CH.

5: CORPORATE SOCIAL RESPONSIBILITY

What is CSR?
- is behaviour in which firms engage that considers the interests of stakeholders outside of the
firm, along with and not solely including those of the firm itself.
- Definition depends upon the perspective you take as to WHY firms might engage in CSR:
o Legitimacy – acting in the firm’s interest
 “The social responsibility of business encompasses the economic, legal, ethical,
and discretionary expectations that society has of organizations” – Carroll, 1979
 CSR is what society says it is, and the firm itself doesn’t decide, it simply reacts -
Legitimacy
o Public responsibility – acting in society’s interest
 Business corporations have an obligation to work for the social betterment –
Fredrick 1986
 Firms must go beyond simply doing what is expected, but be proactive in
improving society since its success is a result of its use of that society - Public
responsibility
o Managerial discretion – acting in the individual’s interest
 The firm’s consideration of, and response to, issues beyond the narrow
economic, technical, and legal requirements of the firm. . .(to) accomplish social
benefits along with the traditional economic gains – Davis, 1973
 Managers have to balance society and performance, but do both - Managers’
discretion

Legitimacy

- Meeting the behavioural expectations of society

o Legitimacy provides firms with access to the resources (financing, customers,
employees) they need to survive and reduces costs associated with operations (less
scrutiny, reduced taxes).
o Legitimacy = Social Acceptance
- Society grants legitimacy and power to business. In the long run, those who do not use power in
a manner in which society considers responsible will tend to lose it. (Wood, 1991)
- If power is lost, the business fails
- Economic Rationality
o Since the firm needs legitimacy to survive, it is in the firm’s best interest to act in a
manner that is socially responsible because if it loses legitimacy it will fail.
o Socially responsible for survival’s sake.
- Does not refer to specific socially responsible activities
o broader expectations, generic responsibilities
- Businesses should care about everything
 o Society expects a lot of businesses, but if the expectations are met the rewards are
great.

Public Responsibility

- Businesses are responsible for outcomes related to their primary and secondary areas of
involvement with society.
- Businesses are not responsible for solving all social problems, but they are responsible for
solving social problems they caused and to which they are related.
- Links firms with the ramifications of their operations without burdening them with too much
responsibility.
o Automakers and air pollution, recyclable cars etc.
o How strong does the link need to be? Where does the responsibility end?
- Lower behavioural expectations - not beholden to all of society
- Socially responsible behaviour is not therefore defined by “whims” of society, but by direct
results of the firm’s actions while still providing latitude within that range.

Managerial Discretion

- Managers are moral actors. Within every domain of corporate social responsibility, they are
obliged to exercise such discretion as is available to them, toward socially responsible outcomes
while at the same time maximizing profit.
- A firm’s social responsibilities are not met by an abstract organizational actor; they are met by
individual humans
o People make up firms and the people are responsible to society
o Relies on ethics, judgement and values of managers
- Managers are given positions of power to act on behalf of their organization. They should use
this power (discretion) to make their firm behave in a socially responsible manner.
- Suggests that CSR refers to acting responsibly to avoid creating problems as opposed to solving
existing problems

*Fundamental Question*

- Should businesses act in a socially responsible manner?

o Depends on your perspective:
 Economic view (Freidman)
 Ethical view
o Depends on your view of what CSR is
 - Note that each perspective can be used for both sides of the argument

Economic View

- Does CSR lead to better firm performance or does better firm performance lead to CSR?
o Answering this question is the heart of the debate

- EV POSITIVE SIDE (+)

o If CSR leads to better economic performance and shareholder wealth maximization,
then it should be followed. – Legitimacy

- EV NEGATIVE SIDE (-)

o Friedman Perspective:
 Business should only be about profit maximization
 When a business allocates resources to endeavours other than profit
maximization it is not fulfilling its fiduciary duty
o Agency problem – in whose interests are managers acting when
they allocate profits to CSR activities?
 Allocating profits to CSR activities is like a tax on the owners of the firm -
the shareholders – and firm’s do not have this right
o If I want to give to charity, I will do it with my money
 Not against CSR, only against CSR that is not profit oriented
 CSR may have indirect profitability benefits, and these should be
pursued, but the intent must be to create shareholder wealth, not
society
 Must always follow laws and ethics
 Consistent with Legitimacy and Public Responsibility perspectives
 Legitimacy – improves performance
 Public Responsibility – Legally and ethically responsible for behaviours
o General Perspective:
 Profits mean employment – less welfare, government money spent on more
beneficial outlets (schools, hospitals etc.)
 More discretionary income means more money spent on socially responsible
causes (charities)
 Businesses do not have competencies in CSR, leave it to experts
 More “trickled-down” money spent on NGOs than from firms
 CSR has a monetary cost. Money spent on CSR is not spent on wages,
innovation, efficiencies and dividends.
 Society benefits from higher profits and wages (more taxes, greater
discretionary income), innovation (high-tech jobs)
Economic View:

Ethical View

- EV Positive (+)
o Businesses are beholden to seven constituencies; thus the firm is both an economic and
socially viable entity.
 Of these constituencies’ customers are the primary responsibility because they
are the providers of revenue to the firm
o Shareholders are viewed as “providers of investment capital” but not the principles –
the firm itself is an autonomous entity
 Managers are responsible for its actions and are therefore the principles
 No agency situation exists
o Managers can and should create the culture of CSR
 Investors know what they are getting into when they invest in the firm so they
exert no control over it
 If they don’t believe in the firm, invest elsewhere
o Suggests that ethically managers must decide to act in a socially responsible manner
because they control vast resources
 Profit is one, but not the only motive (to pay back investors) but also to gain the
resources to act responsibly
 - EV NEGATIVE (-)
o Managers have a moral duty to ensure their business thrives
 Duty to: – Customers – Suppliers – Employees – Shareholders – Society
o If CSR threatens the firm’s ability to maintain its obligations to its customers and other
stakeholders, the firm should not engage in it.
 Stakeholders concerns over those not related to the firm.

Ethical View:

Varieties of CSR:
Corporate Social Responsibility

- Fundamental Question
- Should businesses act in a socially responsible manner? –
o Depends on your perspective:
 Economic view (Freidman)
 Ethical view
o Depends on your view of what CSR is
o Note that each perspective can be used for both sides of the argument

The Business Case for CSR

- Firms are more likely to be able to sustain long-term success for the benefit of shareholders if
they engage in socially responsible behaviour.
o Being good is not always directly rewarded but can be seen as an issue avoidance
strategy (which ultimately reduces potential costs and at worst, maintains profit levels).

o Increased shareholder value: CSR activities seen at worst as value neutral and in most
cases added value
o Revenue: positive relationship – attracts more customers who are often willing to pay
more
o Efficiency: waste reduction reduces costs; happy staff increase productivity
o Human and intellectual capital: attract “enlightened” talented employees
o Reduced risk profile: reduce oversight costs
o Innovation: new, better processes and products evolve out of socially responsive goals
o Legitimacy: societal acceptance = access to needed resources

Strategic Uses for CSR

- Should CSR be used strategically?

o It benefits the firm and society, so what difference does the motive make?
o CSR should be undertaken with the goal of improving society, if the firm benefits that is
fine, but CSR should not be a tool.
- Depends on your perspective.

- PROACTIVE Use for CSR

o Being socially responsible in order to;
 Attract customers
 Divert attention from other negative activities
  Reducing governmental/NGO/interest group scrutiny – reduces indirect costs
 Limiting bad press
 Improving reputation, perceptions and goodwill
 Increasing share price
o The calculation:
 Action 1 will cost $1,000,000, help 10,000 people and 100,000 people will know
about it
 Action 2 will cost $1,000,000, help 5,000 people and 150,000 people will know
about it
 Choose Action 2 – make sure your name is more predominant than the
cause
- REACTIVE Use for CSR
o Being socially responsible in order to;
 Correct past mistakes
 Clean up your image/reputation
 Respond to boycotts
 Meet legal requirements
 Appease shareholders/employees/interest groups/NGOs/governments

- Socially responsible policies

o Protects firm from prosecution and allows firm to blame individuals who violate policies
o Create a “scapegoat” to maintain image/reputation
o Good PR
 Example: Performance-based CEO pay = higher share price
o Suggests that you hold similar beliefs to stakeholders – consumers tend to use firms
with whom they share similar views
o Provides legitimacy with governments when lobbying for firm’s interests
o May create trust between the firm and activists
o Risks Involved (-)
 May create expectations that are too high to meet
 Huge problems if standards aren’t met – Enron Board purposely waiving firm’s
ethics code to allow it to approve actions it knew were unethical and illegal.
 High standards are expensive
 Good reputations are hard to earn, easy to lose, and harder to get back
 Ex. Exxon, Union Carbide, Shell
 Risk looking like you are being self-serving rather than really interested in being
socially responsible

Key CSR Issues

- Bribery, extortion, favouritism, nepotism, embezzlement

- Actions in one country can have implications for the entire firm
- Corruption Perceptions Index – how does corruption affect relative comparative advantage?
- 300 million child labourers – why?
o Poverty
o Lack of educational opportunities
o Family breakdown
o Cultural practices
o Cheap, obedient labour
o Nimble fingers
o Inadequate or unenforced laws
o Poor infrastructure
 Unfortunately, they are not just making something
 Prostitution
 Soldiers
- CSR, as it is defined and utilized by business, is not “ethical”. It is used as a tool to fool us.
Businesses are good at it and WE FALL FOR IT!

- Consumer/Investor Expectations and CSR

o Realities of Western consumer and investor expectations make operating in a truly
ethical way very difficult, because ethics cost
o The only way to meet price and profit expectations is to move operations off-shore to a
developing country and exploit lower factor costs – if a company doesn’t meet
expectations someone else will
o Consumer and investor expectations create a one-way street that must end in
exploitation –
 Keep in mind the consumers are you and the investors are not just big
institutions, they are you, your families and me too
o How can we vilify businesses for doing exactly what we tell them to do? Whose fault is it
really?
o If we really want change we have to change our expectations – if there is a business case
for ethics, businesses will follow it
- Religion Problems with CSR
o Perspective on what is “socially responsible” is dependent upon a given stakeholder’s
morality or ethics which are often faith or religion based and not universal
o Based on morality and ethics which are often faith or religion based and not universal –
who is right and who is wrong and who is in the position to judge?
 Doing something “right” in one country may mean doing something “wrong” in
another