Corporate Social Responsibility

What is a corporation? A corporation is a mechanism by means of which a number of persons unite for the purpose of assembling a fund of capital with which to carry on some business enterprise.

What is a corporation? A corporation is made up of: shareholders (investors) who provide the capital, management (board of directors, executives and managers) who runs the business operations, and employees, who produce the goods and services. 3

What is a corporation? According to the corporate law of the United States, the corporation has the status of a ‘legal person’, which means that it has legal rights and duties similar to those of a human person. For example, a corporation can enter into contracts, own property, incur debts, pay taxes, and sue or be sued separately from its investors and managers. 4

What is a corporation? The main characteristics of the ‘corporate form’ (legal form of business organizations) are: limited liability (i.e. shareholder liability is limited to the value of their investment) separation of ownership (shareholders) and control (management) pooling of capital from multiple investors 5

What is a corporation? The promise of ‘limited liability’ caps each shareholder’s economic risk to the cost of purchasing his shares. As such, shareholders are not liable to the amount of damage the corporation can do to society and customers. They are immune from any damage beyond the investment made. 6

What is a corporation? The corporate form, which protects investors from criminal charges, may encourage them to be irresponsible. Would it be better to encourage investors to be more responsible and take a more active role in management so as to guard against illegal or immoral business practices? 7

Corporate moral agency Like a person, a corporation has both rights and duties. It implies that there are things that a corporation should do and things that it should not do. A basic assumption of business ethics is that the same moral theories and principles that we use to evaluate an individual’s actions can also be applied to evaluate the acts and practices of business organizations.

Corporate moral agency From the standpoint of business ethics, corporations should take responsibility for the effects of their acts and practices on individuals, society and the environment. It means that we can apply moral theories and principles to evaluate a corporation’s activities to see whether such activities are desirable, acceptable or questionable. 9

Corporate moral agency Examples of questionable, unacceptable or unethical business practices include selling dangerous or harmful products to customers, treating employees unfairly, neglecting workplace safety, ignoring the environmental impact of business activity, and so on. 10

Corporate moral agency If the corporation is a legal person, is it also a moral person? Can corporations act like moral agents? Can corporations be held morally responsible in the same way that individuals can be held morally responsible for their actions? 11

Corporate moral agency Some argue that groups or organizations, like individuals, can be held responsible for their actions and decisions. Corporate moral agency implies that corporations can be the proper bearers of moral responsibilities in a manner that is distinct from their human members. 12

Corporate moral agency Others reject the notion of corporate moral agency by arguing that the corporation is an artificial entity designed for a single purpose – the pursuit of profit. Unlike natural persons (human persons), corporations cannot function as moral agents, and thus cannot be held responsible for what they do. 13

Corporate moral agency Peter French draws attention to the corporate internal decision (CID) structures within corporations and proposes that they can be regarded as responsible moral agents. 14

Corporate moral agency French argues that the capacity for intentionality (capacity for intentional action) is a sufficient condition for moral agency and personhood status. Because corporations are intentional agents, they can be held responsible for their actions. 15

Corporate moral agency A corporate internal decision (CID) structure is defined by French as a system of rules and procedures specifying the respective roles and responsibilities of board members, executives, managers, and employees; and thereby allowing their intentions to be interwoven or synthesized into a corporate decision. 16

Corporate moral agency Corporate actions, as French points out, are often the result of collective, not individual, decision making. As established procedures for accomplishing specific goals, the CID structure lays out lines of authority and stipulates under what conditions personal actions become official corporate actions. 17

Corporate moral agency The nature and structure of a modern corporate organization allows nearly everyone in it to share moral responsibility for what it does. In practice, however, this ‘diffusion of responsibility’ can mean that no particular person or persons are held morally responsible. 18

Corporate moral agency Indeed, each of these individuals may have been only following established procedures and decision-making guidelines. Inside a corporation it may often be difficult, even impossible, to assign responsibility for a particular outcome to any single individual because so many different people, acting within a given CID framework, contributed to it in small ways. 19

Corporate moral agency Critics of French’s view argue that corporations cannot be moral agents because they can only function as a result of human interactions. They point out that corporations are created by, made up of, and dependent upon individuals and groups of individuals for their existence. 20

Corporate moral agency Corporations depend on human individuals for capital, property ownership, contracts, management, supplies, marketing, and so forth. Besides, the purposes, mission, policy, goals, and decision-making procedures of corporations are created by groups of individuals. 21

Corporate moral agency Opponents of corporate moral agency, therefore, conclude that corporations do not have the status of moral agents who can act independently or take responsibility for their actions. On this view, only those individual members who make up the corporations can possess moral agency and function as bearers of moral responsibilities. 22

Corporate moral agency If a corporation has made a decision to do something that can be harmful to society, who should be held responsible for that decision – the corporation itself or the individual members who participated in making that decision? 23

Corporate moral agency It is generally believed that only moral agents should be punished for their wrongdoings because only moral agents can be held responsible for their actions. Is it meaningful to punish a corporation if it has no capacity of moral agency? 24

Corporate moral agency Take the example of the British Petroleum oil spill in the Gulf of Mexico in 2010, which led to the death of 11 oil workers and vast damage to properties and livelihoods of those living on the Gulf. It would be very difficult to pinpoint specific individuals at BP who were at fault. Does it make sense to hold the oil company responsible and punish it for causing the disaster? 25

Corporate moral agency Defenders of corporate moral agency may argue that in the case of the BP oil spill, even if we could identify the individual wrongdoers, the magnitude of the harm inflicted was so great that only the corporation would have the financial wherewithal to bear the responsibilities of cleaning up the environment and compensating the victims. 26

Corporate moral agency Opponents of corporate moral agency, however, may argue that although holding a corporation responsible for wrongdoings may have the benefit of making it easier for victims to sue for damages, it also has the disadvantage of letting culpable individuals off the hook. 27

Corporate moral agency When it comes to ‘punishing’ a corporation, usually the only penalty that can be administered is a fine, which is in effect paid by shareholders (who have virtually no control over corporate actions and decisions) or passed on as costs to consumers. Heavy financial penalties on corporations may also harm workers if they lead to plant closures and layoffs. 28

Corporate moral agency According to the critics of corporate moral agency, inasmuch as the corporation is an artificial entity, the effect of any punishment is not felt by the corporation itself. It is unjust to penalize shareholders, consumers or workers who may not be directly responsible for corporate wrongdoings. 29

The shareholder model of business What is the proper role of corporations in society? Do corporations have any responsibilities other than obeying the law, paying taxes, hiring workers, and supplying goods and services?

The shareholder model of business The debate over a corporation’s responsibility is one about whether it should be construed narrowly to cover only profit maximization or more broadly to include acting morally, refraining from socially undesirable behavior, and contributing actively and directly to the public good. 31

The shareholder model of business Corporate social responsibility (CSR) refers to a corporation’s commitment to conduct business in a socially responsible manner. A socially responsible corporation is one that assumes responsibilities to society that go beyond the production of goods and services at a profit. 32

The shareholder model of business In a 1970 article for the New York Times Magazine, Milton Friedman (1912-2006) summarized his position well with its title – ‘The Social Responsibility of Business Is to Increase Its Profits.’

The shareholder model of business CSR became a favorite topic in management discussions during the 1970s. One reason for this is that the respected economist Milton Friedman came out against the concept. In a popular press article, Friedman writes: “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.”

The shareholder model of business According to Friedman, the corporation is an ‘artificial person’ (artificial entity or mechanism) that exists for economic purposes only. ‘Business’ denotes activities that involve the production and exchange of goods and services for economic purposes, primary among which is the generation of profit. 35

The shareholder model of business Friedman claims that corporations should not be concerned with issues like social responsibility or social justice because these are not the proper goals of business. The only responsibility of the directors and managers of a corporation, in Friedman’s view, is to maximize profit for shareholders.

The shareholder model of business In Friedman’s view, under a free-market system with private property rights, the corporation is the private property of the shareholders. As such, the management of a corporation (directors, executives and managers) has a fiduciary (legal or contractual) responsibility to maximize profit for the shareholders. 37

The shareholder model of business For Friedman, a corporation does two things in a free market economy: It produces goods or services that society wants, and it makes a profit. Making a profit, however, is the most important function because a corporation will go out of business if it is unable to make a profit.

The shareholder model of business Friedman argues that the corporation, as an economic institution, is not the proper vehicle to pursue social responsibility. The executives or managers of a corporation are not acting in the best interest of shareholders when they spend corporate funds on solving social problems, such as fighting pollution, relieving poverty, or reducing discrimination. 39

The shareholder model of business Corporations operate in a competitive environment. If a socially responsible corporation has to operate at a higher cost than other corporations that are not concerned about being socially responsible, it will place itself at a competitive disadvantage relative to its competitors.

The shareholder model of business Friedman, in arguing that the primary responsibility of a corporation is to increase its shareholders’ wealth, carefully notes that corporations must play by ‘the rules of the game’. In other words, corporations should adhere to society’s laws and morals and avoid doing anything that involves deception and fraud.

The shareholder model of business Friedman’s view has now become the central tenet of the ‘shareholder model of business’, which holds that: corporations should be managed primarily in the interest of their shareholders; and the market value of shares is the most important measure of shareholder value.

The stakeholder model of business Should corporations move away from focusing solely on maximizing shareholder value and take into consideration other objectives, such as environmental concerns or the welfare of their employees?

The stakeholder model of business A main objection to the shareholder model of business is that the pursuit of profit does not necessarily lead to social progress but often leads to environmental degradation, neglect of workplace safety, and other social problems. 44

The stakeholder model of business The ‘stakeholder model of business’ has been put forward as an alternative to the shareholder model. According to the stakeholder model, the corporation is a social institution that has the responsibility to consider the interests of all the groups it has an impact on, i.e. its stakeholders.

The stakeholder model of business The term ‘stakeholders’ is generally seen as an improvement on a narrow conception of ‘shareholders’ as the source of an organization’s objectives. It implies that a corporation not only has a responsibility to its shareholders but also a responsibility to other people and society as a whole (i.e. the stakeholders).

The stakeholder model of business The stakeholders of a corporation are the individuals, groups or other organizations which are affected by, or can affect, the corporation’s business decisions and actions. They include not only shareholders and managers, but also consumers, employees, suppliers, government, communities, and the natural environment.

The stakeholder model of business 48

The stakeholder model of business The stakeholder concept has been widely employed to describe and analyze the corporation’s relationship to society. According to the stakeholder perspective, the major concern of the management of a corporation is how to balance the interests of different stakeholders. 49

The stakeholder model of business The stakeholder model offers us a relational view of corporate social responsibility: A corporation’s social responsibility can be understood in terms of its interactions with its employees, suppliers, customers, and the communities in which it operates, as well as the extent it attempts to protect the environment.

The stakeholder model of business Challenging the idea that the primary purpose of a corporation is to maximize profit for shareholders, the stakeholder model argues that the primary purpose of any corporation should be the enhancement of the welfare of its stakeholders. 51

The stakeholder model of business From society’s point of view, corporations should be seen as having robust social responsibilities or obligations that cannot be encapsulated in share prices. For example, corporations should do their best to avoid causing harm to the natural environment and the community in which it operates. 52

The stakeholder model of business Instead of focusing on short-term financial performance, the stakeholder model takes a longer, broader view of creating value for all of a corporation’s stakeholders. On this view, CSR involves not only the avoidance of harmful actions (e.g. preventing accidents in the workplace) but also actively doing good (e.g. developing environmentally-friendly technologies).

Corporate social responsibility To what extent does a corporation have obligations to society and to its various stakeholders? What are the arguments for and against corporate social responsibility?

Corporate social responsibility A socially responsible corporation is one that assumes responsibilities that go beyond the production of goods and services at a profit. Justifications for CSR are often expressed in terms of its benefits (1) to the corporation itself, (2) to the corporation’s various stakeholders, and (3) to society as a whole. 55

Corporate social responsibility One argument in favor of CSR is that it is in a corporation’s long-term interest to be socially responsible. For example, from a corporation’s point of view, CSR may have the practical advantage of attracting good publicity. 56

Corporate social responsibility It has been argued that corporations should engage in CSR because the public strongly supports it. Customers are likely to prefer buying from corporations with a good reputation. Thus, ‘strategic CSR’ (i.e. using CSR activities to build a good reputation) is often seen as a way to make a corporation look good in the eyes of the public.

Corporate social responsibility Besides attracting more customers, employees might also prefer working for socially responsible corporations, and suppliers might prefer doing business with them, too. Perhaps even more significantly, investors may also prefer owning shares of socially responsible corporations. 58

Corporate social responsibility The stakeholder approach to business holds that a corporation should consider the interests and well-being of its various stakeholders by taking responsibility for the impact of its activities on customers, employees, shareholders, communities and the environment in all aspects of its operations.

Corporate social responsibility For example, a corporation’s responsibility to its employees should include efforts to ensure workplace safety, or the implementation of a fair and reasonable remuneration system, whereas its obligations to consumers should be based on recognition of their right to choose, right to be informed, and right to be heard, which implies that any practices that threaten these rights should be restrained. 60

Corporate social responsibility Society makes business possible by providing corporations directly or indirectly with what they need to succeed, ranging from an educated and healthy workforce to a safe and stable physical and legal infrastructure, as well as a consumer market for their products. 61

Corporate social responsibility Because society’s contributions make business possible, corporations have a reciprocal obligation to society to operate in ways that are deemed socially responsible and beneficial. One might say that there is an implicit ‘social contract’ between society and business. Because corporations are allowed to operate in society, it is unacceptable for them to ignore society’s expectations. 62

Corporate social responsibility There are 3 main types of arguments against corporate social responsibility, namely: the invisible-hand argument the let-government-do-it argument the business-can’t-handle-it argument 63

Corporate social responsibility The ‘invisible-hand argument’ holds that inasmuch as corporations are permitted to seek self-interest in a free-market economy, their activities will inevitably yield the greatest good for society as a whole. On the other hand, holding corporations responsible for non-economic matters will distort the economic function of business in society and undermine the free-market system. 64

Corporate social responsibility The ‘let-government-do-it argument’ asserts that we cannot trust corporations to be moral on their own, so we should rely on government regulation rather than demand corporations to self-regulate. Only the strong hand of government, through a system of laws and incentives, can make corporations behave themselves. 65

Corporate social responsibility According to the ‘business-can’t-handle-it’ argument, corporations cannot be entrusted with broad responsibility for promoting the well-being of society because corporate executives lack the moral and social expertise to make non-economic decisions. It is, therefore, misguided to rely on corporations to address issues unrelated to business. 66

Limitations of CSR Does a corporation’s objective to maximize profit exclude all considerations of ethics and public interest? Can we expect corporations to act like responsible citizens who put their legal and moral duties above their narrow self-interests? What else can we do if corporations are unable to regulate themselves?

Limitations of CSR Corporations produce much of what is good in society. At the same time, however, they also cause great harms, such as industrial accidents, pollution, and marketing of unhealthy foods or unsafe products to the public. Very often, the investors and managers of corporations pocket the profits, while society as a whole pays a heavy price.

Limitations of CSR For example, some irresponsible corporations may pollute the air, water, or land, or extract resources in unsustainable ways. The bad effects of such actions are known as ‘negative externalities’ or ‘external costs’ because the public or the environment, rather than the corporations themselves, has to bear these costs.

Limitations of CSR Corporations often make decisions based on short-term profitability rather than long-term benefit to society or the environment. The pursuit of profit can put pressure on corporations to cut costs, for example, by moving production to locations with loose environmental regulations.

Limitations of CSR For example, a corporation can reduce production cost by dumping waste into the river instead of installing a wastewater treatment facility. While many people would consider this kind of pollution unethical, the corporation may be doing so in order to cut costs and thereby maximize profit. 71

Limitations of CSR As the idea of an environmental ethic has become more firmly established within society, corporations are being increasingly pressured to adopt more environmentally and socially responsible practices; e.g. to adopt environmentally-friendly methods of production or to conserve resources through recycling.

Limitations of CSR Both law and ethics have recognized corporations’ social and environmental responsibilities. It is now generally agreed that corporations have a legal or moral duty to deal with the social and environmental problems that they have created.

Limitations of CSR Corporations have the responsibility to bear the ‘full cost’ of their business activities, such as cleaning up pollution or making compensations. For example, a factory that dumps toxic chemicals into a river upstream from a community’s drinking water should be held liable for any illness that results. 74

Limitations of CSR From society’s point of view, corporations have a responsibility to avoid intentionally or accidentally causing harm to others. When such harms do occur, corporations have a responsibility to compensate individuals who are harmed by their intentional or negligent acts.

Limitations of CSR Unfortunately, there is at present little or no effective system of global or local governance that can ensure that corporations are subordinated to the interests of the societies that they are intended to serve.

Limitations of CSR In many cases, corporate power and influence eclipses even the democratic political process itself as corporations exert disproportional influence on the making of public policy. Thus, non-government organizations (NGOs) have often taken on the responsibility to monitor corporate misconduct and pressure corporations to behave themselves.

Limitations of CSR The ‘CSR movement’, which emphasizes the adoption of voluntary CSR policies, programs and initiatives, has emerged in part as a response to pressures from NGOs. Enlisting the participation of NGOs, corporations have increased interaction with diverse stakeholders and devoted efforts to addressing specific social and environmental problems.

Limitations of CSR However, critics of the CSR movement are quick to point out that self-regulatory and voluntary CSR policies, programs and initiatives are often deliberately designed by corporations to deflect regulation and convince governments that voluntary efforts are sufficient. 79

Limitations of CSR CSR programs and initiatives, according to the critics, are little more than public relations exercises – efforts to put a good public face on the corporation while continuing business as usual – rather than serious attempts to restructure corporate policy and behavior. 80

Limitations of CSR The responsibility for regulation of corporations should rest not with the corporations themselves, nor with NGOs, but with society through a genuinely democratic process (i.e. through legislation and government regulation). Defects of corporate power are problems of corporate law, and they could only be fixed by revising the law and strengthening regulation. 81

Limitations of CSR The most powerful corporations have been, for the most part, immune from legal responsibility. Even when convicted, corporate executives are rarely held liable, and the fines corporate lawbreakers have faced pale in comparison to the profits to be made by flouting the law. 82

Limitations of CSR Evidence suggests that voluntary CSR initiatives and self-regulation cannot be seen as an adequate guard against corporate power and abuse. Efforts therefore should be refocused on holding corporations (and corporate executives) legally responsible for their wrongful actions. 83