Corporate Social Responsibility

Corporate Social Responsibility

In this lecture… • What is a corporation? • Corporate moral agency • The shareholder model of business • The stakeholder model of business • Corporate social responsibility • Limitations of CSR 2

What is a corporation? • A corporationis, by definition, an artificial mechanism or legal construct that enables individuals to contribute and pool resources, capital, and labor to carry on some business enterprisewith a view to generating a profit.

What is a corporation? • A corporationis made up of: • investors (shareholders or stockholders) who provide the capital, • management (board of directors, executives and managers) who runs the business operations, and • employees, who produce the goods and services. 4

What is a corporation? • Under the corporate law of the United States, the corporation is accorded the status of ‘legal person’, i.e. it has legal rights and duties similar to those of a human person. • ‘Legal personhood’, as such, is what allows a corporation to be treated as a single legal entity. 5

What is a corporation? • The main characteristics of the corporate form of business organizations are: • the status of legal personhood • separation of ownership (shareholders) and control (management) • limited liability (i.e. shareholder liability is limited to the value of their investment) 6

What is a corporation? • A corporation, as a legal person, is separate and distinct from its owners (shareholders), which means that the corporation has the right to conduct business, own property, enter into contracts, incur debts, and undertake or participate in legal actions on its own behalf. 7

What is a corporation? • Separation of ownership and management in corporate governance involves placing the management of the corporation under the responsibility of professionals who are not its owners. This separationallows the corporation to be run by professionals with diverse skills such as in marketing, corporate financing and public relations. 8

What is a corporation? • The promise of ‘limited liability’ caps each shareholder’s economic risk to the cost of purchasing his shares. If a corporation with limited liability is sued, shareholders of the corporation are not personally responsible for any losses resulting from the lawsuit, other than for the amount already invested in the corporation. 9

What is a corporation? • If corporations are artificial entities created for the sole purpose of making profits, is it reasonable to confer personhood status on them? Do you think that these artificial entities should be entitled to similar rights as human persons? Why or why not? 10

Corporate moral agency • If corporations are to be treated as persons, we would expect them to behave like persons. • A basic assumption of business ethics is that the same moraltheories and principles that we use to evaluate human actions can also be applied to evaluate the activities and practices of business organizations.

Corporate moral agency • From the standpoint of business ethics, corporations are expected totake responsibility for the effects of their activities and practices on individuals, society and the environment. • It means that we can apply moral theories and principles to evaluate a corporation’s activities to see whether such activities are desirable, acceptable or questionable. 12

Corporate moral agency • Examples of questionable, unacceptable or unethical business practices include selling dangerous or harmful products to customers, treating employees unfairly, neglecting workplace safety, ignoring the environmental impact of business activities, and so on. 13

Corporate moral agency • If the corporation is a legal person, is it also a moral person? Can corporations act like moral agents? Can corporations be held morally responsible in the same way that individuals can be held morally responsible for what they do? 14

Corporate moral agency • Some argue that groups or organizations, like individuals, can be held accountable for their actions and decisions. • Corporate moral agency implies that corporations can be the proper bearers of moral responsibilities in a manner that is distinct from their individual members. 15

Corporate moral agency • Others reject the notion of corporate moral agency by arguing that the corporation is an artificial entity designed for a single purpose – the pursuit of profit. • Unlike natural persons (human persons), corporations cannot function as moral agents, and thus cannot be held responsible for what they do. 16

Corporate moral agency Peter French suggests that the corporate internal decision (CID) structures within business organizations allow them to function as responsible moral agents. 17

Corporate moral agency • French argues that the capacity for intentionality (capacity for intentional action) is a sufficient condition for moral agency and personhood status. • Because corporations are intentional agents, they can be held accountable for their actions. 18

Corporate moral agency • A corporate internal decision (CID) structure is defined by French as a system of rules and procedures specifying the respective roles and responsibilities of board members, executives, managers, and employees; and thereby allowing their intentions to be interwoven or synthesized into a corporate decision. 19

Corporate moral agency • Corporate actions, as French points out, are often the result of collective, not individual, decision making. • As established procedures for accomplishing specific goals, the CID structure lays out lines of authority and stipulates under what conditions personal actions become official corporate actions. 20

Corporate moral agency • In theory, the structure of a modern corporation allows nearly everyone within it to share collective responsibility for what the corporation does. • In practice, however, this ‘diffusion of responsibility’ canmean that no particular person or persons can be held morally responsible. 21

Corporate moral agency • Indeed, each of the individuals within the organization may have been following established procedures and decision-making guidelines. As such, it may be difficult, even impossible, to assign responsibility fora particular outcome to any single individual because so many different people,acting within a given CID framework, contributed to it in some small ways. 22

Corporate moral agency • Critics of French’s view argue that corporations cannot be moral agents because they can only function as a result of human interactions. • Corporations, according to these critics, are created by, made up of, and dependent upon individuals and groups of individuals for their existence. 23

Corporate moral agency • Corporations depend on human individuals for capital, property ownership, contracts, management, supplies, marketing, and so forth. • Besides, the purposes, missions, policies, goals, and decision-making procedures of corporations are created by groups of individuals. 24

Corporate moral agency • Opponents of corporate moral agency, therefore, conclude that corporations cannot function as moral agents capable of acting independently or taking responsibility for their actions. • They argue that only those individual members who make up the corporations can possess moral agency and function as bearers of moral responsibilities. 25

Corporate moral agency • If a corporation has made a decision to do something that is harmful to society, who should be held responsible for that decision – the corporation itself or the individual members who participated in making that decision? 26

Corporate moral agency • It is generally believed that only moral agents should be punished for their wrongdoings because only moral agents can be held responsible for their actions. Is it meaningful to punish a corporation if it has no capacity of moral agency? 27

Corporate moral agency • Take the example of the British Petroleum oil spill in the Gulf of Mexico in 2010, which led to the death of 11 oil workers and vast damage to properties and livelihoods of those living on the Gulf. It would be very difficult to pinpoint specific individuals at BP who were at fault. Does it make sense to hold the oil company accountable and punish it for causing the disaster? 28

Corporate moral agency • Defenders of corporate moral agency may argue that in the case of the BP oil spill, even if we could identify the individual wrongdoers, the magnitude of the harm inflicted was so great that only the corporation had the financial wherewithal to shoulder the responsibilities of cleaning up the environment and compensating the victims. 29

Corporate moral agency • Opponents of corporate moral agency, however, may argue that although holding a corporation accountable for wrongdoings may have the benefit of making it easier for victims to sue for damages, it also has the disadvantage of letting culpable individuals (i.e. corporate executives) off the hook. 30

Corporate moral agency • When it comes to ‘punishing’ a corporation, usually the only penalty that can be administered is a fine, which is in effect paid by shareholders (who have virtually no control over corporate actions and decisions) or passed on as costs to consumers. • Heavy financial penalties on corporations may also harm workers if they lead to plant closures and layoffs. 31

Corporate moral agency • According to the critics of corporate moral agency, inasmuch as the corporation is an artificial entity, the effect of any punishment is not felt by the corporation itself. • It is unjust to penalize shareholders, consumers or workers who may not be directly responsible for corporate wrongdoings. 32

The shareholder model of business • What is the proper roleof corporations in society? Do corporations have any responsibilities other than obeying the law, paying taxes, hiring workers, and supplying goods and services?

The shareholder model of business • The debate over a corporation’s responsibilityis one about whether itshould be construednarrowly to coveronly profit maximizationor morebroadly to includeacting morally, refrainingfrom sociallyundesirablebehavior, andcontributing to the greater good of society. 34

The shareholder model of business • Corporate social responsibility (CSR) refers to a corporation’s commitment to conducting business in a socially responsible manner. • A socially responsiblecorporation is one that takes account of responsibilities to society that go beyond the production of goods and services at a profit. 35

The shareholder model of business In a 1970 article for the New York Times Magazine, Milton Friedman (1912-2006) summarized his position well with its title – ‘The Social Responsibility of Business Is to Increase Its Profits.’

The shareholder model of business • CSR became a favorite topic in management discussions during the 1970s. One reason for this is that the respected economist Milton Friedman came out against the concept. • In a popular press article, Friedman writes: ‘there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.’

The shareholder model of business • According to Friedman, the corporation is an ‘artificial person’ (artificial entity or mechanism) that exists for economic purposes only. • ‘Business’ denotes activities that involve the production and exchange of goods and services for economic purposes, primary among which is the generation of profit. 38

The shareholder model of business • Friedman claimsthat corporations should not be concerned with issues like social responsibility or social justice because these are not the proper goals of business. • The only responsibility of the directors, managers and executivesof a corporation, in Friedman’s view, is to find ways to increase profit for shareholders.

The shareholder model of business • In Friedman’s view,under a free-market system with private property rights, the corporation is the private property of the shareholders. • As such, the management of a corporation (corporate executives) has a fiduciary (legal or contractual) responsibility to maximize profit for the shareholders. 40

The shareholder model of business • For Friedman, a corporation does two things in a free market economy: it produces goods or services that society wants, and it makes a profit. • Making a profit, however, is the most important function because a corporation will go out of business if it is unable to make a profit.

The shareholder model of business • Friedman argues that the corporation, as an economic institution, is not the proper vehicle to pursue social responsibility. • Corporate executives are not acting in the best interest of shareholders when they spend corporate funds on solving social problems, such as fighting pollution, relieving poverty, or reducing discrimination. 42

The shareholder model of business • Corporations operate in a competitive environment. If a socially responsible corporationhas to operate at a higher cost than other corporations that are not concerned about being socially responsible, it will place itself at a competitive disadvantage relative to its competitors.

The shareholder model of business • Friedman, in arguing that the primary responsibility of a corporation is to increase its shareholders’ wealth, carefully notesthat corporations must play by ‘the rules of the game’. • In other words, corporations should adhere to society’s laws and morals and avoid doing anything that involves deception and fraud.

The shareholder model of business • Friedman’s viewhas now become the central tenet of the ‘shareholder model of business’, which holds that: • corporations should be managed primarily in the interest of their shareholders; and • the market value of shares is the most important measure of shareholder value.

The stakeholder model of business • Should corporations move away from focusing exclusively on maximizing shareholder value (profits) and take into consideration other objectives, such as environmental concerns or the welfare of their employees?

The stakeholder model of business • A main objection to the shareholder model of business is that the pursuit of profit does not necessarily lead to social progress but often leads to environmental degradation, neglectof workplace safety, and other social problems. 47

The stakeholder model of business • The ‘stakeholder model of business’ has been put forward as an alternative to the shareholder model. • Instead of viewing the corporation as an economic institution, the stakeholder model conceives ofthe corporation as a social institution that has a responsibility to consider the interests and well-being of everyone it has an impact on.

The stakeholder model of business • The term ‘stakeholders’ is generally seen as animprovement on a narrow conception of ‘shareholders’as the source of an organization’s objectives. The implication is that a corporation not only has a responsibility to its shareholders but also a responsibility to other people and society as a whole (i.e. the stakeholders).

The stakeholder model of business • The stakeholders of a corporationare the individuals, groups or other organizations that are affected by, or can affect, the corporation’s actions and decisions. • They include not only shareholders and managers, but also consumers, employees, suppliers, government, communities, andthe natural environment.

Corporate Social Responsibility