chapter 5 corporate social responsibility this chapter: defines the idea of corporate social...

Chapter 5

Corporate Social ResponsibilityThis 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.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

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.


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 responsibilityThe duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets.


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.


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.


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.

5-7McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

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


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


1950–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

Update figure with Figure 5.2


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.


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