Responsibility

216 Chapters Coi-porate Social Responsibility

Chapter Objectives After reading this chapter, you will be able to: 1. Define corporate social responsibility. 2. Describe and evaluate the economic model of corporate social responsibility. 3. Distinguish key components of the term responsibility. 4. Describe and evaluate the philanthropic model of corporate social

responsibility. 5. Describe and evaluate the social web model of corporate social responsibility. 6. Describe and evaluate the integrative model of corporate social responsibility. 7. Explain the role of reputation management as motivation behind CSR. 8. Evaluate the claims that CSR is "good" for business.

Introduction

OB)ECTIVE

OBIECTIVE

This chapter addresses the nature of corporate social responsibility (CSR) and how firms opt to meet and demonstrate their fialfiilment of this perceived respon- sibility. In one sense, no one denies that business has some social responsibilities. 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 soci- ety's interests and demands, it will simply fail and go out of business. But, beyond these legal and economic responsibilities, controversies abound. In general terms, we can say that the primary question of CSR is the extent to which business has social responsibilities that go beyond producing needed goods and services within the law. There are a range of answers to this question and it will be helpful to dis- tinguish some prominent alternatives along this continuum.

Most involved in business would accept the general definition of the tenn corporate social responsibility as referring to the responsibilities that a busi- ness has to the society in which it operates. From an economic perspective, a business is an institution that exists to produce goods and services demanded by society and, by engaging in this activity, the business creates jobs and wealth that benefit society fiirther. The law has created a form of business called corporations, which limits the liability of individuals for the risks involved in these activities. Legislatures thought that businesses could be more efScient in raising the capital necessary for producing goods, services. Jobs, and wealth if individuals were pro- tected, and people would therefore be encouraged to engage in these activities.

This narrow view of CSR, what we shall refer to as the economic model of CSR, holds that business' sole duty is to fulfill the economic fiinctions busi- nesses were designed to serve. On this narrow view, the social responsibility of business managers is simply to pursue profit within the law. Because profit is an indication that business is eflficiently and successfully producing the goods and services that society demands, profit is a direct measure of how well a business

Chapter 5 Corporate Social Responsibility 217

firm is meeting society's expectations. Because corporations are created by soci- ety and require a stable political and economic infrastructure in which to conduct business, like all other social institutions, they are expected to obey the legal mandates established by the society. This economic model of CSR denies that business has any social responsibilities beyond the economic and legal ends for which it was created.

Milton Friedman's classic 1970 New York Times article, "The Social Respon- sibility of Business Is to Increase Its Profits," is perhaps best known as an argu- ment for this economic model of the social responsibility of business. Contrary to popular belief, Friedman does not ignore ethical responsibility in his analysis; he merely suggests that decision makers are fulfilling their responsibility if they fol- low their firm's self-interest in pursuing profit. Friedman explains that a corporate executive has a

responsibility to conduct business in accordance with [his or her employer's] desires, which generally will be to make as much money as possible while confonning to the basic rules of society, both those embodied in law and those embodied in ethical custom (emphasis added). This common view of corporate social responsibility has its roots in the util-

itarian tradition and in neoclassical economics (as discussed in the section on utilitarianism in chapter 3). As agents of business owners, the contention is that managers do have social responsibilities—their primary responsibility is to pur- sue maximum profits for shareholders. By pursuing profits, a business manager will allocate resources to their most efficient uses. 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. Over time, the pursuit of profit will continuously work toward the optimal satisfaction of consumer demand which, in one interpretation of utilitarianism, is equivalent to maximizing the overall good.

Debates concerning CSR start with alternatives to the narrow view expressed by Friedman and others. In what follows, we will categorize these alternatives into three general models. As alternatives to the economic model, we will describe the philanthropic model, the social web model, and the integrative model of CSR. Recognize that these three models are intended to be general categories into which various specific versions of CSR can be fit; others may describe them dif- ferently and, certainly, there will be individual businesses that overlap these cat- egories. Nevertheless, these models provide a helpful way to understand debates surrounding corporate social responsibility.

Ethics and Social ResponsibiHty To help us sort through these alternative models of CSR and to better understand

_ the extent of business' social responsibility, let us begin with a general discussion OBJECTIVE of tfie potential responsibilities of a business and how they can be understood

from an ethical perspective.

218 Chapters Corporate Social Responsibility

The words responsible and responsibility are used in several diiFerent ways. When we say that a business is responsible, we might mean that it is reliable or trustworthy. For example, you might recommend a car dealership to a friend by describing them as a responsible, trustworthy business. A second meaning of responsible involves attributing something as a cause for an event or action. For example, poor lending practices were responsible (i.e., the cause) for the collapse of many banks during the 2008 economic crisis; and the location of the gas tank was responsible for fires in the Ford Pinto. A third sense involves attributing lia- bility or accountability for some event or action, creating an obligation to make things right again. To say, for example, that a business is responsible for a polluted river is not only to say that the business caused the pollution, but also that the business is at fault for it and should be held accountable. An unavoidable accident would be a case in which someone was responsible in terms of causing the acci- dent, but did not bear responsibility in terms of being liable or at fault.

Laws regarding product safety and liability involve many of these meanings of being responsible. When a consumer is injured, for example, a first question to ask is whether the product was responsible for the injury, in the sense of having caused the injury. For example, several years ago a controversy developed over the drug Vioxx, produced by Merck. Some evidence suggested that Vioxx was responsible for causing heart attacks in some users. In the debates that followed, two questions required answers. Was Vioxx the cause of the heart attacks, and was Merck at fault, i.e., should it be held legally liable, for the heart attacks? Once the causal question is settled, we might then go on to ask if the manufacturer is responsible in the sense of being at fault and therefore being liable for pay- ing for the damages caused by the product. Both ethics and tort law involve the question of liability or fault for causing harm. (See Figure 5.1, "Responsible and Responsibility.")

It is this last sense of responsibility as accountability that is at the heart of CSR. Corporate social responsibility refers to those actions for which a busi- ness can be held accountable. We can think of responsibilities as those things that we ought, or should, do, even if wc would rather not. Responsibilities bind,

FIGURE 5.1 Responsible and Responsibility

Responsible

Responsibility

Did Vioxx cause the heart attacks?

Was Vioxx responsible for the heart attacks?

Was Merck at fault, i.e., should it be held legally liable, for the heart attacks?

Should Merck bear responsibility for the heart attacks?

Chapters Corpowle Social Responsibility 219

srent ways. is reliable

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or compel, or consti-ain, or require us to act in certain ways. We can be expected to act in order to fulfill our responsibilities; and we will be held accountable if we do not. Thus, to talk about corporate social responsibility is to be concerned with society's interests that should restrict or bind business' behavior. Social responsi- bility is what a business should or ought to do for the sake of society, even if this comes with an economic cost.

Philosophers often distinguish between three different levels of responsibili- ties in this sense, on a scale from more to less demanding or binding. First, the most demanding responsibility, often called duty or obligation in order to indi- cate that they oblige us in the strictest sense, is the responsibility not to cause harm to others. Thus, a business ought not to sell a product that causes harm to consumers, even if there would be a profit in doing so. A second, less binding, responsibility is to prevent harm even in those cases where one is not the cause. These so-called good Samaritan cases are examples of people acting to prevent harm, even though they have no strict duty or obligation to do so. Finally, there might be responsibilities to do good. Volunteering and charitable work are typical examples of responsibilities in this sense. To call an act volunteer work is pre- cisely to suggest that it is optional; one does not have a duty to do it, but it is still a good thing to do.

Is there a duty not to cause harm? Let us consider how each of these three types of responsibilities might be seen in business. The strongest sense of respon- sibility is the duty not to cause harm. Even when not explicitly prohibited by law, ethics would demand that we not cause avoidable harm. 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.

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 hann, then business can appropriately be prevented from marketing that product and can be held liable for harms caused by it. So, in a classic case such as asbestos, busi- nesses are restricted in marketing products that have been proven to cause cancer and other serious medical harms.

Is there a responsibility to prevent harm? But there are also cases in which business is not causing harm, but could easily prevent harm from occurring. A more inclusive understanding of corporate social responsibility would hold that business has a responsibility to prevent harm. Consider, as an example, the actions taken by the pharmaceutical firm Merck with its drug Mectizan, Mectizan is a Merck drug that prevents river blindness, a disease prevalent in tropical nations. River blindness infects between 40 and 100 million people amiuaily, causing severe rashes, itching, and loss of sight. A single tablet of Mectizan administered once a year can relieve the symptoms and prevent the disease from progressing— quite an easy and effective means to prevent a horrendous consequence.

On the surface, Mectizan would not be a very profitable drug to bring to mar- ket. The once-a-year dosage limits the demand for the di'ug among those people who require it. Further, the individuals most at risk for this disease are among

220 Chapters Corpomte Social Responsibility

the poorest people living in the poorest regions of Afriea, Asia, Central America, and South America. However, in 1987, Merck began a program that provides Mectizan free of charge to people at risk for river blindness and pledged to "give it away free, forever." Cooperating with the World Health Organization, UNICEF, and the World Bank, Merck's program has donated more than 1.8 billion doses of Mectizan (by 2007), which have been distributed to 40 million people each year since 1987. The program has also resulted in the development of a health care system, necessary to support and administer the program, in some of the poorest regions of the worid. By all accounts, Merck's Mectizan Donation Program has significantly improved the lives of hundreds of millions of the most vulnerable people on earth. Merck's actions were explained by reference to part of its cor- porate identity statement: "We are in the business of preserving and improving human life."'

Clearly Merck was not at all responsible for causing river blindness and, therefore, according to the standard of CSR discussed earlier, Merck had no social responsibility in this case. But, Merck itself saw the issue differently. Given the company's core business purpose and values, its managers concluded that they did have a social responsibility to prevent a disease easily controlled by their patented drug. Moreover, as we will discuss later, Merck recognized that it was the right thing to do for its business. George Merck, grandson of Merck's founder, explains, "We try never to forget that medicine is for the peo- ple. It is not for the profits. The profits follow and, if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been."

Is there a responsibility to do good? The third, and perhaps the most wide- ranging, standard of CSR would hold that business has a social responsibility to do good things and to make society a better place. Corporate philanthropy would be the most obvious case in which business takes on a responsibility to do good. Corporate giving programs to support community projects in the arts, education, and culture are clear examples. Some corporations have a chari- table foundation or office that deals with such philanthropic programs. (See the Reality Check, "Corporate Philanthropy: How Much Do Corporations Give?") Small business owners in every town across America can tell stories of how often they are approached to give donations to support local charitable and cul- tural activities.

Many of the debates surrounding corporate social responsibility involve the question of whether business really has a responsibility to support these valuable causes. Some people argue that, like all cases of charity, this is something that deserves praise and admirafion; but it is not something that every business ought to do. Philosophers sometimes distinguish between obligations/dufies and respon- sibilities precisely in order to make this point. A responsible person is charitable; but donating to charity is neither an obligation nor a duty. Others argue that busi- ness does have an obligation to support good causes and to "give back" to the community. This sense of responsibility is more akin to a debt of gratitude and

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Chapters Corponile Social Responsibility 221

Rsality Check corporate Philanthropy: How Much Do Corporations Give? In 2011, total chaiitalDle giving in the United Sta tes w a s es t ima ted to b e almost $300 billion. Individual contr ibut ions totalled billion more than $200 billion. Corporate giving totalled $14.5 billion, or 5% pe rcen t of t h e total, giving rate tha t h a s remained flat over t he pas t 40 years.

Source: 2012 Giving USA: The Annual Report on Philanthropy (oi the Year 201'1/Executive Summary," June 18, 2012, http://www.givingusaieports.org/.

thankfulness—something less binding than a legal or contrachaal obligation per- haps, but more than a simple act of charity. Perhaps a clear way to understand the distinction is to compare it to your obligation to write a thank-you note to your grandmother for the extraordinary knit sweater that she sent you for your birthday gift. You might not have a legal requirement to send the note, but nevertheless you feel a strong duty to do so. This discussion can help us gain a fuller understand- ing of the models of CSR described later and in Figure 5.2, "Models of Corporate Social Responsibility."

FIGURE 5.2

Models of Corporate Social Responsibility

Economic View of CSR

Primary Responsibility: Produce goods and

services (seek profit), within the law

Philanthropic CSR

Economic View of

CSR

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not as a matter of duty or social responsibility

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Social web or "Citizenship"

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Integrative/ Strategic Models

ot CSR

Part, or all, of the mission of the company is to serve some important social goals (e.g., social enterprise,

other businesses with serious commitment to sustainability)

224 Chapters Corporate Social Responsibility

Philosopher Norman Bowie has defended one version of CSR that would fall within this social web model. Bowie argues that, beyond the economic view's duty to obey the law, business has an equally important ethical duty to respect human rights. Respecting human rights is the "moral minimum" that we expect of every person, whether they are acting as individuals or within corporate institutions. To explain this notion of a "moral minimum," Bowie appeals to the framework for distinguishing responsibilities that was described earlier and that is derived from the principle-based traditional in ethics described in chapter 3.

Bowie identifies his approach as a "Kantian" theory of business ethics. In sim- ple terms, he begins with the distinction between the ethical imperatives to cause no harm, to prevent harm, and to do good. People have a strong ethical duty to cause no harm, and only a prima facie duty to prevent harm or to do good. The obligation to cause no harm, in Bowie's view, overrides other ethical consider- ations. The pursuit of profit legitimately can be constrained by this ethical duty. On the other hand, Bowie accepts the economic view that managers are the agents of stockholder-owners and thus they also have a duty (derived from the contract between them) to further the interests of stockholders. Thus, while it is ethically good for managers to prevent harm or to do good, their duty to stockholders over- rides these concerns. As long as managers comply with the moral minimum and cause no harm, they have a responsibility to maximize profits.

Thus, Bowie would argue that business has a social responsibility to respect the rights of its employees, even when not specified or required by law. Such rights might include the right to safe and healthy workplaces, right to privacy, and right to due pro- cess. Bowie would also argue that business has an ethical duty to respect the rights of consumers to such things as safe products and truthful advertising, even when not specified in law. But, the contracmal duty that managers have to stockholder-owners overrides the responsibility to prevent hann or to do (philanthi'opic) good.

Example of a Social Web Model: Stakeholder Theory Perhaps the most infiuential version of CSR that would fall within the social web model is stakeholder theory. Stakeholder theory begins with the recog- nition that every business decision affects a wide variety of people, benefiting some and imposing costs on others. Think of the cases we have mentioned to this point—Maiden Mills, Walmart, Enron, and Arthur Andersen; AIDS drugs in Africa; executive compensation; AIG—and recognize that decisions made by business managers produce far-ranging consequences to a wide variety of people. Remember, as well, the economic lesson about opportunity costs. Every decision involves the imposition of costs, in the sense that every decision also involves opportunities foregone, choices given up. Stakeholder theory recognizes that every business decision imposes costs on someone and mandates that those costs be acknowledged. In other words, 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?

Tlie economic model argues that the firm should be managed for the sole benefit of stockholders. This view isjustified by appeal to the rights of owners, the fiduciary

Chapters Corporate Social Responsibility 225

4

duty of managers, and the social benefits that follow from this arrangement. The stakeholder theory argues, on factual, legal, economic, and ethical grounds, that this is an inadequate understanding of business. Let us examine who are the stakehold- ers, what reasons can be offered to justity the legitimacy of their claims on manage- ment, and what are the practical implications of this view for business managers.

R. Edward Freeman has offered a defense of the stakeholder model in his essay "Managing for Stakeholders" that is reprinted at the end of chapter 2. Freeman describes both a narrow and a wider understanding of the concept of a "stake- holder." In a narrow sense, a stakeholder includes anyone who is vital to the sur- vival and success of the corporation. More widely, a stakeholder could be "any group or individual who can aifect or be affected by the corporation."

Stakeholder theory argues that the narrow economic model fails both as an accurate descriptive and as a reasonable normative account of business manage- ment. As a descriptive account of business, the classical model ignores over a century of legal precedent arising from both case law and legislative enactments. While it might have been true over a century ago that management had an over- riding obligation to stockholders, the law now recognizes a wide range of mana- gerial obligations to such stakeholders as consumers, employees, competitors, the environment, and the disabled. Thus, as a matter of law, it is simply false to claim that management can ignore duties to everyone but stockholders.

We also need to recognize that these legal precedents did not simply fall from the sky. It is the considered judgment of the most fundamental instihitions of a democratic society, the courts and legislatures, that corporate management must limit their fiduciary duty to stockJiolders in the name of the rights and interests of various constituencies affected by corporate decisions.

Factual, economic consideraUons also diminish the plausibility of the economic model. The wide variety of market failures recognized by economists show that, even when managers pursue profits, there are no guarantees that they will serve the interests of either stockholders or the public. When markets fail to attain their goals, society has no reason to sanction the primacy of the fiduciary obligation to stockholders.

But perhaps the most important argument in favor of the stakeholder theory rests in ethical considerations. The economic model appeals to two ftindamental ethical norms for its justification: utilitarian considerations of social well-being and individual rights. On each of these normative accounts, however, due con- sideration must be given to all affected parties. Essential to any utilitarian theory is the commitment to balance the interests of all concerned and to give to each (arguably, equal) consideration. The stakeholder theory simply acknowledges this fact by requiring management to balance the ethical interests of all affected par- ties. Sometimes, as the classical model would hold, balancing will require man- agement to maximize stockholder interests, but sometimes not, UtiUtarianism requires management to consider the consequences of its decisions for the well- being of all affected groups. Stakeholder theory requires the same.

Likewise, any theory of moral rights is committed to equal rights for all. According to the rights-based ethical fl-amework, the overriding moral imperafive

226 Chapter 5 Corpomte Social Responsibility

is to treat all people as ends and never as means only. Corporate managers who fail to give due consideration to the rights of employees and other concerned groups in the pursuit of profit are treating these groups as means to the ends of stockholders. This, in the rights-based ethical framework, is unjiist. (Of course, ignoring the interests of slockliolders is equally unjust.)

Thus, the stakeholder theory argues that on the very same grounds that are used to justify tlie classical model, a wider "stakeholder" theory of corporate social responsibility is proven ethically superior. Freeman argues that "the stakeholder theory does not give primacy to one stakeholder group over another, though there will be times when one group will benefit at the expense of others. In general, how- ever, management must keep the relationships among stakeholders in balance.'"'

Films exist in a web of relationships with many stakeholders and these rela- tionships can create a variety of responsibilities. As we have seen in many of the cases and examples mentioned previously, it may not be possible to satisfy the needs of each and every stakeholder in a situation. But, stakeholder theory also recognizes that some stakeholders have different power and impact on decisions than others; that organizations have distinct missions, priorities and values, affect- ing the final decisions. Therefore, social responsibility would require decisions to prioritize competing and conflicting responsibilities.

Integrative Model of CSR Most discussions about CSR are framed in tenns of a debate: Should business be expected to sacrifice profits for social ends? Much of the CSR literature assumes a

OBJECTIVE tension between the pursuit of profit and social responsibility. But. of course, there have always been organizations that turn this tension around, organizations that pursue social ends as the very core of their mission. Non-profits, such as hospitals, NGOs, foundations, professional organizations, schools, colleges, and govern- ment agencies, have social goals at the center of their operations. The knowledge and skills taught in business schools, from management and marketing to human resources and accounting, are just as relevant for non-profits as they are in for-profit organizations. For this reason alone, students in these various sub-disciplines of a business school ctu'riculum should be familiar with non-profit business models.

But there is a growing recognition that some for-profit organizations also have social goals as a central part of the strategic mission of the organization. In two areas in particular, social entrepreneurship and sustainability, we find for- profit firms that do not assume a tension between profit and social responsibility. Firms that make environmental sustainability as central to their mission, such as Interface Corporation, are examples of the second area. (See the Reality Check, "Browsing for Social Good.")

Because these finns 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. At first glance, firms that adopt the integrative model raise no par- ticular ethical issues. Even advocates of the narrow economic model of CSR such as Milton Friedman, would agree that owners of a firm are free to make the pursuit

Chapter 5 Corporate Social Responsibility 227

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The popular w e b browser Firefox and e-mail pro- gram Thundetb i rd are produc ts of Mozilla Corpora- tion, a for-profit subsidiary of Mozilla Foundat ion, a non-profit organization. Mozilia Corporation had rev- e n u e s of more than more than $120 million, and more than 400 million users of their Firefox browser in 2010. Mozilla is descril jed on i ts webs i t e as follows:

W h a t i s M o z i l l a ? We're a global community of thousands who sincerely believe in the power of technology to enrich people's lives. We're a pubUc benefit organization dedicated not to making money but to improving the way people everywhere experience the Internet. And we're an open source software project whose code has been used as a platform for some of the Internet'.? most innovative projects. Tlie common thread that runs throughout MoziUa IS our belief that, as the most significant social and technological development of our

time, the Internet is a public resource that must remain open and accessible to aH. With this in mind, our efforts are ultimately driven by our mission of encouraging choice, innovation and opportunity online. To achieve these goals, we use a highly transparent, extremely collaborative process that brings together thousands of dedicated volunteers around the world with our small staff of employees to coordinate the creation of products like the Firefox web browser This process is supported by the Mozilla Coq^oration, which is a wholly-owned subsidiary of the non-profit Mozilla Foundation. In the end, the Mozilla community, organization and technology is all focused on a single goal: m a k i n g the Internet bet ter for e v e r y o n e .

Source: Mozilla Foundation, The State of Mozilla: Annual Report, (2010), http://www.mozilla.org/en-US/foundation/ annualreport/2010/fac[/ (accessed July 27, 2012).

of social goals a part of their business model. They would just disagree that these social goals should be part of ei-eiy business' mission. (For a clear articulation of the arguments surrounding each of the CSR models, see the reading, "Rethinking the Social Responsibility of Business" reprinted at the end of this chapter.)

No one is claiming that every business should adopt the principles of social entrepreneurs and devote all their activities to service of social goals. There are clearly other needs that businesses are designed to address. At best, social entre- preneurs demonstrate that profit is not incompatible with doing good, and there- fore that one can do good profitably. (See the Reality Check: "Fairness in a Cup of Coffee: Example of the Integrative Model.") On the other hand, there are some who would argue that the ethical responsibilities associated with sustainability are relevant to every business concern. In some ways, sustainability offers a model of CSR that suggests that ethical goals should be at the heart of every corporate mission. There are reasons to think that sustainability promises to be a concept of growing importance in discussions of CSR.

The Implications of Sustainability in the Integrative Model of CSR Sustainability, and specifically its definition, will be discussed in greater detail in chapter 9; but as a topic within CSR, sustainability holds that a firm's financial