The concept of corporate social responsibility or CSR provides a framework or model for defining the mission and vision of an organization and for expressing the extent of its obligations or accountability. This makes it a form of self-regulation. Several organizations have also regarded it as a strategic initiative integrated into their business strategies.
A more modern usage of this concept involves the development and implementation of policies and programs aimed at benefitting the different stakeholders of an organization. These stakeholders include the employees, customers, suppliers or contractors, and the community in which it operates, among others. However, considering the breadth of responsibility, there are several contentions against this modern model of corporate social responsibility.
Take note that there are two competing schools of thought that describe the social responsibility of a business organization. These are the economic model of corporate social responsibility or the shareholder theory of corporate governance and the socioeconomic model of corporate social responsibility or the stakeholder theory of corporate governance.
Shareholder vs Stakeholder: Two Competing Theories of Corporate Social Responsibility
1. The Economic Model of Corporate Social Responsibility or the Shareholder Theory of Corporate Governance
A conservative view of corporate social responsibility implies that the sole purpose of a business is to earn profits and promote the interests of its owners or shareholders by responding effectively to market demand through the production of suitable goods or services. This traditional view is the foundation of the economic model of corporate social responsibility. Note that this model is also called the shareholder theory of corporate governance.
Milton Friedman, an economist and recipient of the Nobel Prize, introduced the fundamentals of the economic model in his doctrine of social responsibility found in his 1962 book “Capitalism and Freedom” and a 1970 seminar article that appeared in The New York Times. The doctrine states that the only social responsibility of a business is to maximize its profitability to benefit its shareholders while observing the laws of the community in which it operates.
Nonetheless, under the economic model, society will eventually benefit from the success of a business. Hence, to realize this benefit, businesses should be free to produce and market products that society needs. Friedman argued that extending their responsibility beyond profit-making contradicts the principle of a free market economic system. He also added that forcing businesses to serve the community through philanthropy is akin to totalitarianism.
The economic model of corporate social responsibility also contends the government, non-profit organizations, and other social institutions have the exclusive duty of promoting the interest of the greater community. It is unfair for investors to channel their assets to activities that would not generate profits. The model also argues that businesses are already contributing to the betterment of society by paying taxes to fund the policies and programs of the government.
2. The Socioeconomic Model of Corporate Social Responsibility or the Stakeholder Theory of Corporate Governance
Contemporary advocates of corporate social responsibility argue that businesses have a responsibility not only toward their investors but also toward their stakeholders. Remember that these stakeholders include the suppliers, employees, customers, and the community in general, among others. The stakeholders of a particular business essentially include any individuals, groups, or organizations that are directly and indirectly affected by its operations.
The inclusion of stakeholders is fundamental to the socioeconomic model of corporate social responsibility or the stakeholder theory of corporate governance. This school of thought argues that businesses have impacts on their immediate communities or the greater society. Each business should consider its impacts in all of its decisions. The stakeholder theory suggests that these businesses have a responsibility toward the impacts they produce.
American philosopher and business management professor R. Edward Freeman was the first to introduce the stakeholder theory in his 1984 book “Strategic Management: A Stakeholder Approach” in which he provided a framework for addressing the moral and ethical obligations of business organizations. This framework connects business and capitalism with ethics by factoring in the importance of creating value for the stakeholders.
Michael E. Porter and Mark R. Kramer, both professors at Harvard University, also introduced the concept of creating shared value in their Harvard Business Review articles “Strategy & Society” and “Creating Shared Value” where they argued that the competitiveness of a business organization and the welfare of the community it serves are inherently intertwined. Recognizing this association creates a win-win solution for both the business and society.
Four Specific Responsibilities: A Synergy Between the Economic and Socioeconomic Models
There are four specific responsibilities that represent a synergy between the shareholder theory of corporate governance or the economic model and the stakeholder theory of corporate governance or the socioeconomic model of corporate social responsibility. These are economic, legal, ethical, and philanthropic responsibilities. These four also represent an assortment of specific duties that follow a successive fashion and highlight their interdependence.
Furthermore, in consideration of these responsibilities, a business organization is responsible for promoting and upholding the interest not only of its shareholders but also of its entire stakeholders which include its customers, employees, suppliers, and the public.
The economic responsibility pertains to the need of a business to generate profits and contribute to the growth of the economy. The legal responsibility corresponds to the need to operate within established rules and regulations and the ethical responsibility pertains to the duty of an organization to act as a moral actor. Philanthropic responsibility implies that a business has a duty to give back in some way and contribute to the betterment of society.
FURTHER READINGS AND REFERENCES
- Freeman, R. E. 1984. Strategic Management: A Stakeholder Approach. New York: HarperCollins
- Friedman, M. 1962. Capitalism and Freedom. Chicago: University of Chicago Press
- Friedman, M. 1970. “The Social Responsibility of Business is to Increase its Profits.” The New York Times. Available online.
- Porter, M. E. and Kramer, M. R. 2006. “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility.” Harvard Business Review. Available online
- Porter, M. E. and Kramer, M. R. 2011. “Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society.” Harvard Business Review. Reprint. Available online.
