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Lecture 5: Corporate Social Responsibility (CSR)

Recap

Work context, org culture – formal and informal, leadership, ethics codes

Roles, groups & hierarchy

The relationship between leadership, culture, ethics codes and behaviour

Overview

Core characteristics of CSR

Corporate social responsibility perspectives

Classical view (Friedman)

Contemporary view (Carroll)

Stakeholder view (Freeman)

Corporate moral responsibility

Corporate social responsibility and corporate governance

Core characteristics of CSR

Managing externalities

CSR

Voluntary

Social & economic alignment

Beyond Philanthropy

Practices & Values

Multiple stakeholder orientation

Crane, Matten & Spence (2014)

CSR perspectives

Classical – Friedman

Contemporary – Carroll

Stakeholder - Freeman

Classical view – the case against CSR

Economic behaviour different from other behaviours – separation thesis.

Different criteria of effective business performance.

Primary goal and motivation of business is profit.

Classical view - Friedman

Friedman’s (1970) arguments against CSR:

Business executives do not have the right to further social interests by spending shareholders’, customers’ or employees’ money

‘Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities’

Business executives have the responsibility to conduct the business in accordance with the desires of the owners of the business …make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom

The case against CSR – Karnani (2010)

Karnani’s arguments against:

“Companies that simply do everything they can to boost profits will end up increasing social welfare”

Problem - misalignment between private and public interests

Executives choose profit - otherwise incompetent or selfish, CG problem.

How then should we ensure good corporate behaviour?

1. Regulation 2. Activism

3. Self-regulation 4. Punishment - financial

The case for CSR – Smith (2003)

Global Iimpact of business demands greater SR - LDCs

Enlightened self-interest

Paternalism

Reputational risk

Societal expectations – Social License to Operate (SLO)

Corporate social responsibility – Carroll’s pyramid/4 faces

Philanthropic responsibilities

Ethical responsibilities

Legal responsibilities

Economic responsibilities

(Carroll 1991, 1998)

Corporate Social Responsibilities

Economic responsibilities

Business produces goods and services, while making an acceptable profit. Without financial viability other responsibilities are dubious.

Legal responsibilities

Business expected to carry out its work lawfully. ‘The law is at the floor of acceptable behaviour’

The law reflects minimum standards of behaviour

Laws are not always up to date

Laws may not address all relevant social issues

Laws may lag behind ethical thinking

(Carroll 1998)

Corporate Social Responsibilities

Ethical responsibilities

Ethics go beyond legal code to include behaviour morally acceptable to stakeholders.

Business ethics is concerned with ‘knowing ethics’ and ‘doing ethics’

Philanthropic responsibilities

Promote human welfare and goodwill

Voluntary endeavour, failure to be philanthropic not considered unethical.

(Carroll 1998)

Three domain approach – Schwartz & Carroll (2003)

Source: Schwartz and Carroll 2003, p.509)

Legal

Economic

Ethical

Legal Ethical

Legal Economic

Economic Ethical

Legal Economic Ethical

Stakeholder Theory

Stake: an interest or share in an effort or undertaking, a claim or a right to something

Stakeholder: an individual or group who has a stake in what the organisation does or how it performs.

‘Businesses can be understood as a set of relationships among groups that have a stake in the activities that make up the business’

(Freeman 2008 p. 45)

Stakeholder Theory cont’d

Corporations ought to be operated for the benefit of all those who have a stake in them.

The unit of analysis of stakeholder theory is the organisation not the individual manager.

Stakeholder theory is a theory of organisational strategy and ethics.

All strategic management theories have moral content.

Stakeholders

Primary:

Employees

Customers

Communities

Financiers

Suppliers

Secondary:

Government

Competitors

Media

Special interest groups

Consumer advocate groups

(Freeman 2008)

Stakeholder Management

“any group or individual who can affect or is affected by the achievement of the organization’s purpose” (Freeman 2011)

Freeman (2011, p. 53) defines stakeholder as “any group or individual who can affect or affected by the achievement of the organization’s purpose”. Phillips (2003) named stakeholders as “any individual or group that is the legitimate object of managerial attention”.

Based on Freeman (2011), “stakeholder management” at least should designed into three basic steps that are

“how to identify the stakeholders” by analysing the stakeholder attributes such power, legitimacy, influence (Mitchell, Agle & Wood 1997)

“how to threat the stakeholders” using ‘communications’ and ‘information’ (Smudde & Courtright 2011)

“how is the impacts of stakeholder management” has been studied by Hillman and Keim (2001) to find the impact of stakeholder management to shareholder value, while Romenti (2010) see stakeholder management impacts on corporate reputation.

2. Stakeholder Approach and Local Legitimacy

Local legitimacy is a general perception or assumption that the actions of businesses are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions (Suchman 1995).

‘Social Pressure’ from local government and NGO is derived from the dissatisfied of local stakeholders with corporate operation (Reimann 2012; Gifford and Kestler 2008).

‘social embeddedness’ is a foundation for company obtaining local legitimacy by building relationship with local stakeholders (Gifford & Kestler 2008; Gifford, Kestler & Anand 2010).

Identification of Stakeholder and Claims

Treatment of Stakeholders

Assessment

of the Impact

Stakeholder Theory Perspectives

Descriptive: describes corporations as a combination of interconnected interest groups

Instrumental: corporations that adopt CSR, will be more successful than those that do not (other things being equal).

Managerial: enables managers to identify options and solutions

Normative: can develop moral/philosophical guidelines for the operation of corporations

(Donaldson & Preston 1995)

Normative stakeholder theory

Addresses morals and values as a central feature of managing organisations

It examines the ends of corporate activity and the means of achieving those ends

(Phillips, Freeman & Wicks 2003)

Distribution of value

Stakeholder theory is concerned with distributive and procedural justice

Benefits are distributed based on relative contribution to the organisation

Owing shares is not riskier than losing a job, product failure, environmental damage etc.

Arguments for managing for stakeholders

Consequences - Stakeholder management leads to best consequences for all because it recognizes that stakeholder interests are joint.

Rights - Stakeholders have rights based on their stake and their basic humanity

Virtue - Business virtues such as efficiency, fairness, respect, integrity etc. are necessary to create stakeholder value

(Freeman 2008)

Shareholder and Stakeholder

views of the firm

Shareholder view

To maximise shareholder value, wealth

Shakeholder view

To create sustainable value, not wealth, for all stakeholders

Why do organisations exist?

Corporate social responsibility (CSR)

Corporate social responsibility assumes that we hold organisations morally responsible for their actions

Corporate social responsibility (CSR): has gained more prominence with an emphasis on the company’s board for its responsibility for relations with its stakeholders.

Cadbury (2002): the broadest way of defining social responsibility is to say that the continued existence of companies is based on an implied agreement between business and society - SLO

Corporate moral responsibility (CMR)

CMR has two meanings (Wilmot 2001):

CMR refers to the quality of corporate behaviour: is the behaviour moral, good right?

CMR refers to holding corporations morally responsible for their behaviour as we hold individuals responsible for their actions

Corporate social responsibility assumes that we hold organisations morally responsible for their actions, i.e. we attribute (some?) moral agency to the organisation

Corporate Governance and CSR

CSR and its related concepts (accountability, sustainability, citizenship, responsiveness and stakeholder management) pertain to the external legitimacy of the corporation because they address the impact corporations have on society.

Corporate governance relates to internal legitimacy, concerned with questions such as who runs the corporation, for whom and by what means.

(Epstein 1999)

CSR Regulation & Local Stakeholders

Source: Post et.al (2002)

Indonesia

Most countries have soft policy encouraging CSR which makes the claims of locals implicit.

Indonesia has moved to legislate CSR which has made the claims of local stakeholders explicit and legitimate.

CSR as Implicit Claims

Locals don’t have any contracts with Companies

CSR as Explicit Claims

Regulations legitimate locals right for CSR

Conclusions

There is a growing need, and pressure, for companies to be socially responsible from many stakeholders

License to exist is socially granted meaning it can be taken away

Mixed findings on the relationship between CSR and company performance but generally positive (Margolis and Walsh 2003).

CSR is voluntary and therefore discretionary.

Review Questions

1. What are the core characteristics of CSR?

2. What are the major arguments for and against CSR and whose views do they represent?

3. Describe Carroll’s corporate social responsibility perspective and explain how it differs from Friedman’s perspective.

4. ‘Stakeholder theory is not very useful because it sees stakeholder interests are joint when in fact they are competing’. Discuss

5. To whom do business organisations have responsibilities?

6. Can organisations be responsible for immoral behaviour?

Under Friedman’s view – to shareholders. Under Freeman – to stakeholders.

Organisations are being held accountable for immoral behaviour – Enron, OneTel, James Hardie Industries, BP. OECD, APRA, ASIC, SEC (USA) are bodies that will take legal action.

Carroll – Economic, Legal, Ethical and Philanthropic. Diff from Friedman – Philanthropic.

Discussion – Freeman “ ..serving all these stakeholder groups requires discipline, vision, and committed leadership.” Who said leadership was easy? Freeman, gain: “Managing for stakeholders is about creating as much value as possible for stakeholders without resorting to tradeoffs.”

Merck & River Blindness (1)

1.The Classical CSR perspective believes that managers faced with the decision of profits or ethics should choose profit, and that any decision to do otherwise with shareholders money is either incompetence or selfish. What do you think?

2.Given the prospect of Merck’s recouping its investment was almost zero does this mean that the only way to justify such a business investment is that being ethical will help the company be more profitable?

3. Does it matter if Merck made this decision because they believed it would lead to greater profitability, and not because of a strongly held commitment to doing the right thing (Week 2 normative ethics)? Does being ethical have to compatible with being profitable?

Under Friedman’s view – to shareholders. Under Freeman – to stakeholders.

Organisations are being held accountable for immoral behaviour – Enron, OneTel, James Hardie Industries, BP. OECD, APRA, ASIC, SEC (USA) are bodies that will take legal action.

Carroll – Economic, Legal, Ethical and Philanthropic. Diff from Friedman – Philanthropic.

Show scene for “Grapes of Wrath” – put into historical context, growth of organisations and the distancing of decision making and accountability from the point of impact and the challenge for decision makers, in any sphere, to understand the impact of their decisions on the stakeholders. Scene 1 – FF 13 mins.

Merck & River Blindness (2)

4. Identify who the stakeholders are in this case, and who would most affect this strategic decision for Merck? How might the decision not to proceed to develop the drug affect stakeholders?

5. Consider Ethical Decision Making from Week 4 (Person-Situation Interactionist Model – i.e decision making is a function of the Person, the Situation and Issue). What role do you think the organizational values, culture and leadership played in this decision?

Under Friedman’s view – to shareholders. Under Freeman – to stakeholders.

Organisations are being held accountable for immoral behaviour – Enron, OneTel, James Hardie Industries, BP. OECD, APRA, ASIC, SEC (USA) are bodies that will take legal action.

Carroll – Economic, Legal, Ethical and Philanthropic. Diff from Friedman – Philanthropic.

The Corporation

Milton Friedman Choir - The Corporation (2.54 mins)

http://www.youtube.com/watch?v=W3Seg0JE1PM&feature=related

THE CORPORATION [7/23] Monstrous Obligations (6.15 mins)

http://www.youtube.com/watch?v=3vorWknUybY&feature=channel

Information Technology Services

References

Carroll, AB 1991, 'The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders', Business Horizons, vol. 34, no. 4, pp. 39-48.

Carroll, AB 1998, 'The Four Faces of Corporate Citizenship', Business and Society Review, vol. 100, no. 1, pp. 1-7.

Crane, A, Matten D & Spence, L (2014) Corporate Social Responsibility: Readings and Cases in a Global Context (2nd Edition), Routledge, New York, USA)

Donaldson, T & Preston, LE 1995, 'The stakeholder theory of the corporation: Concepts, evidence and implications', Academy of Management Review, vol. 22, no. 1, pp. 65-91.

Elkington, J Cannibals with Forks: The Triple Bottom Line of 21st Century Business, New Society Publishers, UK.

Epstein, EM 1999, 'The continuing quest for accountable, ethical and humane corporate capitalism', Business & Society, vol. 38, no. 3, pp. 253-67.

Freeman, RE 2008, 'Managing for Stakeholders', in T Donaldson & PH Werhane (eds), Ethical Issues in Business: A Philosophical Approach, 8 edn, Prentice Hall, London, pp. 39-53.

Freeman, RE 2010, Strategic management : a stakeholder approach, Cambridge University Press, UK.

References

Friedman, M 2007, 'The social responsibility of business is to increase its profits', in WC Zimmerli, M Holzinger & K Richter (eds), Corporate Ethics and Corporate Governance, Springer Berlin, pp. 173-8.

Karnani, A (2010) 'The Case Against Corporate Social Responsibility', Wall Street Journal, 23 August 2010.

Margolis, J.D. and Walsh, J.P. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48: 265-305.

Matten, D & Moon, J (2008) Implicit and explicit CSR: a conceptual framework for a comparative understanding of corporate social responsibility, Academy of Management Review 33(2): 404-424.

Phillips, R, Freeman, RE & Wicks, AC 2003, 'What stakeholder theory is not', Business Ethics Quarterly, vol. 13, no. 4, pp. 479-502.

Smith, NC (2003) Corporate Social Resonsibility: Whether or How?, California Management Review, Summer, Vol.45 (4), pp.52-76.Smith, NC (2003)

Schwartz, MS & Carroll, AB (2003) ‘Corporate Social Responsibility: A Three-Domain Approach’, Business Ethics Quarterly, Vol. 13, No. 4 (Oct., 2003), pp. 503-530

Wilmot, S 2001, 'Corporate moral responsibility: What can we infer from our understanding of organisations?' Journal of Business Ethics, vol. 30, pp. 161-9.