Ethics and Social Responsibility Mgmt 491 Management Ethics in a Global Environment Jeffery D. Smith

New York Times April 9, 2006.

A View of Corporate Social Responsibility Adapted from Archie Carroll (1991). The Pyramid of Corporate Social Responsibility. Business Horizons, 42: PHILANTHROPIC (voluntary contributions to society) ECONOMIC (enhancing stakeholder wealth) ETHICAL (obedience to interpersonal norms and principles) LEGAL (obedience to laws and regulations) Managerial Discretion Least Most

A Revised View of Corporate Social Responsibility ETHICAL Trust, Honesty, Fairness, Freedom, Beneficence, Authority LEGALECONOMICPHILANTRHOPIC

Pacific Lumber Company Corporate Social Responsibility Initiatives Environmental Sustainability Community Sustainability Economic Sustainability The so-called “triple bottom line”

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 (directors, executives, and managers) have moral responsibilities Managers (operation executives and officers) are employees of stockholders (equity investors) established by a voluntary principal-agent relationship Stockholders’ property rights in their equity extends to a property right in what flows from the productive use of their equity

EQUITY INVESTORS (Principals) MANAGERS (Agents) EmployeesSuppliersCustomers Civil Society Organizations LAW and SOCIAL NORMS

Friedman’s Stockholder Model, cont’d The only social responsibility of business is to maximize the wealth of equity investors, 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 equity investors, i.e., a responsibility based upon a special trust arising from an agency relationship

Friedman’s Stockholder Model, cont’d 1. Equity investors 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 equity investors’ property 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 responsibility (CSR) requires managers to act in ways that do not maximize profits, i.e., it requires managers to divert what would otherwise be profit toward social endeavors. 5. From 3) and 4), managers have an ethical responsibility not to pursue corporate social endeavors and thereby maximize profit for stockholders.

The Stakeholder Model, cont’d “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. (2005) The Stakeholder Theory of the Modern Corporation: Kantian Capitalism. In J. DesJardins and J. McCall (Eds.), (pp ). Belmont: Thomson.

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

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 Concepts of Corporate Social Responsibility CSR Philanthropic Strategic