Lesson 1: What is CSR? Two Opposing Views
This lesson defines CSR and provides a broad understanding of the context from which it emerged. In discussing this historical development, four different arguments for CSR are presented (ethical, moral, rational, and economic). It will draw on two perspectives (economic and social) to provide a comprehensive overview of CSR, as well as illustrating the practical challenges faced by decision makers who grapple with this complex topic. The lesson finishes with a case study that looks at how broad societal issues, such as LGBT rights, are increasingly influencing the relationships between stakeholders and corporations.
Organizations are the collective structures used by people to pursue common goals. In general, these organizations come in three broad forms: businesses, governments, and nonprofits (or non-governmental organizations, NGOs). Businesses exist to pursue profit with the intention of making their owners wealthy; governments (at least in democratic societies) respond to the will of their citizens; and, nonprofits or NGOs meet the needs of people in society when the profit motive of business or the political will of government is lacking.
Though organizations are not legally compelled to be “socially responsible”—even if society could agree on a universal definition—societal expectations become embodied in tradition, laws, agency interpretations, and court rulings that form a set of expectations. Thus, we arrive at two central questions of concern to CSR:
- What is the relationship between a business and the societies within which it operates?
- What responsibilities do businesses owe society to self-regulate their actions in pursuit of profit?
These questions grow in importance as businesses grow in importance to society. Ultimately, it is business organizations that provide the most basic necessities of societal survival, including much of the wealth that funds government and nonprofit activities. Because of this broad reaching impact of business corporations, CSR has emerged as a study to better understand the answers to the above questions.Next Page: Definition of CSR
Definition of CSR
What is corporate social responsibility (CSR)? To answer this question, we need to consider the big picture questions: What is the purpose of for-profit organizations in society? Why do firms exist? What value do businesses serve for society?
The concept of CSR represents an extension of the ongoing debate about the role of business in society.
Two opposing perspectives to CSR have emerged resulting from different interpretations of the role of corporations in society—business view and societal view. In the narrow business view (or economic view), corporations contribute to society by making a profit, which supports employment, wages, purchase, investments, and taxes. Milton Friedman, one of the forerunners of the business view, argued that the social responsibility of a business is to increase its profits. Friedman noted:
"There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
From this perspective, society falls outside the zone of business; governments and non-governmental, non-profit organizations should be responsible for improving society. Friedman further argued that CSR can be a major threat to the capitalist system as the profits belong to the shareholders, not to the corporations.
Along these lines, Williamson, in his theory of transaction-cost analysis, argued that agency problems increase when managers act on behalf of non-shareholding stakeholders, and added that the central relationship between shareholders and managers will be distorted when the additional concern for stakeholders added into the relationship. Similarly, Fama and Jensen argued that shareholder value maximization should be priority for corporate managers—not the stakeholder welfare. However, the business view has been increasingly challenged by many circles in recent years, leading management scholars to develop theories that reconcile the business view with societal approaches.
In contrast, the societal view, also called the stakeholder view, argues that no one group of stakeholders has a priority over other groups, and that corporations must balance the interests of all stakeholders. In other words, the societal view holds that stakeholder welfare is maximized when corporations attend directly to all stakeholders without prioritizing the interests of some over the others. In essence, stakeholder theory emphasizes responsibilities of corporations to society and “personalizes societal responsibilities by delineating the specific groups or persons.”
CSR is then conceptualized as the notion that corporations have responsibilities to society that go beyond economic, legal, and moral expectations.
As such, the economic view suggests that businesses are only obligated to create wealth for their owners. The social view expects them to create wealth for owners, but to do so in ways that are deemed acceptable to society. CSR covers the relationship between corporations (or other large organizations) and the societies with which they interact.
What is CSR Behavior?
Corporate social responsibility has been discussed and researched for more than three decades. However there is no consensus on what constitutes corporate virtuous behavior, and there is no uniform definition of the notion.
CSR has been described as a value-laden concept wherein “corporate social responsibility and value representation concerns are not about whether values, but whose and what values, are represented in business decisions." CSR has been practiced in response to three main forces: societal demands, the desires of influential stakeholders (e.g., investors), and the ability of such activities to increase competitiveness and stock performance.
According to Carroll, the social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time. This definition suggests that CSR embraces the range of economic, legal, ethical, and discretionary actions and obligations that directly or indirectly affect the future economic performance of the firm (see Figure 1.1). Carroll suggests a hierarchy wherein discretionary issues that appear abusive may become ethical considerations. Allowed to continue long enough or over a large enough number of potential claimants and ethical issues may become legal ones. At the extreme, this hierarchy of CSR issues can eventually lead to economic impact, whether by formal societal restraints (such as laws or regulations) or less formal consumers.
Figure 1.1. The Pyramid of Corporate Social Responsibility
Carroll, A. B. (1991). The pyramid of corporate social responsibility: toward the moral management of organizational stakeholders. Business Horizons. 34(4):39-48.
Legal compliance is a necessary minimum condition for CSR. But, legal compliance does not assure that the firm’s actions will be seen as ethical or proper. Often, actions that were legal—even socially tolerated—may become unacceptable, even illegal, in a different time or place. For example, consider the history of race or gender based discrimination. Both were widely accepted by society in the 1940s and 1950s. But, with the greater political activism of later years, these widespread practices were increasingly seen as unethical, until eventually they became illegal through legislative actions and court interpretations.
Most recently, Werther and Chandler defined the concept as “responsibility among firms to meet the needs of their stakeholders and a responsibility among stakeholders to hold firms to account for their actions.” This definition is more comprehensive because it emphasizes the reciprocal role of stakeholders holding firms to account.
CSR is, therefore, a fluid concept. Importantly, it is both a means and an end. It is an integral element of the firm’s strategy, a way of maintaining its legitimacy in the larger society by bringing stakeholder concerns to the foreground. At the same time, a firm’s CSR reflects how well it is able to navigate stakeholder concerns while implementing its business model. CSR means valuing the inter-dependent relationships that exist among businesses, their stakeholder groups, the economic system, and the communities within which they exist. CSR is a means of discussing the obligations a business has to its immediate society; a way of proposing policy ideas on how those obligations can be met; as well as a tool by which the mutual benefits for meeting those obligations can be identified. Simply put, CSR addresses a company’s relationships with its stakeholders.
Arguments for CSR: Ethical Argument
Although many discussions around CSR assume an ethical component, the precise relationship between ethics and CSR is often left unspecified. The main question is: “Can a socially responsible company be unethical?” In essence, responsibility is one of the core five elements of ethics:
Ethics requires all five. Therefore, a corporation can have a strong sense of responsibility without necessarily being honest.
CSR is an argument based on two forms of ethical reasoning—consequentialist (utilitarian) and categorical (Kantian). Consequentialist reasoning justifies action in terms of the outcomes generated (the greatest good for the greatest number of people), while categorical reasoning justifies action in terms of the principles by which that action is carried out (the application of core ethical principles, regardless of the outcomes they generate).
At a more practical level, these two ethical perspectives become realized in social norms which have been accepted by the organization, the industry, the profession, or society as necessary for the proper functioning of business. They are codified with the organization in the form of a code of conduct or code of ethics, which then acts as a point of reference or guide in determining “whether a company is acting ethically according to the conventional standards.”
The violation of a society’s ethical principles regarding issues of social justice, human rights, and environmental stewardship is deemed to be ethically wrong and socially irresponsible.This premise is the foundation of the “social contract,” which is based on societal expectations that bind firms because compliance is directly related to a social license to operate. Remaining within these implicit ethical boundaries is directly related to the firm’s societal legitimacy and long-term viability.
Arguments for CSR: Moral Argument
CSR is an argument of moral reasoning that reflects the relationship between a company and the society within which it operates. It assumes businesses recognize that for-profit entities do not exist in a vacuum and that their ability to operate and achieve ongoing success comes as much from societal resources (e.g., infrastructure, rule of law) and consent (e.g., social contract) as from factors that are internal to the firm. CSR emerges from the interaction and interdependence between for-profits and society. It is shaped by individual and societal standards of morality, ethics, and values that define contemporary views of human rights and social justice. Thus, to what extent does a business have an obligation to re-pay the debt it owes society for its continued business success?
On the one hand, it can be argued that business success depends on the society that provides the infrastructure, employees, consumers, and other elements that are central to success. On the other hand, if a business must fully reflect societal costs, it may not be able to compete—especially with firms in other societies that may be able to externalize their costs (such as dumping unfiltered pollution into local waterways).
Arguments for CSR: Rational Argument
CSR is a rational argument that focuses on the benefits to performance of avoiding external constraints. Adopting the path of least resistance with regard to issues of concern makes common and business sense. In today’s globalized world, where individuals and organizations are empowered to enact change, CSR represents a means of anticipating and reflecting societal concerns to minimize operational and financial sanctions.
The loss of moral legitimacy can lead to the countervailing power of social activism, restrictive legislation, or other constraints on the firm’s freedom to pursue its economic and other interests. Violations of ethical and discretionary standards are not just inappropriate; they present a rational argument for CSR. Because societal sanctions—such as laws, fines, prohibitions, boycotts, or social activism—impact the firm’s strategic goals, efforts to comply with societal expectations are rational, regardless of moral arguments. Where compliance with moral expectations is based on highly subjective values, the rational argument rests on sanction avoidance.
Ultimately, the Iron Law of Social Responsibility suggests that in a free society discretionary abuse of societal responsibilities leads, eventually, to mandated solutions. That is, in a democratic society, power is taken away from those who abuse it.
Arguments for CSR: Economic Argument
CSR is an argument of economic self-interest for businesses. CSR adds value because it allows companies to reflect the needs and concerns of their various stakeholder groups. By doing so, the firm is more likely to create greater value and, as a result, retain the loyalty of those stakeholders. Simply put, CSR is a way of matching corporate operations with stakeholder values and expectations that are constantly evolving.
Summing the moral and rational arguments for CSR leads to an economic argument. To incorporate CSR into operations offers a potential point of differentiation and competitive market advantage upon which future success can be built, besides avoiding moral, legal, and other sanctions. This perspective argues that social contribution can be profitable and can increase competitive advantage, supporting CSR. In summary, the economic argument contains all the factors explaining why CSR is of strategic importance for businesses today.
Why is CSR important?
Increasingly, society is becoming better informed and more socially aware of what firms are doing. Businesses, especially those that survive and prosper directly from consumers, risk their success and brand name when acting in ways that are not seen as socially appropriate. What would be the impact on Coca-Cola, for example, if the employees in its Minute Maid orange juice division were seen as exploited by poor wages or working conditions?
Why is CSR Increasingly Relevant Today?
A variety of forces are heightening interest in CSR. Among these are increased affluence, ecological sustainability, globalization, the free flow of information, and brands. Affluence means choices. Citizens of wealthy countries can make choices based on considerations that are more varied and complex than simple survival and economics.
Ecological sustainability matters, from both the reality of a shared planet and the public’s perceptions of a firm’s commitment to the health and well-being of the communities in which it operates—especially since more people identify themselves as supporting ecological concerns than either major political party in the United States. And, of course, firms that do obvious ecological damage are increasingly penalized by high profile protests from activist groups such as Greenpeace, which have become particularly adept at gaining media attention.
Globalization increasingly strips down geographical and cultural barriers, so that actions in one place (even if legal and proper) are subject to evaluation from the perspective of multiple cultures, laws, and societal expectations. Globalization combined with the ever increasingly free flow of information, further underscores the “shrinking planet” metaphor. Actions and practices in one locale can jump across the globe.
Perhaps nowhere is the impact of CSR more obvious than when it comes to brands. The equity built up from customer use, advertising, and other image-shaping actions represents an often-huge investment and an important “asset” to the firm. Maltreatment of workers, defective products, and related problems can tarnish, even destroy, a brand and the investments made to create it.
- What is the purpose of the for-profit firm? What value does it create for society?
- What is the relationship between a firm and the societies in which it operates?
- What responsibility does a firm owe society to self-regulate its actions in pursuit of profit?
- Define corporate social responsibility. What arguments in favor of CSR seem most important to you? How is CSR different from strategic CSR?
- What are the four responsibilities of a firm outlined in Archie Carroll’s pyramid of CSR model? Illustrate your definitions of each level with corporate examples.
- What extent does a business have an obligation to re-pay the debt it owes society for its continued business success?
- Milton Friedman argued that “few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” What are two arguments in support of Friedman’s assertion and two against?
- What are the ethical, moral, rational, and economic arguments for CSR? Define and discuss each one briefly.
- What are the advantages and disadvantages of a firm incorporating as a benefit corporation? Is this new organizational form necessary? If you were starting a firm and you were in a state that allowed it, would you consider incorporating your firm as a benefit corporation?
Case Study: An Ethical Perspective to Competing Stakeholder Interests
Starbucks News Release (PDF)
News Article 1 (PDF)
News Article 2 (PDF)
In March 2012, National Organization for Marriage launched a global campaign called “Dump Starbucks,” urging people to boycott Starbucks. The organization claims that by advocating same-sex marriage, Starbucks offended “at least half of its U.S. customers and the vast majority of its international customers” (Dump Starbucks, 2016). National Organization for Marriage (NOM) is a nonprofit organization with a mission “to protect marriage and the faith communities that sustain it” (NOM About Us, 2016). Founded in 2007 as an organized opposition to same-sex marriage in state legislatures, NOM serves as a national resource for marriage-related initiatives at the state and local level.
In January 2012, Starbucks joined Microsoft and Nike in announcing support of a Washington state bill to legalize same-sex marriage, which ultimately passed. In response, NOM has targeted Starbucks through its "Dump Starbucks" boycott and various campaigns including a full-fledged social media campaign. The organization has launched a website called “Dump Starbucks” (www.dumpstarbucks.com/) and created a Facebook account (www.facebook.com/dumpstarbucks/). As of November 2016, its Twitter account @dumpstarbucks has 11.1K followers and its Dumb Starbucks petition has received 71,204 pledges.
In addition, the organization has promoted a parody coffee shop called “Dumb Starbucks” to boycott Starbucks.
NOM’s campaign has attracted other conservative organizations. In March 2013, TheTeaParty.net, the largest Tea Party organization, joined the campaign and shared the link on its Facebook, which attracted more over 1.6 million “Likes” and garnered thousands of comments (Delgado, 2013).
At Starbucks’ 2013 annual shareholder meeting in Seattle, investor-analyst Tom Strobhar, who is also the founder of The Corporate Morality Action Center, asked Howard Schultz whether the company’s support for same-sex marriage was hurting its stock price. Strobhar attributed his disappointment in Starbucks stock to NOM’s boycott:
It's my understanding, something like tens of thousands of people signed on this particular boycott. And then the [first quarter] after this boycott was announced, our sales and our earnings ... were [a] bit disappointing. Until January a year ago, we existed without making gay marriage a core value of our company. Hence we did quite well. (Stuart, 2013)
In essence, investor Strobhar was asking whether it was prudent to risk all shareholders on a controversial social issue that may not directly affect the company.
Course of Action
In response, Schultz noted that the company’s decision was not about economics but about embracing diversity, adding:
The lens in which we are making that decision is through the lens of our people. We employ over 200,000 people in this company, and we want to embrace diversity. Of all kinds…If you feel, respectfully, that you can get a higher return than the 38 percent you got last year, it’s a free country. You can sell your shares of Starbucks and buy shares in another company. Thank you very much. (Allen, 2013)
Schultz’s response to Strobhar is aligned with the company’s established inclusion and diversity policy:
At the heart of our business, we seek to inspire and nurture the human spirit - understanding that each person brings a distinct life experience to the table. Our partners are diverse not only in gender, race, ethnicity, sexual orientation, disability, religion and age, but also in cultural backgrounds, life experiences, thoughts and ideas. (Starbucks Diversity & Inclusion, 2016)
Furthermore, Starbucks explains its diversity policy from an economic argument:
Embracing diversity only enhances our work culture, it also drives our business success. It is the inclusion of these diverse experiences and perspectives that create a culture of empowerment, one that fosters innovation, economic growth and new ideas. (Starbucks Diversity & Inclusion, 2016)
Indeed, Starbucks has long been a supporter of same-sex marriage as part of its CSR commitment (Lii & Lee, 2012). In 2011, the company was among a group of 70 businesses and organizations that filed a brief in federal court opposing the Defense of Marriage Act, which restricts the definition of marriage to that between a man and a woman (Allen, 2013).
It is difficult to determine whether NOM boycott had any direct effect on the company’s bottom line but, based on share price, it does not appear to have had an impact. The day NOM announced its boycott, Starbucks shares were trading at about $53 a share. One month later, shares were trading at about $58 a share. However, Starbucks’ earnings, while strongly positive, came in below analysts’ estimates (BrandIndex, 2013). This exchange at the Starbucks’ annual shareholder accelerated the debate and garnered more attention. On Twitter some expressed their plans to #BoycottStarbucks:
Many conservative media have also used Schultz’s response to support their point of view:
Source: Grider, G. (October 2, 2014). Starbucks Howard Schultz Tells Anti-Gay Marriage Christians To ‘Sell Your Shares. Now the End Begins. http://www.nowtheendbegins.com/starbucks-howard-schultz-tells-anti-gay-marriage-christians-sell-shares-video/
Moral of the Story
From a business view, corporate managers should prioritize shareholder demands, as they possess power, legitimacy, and urgency (Mitchell et al., 1997). Nevertheless, Starbucks’ stand for same-sex marriage, in spite of the bottom-line concerns, challenges the traditional understanding of ethical or proper corporate behavior. Closely related to CSR, corporate ethics include all five elements: honesty, respect, fairness, compassion, and responsibility.
Diversity and inclusion have increasingly become social issues in the domain of CSR that require an ethical treatment. Because of Starbucks’ strong advocacy for social issues, the company has often pushed the boundaries of the role of business in society. By tackling controversial social issues like gun control, gay marriage and, recently, race, Starbucks has gone beyond traditional CSR, the company actively advocates for social change.
This case presents a unique challenge for corporate managers and public relations professionals, as shareholders play a dual role as the owners of a public company and activists. Unlike, conventional activists, they have a direct access to top management to voice their grievances. This case study resides at the intersection of management, public relations and social activism, and provides important insights into the boundaries of corporate social responsibility.