Corporate Social Responsibility
Introduction
The modern corporation as a legal entity was born of enterprises that were, originally, organisations chartered to provide public benefit (Hiller, 2013). Some might argue they have strayed from their roots. This essay critically examines one such claim from Devinney (2009: 44) (hereafter ‘Devinney’s claim’) that ‘…the notion of a socially responsible corporation is potentially an oxymoron because of the naturally conflicted nature of the corporation.’ Through examining the evidence, this essay finds Devinney’s claim ignores several important factors (beyond the nature of corporations) influencing whether corporations are socially responsible. Additionally, it questions whether the ‘nature of the corporation’ is ‘naturally conflicted’ at all.
To arrive at these conclusions, this essay first examines complexities of defining ‘corporate social responsibility’ (CSR) discussed in the literature, particularly given contextual factors that alter what constitutes CSR. Second, it examines motives for why corporations engage in socially responsible behaviours. Third, it compares corporate structures to determine whether corporations are, per Devinney’s claim, ‘naturally conflicted’. Based on this discussion, the essay presents a theoretical model offering possible explanations for when corporate behaviour should and should not be expected to be socially responsible. Moreover, this essay demonstrates that whether ‘socially responsible corporation’ constitutes an oxymoron is context specific, depending on how one defines ‘corporation’ and what society deems socially responsible behaviour on their part.
Defining ‘CSR’ and ‘corporation’
The definition of CSR remains a topic of debate in the academic literature (Virvilaite & Daubaraite, 2011) and has evolved over time (Carroll, 1999). A general lack of consensus on a precise definition continues, however, although evidence of firms’ adopting CSR policies abounds (Wan-Jan, 2006). The lack of consensus on the meaning of CSR proves problematic, however, when measuring and comparing corporate social performance (CSP). Without standardised reporting, comparing CSP across corporations will remain difficult, and CSR efforts may fail to produce CSP at socially optimal levels.
Looking at corporations narrowly as accountable above all to maximise shareholder value (the notion of shareholder primacy), corporations are conflicted anytime doing good by society and by shareholders stand at odds. But taking ‘corporation’ to include corporations that are set up to include other factors besides profit maximisation in their decisions (such as Benefit Corporations (BCs) in the U.S. and community interest companies in the U.K.), then the oxymoron disappears (as does the ‘naturally conflicted nature of the corporation’). Moreover, in practice, even traditional corporations have flexibility to act socially responsibly, and this essay provides several examples of both traditional corporations and BCs acting socially responsibly.
Ultimately, CSR is whatever the society in which a corporation operates expects of corporations regarding their behaviour towards society. What different societies deem ‘socially responsible’ corporate behaviour, however, varies across time (Carroll, 1999), geography (Galego-Álvarez, Formigoni, & Pompa Antunes, 2014; Kampf, 2007; Soboleva, 2006; Tobey, 2012), culture (see Rashid, Abdeljawad, Ngalim, & Hassan, 2013), and corporation type (Smith, 2011) (as already discussed), among other factors. For example, Kampf (2007) illustrates how different societal expectations in the U.S. and Denmark for socially acceptable corporate behaviour drive different CSR reporting styles by Wal-Mart and Maersk. Rashid et al. (2013) show how cultural and religious values influence what society expects of corporations—thus modifying the definition of socially responsible corporation—giving the example of Islamic financial institutions, for which societally expected pro-social behaviour includes offering interest-free loans. These are only two examples of the much broader point that the definition of CSR is driven by societies. Thus, any discussion of whether a socially responsible corporation is an oxymoron must account for different expectations of what constitutes CSR in different contexts.
Motives for undertaking CSR
Firms engage in CSR-related activities for a variety of reasons. The way the public perceives these motivations may be as important in whether the public criticizes the corporation’s actions as the actions themselves. Thus, one reason corporations engage in CSR-related activities is to manage corporate image (Virvilaite & Daubaraite, 2011), thus protecting future profits. For Graafland & Mazereeuw-Van der Duijn Schouten (2012), corporations may adopt CSR for financial, ethical, or altruistic reasons. Financial incentives could include anything from having cheaper access to credit (Attig, El Ghoul, Guedhami, & Suh, 2013) to creation of long-term shareholder value (Bénabou & Tirole, 2010; Silberhorn & Warren, 2007). For these extrinsic motivations, shareholder primacy and the public interest are aligned. Whenever shareholder primacy and public interest are aligned, socially responsible corporate behaviour is expected and is not oxymoronic. For example, any corporation that can cut production costs through material efficiency gains can both improve its bottom line and achieve the socially responsible outcome of reducing environmental impact. The intrinsic motivators of an ethical or altruistic nature, however, may be harder to justify to shareholders if they do not align with profit maximisation. Bénabou & Tirole (2010) point to ‘insider-initiated corporate philanthropy’ (p. 1) as one such motivation that may or may not be palatable to shareholders and investors. Ultimately, such goodwill investments may be justifiable as profit maximising, however, if framed as an investment in securing licence to operate from society over the long run.
To expand on this last idea, Kotchen & Moon (2012) find that corporations undertake CSR to offset corporate social irresponsibility (CSI). Thus, corporations that either perceive themselves or are perceived by the public to do more CSI do more CSR as a way to secure their licence to operate. Examples include corporations operating in extractive industries, such as supermajor oil companies, which are expected to make and maintain significant community investments (e.g., see International Petroleum Industry Environmental Conservation Association, 2008) to gain sufficient favour in a developing country’s government’s eyes to receive permission to drill.
For Garriga & Melé (2004), the breakdown of motivations is among instrumental, political, integrative, or ethical reasons. Thus, they suggest ‘the necessity to develop a new theory on the business and society relationship, which should integrate [the] four dimensions’ of ‘profits, political performance, social demands and ethical values’ (ibid., p. 51). Later in this essay, a theoretical framework will be proposed to account for the dimensions discussed in this section.
Corporations may also engage in CSR as a strategic move to differentiate themselves from competitors, either to attract or retain employees (Hsieh & Chan, 2012) or customers. Kemper, Schilke, Reimann, Wang, & Brettel (2013) find that, in highly competitive markets, marketing a firm’s CSR is associated with stronger performance against competitors. When corporations engage in CSR for such strategic purposes, they are putting shareholders first. Consumers also play an important role in driving CSR. Golinelli (2008) and Morrison & Bridwell (2011) both discuss the power consumers have in driving CSR based on their purchase decisions. Ultimately, a corporation is financially bound by its customers’ preferences, and CSR performance can have an effect on bottom lines. In this sense, CSR is arguably in the long-term financial interest of every corporation.
In summary, the findings cited in this section suggest that much of what is termed CSR is actually acting in the corporation’s self-interest. This does not diminish the socially responsible nature of the corporation’s actions; rather, it shows that shareholder primacy and CSR objectives may not be at odds as often as believed. This conclusion calls into question Devinney’s claim that corporations are naturally conflicted organisations.
Corporation structures: naturally conflicted?
Traditional corporations
In their traditional conception, corporations are first responsible to their shareholders for financial performance. In a strictly theoretical sense, this notion of shareholder primacy limits the ability of traditional corporations to pursue public interest to those occasions when the public interest and shareholder profit maximization overlap. As illustrated earlier in this essay, these opportunities do exist. Any process efficiency gains are a good example. However, if a corporation is expected to be profit maximizing in all situations, then the term ‘socially responsible corporation’ may constitute an oxymoron whenever laws or social pressures are too weak to require corporations to be socially responsible, particularly if the corporation is able to hide the social impacts of its operations. A profit-maximising corporation would seek to exploit every loophole and every market failure that enables it to be more profitable. Thus, when confronted with the choice between being socially responsible (even as judged by board members) and maximizing profit, traditional corporations are legally bound to maximize profit. The sale of Ben & Jerry’s to Unilever (the highest bidder) and the contentious relationship between craigslist co-founders and investor eBay are examples. In both cases, the outside investor (Unilever and eBay, respectively) lacked dedication to the founders’ social values, but shareholder primacy was invoked as justification (Hiller, 2013). The line between what is best for shareholders and a company’s social values can be difficult to establish, however, since a corporation’s success may be rooted in its dedication to its social values. If a corporation has acquired a loyal following of customers and investors based on such values, turning from them in the name of profit maximisation may actually backfire. Also, as previously discussed, being socially responsible may always be in the long-term best interest of the corporation if continued social responsibility maintains the corporation’s licence to operate and competitive advantage as consumer preferences for more responsible corporations evolve.
In practice, however, even traditionally structured corporations have leeway to make socially responsible decisions. At Apple’s latest annual meeting, a shareholder challenged CEO Tim Cook on the profitability of Apple’s renewable energy investments. Cook is reported to have replied: ‘If you want me to do things only for ROI reasons, you should get out of this stock’ (Shankleman, 2014). Cook also pointed to the company’s efforts to make its products accessible to people with disabilities and its concern for worker safety conditions as times when it considered factors other than ROI in decision making (ibid.). Apple is not the only corporation taking socially responsible decisions in its business practices. Other corporations such as Unilever, IBM, and P&G (and many others) have embraced sustainability as part of their corporate culture (Emerald Group Publishing Limited, 2013). Such actions are pushing the boundaries between shareholder primacy and socially responsible corporate action and may be in response to the negative light in which corporations have been cast since the financial crisis (see Hiller, 2013) or simply as a response to competitive pressures (Kemper et al., 2013).
Benefit corporations
As demonstrated above, traditional corporations do have leeway to work towards socially responsible goals. However, new legal forms of incorporation are also emerging, such as ‘community interest companies’ in Britain and ‘benefit corporations’ (BCs) in many States across the U.S., as a way to formalize corporations’ commitments to social causes. BCs are first incorporated as traditional corporations and are still for-profit entities; however, in states with codified BC legislation, corporations may opt to alter their articles of incorporation to include one or more social causes in addition to their profit-maximisation requirement and become BCs. BCs are legally obligated to consider social and environmental responsibility in their business decision-making processes ('B Corps: Firms with benefits', 2012; Gupta, 2011; Hiller, 2013; Reiser, 2011). One of the best-known BCs is outdoor-clothing maker Patagonia, whose environmental-activist founder Yvon Chouinard had made social responsibility a corporate priority long before BC legislation was passed in California where the company is headquartered.
Even in states where BCs are not yet legally recognised, corporations may still alter their articles of incorporation to include social goals and register as ‘B Corps’ with B Labs, the primary promoter of BC legislation; however, shareholder primacy may remain a viable legal challenge if shareholders pressed the issue in state courts (Hiller, 2013). Despite this risk, B Labs lists close to 1000 ‘B Corps’ corporations across the U.S.[1], including many household names. As a new corporate form, however, BCs still face challenges, including governance issues facing their boards in a legal and business environment where what constitutes a BC’s legally mandated positive social impact remains unclear (Loewenstein, 2013).
Criticisms of CSR
One of the principle criticisms levelled at corporations generally regarding their CSR efforts is that they pale in comparison to the gravity of the problems corporate actions create. With no legally recognised universal performance indicators to be measured and no standard, comparable format for reporting or benchmarking across corporations, CSR reporting rarely does a good job of contextualising the environmental or social benefits corporations provide as compared to the scope of their (negative) environmental or social impacts, typically attempting instead to portray any social benefits in their best possible light. In such cases, CSR may be accused of being little more than greenwashing. For example, Dobers & Springett (2010) compare CSR efforts to sustainable development (SD) goals, and find the former substantially lacking in light of the latter, despite efforts such as the Global Reporting Initiative (GRI) to bring continuity to reporting. Font, Walmsley, Cogotti, McCombes, & Häusler (2012) find a disclosure-performance gap among hoteliers in Europe, and Busse, Sun, & Zhu (2013) discuss an ‘authenticity shortage of corporate social responsibility’ (p. 243). However, since the definition of CSR is determined by the society in which a corporation operates, standards such as SD goals may not be appropriate measures of CSR if society does not prioritise SD. Such criticisms of CSR in no way diminish whether corporations are acting socially responsibly by their societies’ standards.
A theory for predicting socially responsible corporate behaviour
Based on the discussion in the sections above, many factors influence whether corporate behaviour is socially responsible. The following theoretical framework (Figure 1, below) sets out ‘Socially Responsible Corporation Theory’, a novel contribution of this essay. The theory is comprised of intrinsic and extrinsic factors that motivate socially responsible corporate behaviour (Graafland & Mazereeuw-Van der Duijn Schouten, 2012) and incorporates Garriga & Melé's (2004) ‘profits, political performance, social demands, and ethical values’ (p. 51). Drawing from many of the sources cited in this essay, the theory posits that socially responsible corporations will result from one of two causes: either (1) a legal/regulatory framework (extrinsic) that requires it or (2) strategic decisions (intrinsic) taken by the corporation’s leadership. Working backwards from this outcome, factors contributing to the (1) legal/regulatory framework in which a corporation operates include the (a) institutional capacity of the nation in which the corporation operates, which affects regulatory bodies’ ability to enforce social responsibility legislation, and (b) public/NGO pressure, which can shape the legal/regulatory framework and which can be a reaction to it, as well as to a perceived shortcoming in institutional capacity. Factors contributing to the (2) strategic decisions taken by a corporation’s leadership include the intrinsic factors of (a) corporate structure (e.g. BC, traditional corporation) and (b) philanthropic/altruistic preferences of the corporation’s leaders, as well as the extrinsic factors of (c) public/NGO pressure and (d) competition. Two-way relationships are illustrated between each of these factors because a corporation’s strategic decisions can affect each factor as well as be affected by it.
According to Socially Responsible Corporation Theory, either extrinsic (legal/regulatory framework) or intrinsic (strategic decisions) motivating factors could potentially suffice on their own to bring about a socially responsible corporation. On the one hand, in a nation with strong institutional capacity and strong regulation requiring CSR, corporations may be required to be socially responsible in order have the legal right to operate. On the other hand, even in a nation where institutional capacity was weak and where CSR regulation was lacking, a corporation could decide to ‘do the right thing’ and act in a socially responsible manner of its own volition. Since such theoretical extremes are rarely if ever observed, the theory shows the way additional contributing extrinsic and intrinsic factors interact and may affect whether corporations end up being socially responsible. In all likelihood, a socially responsible corporation would result from both intrinsic and extrinsic motivators.
Socially Responsible Corporation Theory
Conclusions
In a theoretical sense, any system that does not legislate socially responsible corporate behaviour (with a credible enforcement mechanism) and that is based on a corporate structure that gives precedence to shareholder primacy opens itself up to potential corporate social irresponsibility. However, it is a perfectly reasonable conclusion that given the right conditions, socially responsible corporations can exist. What are such conditions? As discussed in this essay, a corporation acting in an environment where socially responsible behaviour was legislated and where market externalities allowing for corporations to do social harm were internalised could be expected to act responsibly. Alternatively, consumers and NGOs have power through organised action, such as boycotts, to persuade corporations to act responsibly even when they are not legally obligated to do so. Finally, corporations may choose to act responsibly based on the altruistic or philanthropic preferences of their directors or as a strategic decision. Devinney’s claim is based on a narrow interpretation of a single intrinsic factor (corporate structure) rather than on considering additional intrinsic (new, alternative corporate forms; philanthropic preferences) and extrinsic factors (political, societal) that shape the environment in which corporations operate. When taken together, these additional factors, as discussed in this essay, can provide powerful incentives to corporations to engage in socially responsible behaviour.
Ultimately, however, corporations can be expected to be socially responsible as soon as society demands it—whether through traditional or civil regulation. Accepting improving social outcomes from corporate behaviour as a normative goal, policymakers have at least three options: they can strengthen codified social performance requirements and thus effectively require CSR as a precondition for market participation; they can require improved (perhaps standardised) information disclosure to empower consumers and civil society at large to hold corporations accountable as they see fit; and they can create and incentivise alternative corporate structures (such as BCs) to give corporations greater licence to prioritise social objectives. A combination of such policies may prove most effective, appealing both to intrinsic and extrinsic motivations for socially responsible corporate behaviour.
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[1] See http://www.bcorporation.net. As of 15 March 2014, there were 987 certified ‘B Corps’ listed on the site.