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5 - 2 Chapter 5 Corporate Social Responsibility This chapter:  Defines the idea of corporate social responsibility and explains how it has expanded in meaning and practice over time.  Explains more about how corporations carry out their social responsibilities.

5 - 3 Merck & Co., Inc. Opening Case  For centuries river blindness, or onchocerciasis, has tortured humanity in tropical regions.  In 1975 scientists at Merck discovered a compound that killed animal parasites. Introduced as a veterinary drug, they believed it could also help humans.  Neither those in need nor their governments could afford to buy the drug.  In 1987, Merck decided to provide the drug at no cost. Merck’s donations of medicine are a stellar example of old- fashioned philanthropy the way it has been done in America since the rise of big companies.

5 - 4 The Evolving Idea of Social Responsibility  The fundamental idea is that corporations have duties that go beyond carrying out their basic economic function in a lawful manner.  Over time the doctrine has evolved to require more expansive action by companies largely because:  Stakeholder groups have gained more power to impose their agendas  The ethical and legal philosophies underlying it have matured Corporate social responsibility The duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets.

5 - 5 Social Responsibility in Classical Economic Theory  Throughout American history, classical capitalism has been the basic inspiration for business.  In this view, a business is socially responsible if it maximizes profits while operating within the law.  The idea that markets harness low motives and work them into social progress has always attracted skeptics.  Today the classical ideology still commands the economic landscape, but ethical theories of broader responsibility have worn down its prominences.

5 - 6 The Early Charitable Impulse  Most colonial era businesses practiced frugality, yet charity was a coexisting virtue.  The wealthy endowed social causes as individuals, not through their companies.  Steven Girard changed the climate of education in the United States by bequeathing $6 million for a school to educate orphaned boys.  John D. Rockefeller systematically gave away $550 million over his lifetime.  Andrew Carnegie gave $350 million over his lifetime to causes that would elevate the culture of a society.  Carnegie believed fortunes should not be wasted by paying higher wages or giving gifts to poor people.

5 - 7 The Early Charitable Impulse (continued)  People such as Andrew Carnegie and Herbert Spencer believed in the doctrine of social Darwinism when it came to charity.  Social Darwinism held that charity interfered with the natural evolutionary process in which society shed its less fit to make way for the better adapted.  Additionally, courts consistently held charitable gifts to be ultra vires (beyond the law) because charters granted by states when corporations were formed did not expressly permit them.

5 - 8 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries  Giving, no matter how generous, was a narrow kind of social responsibility often unrelated to a company’s impacts on society.  During the Progressive era, three interrelated themes of broader responsibility emerged:  Managers were trustees  Managers had an obligation to balance multiple interests  Many managers subscribed to the service principle

5 - 9 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries (continued)  Henry Ford – touted citizenship but was ultimately unconcerned about the welfare of his employees.  General Robert E. Wood – believed in responsibility to customers, the public, employees, suppliers, and finally stockholders.  1920s and beyond, organized charities began forming to which corporations contributed:  Community Chest  Red Cross  Boy Scouts

–The Present  Contemporary understanding of corporate social responsibility formed during this period.  Social Responsibilities of the Businessman  Dissenters to this theory were conservative economists who claimed that business is most responsible when it makes money efficiently, not when it misapplies its energy to social projects.  1971 – Bold statement by the Committee for Economic Development outlining three concentric circles of responsibilities.  1981 – Statement on Corporate Responsibility from the Business Roundtable.

Basic Elements of Social Responsibility

General Principles of Corporate Social Responsibility  Corporations are economic institutions run for profit.  All firms must follow multiple bodies of law.  Managers must act ethically  Corporations have a duty to correct the adverse social impacts they cause.  Social responsibility varies with company characteristics.  Managers should try to meet legitimate needs of stakeholders.  Corporate behavior must comply with norms in an underlying social contract.  Corporations should also accept a measure of accountability toward society.

Are Social and Financial Performance Related?  A recent review of 95 studies over 30 years found that a majority (53 percent) of businesses showed a positive relationship between profits and responsibility, while only 5 percent showed a negative one.  Results inconsistent and ultimately inconclusive due to methodological questions.  Safe to say corporations rated high in social responsibility are no less profitable than lower rated firms.

Corporate Social Responsibility in a Global Context  By the end of the twentieth century the doctrine of corporate social responsibility had been widely accepted in industrialized nations.  Recent debates over the duties of corporations in their international operations.  International law is weak in addressing social impacts of business.  Giant corporations may not be subject to strong laws and regulations in foreign countries.  In adapting to global economic growth corporations have used business strategies that distance them from direct accountability or social harms.  More national regulation of multinational corporations is unlikely.

Corporate Social Responsibility in a Global Context (continued)  Extraterritoriality – enforcement is problematic.  Nongovernmental organizations (NGOs) – voluntary organizations becoming powerful advocates of restricting corporate power outside the borders of industrialized nations.  Pushed for UN-sponsored conferences on the environment, population, human rights, social development, and gender.  Soft law – statements of philosophy, policy, and principle found in nonbinding international conventions

Global CSR: Development of Norms and Principles  Norm – a standard that arises over time and is enforced b social sanction or law  Principle – a rule, natural law, or truth used as a standard to guide conduct  Milestones in the development of norms  U.N. Universal Declaration of Human Rights  Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy  Norms on the Responsibilities of Transnational Corporations

Global CSR: Codes of Conduct  Codes of conduct set forth aspirations, principles, guidelines, and rules for corporate behavior.  Created by companies, trade associations, NGOs, governments, and international organizations.  The target is the corporation  The code’s effectiveness depends on how the corporation carries it out.  Many codes are weak because they lack the force of law

Global CSR: Reporting and Verification Standards  Sustainability reporting – the practice of a corporation publishing information about its economic, social, and environmental performance  Two problems of sustainability reporting:  Defining and measuring social performance is difficult  Reports are not comparable from company to company

Global CSR: Labeling and Certification Schemes  Influence the market on the demand side.  Criteria for labels set by industry, NGOs, unions, and sometimes governments.  Certifications promote many ideals including human rights, fair trade, and campaigns against child labor.

Global CSR: Management Standards  Eco-Management and Audit Scheme (EMAS)  International Standards Organization (ISO)

Global CSR: Social Investment and Lending  U.N. Principles for Responsible Investment require signatories to consider a company’s environmental, social, and governance performance when they invest.  FTSE4Good Global Index is intended to set the world standard for investors seeking “companies that meet globally recognized corporate responsibility standards.”  International Finance Corporation (IFC) seeks to promote development and reduce poverty by funding projects for corporations.

Global CSR: Government Actions and Civil Society Vigilance  Governments advance corporate responsibility through binding regulation and by actively promoting voluntary actions.  NGOs watch multinational corporations and police actions they see as departing from emerging norms.

Assessing the Evolving Global CSR System  As multinational corporations grew in power with the expansion of global trade, a perceived deficiency in regulation was countered by action within civil society.  No company can remain aloof from the emerging global CSR system that promotes and enforces corporate adherence to international CSR standards  An important issue is whether or not the emerging system is the most appropriate way to regulate large corporations.

Concluding Observations  Historically, corporations have been motivated primarily by the central focus on profits.  Corporations are now being pressured to alter this focus.  The idea of corporate social responsibility has continuously expanded in meaning.  The power of stakeholders to define corporate duty has increased.  The explosive growth of global trade and global corporations has created new standards and practices of social responsibility tied to global norms.