Theories of corporate social responsibility

Theories of corporate social responsibility

Corporate social responsibility or CSR is a concept that provides a framework for defining the mission and vision of a business organization, as well as for expressing the extent of its obligations or accountability.

In its modern usage, CSR pertains to 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, there are several contentions against this particular model of CSR.

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 on CSR suggests that the only purpose of a business organization is to generate 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 on 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 laws of the community in which it operates.

Nonetheless, under the economic model school of thought, society will eventually benefit from the success of a business organization. Hence, to realize this benefit, businesses should be free to produce and market products that the society and its members need.

Friedman further argued that extending the social responsibility of a business beyond profit-making initiatives contradict 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 that promoting the interest of the greater community is the duty of the government, as well as non-profit organizations and other social institutions. It is not fair for investors or shareholders to channel their assets to activities that would not generate profits.

Also, the economic model argues that businesses are already indirectly contributing to the betterment of the community by paying their taxes. The government depends on these taxes to provide for the needs of the society.

2. The Socioeconomic Model of Corporate Social Responsibility or the Stakeholder Theory of Corporate Governance

Contemporary advocates of CSR argue that business organizations have a responsibility not only to their respective investors or shareholders but also to their stakeholders. Remember that these stakeholders include the suppliers, employees, customers, and the community in general, among others. Essentially, the stakeholders of a particular business 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. Specifically, this school of thought argues a business affects the society, and it should consider its impacts when making decisions.

R. Edward Freeman, an American philosopher and business management professor, was the first to introduce the stakeholder theory in his 1984 book “Strategic Management: A Stakeholder Approach” to provide a framework for addressing the moral and ethical obligations of business organizations.

In addition, Michael E. Porter, a leading authority on competitive strategy and a professor at Harvard Business School, and Mark R. Kramer, a professor at Kennedy School in Harvard University, also introduced the concept of creating shared value. They argued that the competitiveness of a business organization and the health of the community it serves are inherently intertwined. Recognizing and capitalizing on this association creates a win-win solution for both the business and the society.

Note that the shared value concepts were first introduced in the Harvard Business Review article “Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility,” and reiterated in the related article “Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society” both by Porter and Kramer

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.