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This is “Three Theories of Corporate Social Responsibility”, section 13.2 from the book Business Ethics (v. 1.0). For details on it (including licensing), click here.

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Table of Contents

Table of Contents

13.2 Three Theories of Corporate Social Responsibility

L E A R N I N G O B J E C T I V E

1. Define and discuss the three main theories of corporate social responsibility.

Corporations as Responsible

A Civil Action was originally a novel, but more people have seen the movie, which was distributed by W.

W. Hodkinson’s old company, Paramount. One of the memorable scenes is John Travolta playing a

hotshot lawyer speeding up a rural highway to Woburn, Massachusetts. He gets pulled over and

ticketed. Then he continues on his way to investigate whether there’s any money to be made launching

a lawsuit against a company that allowed toxic industrial waste to escape into the town’s aquifer. The

polluted water, Travolta suspects, eventually surfaced as birth defects. After checking things out, he

races his Porsche back to Boston at the same speed. Same result.A Civil Action, directed by Steven

Zaillian (New York: Scott Rudin, 1998), film.

One of the movie’s messages is that many corporations are like greedy lawyers—they have little sense of

right and wrong, and their behavior can only be modified by money. The lesson is that you can’t make

Travolta slow down and drive safely by appealing to the right of others to use the road without being

threatened by speeding Porsches, or by pleading with him to respect general social well-being that is

served when everyone travels at about the same speed. If you want him to slow down, there’s only one

effective strategy: raise the traffic ticket fine. Make the money hurt. Analogously for companies, if you

want them to stop polluting, hit them with harder penalties when they’re caught.

What if that’s not the only way for corporations to exist in the world, though? What if people who

directed businesses began understanding their enterprise not only in financial terms (as profits and

losses) but also in ethical ones? What if companies became, in a certain moral sense, like people,

members of society bound by the same kinds of duties and responsibilities that you and I wrestle with

every day? When companies are seen that way, a conception of corporate social responsibility comes

forward.

Three Approaches to Corporate Responsibility

According to the traditional view of the corporation, it exists primarily to make profits. From this

money-centered perspective, insofar as business ethics are important, they apply to moral dilemmas

arising as the struggle for profit proceeds. These dilemmas include: “What obligations do organizations

have to ensure that individuals seeking employment or promotion are treated fairly?” “How should

conflicts of interest be handled?” and “What kind of advertising strategy should be pursued?” Most of

this textbook has been dedicated to these and similar questions.

While these dilemmas continue to be important throughout the economic world, when businesses are

conceived as holding a wide range of economic and civic responsibilities as part of their daily operation,

the field of business ethics expands correspondingly. Now there are large sets of issues that need to be

confronted and managed outside of, and independent of the struggle for money. Broadly, there are

three theoretical approaches to these new responsibilities:

1. Corporate social responsibility (CSR)

2. The triple bottom line

3. Stakeholder theory

Corporate Social Responsibility (CSR)

The title corporate social responsibility has two meanings. First, it’s a general name for any theory

of the corporation that emphasizes both the reponsibility to make money and the responsibility to

interact ethically with the surrounding community. Second, corporate social responsibility is also a

specific conception of that responsibility to profit while playing a role in broader questions of

community welfare.

As a specific theory of the way corporations interact with the surrounding community and larger world,

corporate social responsibility (CSR) is composed of four obligations:

1. The economic responsibility to make money. Required by simple economics, this obligation is

the business version of the human survival instinct. Companies that don’t make profits are—in a

modern market economy—doomed to perish. Of course there are special cases. Nonprofit

organizations make money (from their own activities as well as through donations and grants), but

pour it back into their work. Also, public/private hybrids can operate without turning a profit. In

some cities, trash collection is handled by this kind of organization, one that keeps the streets clean

without (at least theoretically) making anyone rich. For the vast majority of operations, however,

there have to be profits. Without them, there’s no business and no business ethics.

2. The legal responsibility to adhere to rules and regulations. Like the previous, this responsibility

is not controversial. What proponents of CSR argue, however, is that this obligation must be

understood as a proactive duty. That is, laws aren’t boundaries that enterprises skirt and cross over

if the penalty is low; instead, responsible organizations accept the rules as a social good and make

good faith efforts to obey not just the letter but also the spirit of the limits. In concrete terms, this is

the difference between the driver who stays under the speed limit because he can’t afford a traffic

ticket, and one who obeys because society as a whole is served when we all agree to respect the

signs and stoplights and limits. Going back to John Travolta racing his Porsche up and down the

rural highway, he sensed none of this respect. The same goes for the toxic company W. R. Grace

Incorporated as it’s portrayed in the movie: neither one obeys regulations and laws until the fines

get so high they’ve got no choice. As against that model of behavior, a CSR vision of business

affirms that society’s limits will be scrupulously obeyed, even if the fine is only one dollar.

3. The ethical responsibility to do what’s right even when not required by the letter or spirit of the

law. This is the theory’s keystone obligation, and it depends on a coherent corporate culture that

views the business itself as a citizen in society, with the kind of obligations that citizenship normally

entails. When someone is racing their Porsche along a country road on a freezing winter’s night and

encounters another driver stopped on the roadside with a flat, there’s a social obligation to do

something, though not a legal one. The same logic can work in the corporate world. Many industrial

plants produce, as an unavoidable part of their fabricating process, poisonous waste. In Woburn,

Massachusetts, W. R. Grace did that, as well as Beatrice Foods. The law governing toxic waste

disposal was ambiguous, but even if the companies weren’t legally required to enclose their poisons

in double-encased, leak-proof barrels, isn’t that the right thing to do so as to ensure that the

contamination will be safely contained? True, it might not be the right thing to do in terms of pure

profits, but from a perspective that values everyone’s welfare as being valuable, the measure could

be recommendable.

4. The philanthropic responsibility to contribute to society’s projects even when they’re

independent of the particular business. A lawyer driving home from work may spot the local

children gathered around a makeshift lemonade stand and sense an obligation to buy a drink to

contribute to the neighborhood project. Similarly, a law firm may volunteer access to their offices

for an afternoon every year so some local schoolchildren may take a field trip to discover what

lawyers do all day. An industrial chemical company may take the lead in rehabilitating an empty lot

into a park. None of these acts arise as obligations extending from the day-to-day operations of the

business involved. They’re not like the responsibility a chemical firm has for safe disposal of its

waste. Instead, these public acts of generosity represent a view that businesses, like everyone in the

world, have some obligation to support the general welfare in ways determined by the needs of the

surrounding community.

Taken in order from top to bottom, these four obligations are decreasingly pressing within the theory

of corporate social responsibility. After satisfying the top responsibility, attention turns to the second

and so on. At the extremes, the logic behind this ranking works easily. A law firm on the verge of going

broke probably doesn’t have the responsibility to open up for school visits, at least not if the tours

interfere with the accumulation of billable hours and revenue. Obviously, if the firm does go broke and

out of business, there won’t be any school visits in any case, so faced with financial hardship, lawyers

are clearly obligated to fulfill their economic obligations before philanthropic ones.

More difficult questions arise when the economic responsibility conflicts with the legal one. For

example, to remain profitable, an industrial plant may need to dispose of waste and toxins in barrels

that barely meet legally required strengths. Assuming those legal limits are insufficiently strict to

guarantee the barrels’ seal, the spirit of the law may seem violated. The positive economic aspect of the

decision to cut corners is the ability to stay in business. That means local workers won’t lose their jobs,

the familial stresses of unemployment will be avoided, suppliers will maintain their contracts, and

consumers will still be served. The negative, however, is the possibility—and the reality at Woburn—

that those toxins will escape their containers and leave a generation of workers’ children poisoned.

Knowing what we do now about those Woburn children, there’s no real conflict; anything would have

been better than letting the toxins escape. If necessary, the company should have accepted bankruptcy

before causing the social damage it did. At the time of the decision, however, there may have been less

certainty about exactly what the risks and benefits were. Even among individuals promoting a strong

sense of corporate responsibility for the surrounding community, there may have been no clear answer

to the question about the proper course of action. Regardless, corporate social responsibility means

every business holds four kinds of obligations and should respond to them in order: first the economic,

then the legal, next the ethical, and finally the philanthropic.

The Triple Bottom Line

The triple bottom line is a form of corporate social responsibility dictating that corporate leaders

tabulate bottom-line results not only in economic terms (costs versus revenue) but also in terms of

company effects in the social realm, and with respect to the environment. There are two keys to this

idea. First, the three columns of reponsibility must be kept separate, with results reported

independently for each. Second, in all three of these areas, the company should obtain sustainable

results.

The notion of sustainability is very specific. At the intersection of ethics and economics, sustainability

means the long-term maintenance of balance. As elaborated by theorists including John Elkington,

here’s how the balance is defined and achieved economically, socially, and environmentally:

Economic sustainability values long-term financial solidity over more volatile, short-term

profits, no matter how high. According to the triple-bottom-line model, large corporations have a

responsibility to create business plans allowing stable and prolonged action. That bias in favor of

duration should make companies hesitant about investing in things like dot-coms. While it’s true

that speculative ventures may lead to windfalls, they may also lead to collapse. Silicon Valley,

California, for example, is full of small, start-up companies. A few will convert into the next Google,

Apple, and Microsoft. What gets left out, however, of the newspaper reports hailing the

accomplishments of a Steve Jobs or a Bill Gates are all those other people who never made it—all

those who invested family savings in a project that ended up bankrupt. Sustainability as a virtue

means valuing business plans that may not lead to quick riches but that also avoid calamitous

losses.

Moving this reasoning over to the case of W. R. Grace dumping toxins into the ground soil, there’s a

possible economic-sustainability argument against that kind of action. Corporations trying to get

away with polluting the environment or other kinds of objectionable actions may, it’s true, increase

their bottom line in the short term. Money is saved on disposal costs. Looking further out, however,

there’s a risk that a later discovery of the action could lead to catastrophic economic consequences

(like personal injury lawyers filing huge lawsuits). This possibility leads immediately to the

conclusion that concern for corporate sustainability in financial terms argues against the dumping.

Social sustainability values balance in people’s lives and the way we live. A world in which a few

Fortune 500 executives are hauling down millions a year, while millions of people elsewhere in the

world are living on pennies a day can’t go on forever. As the imbalances grow, as the rich get richer

and the poor get both poorer and more numerous, the chances that society itself will collapse in

anger and revolution increase. The threat of governmental overthrow from below sounds remote—

almost absurd—to Americans who are accustomed to a solid middle class and minimal resentment

of the wealthy. In world history, however, such revolutions are quite common. That doesn’t mean

revolution is coming to our time’s developed nations. It may indicate, however, that for a business

to be stable over the long term, opportunities and subsequently wealth need to be spread out to

cover as many people as possible.

The fair trade movement fits this ethical imperative to shared opportunity and wealth.

Developed and refined as an idea in Europe in the 1960s, organizations promoting fair trade ask

businesses—especially large producers in the richest countries—to guarantee that suppliers in

impoverished nations receive reasonable payment for their goods and services even when the raw

economic laws of supply and demand don’t require it. An array of ethical arguments may be

arranged to support fair trade, but on the front of sustainability, the lead argument is that peace

and order in the world depend on the world’s resources being divided up in ways that limit envy,

resentment, and anger.

Social sustainability doesn’t end with dollars; it also requires human respect. All work, the logic of

stability dictates, contains dignity, and no workers deserve to be treated like machines or as

expendable tools on a production line. In today’s capitalism, many see—and the perception is

especially strong in Europe—a world in which dignity has been stripped away from a large number

of trades and professions. They see minimum wage workers who’ll be fired as soon as the next

economic downturn arrives. They see bosses hiring from temporary agencies, turning them over

fast, not even bothering to learn their names. It’s certainly possible that these kinds of attitudes,

this contempt visible in so many workplaces where the McJob reigns, can’t continue. Just as people

won’t stand for pennies in wages while their bosses get millions, so too they ultimately will refuse to

accept being treated as less dignified than the boss.

Finally, social sustainability requires that corporations as citizens in a specific community of people

maintain a healthy relationship with those people. Fitting this obligation into the case of W. R.

Grace in Woburn, it’s immediately clear that any corporation spilling toxins that later appear as

birth defects in area children isn’t going to be able to sustain anything with those living nearby. Any

hope for cooperation in the name of mutual benefit will be drowned by justified hatred.

Environmental sustainability begins from the affirmation that natural resources—especially

the oil fueling our engines, the clean air we breathe, and the water we drink—are limited. If those

things deteriorate significantly, our children won’t be able to enjoy the same quality of life most of

us experience. Conservation of resources, therefore, becomes tremendously important, as does the

development of new sources of energy that may substitute those we’re currently using.

Further, the case of an industrial chemical company pouring toxins into the ground that erupt years

later with horrific consequences evidences this: not only are resources finite, but our earth is

limited in its ability to naturally regenerate clean air and water from the smokestacks and runoff of

our industries. There are, clearly, good faith debates that thoughtful people can have about where

those limits are. For example, have we released greenhouse gases into the air so heavily that the

earth’s temperature is rising? No one knows for sure, but it’s certain that somewhere there’s a limit;

at some point carbon-burning pollution will do to the planet what toxic runoff did in Woburn: make

the place unlivable. Sustainability, finally, on this environmental front means actions must be taken

to facilitate our natural world’s renewal. Recycling or cleaning up contamination that already exists

is important here, as is limiting the pollution emitted from factories, cars, and consumer products

in the first place. All these are actions that corporations must support, not because they’re legally

required to do so, but because the preservation of a livable planet is a direct obligation within the

triple-bottom-line model of business responsibility.

Together, these three notions of sustainability—economic, social, and environmental—guide businesses

toward actions fitted to the conception of the corporation as a participating citizen in the community

and not just as a money machine.

One deep difference between corporate social responsibility and the triple bottom line is cultural. The

first is more American, the second European. Americans, accustomed to economic progress, tend to be

more comfortable with, and optimistic about, change. Collectively, Americans want business to

transform the world, and ethical thinking is there (hopefully) to help the transformations maximize

improvement across society. Europeans, accustomed to general economic decline with respect to the

United States, view change much less favorably. Their inclination is to slow development down, and to

keep things the same as far as possible. This outlook is naturally suited to sustainability as a guiding

value.

It’s important to note that while sustainability as a business goal puts the breaks on the economic

world, and is very conservative in the (nonpolitical) sense that it favors the current situation over a

changed one, that doesn’t mean recommending a pure freeze. Sustainability isn’t the same as

Ludditism, which is a flat resistance to all technological change.

The Luddites were a band of textile workers in Britain in the 1800s who saw (correctly) that

mechanized looms would soon rob them not only of their livelihood but also of their way of life. To stop

the change, they invaded a few factories and broke everything in sight. Their brute strategy succeeded

very briefly and then failed totally. Today, Ludditism is the general opposition to new technologies in

any industry on the grounds that they tear the existing social fabric: they force people to change in the

workplace and then everyplace, whether they like it or not. There’s an element of (perhaps justifiable)

fear of the future in both Ludditism and the business ethics of sustainability, but there are differences

between the two also. For example, sustainability concerns don’t always stand against technological

advances. Actually, innovation is favored as long as advances are made in the name of maintaining the

status quo. For example, advances in wind power generation may allow our society to continue using

energy as we do, even as oil reserves dwindle, and with the further benefit of limiting air pollution.

Stakeholder Theory

Stakeholder theory, which has been described by Edward Freeman and others, is the mirror image of

corporate social responsibility. Instead of starting with a business and looking out into the world to see

what ethical obligations are there, stakeholder theory starts in the world. It lists and describes those

individuals and groups who will be affected by (or affect) the company’s actions and asks, “What are

their legitimate claims on the business?” “What rights do they have with respect to the company’s

actions?” and “What kind of responsibilities and obligations can they justifiably impose on a particular

business?” In a single sentence, stakeholder theory affirms that those whose lives are touched by a

corporation hold a right and obligation to participate in directing it.

As a simple example, when a factory produces industrial waste, a CSR perspective attaches a

responsibility directly to factory owners to dispose of the waste safely. By contrast, a stakeholder

theorist begins with those living in the surrounding community who may find their environment

poisoned, and begins to talk about business ethics by insisting that they have a right to clean air and

water. Therefore, they’re stakeholders in the company and their voices must contribute to corporate

decisions. It’s true that they may own no stock, but they have a moral claim to participate in the

decision-making process. This is a very important point. At least in theoretical form, those affected by a

company’s actions actually become something like shareholders and owners. Because they’re touched

by a company’s actions, they have a right to participate in managing it.

Who are the stakeholders surrounding companies? The answer depends on the particular business, but

the list can be quite extensive. If the enterprise produces chemicals for industrial use and is located in a

small Massachusetts town, the stakeholders include:

Company owners, whether a private individual or shareholders

Company workers

Customers and potential customers of the company

Suppliers and potential suppliers to the company

Everyone living in the town who may be affected by contamination from workplace operations

Creditors whose money or loaned goods are mixed into the company’s actions

Government entities involved in regulation and taxation

Local businesses that cater to company employees (restaurants where workers have lunch, grocery

stores where employee families shop, and similar)

Other companies in the same line of work competing for market share

Other companies that may find themselves subjected to new and potentially burdensome

regulations because of contamination at that one Massachusetts plant

The first five on the list—shareholders, workers, customers, suppliers, and community—may be cited as

the five cardinal stakeholders.

The outer limits of stakeholding are blurry. In an abstract sense, it’s probably true that everyone in the

world counts as a stakeholder of any serious factory insofar as we all breathe the same air and because

the global economy is so tightly linked that decisions taken in a boardroom in a small town on the East

Coast can end up costing someone in India her job and the effects keep rippling out from there.

In practical terms, however, a strict stakeholder theory—one insistently bestowing the power to make

ethical claims on anyone affected by a company’s action—would be inoperable. There’d be no end to

simply figuring out whose rights needed to be accounted for. Realistically, the stakeholders

surrounding a business should be defined as those tangibly affected by the company’s action. There

ought to be an unbroken line that you can follow from a corporate decision to an individual’s life.

Once a discrete set of stakeholders surrounding an enterprise has been located, stakeholder ethics

may begin. The purpose of the firm, underneath this theory, is to maximize profit on a collective bottom

line, with profit defined not as money but as human welfare. The collective bottom line is the

summed effect of a company’s actions on all stakeholders. Company managers, that means, are

primarily charged not with representing the interests of shareholders (the owners of the company) but

with the more social task of coordinating the interests of all stakeholders, balancing them in the case of

conflict and maximizing the sum of benefits over the medium and long term. Corporate directors, in

other words, spend part of the day just as directors always have: explaining to board members and

shareholders how it is that the current plans will boost profits. They spend other parts of the day,

however, talking with other stakeholders about their interests: they ask for input from local

environmentalists about how pollution could be limited, they seek advice from consumers about how

product safety could be improved and so on. At every turn, stakeholders are treated (to some extent)

like shareholders, as people whose interests need to be served and whose voices carry real force.

In many cases transparency is an important value for those promoting stakeholder ethics. The

reasoning is simple: if you’re going to let every stakeholder actively participate in a corporation’s

decision making, then those stakeholders need to have a good idea about what’s going on. In the case of

W. R. Grace, for example, it’s important to see that a stakeholder theory would not necessarily and

immediately have acted to prohibit the dumping of toxins into the soil. Instead, the theory demands

that all those who may be affected know what’s being dumped, what the risks are to people and the

environment, and what the costs are of taking the steps necessary to dispose of the chemical runoff

more permanently and safely.

As already noted, we know now what W. R. Grace should have done under most every ethical theory. At

the time, however, stakeholders fully informed of the situation may have been less sure because it

wasn’t so clear that the runoff would cause so many problems (or any problems at all). Given that,

owners may have favored dumping because that increases profits. Next, what about workers in town?

It’s important to keep in mind that the safe removal of the waste may have lowered company profits

and potentially caused some layoffs or delayed wage hikes. As stakeholders, they may have been willing

to agree to the dumping too. The same goes for community politicians who perhaps would see

increased tax revenue as a positive effect of high corporate profits.

What’s certain is that stakeholder theory obligates corporate directors to appeal to all sides and balance

everyone’s interests and welfare in the name of maximizing benefits across the spectrum of those whose

lives are touched by the business.

Conclusion on the Three Forms of Corporate Social Responsibility

Traditionally, the directors of companies have had an extremely difficult but very narrowly defined

responsibility: guide the enterprise toward money. The best companies have been those generating the

highest sales, gaining the most customers, and clearing the largest profits. As for ethical questions,

they’ve been arranged around the basic obligation to represent the owners’ central interest, which

presumably is to profit from their investment. Consequently, the field of business ethics has mainly

concerned conflicts and dilemmas erupting inside the company as people try to work together to win in

the very competitive economic world. The idea of corporate social responsibility—along with the related

ideas of the triple bottom line and stakeholder theory—opens a different kind of business ethics.

Morality in the economic world is now about corporate directors sensing and responding to a broad

range of obligations, ones extending through the town where the business is located and then out into

surrounding communities and through society generally.

In Woburn, Massachusetts, in the early 1980s, this conflict between two ways of running a business

played out in the Hollywood depiction of the lawyer played by John Travolta. At the movie’s beginning,

right and wrong for a business got decided in dollars and without broader sensibility. Travolta’s law

firm existed to make money and operated by accepting only cases that promised big payouts. That’s

what brought Travolta to Woburn, the chance to sue deep-pocketed W. R. Grace for poisoning the land

with toxic runoff and for destroying the lives of families living near the pools of contamination. Over

the course of the movie, however, Travolta becomes attached to Woburn’s cause and the social good of

fighting for a clean environment. By the end, he’s risking his firm’s high profits—and, according to his

law-firm partners, all common sense—to make sure that harmed people living in town get their good

lives back, and to ensure that a Woburn-like toxic disaster won’t happen again.

In terms of business ethics, it’s not difficult to interpret Travolta’s transformation from a businessman

taking care of the bottom line, to one engaged by a broader vision of social responsibility. Each of the

three discussed theories—corporate social responsibility, the triple bottom line, stakeholder theory—

can be fit into the movie A Civil Action.

In terms of corporate social responsibility, Travolta came to believe that his job as the law firm’s leader

obligated him to satisfy his economic responsibility to make money for the firm by suing for financial

damages while also acting legally. Further, his firm needed to satisfy the ethical responsibility to help

others in Woburn get their good lives back. Here, there is a basic duty to help others in need when you

have the capability. Finally, there was an element of philanthropy in Travolta’s endeavor because his

law firm pursued a case that served the greater good even though more profitable work opportunities

were available.

In terms of the triple bottom line of economics, society, and the environment, Travolta came to believe

that his job as the law firm’s leader obligated him to take account of and do well in all three areas. It

was no longer enough to win money; his business had a moral responsibility to win for society and to

win for the environment also. The long-term goal was to ensure the economic sustainability of his firm,

the sustainability of healthy family life in Woburn, and the sustainability of clean earth and air in that

part of Massachusetts.

In terms of stakeholder ethics, Travolta came to believe that his job as the law firm’s leader obligated

him not only to work for the firm’s owners (including himself) but also to take direction from those who

would be affected by the firm’s actions. That meant considering—trying to balance and to add up—the

interests of his partners and all those who lived in Woburn.

Finally, because Travolta’s story was also a Hollywood story, his transformation on the big screen was

presented as the change from an aloof bad guy to a caring good guy. It’s not clear, however, in the real

world whether a corporate ethics based on social responsibility, the triple bottom line, or all

stakeholders is actually recommendable. The debate between the two ways of thinking about business—

the traditional, profit-centered view and the broader, socially responsible view—is hard-fought and

intensified by good arguments on both sides.

K E Y TA K E AWAY S

Corporations may have obligations that go beyond generating profits and include the larger

society.

Corporate social responsibility as a specific theory affirms that corporations are entities with

economic, legal, ethical, and philanthropic obligations.

Corporations responsible for a triple bottom line seek sustainability in the economic, social,

and environmental realms.

Corporate ethics built on stakeholder theory seek to involve all those affected by the

organization in its decision-making process.

R E V I E W Q U E S T I O N S

1. For corporate advocates of the specific CSR theory, what are the responsibilities the

corporation holds, and how are conflicts between those responsibilities managed?

2. Create a hypothetical situation in which philanthropy would not be required of a corporation

by CSR theory.

3. What does sustainability mean within each of the three columns of the theory of the triple

bottom line?

4. How does the fair trade movement fit together with the triple-bottom-line theory of corporate

responsibility?

5. Who are the stakeholders in stakeholder ethics?

6. What does it mean for a corporate director to “balance stakeholder interests”?

7. What basic elements do CSR, the triple bottom line, and stakeholder theory have in

common?