2009)

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Corporate Social Responsibility
Five key elements
Corporations have responsibilities that go beyond the

production of goods and services at a profit.
These responsibilities involve helping to solve important social problems, especially those they have helped create.
Corporations have a broader constituency than stockholders alone.
Corporations have impacts that go beyond simple marketplace transactions.
Corporations serve a wider range of human values than can be captured by a sole focus on economic values. (Buchholtz, 1991)

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Early Conceptualization
The social responsibility of business “refers to the obligations of

businessmen to pursue those politics, to make those decisions, or to follow those lines of actions which are desirable in terms of the objectives and values of society.” (Bowen, 1953)
Focus on business and businessmen
Emphasis on philanthropy and community relations
Focus on social responsibility of the firm (corporation) emerges about 1967 in the US

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A legal entity - an “artificial” rather than “natural” person –

having rights and duties For example: it can own property, buy and sell, sue and be sued, employ people.
Owned by shareholders (e.g., in England, the US, and Australia). Can be publicly traded or privately held.
Often managed by “agents” (managers) who have a fiduciary duty to fulfil the goals and mission given them by its “principals” (owners).

What is a Corporation?

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What is its Purpose?
Should it exclusively focus on maximizing profits?
Or be

more “broadly” concerned with social and environmental issues (e.g. adopt sustainability as a key framework, integrate the Triple Bottom Line into business decisions)?
Depends on the country: different national business systems (which include legal systems and national cultural values) provide different answers

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What is its Purpose?
US & UK (Anglo-American model): shareholder value maximization

(shareholder primacy) view dominant since 1980’s; emphasis on profits
In Continental Europe, Scandinavia and East Asia, corporations have a broader mandate
Germany, Netherlands & France: firm’s purpose includes furthering the welfare of employees and general society
China: Well-being of the state is a priority

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The US Case
US law privileges the interests of shareholders, but not

exclusively.
Culturally there is a tension:
“Libertarian” position advocates for minimalist responsibility of corporations
“Egalitarian” position advocates for broader responsibilities (but not necessarily through expansion of law or regulation)
This tension gave rise to the CSR debate and has shaped its evolution

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Carroll’s Four-Part Model: The Pyramid of CSR
Philanthropic Responsibilities
Expected by society
Do Good
Do

No Harm

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Why should firms engage in CSR?
Moral arguments: pro-CSR arguments based on

the view that corporations have moral obligations (“It’s the right thing to do”) Other terms:
Normative view: “based on what is considered to be the usual or correct way of doing something”; “conforming to or based on norms” (Merriam-Webster)
The “Broad CSR” position (Schwartz & Saiia)

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Why should firms engage in CSR?
Instrumental arguments: based on claims that

CSR leads to desirable outcomes, specifically increased profits, for firms (“It’s the profitable thing to do”) Similar terms:
The business case for CSR
Enlightened self-interest
Pragmatic view
Strategic CSR or “profit-maximizing” CSR

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Moral Arguments for CSR

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Historical Causes
1969 Cuyahoga River Fire, Cleveland, Ohio, USA

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Birth of the U.S. Environmental Movement
1970’s - Consequences of the modern

U.S. environmental movement:
New legislation (Clean Water Act)
New governmental agency: Environmental Protection Agency (EPA)
New expectations of firms
Public concern gave impetus to CSR movement
Similar phenomenon in many industrialized or industrializing countries in intervening years

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A Polluted River

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Moral Arguments for CSR
“It’s the right thing to do”
Focus on responsibility,

obligation, accountability
Driven by growing concern over dwindling natural resources and environmental degradation: Pollution, water contamination, over-population, deforestation, climate change, etc.
And concern over social issues: Poverty, inequality, slavery, forced labor, starvation, health, human rights

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Moral Arguments 1
Firms have the responsibility to respond to social and

environmental issues because: 1. They helped create these problems.
Accountability

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Moral Arguments 2
2. Firms have prospered and should give back to

society
Reciprocity, philanthropy

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Moral Arguments 3
3. The issues are too large for governments (or

NGOs)
OR Firms have power and resources and “With great power comes great responsibility”
Obligation

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The Power of Corporations
“The sheer magnitude of problems, from malnutrition and

HIV to illiteracy and homelessness, inspires a turn toward all available sources of aid, most notably corporations.” UN Secretary General Kofi Annan

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Moral Arguments 4
4. Firms are members of society and have to

do their part
Social contract

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Who is Responsible?
Are moral arguments directed toward all firms equally?
No.

Generally the focus is on larger, more “visible” (high profile), more prosperous and multinational corporations.
Also on firms or industries that are seen to do more damage (oil industry, Walmart, etc.)

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Critique of Moral Arguments for CSR
Three arguments against CSR
1. The only

responsibility of business is maximizing profits while (1) obeying the law, (2) conforming to “ethical custom”; and (3) acting “without deception or fraud.”

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Friedman’s Critique
2. Managers (agents) are employed by shareholders (principals) and have

the obligation to pursue the latters’ goals
Managers who engage in CSR are illicitly spending the money of shareholders (or imposing a “tax”)

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Friedman’s Critique
3. Managers don’t have the know-how or the right to

decide how to solve social and environmental issues.
It is the job of democratically elected politicians to pursue and/or protect the social good and

to set the “rules of the game” to guide firm behaviour towards achieving the social good.

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Instrumental Arguments for CSR

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Instrumental Arguments for CSR
There is no tension between pursuing shareholder wealth

(Friedman/libertarian position) and responding to “broader” interests of society and environment
Because: “It’s good for business” (or bad to ignore it)

Maximize Shareholder Value
(Exclusively)

Serve the Broader Interests of Society (Beyond Profits)

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Instrumental Arguments for CSR
Reasons:
Changing expectations & radical transparency (cf. Lecture

1), resources dwindling
Growing “conscious consumer” & LOHAS (Lifestyles of Health and Sustainability) segments
Focus on cost reduction, risk management, opportunity, reputation

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LOHAS

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LOHAS in China
“17% of consumers in China’s top five cities –

a combined population of more than 60 million – describe themselves as LOHAS-focused, versus 19% of American consumers, despite the significant head start of the US market’s LOHAS consciousness.”
“And China’s LOHAS consumers are not price sensitive – nine out of ten consumers would be willing to pay 20% more on average for sustainable products, and are looking for increased product choices and availability.”

http://blog.lohas.com

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Good Reputation
CSR rankings: Reputation Institute RepTrak, Newsweek’s Top Green Companies
CSR

makes corporations more attractive to employees and prospective employees (“Employer of Choice”)
CSR makes corporations more attractive to investors
CSR helps corporation maintain good relations with government (Less monitoring, oversight and regulation)
CSR makes suppliers more attractive
Good reputation = Good relations

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Trailblazer, game changer
Brand identity, employer of choice
New markets for unmet needs
Product

differentiation (green, organic)

Reducing costs (energy, waste, materials)

Reducing compliance risks

Types of Instrumental Focus

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Risk Management
Nike, 1996
48% decline in stock price over 19 months, destroying

$12.2 billion in market value
Reaction, Defense
Accommodation: protect reputation, avoid government intervention
Prevention focus

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Walmart , 2000’s
Prevention focus, proactive
Cost and Waste Reduction

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Nike vs. Adidas, 2008
Promotion focus, proactive
Strategic CSR
Differentiation

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Game Changers
Promotion focus, proactive
Strategic CSR
Tennant Company
Toyota Prius

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Does CSR increase firm financial performance?
A recent meta-analysis found that: The overall

effect is positive but small (mean r=.13, median r=.08)

Margolis, Walsh & Elfenbein (2007)

Are Instrumental CSR Claims True?

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Possible Contingencies
Firms that are more likely to reap benefits:
Consumer-facing (as opposed

to B2B)
Employ highly educated workforce
Have a differentiation strategy
Sell experience goods (as opposed to search goods)
Are in industries with poor reputation or heavily regulated industries
Know how to improve stakeholder relationships through CSR

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Recent Evidence
Barnett & Salomon (2012) analysis of US firms

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Critiques of Instrumental Arguments
Continues to prioritize profits above all
It is deceptive,

not genuine (Friedman: firms shouldn’t call it CSR)
Can lead to superficial CSR initiatives focused on appearances while business as usual e.g. (pollution, exploitation of labor, etc.) continues “Window-dressing”
Can be used by irresponsible companies to make themselves look good “Greenwashing”

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Critiques of Instrumental Arguments
What if there is no “Market for Virtue”?

What happens when there is a real conflict between profits and the broader interests of society? (e.g., Ford Pinto case)

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How Companies View CSR

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Corporate Social Responsiveness
How do companies respond to social or environmental issues

or demands?
Theoretically four responses are possible:
Reactive – denial, pass responsibility to others
Defensive – doing the least required, superficial response, subterfuge
Accommodative – doing what is demanded
Proactive – going beyond expectations, anticipating future demand
(Carroll, 1979, 1991; Wartick & Cochran, 1985)
Generally CSR activity has been increasing the world over

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Importance to Firms
Haanes et al., 2011
The Economist, 2008

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CSR in China
Gao, 2009

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Why Do Firms Do It?
Three explanations:
Competitiveness: Consumer demands, cut costs, increase

profits, differentiate
Legitimacy: Reputation, survival, conformity
Ethics: Social and ecological responsibility (Bansal & Roth, 2000)

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Why Do Firms Do It?
The Economist, 2008

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Perceived Benefits
Haanes et al., 2011

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Why Has CSR Spread?
Globalization, especially global supply chains
Spread of “good” management

ideas, emulation of most admired companies
Internationalization (access to international markets), CSR as a signal of quality
Rise of the Anglo-American model; CSR as a way of signaling that corporations can self-govern or self-regulate
Changing Global Business Context (Lecture 1): public concern over dwindling resources, pollution, etc.

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The Challenge
What exactly are a firm’s social and environmental responsibilities?
Whose needs,

interests & demands should it pay attention to?

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Stakeholder Theory

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Stakeholder Theory of the Firm
First proposed by Ed Freeman (1984)
A response

to the shareholder maximization view championed during the 1980’s
1980’s: Reagan, Thatcher, deregulation, privatization, neo-liberalism, neo-classical economics

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Critique of Shareholder Value
US: The law does not actually dictate that

corporations must prioritize it at all times.
Not a good way to manage. Instead focus should be on customers, sound strategy.
Can lead to an obsession with short-term earnings and great harm (eg, GFC).
Shareholders have no commitment to the firm, may own for minutes or seconds with no interest in its fortunes. Employees, suppliers, customers, communities are in it for the long run (long-term).

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Definition of Stakeholders
“A stakeholder is any group or individual who can

affect or is affected by the achievement of the organization’s objectives” (Freeman)
“The stakeholders in a firm are individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers” (Post, Preston, & Sachs)

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Stakeholder Relations
The Firm and its Managers
Suppliers: Supply high quality inputs & receive

payment

Civil society (NGOs): Don’t criticize or boycott & achieve their goals

Customers: Purchase products or services & obtain value

Shareholders: increase value of the firm & make profits

Governments: Don’t regulate extensively & and receive taxes

Employees: Create good products or services & receive income

Interdependence

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Types of Stakeholders
Werther & Chandler (2010)
Which of all of these stakeholders

should managers pay attention to?

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Stakeholder Analysis
The process of identifying stakeholders and determining which are the

most important.

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Primary Stakeholders
“A primary stakeholder group is one without whose continuing participation

the corporation cannot survive as a going concern. Primary stakeholder groups typically are comprised of shareholders and investors, employees, customers, and suppliers, together with what is defined as the public stakeholder group: the governments and communities that provide infrastructures and markets, whose laws and regulations must be obeyed, and to whom taxes and other obligations may be due. There is a high level of interdependence between the corporation and its primary stakeholder groups.” (Clarkson, 1995)

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Secondary Stakeholders
“Secondary stakeholder groups are defined as those who influence or

affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival. The media and a wide range of special interest groups are considered as secondary stakeholders under this definition.”
“The corporation is not dependent for its survival on secondary stakeholder groups.” (Clarkson, 1995)

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Stakeholder Salience
Which stakeholders (should) matter depends on the situation
Three factors influence

salience: power, legitimacy, urgency

Mitchell, Agle & Wood, 1997

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Ford Pinto

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The Problem

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Ford Pinto Case
Recall & fix: Cost would be $11 per vehicle,

with 12.5 million vehicles needing to be recalled. The total cost would be $137.5 million (and less trunk space).
Do nothing: Predicted 180 people could die, 180 people could suffer serious burns, and 2,100 vehicles could be destroyed by fire. Based on estimates, total cost would be $49.5 million (180 deaths x $200,000 + 180 serious burns x $67,000 + 2,100 vehicles x $700) (Schwartz & Saiia, 2012)

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Discussion
Consider the Fort Pinto case
Who are the most important stakeholders in

this situation? What would there demands have been (had they been aware)?
From an instrumental view, what should Ford do: recall the Pinto or not? Why?
From a moral view, what should Ford do? Why?

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Integration 1
Using business acumen and innovation, create products or services that

genuinely do good (or solve a social problem) and generate significant profits for companies at the same time
Create new markets
Shared value
Sustainable value
Doing well by doing good
Base of the pyramid

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Stakeholder
Value
Shareholder Value
Unsustainable
(Value Transfer)
Unsustainable
(Value Transfer)
Unsustainable
(Lose/Lose)
Sustainable Value
Clean energy, etc.
Fossil fuel,
toxic chemicals
Laszlo

(2003); also Porter & Kramer (2011)

Integration 1

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Integration 2
Value Maximization Proposition:
It is impossible to maximize more than one

thing.
Maximization of the long-run value of the firm should be the goal of all managers.
Social welfare is maximized when all firms do this.
Stakeholders’ and shareholders’ claims should be evaluated solely based on this criteria. Neither is necessarily more important than the other. (Jensen, 2002)

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Summary
Debates regarding the role of the corporation in society largely relate

to the profit maximization thesis, but some version of the validity of CSR is generally accepted
On one side, there are the likes of Friedman who argue that corporate managers should be primarily concerned with maximizing profits
On the other, there are claims that corporate managers should be more “broadly” concerned with the social good (for moral and/or instrumental reasons)
Today’s lecture aimed to outline the various arguments, show their strengths and problems and their historical origins. Think about where you would place yourself between the two sides?

The role of the corporation

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