Lecture 5 & 6 Corporate Social Responsibility (CSR) Personal & Professional Ethics McGraw-Hill/Irwin Adapted Version Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business 2 5- Corporation A corporation is an organization created by law: -a legal “person,” -has legal rights and duties that are primarily determined by the laws of the state -Forming a corporation has several benefits, including: o limiting legal liability, o protecting personal assets, o providing tax advantages, o and ensuring organizational continuation beyond the life or involvement of individuals. 3 5- Benefit Corporation • Benefit corporation is a legal entity in US with legal rights and duties created to achieve the general benefits of any corporation • Benefit corporations are not nonprofits; they are for-profit businesses that create value for their stockholders as a byproduct of creating values for a wide range of other stakeholders. • Benefit corporations differ from traditional corporations in that their boards and managers are given the legal authority to pursue social and environmental goals in addition to the financial goals that corporations generally pursue. 4 5- Benefit Corporation • Benefit corporations are free to make social and environmental goals part of the very mission and identity of the corporation and therefore make the boards and managers accountable to wider social goals. • The profit sought by stockholders thus becomes one among other equally legitimate goals sought by a range of corporate stakeholders. • Examples: King Arthur Flour, Patagonia, Kickstarter, Seventh Generation, and Plum Organics 5 5- Case Study: Walmart’s Ethics o Although controversial, Walmart does have some claim to being regarded as a socially responsible company. o In addition to huge financial success, & consistently being among the “most admired” companies in the world the company also: o Brings consumers the benefits of low prices o Gives jobs to about 2 million employees o Gives business to suppliers of products o Gives millions of dollars to charity each year 6 5- Case Study: Walmart’s Ethics o On the other hand: o Walmart faced serious criticism over its treatment of workers o Employees required to work overtime without pay o And in 2012, the New York Times exposed a pattern of bribery being conducted by Walmart in Mexico. o Do Walmart’s ‘socially responsible’ activities do anything to compensate for other unethical and/or illegal behavior? 7 5- Corporate Social Responsibility (CSR) Actions of organizations impact positively or negatively: • Customers • Employers • Suppliers • Community 8 5- Corporate Social Responsibility (CSR) What Responsibility Does Business Have? At a minimum, it is indisputable that business has a social responsibility to obey the law. • Economists might also say that business has a social responsibility to produce the goods and services that society demands. • If a firm fails to meet society’s interests and demands, it will simply fail and go out of business. We can say that the primary question of CSR is the extent to which business has social responsibilities that go beyond producing goods and services within the law. 9 5- What is CSR? • CSR refers to the responsibilities that a business has to the society in which it operates • From an economic perspective: A business exists to produce goods & services demanded by society & by engaging in this activity, the business creates jobs & wealth that benefit society • The law has created a form of business called corporations, which limits the liability of individuals for the risks involved in these activities. 10 5- CSR Equation • CSR is the sum of: • Economic Responsibilities (make a profit) • Legal Responsibilities (obey the law) • Ethical Responsibilities (be ethical) • Philanthropic Responsibilities (good corporate citizen) 11 5- • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business 12 5- Different meanings of the word responsible and responsibility are used in several different ways: • Reliable or trustworthy • Something as a cause for an event or action. • A third sense involves attributing liability or accountability for some event or action creating a responsibility to make things right again. o For example, that a business is responsible for a polluted river is not only to say that the business caused the pollution but that the business is at fault for it and should be held accountable. • Laws regarding product safety and liability involve many of these meanings of being responsible. o For example, when a consumer is injured, a first question is to ask if the product was responsible for the injury, in the sense of having caused the injury. 13 5- Responsibility as accountability that is at the heart of CSR. Corporate social responsibility refers to those actions for which a business can be held accountable. 1. Responsibilities as those things that we ought, or should, do even if we would rather not. 2. Responsibilities bind, or compel, or constrain, or require us to act in certain ways. 3. Expected to act in order to fulfill our responsibilities; and we will be held accountable if we do not. 4. To talk about corporate social responsibility is to be concerned with society’s interests that should restrict or bind business’ behavior. 5. Social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost. 14 5- Philosophers often distinguish three different levels of responsibilities in this sense on a scale from more to less demanding or binding: 1.The most demanding responsibility is the responsibility not to cause harm to others: often called duty or obligation, obliges us in the strictest sense. For example, a business ought not to sell a product that causes harm to consumers, even if there would be a profit in doing so. 2.The second, less binding, responsibility is to prevent harm even in those cases where one is not the cause. These are so-called good Samaritan 3.Finally, there might be responsibilities to do good, such as volunteering and charitable work. 15 5- Philosophers often distinguish three different levels of ethical responsibilities on a scale from less to more obligatory. Do good • Volunteering • Sponsoring a charity event Prevent harm • Good Samaritan • Use renewable energy Don’t cause harm to others • A duty or an obligation • Enforced by legal punishment 16 5- Is there a duty not to cause harm? 1.The strongest sense of responsibility is the duty not to cause harm. Even when not explicitly prohibited by law, ethics would demand that we not cause avoidable harm. 2.If a business causes harm to someone and, if that harm could have been avoided by exercising due care or proper planning, then both the law and ethics would say that business should be held liable for violating its responsibilities. 17 5- Is there a duty not to cause harm? 3.In practice, this ethical requirement is the type of responsibility established by the precedents of tort law. When it is discovered that a product causes harm, then business can appropriately be prevented from marketing that product and can be held liable for harms caused by it. For example: Businesses are restricted in marketing products that have been proven to cause cancer and other serious medical harms. 18 5- Is there a responsibility to prevent harm? 1.There are other cases in which a business is not causing harm, but could easily prevent harm from occurring. 2.A more inclusive understanding of corporate social responsibility would hold that business has a responsibility to prevent harm 19 5- Is there a responsibility to prevent harm? Example: Merck’s drug, Mectizan, prevents river blindness, a disease prevalent in tropical nations – infecting between 40 and 100 million people annually. A single tablet of Mectizan administered once a year can relieve the symptoms and prevent the disease from progressing. Mectizan would not be a very profitable drug to bring to market considering the low demand and the target audience being among the poorest people living in the poorest regions of Africa, Asia, Central America and South America. However, in 1987, Merck started a program to provide Mectizan free of charge, forever. Merck’s actions were explained in part of its corporate identity statement: “We are in the business of preserving and improving human life.” Clearly, Merck was not responsible for causing river blindness, thus, according to the standard of CSR, they had no social responsibility, but their executives saw this issue differently. They felt that they did have a social responsibility to prevent a disease easily controlled by their patented drug. 20 5- Is there a responsibility to do good? 1.Business has a social responsibility to do good things and to make society a better place. 2.Corporate philanthropy would be the most obvious case 3.Corporate giving programs to support community projects in the arts, education, and culture are clear examples. Some corporations have a charitable foundation or office that deals with such philanthropic programs. 21 5- Is there a responsibility to do good? 4.Some argue that, like all cases of charity, this is something that deserves praise and admiration; but it is not something that every business ought to do. 5.Others argue that business does have an obligation to support good causes and to “give back” to the community, as a sense of gratitude and thankfulness – something less binding than a legal or contractual obligation, but more than a simple act of charity. 22 5- • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business 23 5- We now distinguish only THREE models: the “Economic Model” which corresponds to the Friedman, free-market, “dominant model”, the “Stakeholder model” which replaces the former “social web model” and now more explicitly focuses on stakeholder theory, and the “Integrative model,” which has been re-worked to emphasize benefit corporations. 24 5- There are competing understandings of corporate social responsibility. The narrow economic model of CSR directs managers to maximize profit and shareholder wealth within legal limits. The stakeholder model asserts that neither a business nor the employees are exempt from ordinary ethical responsibilities. The integrative model of CSR says that part of the managerial responsibility to shareholders is to serve the social good. 25 5- Figure 5.1 26 5- • The general definition of the term corporate social responsibility (CSR) is the ethical responsibilities a business has to the society in which it operates. • From an economic perspective, a business exists to benefit society by producing goods and services and creating jobs and wealth that provide further social benefits. • The law created a form of business called a corporation, which promotes economic ends by limiting the liability of individuals for the risks involved in these activities. 27 5- • The economic model of CSR holds that businesses’ sole social responsibility is to fulfill the economic functions they were designed to serve. Freeman refers to is as “managerial capitalism.” • Profit is an indication that business is efficiently & successfully producing the goods & services that society demands • This model DENIES that business has any SR beyond the economic goals for which it was created 28 5- • Places shareholders at the center of the corporation. – Managers have a primary responsibility to pursue profit within the law. • Corporations are expected to obey legal mandates. • Business has no social responsibilities beyond the economic and legal. 29 5- • Places shareholders at the center of the corporation. – Managers have a primary responsibility to pursue profit within the law. • Corporations are expected to obey legal mandates. • Business has no social responsibilities beyond the economic and legal. 30 5- Profit-Based Social Responsibility: Milton Friedman’s 1970 New York Times article “The Social Responsibility of Business Is to Increase Its Profits” is perhaps best known as an argument for this economic model, or profit-based, social responsibility of business. 1. Friedman does not ignore ethical responsibility in his analysis; he suggests that decision makers are fulfilling their responsibility if they follow their firm’s selfinterest in pursuing profit. 31 5- Profit-Based Social Responsibility: 2. Friedman explains that a corporate executive has a responsibility to conduct business in accordance with his/her employer’s desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom. 32 5- • It has its roots in the utilitarian tradition & in neoclassical economics ◦ Primary SR of business: Pursue maximum profits for shareholders ◦ By pursuing profits, managers will allocate resources to their most efficient uses 33 5- • It has its roots in the utilitarian tradition and in neoclassical economics ◦ Consumers who most value a resource will be willing to pay the most for it; ◦ so profit is the measure of optimal allocation of resources ◦ The pursuit of profit will continuously work towards the optimal satisfaction of consumer demand: Optimal social good (maximizing overall good) 34 5- • Within this model, there is room to pursue social responsibilities. • Business is free to contribute as philanthropy. – It builds goodwill and/or a good reputation. – Some anonymous contributions are done because it is the right thing. • The economic model holds that philanthropy done for reputational reasons is ethically responsible. 35 5- There are also cases in which business contributes to social causes without seeking any reputational benefits. 1. Some firms contribute to charity anonymously. 2. Some support causes that have little or no business or financial payoff as a matter of giving back to their communities. 3. One may contend that corporate support for these social causes is done imply because it is the good and right thing to do. 4. Others would suggest that the business has concluded that the society in which the firm does business is a stronger or better one if this particular activity exists. 36 5- Situations where a business supports a social cause for the purpose of receiving a business benefit in return are not much different from the economic view of CSR. 1. In these cases, a business manager exercises managerial discretion in judging the social contribution will have economic benefits. 2. There is a great deal of overlap between decision makers who engage in the philanthropic model for reputational reasons and those who follow the economic view of business’ social responsibilities. 37 5- • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business. 38 5- STAKEHOLDER MODEL OF CSR Stakeholder model of CSR Businesses exist within a web of social and ethical relationships and create value for a range of stakeholders 39 5- STAKEHOLDER MODEL OF CSR Philosopher Norman Bowie has defended one version of CSR that would fall within this social web model. 1. Bowie argues that beyond the economic view’s duty to obey the law business has an equally important ethical duty to respect human rights. 2. Respecting human rights is the “moral minimum” that we expect of every person whether they are acting as individuals or within corporate institutions. 40 5- STAKEHOLDER MODEL OF CSR 3. Bowie identifies his approach as a “Kantian” theory of business ethics. He begins with the distinction between the ethical imperatives to cause no harm to prevent harm and to do good. a. People have a strong ethical duty to cause no harm, and only a prima facie duty to prevent harm or to do good. b. The obligation to cause no harm, in Bowie’s view, overrides other ethical considerations. 4. Bowie accepts the economic view that managers are the agents of stockholder-owners and thus they also have a duty to further the interests of stockholders. 41 5- STAKEHOLDER MODEL OF CSR 5. According to Bowie, as long as managers comply with the “moral minimum” and cause no harm, they have a responsibility to maximize profits. 6. Bowie would argue that business has a social responsibility to respect the rights of its employees, even when not specified or required by law. 7. But the contractual duty that managers have to stockholder-owners over-rides the responsibility to prevent harm or to do (philanthropic) good. 42 5- STAKEHOLDER MODEL OF CSR Stakeholder Theory is perhaps the most influential version of CSR that would fall within the social web model. 1. Stakeholder theory begins with the recognition that every business decision affects a wide variety of people benefiting some and imposing costs on others. 2. Business decisions produce far-ranging consequences to a wide variety of people. Every decision involves the imposition of costs, in the sense that every decision involves opportunities forgone, choices given up. 43 5- STAKEHOLDER MODEL OF CSR 3. Stakeholder theory recognizes that every business decision imposes costs on someone and mandates that those costs be acknowledged. 4. Any theory of corporate social responsibility must then explain and defend answers to the questions: for whose benefit and at whose costs should the business be managed? 44 5- STAKEHOLDER MODEL OF CSR • It views business as a citizen of the society in which it operates, like all members of a society • Hence, business must conform to the normal ethical duties & obligations that individuals face • While producing goods and services and creating wealth and profits are among business’ responsibilities, they do not trump other ethical responsibilities that equally bind all members of a society. 45 5- STAKEHOLDER MODEL OF CSR Stakeholder theory Recognizes that every business decision affects a wide variety of people, benefiting some and imposing costs on others 46 5- STAKEHOLDER MODEL OF CSR • The law recognizes moral obligations to stakeholders other than stockholders. • Stakeholder theory requires balancing ethical interests of all affected parties. • Like utilitarianism, it asks managers to consider the consequences of its decisions. • Firms exist in a web of relationships with many stakeholders and these relationships can create a variety of responsibilities. It may not be possible to satisfy the needs of each and every stakeholder in a situation, therefore social responsibility would require decisions to prioritize competing and conflicting responsibilities. 47 5- • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business. 48 5- Much of CSR literature assumes a tension between the pursuit of profit and social responsibility. But, there have always been organizations that turn this tension around and pursue social ends as the very core of their mission. 49 5- • Should business be expected to sacrifice profits for social ends? • There are non-profit organizations that pursue social ends as the very core of their mission ◦ Examples: NGOs, foundations, professional organizations, schools, colleges, & government agencies 50 5- • Some for-profit organizations have social goals as a central part of its strategic mission • Because these firms bring social goals into the core of their business model and fully integrate economic and social goals, we refer to this as the integrative model of CSR • Even defenders of the narrow economic model of CSR, such as Milton Friedman, would agree that owners of a firm are free to make the pursuit of social goals a part of their business model. They would just disagree that these social goals should be part of every business’s mission. 51 5- • There are no claims that every business should adopt the principles of benefit corporations. • Benefit corporations show profit is not incompatible with doing good. • There are some who would argue that the ethical responsibilities associated with sustainability are relevant to every business concern. o Sustainability offers a model of CSR that suggests that ethical goals should be at the heart of every corporate mission. 52 5- • The implications of sustainability in the Integrative Model of CSR ◦ As a topic of CSR, sustainability holds that a firm’s financial goals must be balanced against & even over-ridden by, environmental considerations ◦ Defenders of sustainability point out that all economic activity exists within a biosphere that supports all life. • Hence, present model of economics is already running up against the limits of the biosphere’s capacity to sustain life. 53 5- The implications of sustainability in the Integrative Model of CSR. • The success of a business must be judged not only against the financial bottom line of profitability but also against the ecological and social bottoms lines of sustainability. • A firm that is financially profitable, but that uses resources at unsustainable rates and that creates wastes at rates that exceed the Earth’s capacity to absorb them is a business or industry that is failing its fundamental social responsibility. • A firm that is environmentally unsustainable is also a firm that is financially unsustainable in the long-term. 54 5- The implications of sustainability in the Integrative Model of CSR. • A business model that ignores the biophysical and ecological context of its activities is a business model doomed to failure. 55 5- • A corporate sustainability report – provides all stakeholders with financial and other information regarding a firm’s economic, environmental, and social performance. 56 5- • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business 57 5- • CSR not only provides benefits to society, but it can also benefit an organization by securing its place within a society • CSR-related activities can improve profitability by enhancing a company’s standing among its stakeholders, including consumers & employees. ◦ Some evidence suggests that employees who are well treated in their work environments may prove more loyal and more effective and productive in their work. ◦ The positive impact on the bottom line stems from customer preference & employee preference. 58 5- CSR can impact a firm’s reputation within a community • • • With focus on reputation, SR might become merely social marketing A firm may use the image of SR to garner customer support or employee loyalty while the facts do not evidence a true commitment Reputation can be hurt if the company is seen as unresponsive even if they are not. 59 5- • Reputation Management: • The practice of attending to the “image” of a firm • Nothing wrong with managing a firm’s reputation; BUT failure to do so might be a poor business decision • But observers could challenge firms for engaging in CSR activities solely for the purpose of impacting their reputations 60 5- • • • • If a firm creates a good image for itself, it builds a type of trust bank Hence consumers or stakeholders may give it some slack if they hear something negative about the firm If a firm has a negative image, that image may stick, regardless of what good the corporation may do Plato explored this issue when he asked whether one would rather be an unethical person with a good reputation or an ethical person with a reputation for injustice. You may find that if given the choice between the two, companies are far more likely to survive under the first conception than under the second. 61 5- • Is good ethics also good business? ◦ One important justification offered for CSR — enlightened self-interest — presumes that it is, or at least it can be ◦ Unethical decisions do lead to high profits, but in the long run ethics pays off, measurement of that payoff is the challenge 62 5- The Construction of Corporate Reputation Figure 5.2 Source: Copyright © Harris Interactive Research. Reprinted by permission from www.harrisinteractive.com/services/reputation.asp. 63 5- • After exploring this lecture, you will be able to: 1. Define corporate social responsibility (CSR) 2. 3. 4. 5. 6. 7. Distinguish key components of the term responsibility. Describe & evaluate the economic model of CSR Describe & evaluate the stakeholder model of CSR Describe & evaluate the integrative model of CSR Role of reputation management as motivation behind CSR Evaluate the claims that CSR is “good” for business 64 5- • Is there a business case for return on investment from ethics? • Evidence says yes, but the dominant thinking is that, if it cannot be measured, it is not important • Efforts have been made to measure the bottom-line impact of ethical decision making 65 5- • Measurement is critical as there are detractors. – David Vogel from Berkeley contends that firms with strong CSR missions serve a niche market of consumers and investors. • Not a global shift, just an option. – Research shows that it does pay for businesses in emerging markets to pursue a wider role in environmental and social issues. • Studies find there are a number of expected and measurable outcomes to ethics programs in organizations. 66 5- ◦ There is a market for firms with strong CSR missions ◦ It is a niche market: Caters to only a small group of consumers or investors ◦ Contrary to a global shift in the business environment, CSR instead should be perceived as just one option for a business strategy that might be appropriate for certain types of firms under certain conditions 67 5- ◦ Researchers warn of the exposure a firm might suffer if it then does not live up to its CSR promises ◦ Researchers caution against investing in CSR when consumers are not willing to pay higher prices to support that investment 68 5- • A landmark study by Professors Stephen Erfle & Michael Frantantuono found that firms that were ranked highest in terms of their records on a variety of social issues had greater financial performance as well 69 5- Does a Social Responsibility of Business Exist? • The responsibility may be based in a concept of good corporate citizenship, a social contract, or enlightened self-interest. • It is impossible to engage in business today without addressing CSR. • Despite substantial differences among companies, research demonstrates that almost all companies will confront CSR issues from stakeholders at some point in the near future. 70 5- Conclusion • This chapter sought to answer the question of whether there exists a social responsibility of business. – Several sources were proposed. – Responsibility may be based in a concept of good corporate citizenship, a social contract, or enlightened self-interest. • The chapter explored the challenge of how an inanimate entity (a corporation) could have a responsibility to others. – The chapter also discussed the extent of that obligation, both in law and ethics. • One thing is certain: it is impossible to engage in business today without encountering and addressing CSR. 71 5-