5 Corporate Social Responsibility LEARNING OBJECTIVES The definition of corporate social responsibility. How the idea of corporate social responsibility has evolved, broadening over the years. To understand the arguments of opponents of corporate social responsibility. General principles of corporate social responsibility. What studies show about the relationship between social and financial performance in firms. About the rise of a global CSR system based on civil regulation. To understand eight principle components of the global CSR system. How ideas about corporate responsibility in the chapter apply to General Electric Company. SUMMARIZING OUTLINE This chapter introduces the idea of corporate social responsibility and follows its evolution from colonial America to its present expansion into the global business arena. The opposition of critics and managers who defy the idea in practice is explained. General principles of corporate social responsibility are set forth. The relationship between social and financial performance is discussed. A section is devoted to the rise of a global system of civil regulation to prompt CSR in multinational corporations. Illustrations of how CSR is encouraged by 8 major elements of this system are given. The introductory story is about Merck & Co., Inc. Merck spent more than $200 million developing a drug treatment for river blindness, a disease endemic in underdeveloped nations, although neither patients nor international organizations could or would pay for it. Since 1987 Merck has given away more than 1.4 billion doses of ivermectin, mostly in Africa, at a cost of $2.1 billion. The medicine has saved hundreds of thousands of people from blindness and helped the economies of African nations. The story is an outstanding example of how some corporations accept the idea of corporate social responsibility and go beyond normal market operations, acting to improve society in some way. Corporate social responsibility, or CSR, is the duty a corporation has to create wealth in ways that avoid harm to, protect, or enhance societal assets. The idea has expanded in meaning over time.
Advocates of CSR justify it with two arguments. It is a moral duty to promote social justice. It has concrete benefits such as creating loyal customers. Opponents of CSR have several arguments against it. It imposes costs that make corporations less efficient, thus subtracting from overall social welfare. It is unfair to shareholders because managers divert profits that belong to them to social projects. Libertarians are advocates of laissez-faire, who believe that the market allocates resources more efficiently than political pressures. They oppose CSR because they believe its advocates are predominantly progressives with a leftist policy agenda. The meaning of corporate social responsibility has evolved. In classical economic theory a business was socially responsible if it maximized profits while operating within the law. In colonial America merchants were thrifty, but charity was a coexisting virtue and business owners gave to churches, orphanages, and poorhouses. In the early 1800s wealthy entrepreneurs such as Steven Girard began to give large gifts and bequests to schools and other worthy causes. They were followed by entrepreneurs who made fortunes during the economic growth of the late 1800s. John D. Rockefeller and Andrew Carnegie are examples of industrialists who turned into great philanthropists. The rise of social Darwinism in the last half of the nineteenth century braked expansion of the social responsibility idea. Popularized by Herbert Spencer, social Darwinism held that charity, which supported weaker and less successful individuals, ran contrary to the harsh reality of evolution. And it was evolution, not soft-headed benevolence, that brought progress. Social Darwinism justified ruthless, predatory competition. Early in the twentieth century three interrelated ideas emerged to justify broader corporate responsibility. Managers were trustees, or agents of corporate power whose positions implied a duty to protect stakeholders. Managers had an obligation to balance the multiple interests of stakeholders.
The service principle was a near-spiritual belief that individual managers served society by building successful businesses. The prosperity they created would eradicate broad social ills such as poverty. Not everyone subscribed to these expansions of the social responsibility doctrine. Henry Ford, for example, ruthlessly maximized profits at the expense of workers. But others such as General Robert E. Wood of Sears, Roebuck accepted expanding duties toward society. An early statement of the contemporary idea of social responsibility was Howard R. Bowen s book, Social Responsibilities of the Businessman, in 1953. Soon conservative economists such as Milton Friedman emerged with a set of arguments against business responsibility. Friedman s basic views, as follows, are still heard today. The one and only responsibility of business is to make a profit because business institutions work best responding to markets. Governments should run social programs, not companies. In the free enterprise system managers are responsible only to stockholders. Spending money on social projects wrongly appropriates money that belongs to them. It also robs consumers, who must pay higher prices for products. This is taxation without representation. Social responsibility threatens political freedom because it requires that companies perform political functions, gives executives political power, and opens business to evaluation by political criteria. Despite Friedman s arguments the business community accepted the idea of corporate social responsibility. Two groups of business leaders issued supportive statements, ending major opposition. In 1971 the Committee for Economic Development published a report making a case for expansive social responsibility. The report set forth three concentric circles of responsibility. An inner circle of responsibility for economic performance. An intermediate circle requiring exercise of the economic function with sensitivity to social values and priorities. An outer circle of emerging responsibilities for business to improve the social environment broadly in ways not directly related to its economic function.
In 1981 the Business Roundtable issued a Statement on Corporate Responsibility saying that corporations had both economic and social duties and that there was no necessary conflict between them. Acceptance of the doctrine of corporate social responsibility by the business elite protected the legitimacy of large corporations. But many managers retain a conviction that Friedman is correct and they continue to operate with an eye only to profits. There are three basic elements of social responsibility. Market actions are competitive responses to forces in markets. They dominate corporate decisions. When a corporation responds to markets, it fulfills its first and most important social responsibility. Creating jobs, paying taxes, and making products is the major impact of a company on society. Mandated actions are programs required by government regulation or by agreements negotiated with stakeholders such as unions. The importance of mandated actions grew in the twentieth century. Voluntary actions are those that go beyond legal, regulatory, or negotiated mandates. A wide range of social programs and charitable activities are included in this category. Eight general principles of corporate social responsibility should guide managers. First, corporations are economic institutions run for profit and should not be expected to meet major social objectives without financial incentives. Second, all firms must follow multiple bodies of law including (1) corporation laws and chartering provisions, (2) the civil and criminal laws of nations, (3) government regulations, and (4) international law. Third, managers must act ethically. Fourth, corporations have a duty to correct the adverse social impacts they cause. They should internalize external costs, or costs of production borne by society. Fifth, social responsibility varies with company characteristics such as size and location. Sixth, managers should try to meet legitimate needs of stakeholders. Seventh, corporate behavior must comply with norms in an underlying social contract. Eighth, corporations should accept a measure of accountability toward society and publicly report on their market, mandated, and voluntary actions.
Are social and financial performance related? Research suggests that more responsible companies are more profitable, but methodological difficulties create enough doubt to make reservation of final judgment wise. Today the idea of CSR has taken on a global dimension. While there is no consensus on its meaning and practice it is widely accepted in developed nations and in many developing nations. As global economic activity has expanded, transnational corporations are perceived as eluding proper controls International law is weak in addressing the social impacts of business. Less developed nations sometimes have weaker regulations. Strategies of joint venture, outsourcing, and supply chain extension distance large corporations in developed nations from direct accountability for social harms. Conservative political climates in developed nations often prevent passage of new regulations to control international business activities. Resentment of extraterritorial jurisdiction prevents enforcement of the more stringent laws of developed nations in less-developed nations. To overcome these barriers to responsible corporate behavior the United Nations has promoted new international standards for the conduct of corporations. It has been instrumental in the development of soft law, or statements of philosophy and principle that, over time, gain legitimacy as guidelines for interpreting legally binding agreements. A new system of global CSR is evolving. It is based on an evolving, solidifying, maturing patchwork of ideas, codes, voluntary corporate actions, and multistakeholder initiatives involving corporations, nongovernmental organizations, and governments working together to promote a part of the CSR agenda. There are eight major elements in this new global CSR system. New norms and principles to direct CSR have emerged. Many are found in declarations and codes emanating from United Nations. Codes of conduct, or formal statements of aspirations, principles, and guidelines for corporate behavior, have proliferated. Such codes lack the force of law and are seen as weak unless compliance is effectively monitored. Reporting and verification standards have led more companies to disclose information about their CSR performance through, for example, sustainability reports that report progress toward economic, social, and environmental goals.
Labeling and certification schemes set rules for social and environmental responsibility in the production process, then use labels or certifications on the resulting products to show consumers that companies have complied. Management standards provide models of methods a corporation can use to achieve social responsibility goals. The World Bank, the United Nations, and progressive investors have developed social investment and lending criteria. They require corporations to meet social, human rights, and environmental standards as a condition of borrowing and attracting investment. Government actions also advance the CSR agenda. These actions include participation in code or labeling initiatives with corporations and nongovernmental organizations and adoption of laws that require CSR. Civil society vigilance enforces corporate compliance with emerging CSR norms as groups threaten brand attacks and harassment against deviant corporations. The new system of global CSR is based on civil regulation, or regulation by nonstate actors based on social norms or standards enforced by social or market sanctions. The system has affected corporate behavior. Critics point out that the new regime stands outside governments and is, therefore, nondemocratic. In conclusion, for more than two centuries doctrines of business responsibility have expanded to require more concern for stakeholders and society. This expansion will continue.