Corporate Social Responsibility (Chapter 5)Professor Charles H. Smith

Spring 2010

Read this case study on pages 117-19 on your own before class and discuss the following questions with small groups in class What were the advantages gained by

Merck when it distributed this drug for free?

What were the disadvantages suffered by Merck when it distributed this drug for free?

Also known as CSR, corporate citizenship, stakeholder management, and sustainability.

No precise definition, though text (page 119) says that it is “the duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets.”

Premise is that companies have obligations beyond those imposed by law.

However, what are those additional obligations? – Student examples.

It is a moral duty to promote social justice because it is the “right thing to do.”

Social responsibility has concrete benefits such as good publicity for those outside the company and good morale for those inside the company.

Student examples.

Social responsibility is an unwarranted cost. Management focus should be profit-

maximization for the benefit of ownership. CSR has no definitive meaning – reasonable

people disagree about if and how a company should be socially responsible.

CSR is more politics than business – market, not politics, should direct company.

Student examples.

Inclination was to be thrifty, but charity thrived, too.

Great fortunes made by individuals who were generous givers; e.g., Steven Girard, John D. Rockefeller, Andrew Carnegie.

However, charity often influenced by “social Darwinism” (Herbert Spencer) – best to donate for benefit of large institutions (e.g., universities) or to build grand projects (e.g., concert halls) instead of giving to poor individual; what supports this sort of “impersonal” charity?

Progressives had three themes Managers are trustees who have to act in favor

not just ownership but also other stakeholders such as employees, consumers and communities.

Managers should balance these competing interests.

Many managers believed in the service principle which held that aggregate success of all businesses would serve society by eliminating society’s ills.

Examples – Henry Ford (pages 124-25), General Robert E. Wood (page 125).

Competing outlooks on CSR Howard R. Bowen – felt public had expectations

that went beyond profit-maximization; basic arguments for CSR on page 125.

Milton Friedman – maintained that sole responsibility of company was to maximize profits while acting legally.

Committee for Economic Development – “three concentric circles of responsibilities” (pages 126-27).

Which one do you prefer?

Responses to competitive forces found in markets.

Always dominant – company’s response to market fulfills its primary social responsibility.

Example – Unilever Indonesia (pages 127-28).

Student examples.

Government regulation – laws imposed on business by government entities according to the state’s authority; e.g., local zoning statute, Supreme Court decision interpreting Constitution.

Civil or private regulation – demands made by private entities (such as activists and consumers) and failure to comply will result in reputation or financial damage; e.g., boycott of goods made using child labor, advertisements about bad side effects of using product.

Student examples of both.

These actions go above and beyond legal requirements (“legal plus”).

Example – charitable giving.Student examples.How does a company benefit from

voluntary actions?

Companies are economic institutions run for profit First obligation is to make a profit. Need financial incentive to undertake socially-

responsible activity. All companies must follow multiple sets of laws

Many laws (local, state, federal, foreign, international) govern all businesses.

Law is minimum requirement and reacts to cutting-edge issues.

Management must act ethically Not just according to the law but also ethics. Must establish policies and procedures for company.

Student examples of all.

Companies have a duty to correct adverse social impacts they create Should internalize external costs (which are usually

borne by society). CSR varies with company characteristics such as size,

industry, location, etc. Social obligation will vary due to many factors.

Management should try to meet legitimate needs of multiple stakeholders Fiduciary duty owed to ownership but not possible or

legally required to meet their interests only; other stakeholders have legitimate and even legally-required needs.

Student examples of all.

Companies’ behavior must comply with norms in the underlying social contract Understanding nature of and possible

changes in social contract necessitates understanding of national and international laws and customs.

Companies should accept a measure of accountability toward society Public reporting on CSR by independent

party. Student examples of both.

What is this relationship? Some studies indicate CSR and profits go together. Others indicate mixed, inconclusive or negative

findings! Difficulties in doing these studies include

No certain definition of CSR, so no objective ranking system possible.

While profitability would seem more objective, this also can be interpreted – or manipulated – in more than one way (e.g., last quarter’s profits vs. value of stock vs. assessing value of long-term profitable assets like intellectual property).

CSR is not just an American concept – it is accepted worldwide in the following ways Europe – employee rights and

environmental protection. Japan – paternalism toward workers. India – those who accumulate wealth

hold it in trust for society; analogize to Progressive theory of “managers as trustees.”

Case Study – Jack Welch

Read “The Jack Welch Era at General Electric” on pages 143-52 on your own before class and then discuss the questions on page 152 with small groups in class.