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McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5

Corporate Social
Responsibility
This 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.
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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.
Mercks donations of medicine are a stellar example of oldfashioned philanthropy the way it has been done in America
since the rise of big companies.
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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
responsibility
The duty of a
corporation to
create wealth in
ways that avoid
harm to, protect,
or enhance
societal assets.

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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.
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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.
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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.

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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
companys 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

5-8

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

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1950The 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.
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Basic Elements of Social


Responsibility

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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.

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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.

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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.
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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
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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
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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 codes effectiveness depends on how the
corporation carries it out.
Many codes are weak because they lack the force
of law

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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

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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.
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Global CSR:
Management Standards
Eco-Management and Audit Scheme
(EMAS)
International Standards Organization
(ISO)

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Global CSR:
Social Investment and Lending
U.N. Principles for Responsible Investment require
signatories to consider a companys 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.

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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.
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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.

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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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