CORPORATE SOCIAL RESPONSIBILITY
Introduction:
Through their market activities firms contribute to socias well-being by meeting consumer demand, providing jobs, developing new products, and paying taxes that fund public programs. Through their nonmarket activities firm shape their environment by, for example, supporting free trade and socially efficient approavhhes to environmental protection. Firms also give representation to stakeholders whose interest might not otherwise be represented in public processes.
Many firms go beyond what is required by their market and non market environments and attempt to serve directly the needs of their stakeholders or, more broadly, of society. For these firms, successful performance requires not only compliance with the law and public policies but also requires fulfilling broader responbilities. Firms make charitable contributions, provide direct assistance to community organizations, support schools, provide employee and community education programs, establish programs to aid the didsanvantaged.
The previous chapter provide a basis for addressing issues in the market and nonmarketenvirnments of business. In these chapters the objective of a firm was assumed to be the maximization of its market value, and the focus was primaly on the non market challenges that various interst directed at firms. Social responsibility focuses less on pressueres from interest and more on normative principiles that identify duties based on conceptions of well-being, rights, and justice. The content of social responsibility is developed in the following chapters in terms of ethics systems and their application in management, and chapter 21 and 22 addres the implementation of ethics systems and concepts of corporate responsibility.
The Corporate Social Responsibility Issue
The concept of corporate responbility is poorly defined. For some firms its tent ia a moral commitment to certain principles or to the altruistic redistribution corporate wealth from stakeholders to others. For other firms it is currently fashion rhetoric for communicating with external stakeholders; for others it is a thin disg for profit maximization. There is no conclusive empirical analysis on the relation between action taken in the name of CSR and corporate financial performance as measured, for example, by competitiveness and profitability.
Advocates of CSR argue both that normative principles demand redistribution firms and that if firms do not meet the expectations of society with regard th their some a moral motivation, whereas the second argument pertains to response to, a threat. A third argument made by some advocates is that firms that tarily take actions in the cause of CSR will be rewarded in the marketplace, for example,by increased demand for their products. Others may do so defensively to avoid external pressure from interest groups and activists.
This chapter also distinguishes between socially responsible policies that simply represent sound business practice. Attention to consumer demand sound business practice and requires no justification other than the remuneration provides, similiarly, creating a culture that builds mutual commitment between the and its employedes requires no justification beyond the benefits it provides. The strategic use corporate social responsibility to incroduction profits thus should be distinguished from morally motivated actions. The motive taking an action are also important for distinguishing between socially responsibility activist group to minimize the damage it could impose should be distinguishing from action taken taken voluntary by firm.
The Role Role Of Business In Society
This section presents and critiques perspectives on the role of business in social and the following section presents two contrasting conceptions of corporate social responsibility.
THE EFFICIENCY PERSPECTIVE
The classical view of the role of business in society is based on the economic that human well-being is served by the efficient use of society’s resources and that free enterprise system is the best means of achieving that efficiency. Particularly period of rapid technological progress, innovation, and the globalization of market efficiency and competitivieness are necessary for improvements in the social being-or even its maintenance. The best means of achieving economic efficiency through the private enterprise system with incentivies provided by institutionprivate property, as implemented through the corporate form, with market as institution for organizing economic activity.
As adam smith (1776) concluded, the surest way to achieve well-being place resources in the hands of individuals and allow them to compete in market response to consumer demand. Not only are market the best means scasrce resources to society’s needs, buy the are also a source of protection, for summers who can turn to other suppliers if they become dissatisfied with product service.
From this perspective the role of business in society is to generate well-being through economic efficiency. Private property, the corporate form, and markets and principal institutions for organizing economic activity.
MARKET CAPITALISM AND MANAGERIAL CAPITALISM
The corporate form involves a separation of management of ownership. This separation is essential for the efficient allocation of capital, but is also gives managers a degree of disttrection to pursue interests other than those of owners. The separation of ownership from management and the resulting managerial distraction means that adam smith’s market capitalism-the realiance on markets to direct the allocation of resources-coexists with managerial capitalism-the realiance on managers for the allocation of resources.
In principle managerial capitalism could be more efficient than market capitalism. It allows the accumalaion of resources through retained earnings and their allocations whitin the firm without having to incur the transactions costs of raising funds in the capital markets. It my also have advantages if management has information whose value would be dissipated if disclosed in order tp rise capital. Managerial capitalism, however, can result in inefficiency when the incentivies of management are not structured properly. For example, some firms cross-subsidize losses in one line of business with profits from another line of business.
THE SOCIAL RESPONSIBILITY PERSPECTIVE
The social responbility perspective focuses on roles for business identified by concerns that extend beyond economic efficiency. Those roles may stem from societal needs not otherwise adequately addressed or from the consequences of market imperfections such as externalities. They may also stem from concerns that government is either unable or unwilling to address.
Business leaders advocate corporate social responbility for a variety of some argue that there are societal objectives that can be achieved only through corporate action. Business, for example, may be more efficient than government or cational institutions training workers for certain jobs. Others business leaders restraint on pursuit of profits and for self-regulation in the hope that it will additional government intervention and regulation.
Conceptions Of The Social Responsibility Of Business
CORPORATE SOCIAL RESPONSIBILITY AS PROFIT MAXIMIZATION
Friedman (1970) argues that corporate responsibility is”to conduct the busin accordance with desires, which generally will be to make as much possible while conforming to the basic rules of society, both those embodied in ethical custom. “ the objective of a corporation thus is the maximization of its profits, or market value, subject to the constraints imposed by the of society. Friedman concludes that those whoe argue that a “corporate executive’ social responsibility’…must mean that he is to act in some way that is not interest of his employers”; that is, shareholders.
He argues futher that corporate executives who serve some social acting as civil servants by imposing taxes on shareholders and making that shareholders would not approve. They act as if”political mechanisms, not mechanisms, are the appropriate way determine the allocation of scarse resources to alternative uses,” according to friedman, that amounts to socialism rather than capitalism.
From Friedman’s perspective, a corporation is a voluntary association of individuals who have joined together for a mutual purpose. That purpose may be the generation of profits in wich they will share or the achievement of some social or nonprofit objective. The corporation is managed by agents-the managers-who are to operate it in the best interest of the principals. In an efficient capital market, shareholders unanismously prefer that the firm be operated to maximize its market value. If management does not maximize the value of the firm market for control through a takeover or proxy contest will replace that management-if shareholders have not already done so.
THE STAKE HOLDER CONCEPT
As the business roundtable emphasizes, a firm interacts with a number of constituencies, including employees, suppliers, customers, the communities in which its facilities are located, and the public in general. To the extent that these constituencies have an interest or stake, in their relationship with the firm, they may be refered to as stakeholders.a stakeholder relationship center on an exchange, as when an employee provides labor service to affirm in exchange for wages. Both parties presumably benefit from the continuation of such an exchange relationship. Similarly, the firm may have a stake in the relationship with employees to the extent that wages are less than the value of employees’ contributions plus the cost of finding and training replacements. Both the firm and the employees then have incentives to take into account the interest on the other side of the relationship. Their stakes are voluntarily maintained through bargaining and the labor market.
Strategic Corporate Social Responbility
Some firms use the rhetoric of corporate social responsibility strategically to maximize their profits. From a defensive perspective, some firms act to reduce the likelihood that stakeholders will damage the firm either through actions taken in markets or in the non market environment. Consumers may stop buying a product such as canned tuna employees or communities may sue to block the closing of a plant; and consumer and environmental interest groups may intervene in regulatory proceendings. Conversely, if consumers will pay a premium for green product or for organic foods, a firm that supplies those products is responding to market forces and may be motivated by self-interest. Activitits may bequite willing to praise a firm when it concedes to pressure, but if the motivation the policy was to avoid the harm brought by activists, the firm can simply be maximize. In contracts, CSR involves going beyond profit maximization.
Policies that respond to interest of stakeholders or advocacy groups can build support in the market and the nonmarket environments. Firms may develop customers, suppliers, and local communities whose support they can call on if need expand their facilities or influence government policy.
Consideration of stakeholder interest is important because implicit relations and contracts can in some cases be more efficient than explicit bargaining and tracting. This may involve the garanting and honoring of trust and the cration of istic expectations about how issues not covered by explicit agreements, such as contracts, will be addressed. To the extent that employees, customers, suppliers, communities understand their mutual interest in the communication of their relationships, all parties can benefit.
Responsible policies may provide better access to government institutions their officeholders. This may icrease the effectiveness of lobbying and other policy strategies, wich can result in more favorable government policies or responsible policies may also result in activist having greater trust in the firm may provide an opportunity to communicate with them in the event of an non market issue.
Examples of corporate social responsibility?
ARCO AND GASOLINE PRICE RESTRAINTS
After Iraq in invaded Kuwait in 1990, crude oil prices doubled, and the price increase was quickly reflected in higher gasoline prices. Three hours before president George h.w Bush asked oil companies’ to do their fair share to limit their price increas’, ARCO annauced that it would freeze prices for gasoline, diesesl, and aviation fuel in the five western states in which it operated. Within 10 days ARCO was forced to withdraw its freeze on diesel and aviation fuel because its supplies were running out. The company, however, increased its whosale gasoline price by only four cents a gallon, whereas gasoline on the spot market had increased by 20 cents a gallon. Demand was so strong that despite daily deliveries many ARCO stations ran out of gasoline every day for hours at a time. Within two weeks ARCO ended the freeze
From the perspective of economic efficiency, a price below cost encouranges consumption and dampens the incentives for exploration. The oil price controls imposed during the 1970s, for example, were estimated to have cost the united states billions of dollars a year by discouraging production, encouraging higher consumption, and strengthening the OPEC cartel. If ARCO had wanted to avoid taking advantage of a price increase resulting from a crisis, it could have priced at market levels to promote economic efficiency and given the additional profits to charity.
Some analysts speculated that ARCO’s freeze was politically motivated to increase its standing at a time when it was engaged in a campaign to open the artic national wildlife refuge to oil exploration. Others viewed it as lessening the calls for oil price controls or a windfall profits tax, both of which had been imposed in the 1970s others pointed to the personal relationship between president bush and ARCO’s chairman, who had contributed $ 100.000 to the republicanparty in 1988.
Corporate Governance
CONSTITUENT REPRESENTATION ?
If corporations are to take into account stakeholeder and broader public interest business roundtable suggest, should stakeholders be represented in corporate making processes? One approach would be to allow them to participated in corporatedecision making the board of directors level , with board members selected and representing the principal constituencies. During the carter administration activist supported an unsuccessful legislative effort, refered to as the “ corporate democracy act”, that would have required board representation to stakeholder group.
Most firms opposebboard representation of of constituent groups the business roundatable (1990, p. 18) stated:” we reject the notion of so called constituency directors. Individuals directors responsible to particular claimant groups would introduce the board disive and adversary atmosphere which would obstruct the effective performace of enterprise.
A few firms have included union leaders on their boards, but some union leaders subsequently resigned because of concerns that their independence might be communitation on supervisory boards and for large companies on the management board united automobile workers union received a seat on the management board Daimler Chrysler when the two companies merged.
SOCIAL ACCOUTABILITY
Accountability continues to be an issue for firms that adopt corporate social responsibilities. Some firms experimented with independent”social audits” of their some published those audits.
Many firms now conduct their own assessments of social performance. Some of these assessments BP provides an extensive and detailed report on its green house gas emissions including a report on an independent audit of its individual facilities. Dow chemical provides a detailed report on its environment, health, and safety performance in 1990 Ford began providing a report on its social performance and its commitments to fituar goals.
Accountability is not assessed by firms but also incolves external monitoring and evaluation of performance by activist and interest groups. A number of “socially responsible” mutual funds have been established and refuse to hold shares in cigarette companies, weapons manufactures, or firms that damage the environment, several independent organizations provide institutions, such as universities and pension funds, with evaluations withdrew its highest rating for the body shop. Other organizations such as the investor responsibility research center provide evaluations on corporate policies on particular issues that are the subject of shareholder resolutions voted on at annual shareholder meetings.
THE DUTIES OF BOARDS OF DIRECTORS
Corporations are managed under the direction”. Of their board of directors, and board members have fiduciary responsibilities. The legal oblications of directors generally fall into categories refered to as the duty of loyality and the duty of care. The duty of loyality pertaints to conficts of interest and requires that directors serve the interest of the corporation and its shareholders. According to Clark (1985, P.73) “case law on manager’s fiduciary duty of care can fairly be read to say that the manager has an affirmative, open-ended duty maximize the beneficiaries’ wealth…” The duty of care requires directors to take care in their direction of corporation under the prudent person standard and to make informed decisions.
The courts judge the discharge of the obligations directors according to a compamon law standard referred to as the “business judgment rule.” Under this standars actions taken by the board generally are not subject to judicial review if’they are taken in accord with the duty of lyality and the duty of care. The business judgment rule I based on the view that courts have no special expertise in second-guessing business decisions and that business decisions making would be unduly hampered if it were subject to judicial review.
If directors do not exercise due care, they may be held liable. In Smith v. van gorkom (1985), 488 A.2d 858(Del), the Delaware Supremee Court held that the directors of trans Union Corporation were grossly negligent, and hance not protected by leveraged buyout. A subsequent case, Hanson Trust PLC v ML SCM Acquisition (1986), 781 F.2d 264 (2nd Cir.1986), extablished that being adequately informed is not sufficient to be protected the business judgement rule. Directors must be informed when they make decisions. Consequently, board now seek the advise independent experts is any valuation decision and in many other decisions as reliance on experts is not sufficient, howefer, and directors are required to into the content and quality of the reports given by management. The Van Gorkom and Hanson decision caused the cost of directors and officers insurance to sharply. In addition to legal requirements, boards have anumber of specific roles functions. The business Roundatable (1997, pp. 4-5) identified dive principal of the board:
i. Select , regulary evaluate and, if necessary, replace the cief executive officer, determine management compensation, and review succession planning
ii. Review and, where appropriate, approve the major strategies and financial and others objective, and plans of the corporation.
iii. Advise management on significant issues facing the corporation.
iv. Oversee processes for evaluating the adequacy of internal controls, management, financial reporting and compliance, and satisfy it self as to the adequancy of such processes.
v. Nominate directors an ensure that the structure and practice of the board provide for sound corporate governance.
THE MARKET FOR CONTROL
The market for control supervises the actions of management and directors through mergers, acquisitions, hostile takeovers, and proxy contents and thereby disciplines management by providing incentives to serve shareholder interest. Honower, many managers prefer to be insulated from the market for control, arguing that they are best able to chart the firm’s course. Investorsoften disagree and favor the discipline of the market to the direction of management; that is, they prefer market capitalism to managerial capitalism. For example, through a series of acquisitions, united airlines, which was renamed allegis, had included in its system Hertz Rent-A-Car, Westin Hotels, and Hilton international. Pressure on allegis for better financial performance caused its board of directors to replace its CEO. Under new management allegis was broken up, with UAL, inc. The surviving entity. In his letter to shareholders, the new chairman and CEO wrote: My objective..has been…enhancing nar term stocksholder values and the goal of permitting United Airlines to operate successfully and gain in value in the future in a very competitive environment…we have determined to proceed immediately with the sale of all of our non airline business-Hertz, Westin, and Hilton International-and to distribute the net proceeds from those sales to stakeholders.
Institutional investors are an increasingly important force in the market for control. During the 1970s and most of the 1980s, institutional investors were rerelatively passive and seldom attemted to influence the management of the firms whose they held. Shareholder resolutions tended to focus on issues such as operating in south Africa, and institutional investors seldom initiated resolutions.nevertheless, although market for control is active and provides discipline to managers and considerable it’s the exercise of managerial capitalism, the imperfections in the market for corporate leave some, and in many cases considerable, room for management to guide a decisions as it chooses.
Under pressure from a number of corporations and organized labor. Pennsylavania enacted an anti-takeover law intended to protect its firms and the jobs they provided the state. This event provided evidence on both the market for control and management responses to the protection of firms and their management. A unique feature law was that it gave corporations a window during which they could opt out of more of the law’s protective provisions. The capital market reaction to the occurred soon after the bill was introduced in Pennsylvania fell over 5 percent relationship the corporate standard & poor’s 500 index. As the likelihood increased that the would pass, the gap was 6.9 percent. Since some firms were expected to opt out of the law decrease in market value for those firms that were expected to choose the protection of the law was considerably higher. The capital market penalizes thoses companie protect management from the market for control.
Summary
The role of business in society and the extent of its social responsibilities remained jects of disagreement. The duties of care and loyality and the business judgement leave considerable discretion to directors and management, but management free to rely on its personal preferences for charting the paths of the firms they management and directors face continuing pressure for improved financial performance, which limits management’s discrection to pursue social objectives.
In assessing what constitutes corporate social responsibility, it is impor consider the motive for action, whether it was taken based on principles, in to pressure or to maximize profits. Actions taken to benefit shareholders by responding to pressure and action that maximize profits differ from actions taken in response to the nedds of constituents or moral arguments to justify actions taken indenpendently of those considerations is not social responsibility to its content and motives.
The relation between social responsibility and economic performance remains unclear, but many companies argue that the two can, and do, go hand in hand. Even Friedman’s dictum to maximize profits is subject to the limits of the law and ethical custom, both of which leave a gray area between what is clearly responsible and what is clearly irresponsible. On such issues manager obtain guidance from two primary sources. The first is government, which proscribes as well as prescribes certain actions and provides incentives to adopt certain types of policies. The tax deductibility of philantroppic contributions and the tax advantages provided for hiring disadvantaged youths are examples of such incentives. The second source of guidance is ethics. Ethics provides a basis for reasoning about and evaluating actions and policies. The content of social responsibility ultimately is found in those principles and their moral foundations.
