Corporate Social Responsibility Mgmt 621 Contemporary Ethical Issues in Management Jeffery D. Smith

A View of Corporate Social Responsibility (CSR) CSR PhilanthropicEconomicEnvironmentalEthicalLegal Adapted from Archie Carroll (1991). The Pyramid of Corporate Social Responsibility. Business Horizons, 42:

Pacific Lumber Company Corporate Social Responsibility Initiatives Environmental Sustainability Community Sustainability Economic Sustainability

Milton Friedman’s Stockholder Model Nobel Prize in Economics (1976) Capitalism and Freedom (1962) “The Social Responsibility of Business is to Maximize Profits” (1971) Free to Choose (1980)

Milton Friedman’s Stockholder Model Some Preliminary Assumptions The corporation only has "artificial responsibilities", i.e., only individuals (proprietors, executives, and managers) have moral responsibilities Managers (operation executives and officers) are employees of stockholders (owners) Managers and stockholders are in a voluntary principal- agent relationship Stockholders own the corporation and this gives them a primary ethical entitlement to the ownership of profits

OWNERS (Principals) MANAGERS (Agents) EmployeesSuppliersCustomers LAW

Friedman’s Stockholder Model, cont’d The only social responsibility of business is to maximize shareholder wealth, i.e., maximize profits, within the bounds of the law Managers have a fiduciary responsibility to carry out the directives and protect the interests of shareholders.

Friedman’s Stockholder Model, cont’d 1. Stockholders have an ethical entitlement to their property (capital) and the profits that flow from its productive use by the firm. 2. Through an act of trust, managers agree to maximize the value of stockholders’ property (capital) by maximizing the profits of the firm. 3. From 1) and 2), managers have an ethical responsibility to maximize the profits of the firm. 4. Corporate social endeavors require managers to act in ways that do not maximize the profits owned by stockholders. 5. From 3) and 4), managers have an ethical responsibility not to pursue corporate social endeavors.

The Stakeholder Model “A stakeholder theory of the firm must redefine the purpose of the firm. The stockholder theory claims that the purpose of the firm is to maximize the welfare of the stockholders…The purpose of the firm is quite different [for the stakeholder approach.] The very purpose is…to serve as a vehicle for coordinating stakeholder interests. It is through the firm that each stakeholder group makes itself better off through voluntary exchanges.” William Evan and R. Edward Freeman. (1993) The Stakeholder Theory of the Modern Corporation: Kantian Capitalism. In Norman Bowie and Tom Beauchamp (Eds.), Ethical Theory and Business (pp ). Upper Saddle River: Prentice Hall.

FIRM OwnersSuppliersEmployeesCustomersCommunitiesManagement R. Edward Freeman Stakeholder: an individual or group that is vital to the survival and success of the corporation

FIRM OwnersSuppliersEmployeesCustomersCommunitiesManagement

2. The Stakeholder Model, cont’d Kant’s Humanity Formula of the Categorical Imperative Corporate agents must always respect the humanity of each stakeholder group by never treating stakeholders as a means to corporate ends. Principle of Corporate Rights (PCR) The corporation and its managers may not violate the legitimate rights of others to determine their own future. health, safety, association, contractual entitlements, fair/equitable treatment Principle of Corporate Effects (PCE) The corporation and its managers are responsible for the effects of their actions on others.

2. The Stakeholder Model, cont’d Principle of Corporate Legitimacy (PCL) The corporation should be managed for the benefit of its stakeholders…The rights of these groups must be ensured and…the groups must participate, in some sense, in decisions that substantially effect their welfare (Evan and Freeman, p. 82) Stakeholder Fiduciary Principle (SFP) Management bears a fiduciary relationship to stakeholders and to the corporation as an abstract entity. It must act in the interests of the stakeholders as their agent, and it must act in the interests of the corporation to ensure the survival of the firm, safeguarding the long- term stakes of each group. (p. 82)

2. The Stakeholder Model, cont’d Some Problems and Concerns Institutionalizing/Implementing the PCL and SFP Conflicts Between Stakeholder Groups Efficiency Turns the Regulation of the Market Excessively Inward