Business Ethics

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Corporate Social Responsibility
McGraw-Hill/Irwin
Business Ethics: Decision-Making for Personal Integrity
& Social Responsibility, Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5

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Business has to take account of its responsibilities to society in coming to
its decisions, but society has to accept its responsibilities for setting the
standards against which those decisions are made.
- Sir Adrian Cadbury
By `social responsibility,' we mean the intelligent and objective concern
for the welfare of society that restrains individual and corporate
behavior from ultimately destructive activities, no matter how
immediately profitable, and leads in the direction of positive
contributions to human betterment, variously as the latter may be
defined.
- Kenneth R. Andrews
Ethics is tougher than
you think . . .

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Fill your bowl to the brim
and it will spill.
Keep sharpening your knife
and it will be blunt.
Chase after money and security
and your heart will never unclench.
Care about people's approval
and you will be their prisoner.
Do your work, then step back.
The only path to serenity.
-Tao Te Ching
“You never expect justice from a company, do you?
They neither have a soul to lose nor a body to kick.”
- Sydney Smith, 1771-1845, English writer, clergyman
Ethics is tougher than
you think . . .

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Chapter Objectives
 After exploring this chapter, you will be able to:
1. Define corporate social responsibility
2. Discuss the three models of CSR
3. Discuss the challenge in identifying the object of a corporation’s
responsibility.
4. Distinguish key components or elements of the term
“responsibility”
5. Explain the role of reputation as one possible motivation behind
CSR
6. Evaluate the claims that CSR is “good” for business

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Opening Decision Point:
Does Motivation Matter?
 What are the key facts relevant to your judgment?
 What is the ethical issue involved in a firm’s decision to
sponsor an event or an organization?
 Who are the stakeholders?
 What alternatives does a firm have with regard to the way in
which it engages in sponsorship? How do the alternatives
compare, how do the alternatives you have identified affect
the stakeholders?
 (Continued)

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Opening Decision Point:
Does Motivation Matter?
 Does the law provide any guidance whatsoever in connection with
the source of funds for particular causes?
 What are the consequences of offering greater support to
companies that support causes that are important to you? Who
benefits from that perception and by your judgment?
 Do you simply respect the Bank or feel that it is a good corporate
citizen based on its choice of how to spend its money? Can a bank
have “virtues” as understood by virtue ethics?

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Is there a social responsibility of
business? If so, what is its source?
 What is our early concept of a corporation?
 1906 definition of the corporation submitted by Ambrose
Bierce in his Devil’s Dictionary: a corporation is “an
ingenious device for obtaining individual profit without
individual responsibility.”
 In fact, one of the reasons that individuals who engage in
business “incorporate,” is to create a legal corporate shield by
which to protect themselves from personal liability for the
liabilities of the new corporation.

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Synonyms for CSR – Others, in your
language?
 Corporate Social Responsibility (CSR),
 Business Ethics,
 Corporate Citizenship,
 Sustainability,
 Corporate Environmental Management,
 Business and Society,
 Business and Governance,
 Business and Globalization,
 Stakeholder Management,
 Governance

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Defining “Corporate Social
Responsibility” (insert obj. 1)
 In general terms, CSR encompasses the responsibilities that
businesses have to the societies within which these businesses
operate.
 The European Commission defines CSR as “a concept
whereby companies decide voluntarily to contribute to a
better society and a cleaner environment.”
 Specifically, CSR suggests that a business identify its
stakeholder groups and incorporate their needs and values
within its strategic and operational decision-making process.

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What is the difference between
social responsibility and ethics?
Issue Not Illegal Not
Unethical
Socially
Responsible
Employment
Practices
No illegal
discrimination
Fair &
equal
treatment
Diversity
Environment Do not violate
environmental
laws
Don't
pollute
Conserve, reduce,
recycle
Supplier
Sourcing
Don't violate
laws
Don't use
suppliers
who violate
laws or
standards
Reward suppliers
who go above and
beyond

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Why do it?
Three Models by which to Define
(insert obj. 2)
 Advocates for CSR have several bases for their contentions that a
business should go above and beyond the maximization of profits or
at least that CSR activities contribute to that objective.
 The models for CSR are based in both ethics (“citizenship”) and
economics, and the language used in each tends to vary.
 Not meant to be exclusionary nor all-encompassing; they simply
assist us in discussing areas of differentiation.
K

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The Corporate Citizenship
Model of CSR
 Some companies engage in CSR efforts solely for the public good and do
not expect a commercial return on their contributions.
 These organizations believe that they play a particular role in the
community and that their ability to do good – which derives from the
profits they reap – creates a responsibility to do good.
 This model often exists where there is a strong leader with a sense of
responsibility and connection to the community.
 Example: in Ben & Jerry’s Ice Cream most recent Social &
Environmental Assessment, the company explains that it seeks to create a
“broader, bolder vision of how it can leverage its reputation and its
expertise to advance its Social Mission.”
K

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The Social Contract Model of
CSR
 Second, some CSR proponents argue that corporations reap
the benefits of serving as a community citizen and therefore
owe a reciprocal obligation to that community.
 This model holds that the moral rights possessed by various
stakeholders create responsibilities on the part of the
corporation to respect those rights.

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The Enlightened Self-Interest
Model of CSR
 States that the incorporation of CSR can lead to differentiation and
competitive market advantage for the business, something that can be
branded for the present and future. (Also sometimes termed the economic
model)
 Some companies have implemented a strong CSR policy and have been
successful in the establishment of a positive brand. Examples: BP and
Nike.
 In a 2005 announcement about an increase in funding for green technology
research, General Electric CEO Jeffrey Immelt explained that it was not a “self-
sacrificing attempt to save the planet,” but instead because GE planned “to make
money doing it.”
 Under this larger economics umbrella, one would find arguments based in
reduction of risk, market reputation, brand image, stakeholder
relationships, and long term strategic interests.
K

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Milton Friedman
 (August, 2005 BusinessWeek article):
“I believe most of the claims of social responsibility are pure public
relations.”
“The idea that the resources of a company should be distributed by
people on some basis other than ownership and by people who are
not elected for that purpose -- surely, that is a socialist concept
and fundamentally subversive.”
http://www.businessweek.com/magazine/cont
ent/05_33/b3947115_mz017.htm

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Friedman
 A corporate executive has a “responsibility is to conduct
business in accordance with [his or her employer’s]
desires, which generally will be to make as much money
as possible while conforming to the basic rules of
society, both those embodied in law and those embodied
in ethical custom.”
 Do they have any other types of responsibilities?

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Why do it?
 The following were cited in a poll throughout eight Western,
developed countries by citizens as the main reasons why firms want to
be socially responsible, good citizens. Note how most could fall
under one umbrella: Company long term strategic interest
 Reduced risk
 Market reputation/brand image
 Relations with stakeholders (attracting & retaining employees,
morale, expedited permits, happy regulators)
 Putting something back
 The right thing to do/corporate values
 Offers social capital or license to operate or grow (give and take)

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Profit =
Optimal allocation of resources
 This common view of CSR has its roots in the utilitarian tradition and in
neoclassical economics.
 As the agents of the owners of business, managers have primary
responsibility to pursue maximum profits for shareholders.
 By pursuing profits, a business manager functions to allocate resources to
their most efficient uses. Consumers who most value a resource will be
willing to pay the most for it; thereby profit is the measure of optimal
allocation of resources. Over time, the pursuit of profit will continuously
work towards the optimal satisfaction of consumer demand, which in one
interpretation of utilitarianism, is the optimal social good.

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Application (consider):
“Nestlé chief rejects the need
to ‘give back’ to communities”
 March 9, 2005, Boston Herald
 “Companies shouldn’t feel obligated to ‘give back’ to communities
because they haven’t taken anything away,” said Nestlé S.A. CEO
Peter Braeck-Letmathe
 “Companies should only pursue charitable endeavors with the
underlying intention of making money.”
 “It is not our money we’re handing out but our investors’.”
 “A company’s obligation is simply to create jobs and make products.
What the hell have we taken away from society by being a successful
company that employs people?”
Do you agree??

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To whom does business owe this
social responsibility? (Insert obj. 3)
 Firms exist in relationships with many stakeholders and these
relationships can create a variety of responsibilities.
 It may not be possible to satisfy the needs of each and every
stakeholder in a situation.
 Therefore, social responsibility would require decisions to
prioritize competing and conflicting responsibilities.

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Prioritization of Stakeholders
 The prioritization of stakeholders is often determined by a
company’s mission, practice, board or custom.
 All too often, however, the prioritization is presumed rather
than intentionally discussed and challenged, which might lead
to entrenchment rather than enhancement of the firm.

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The Nature and Extent of the
Responsibility (Insert obj. 4)
 Is profit, legally made, the only guiding principle of socially
responsible business activities, or should the impact of a
decision on others be considered, even where the law does not
require it?
 What do we mean when we say “responsible?”
 We might mean that it is reliable, dependable or trustworthy.
 A second meaning of responsible involves attributing something
as a cause for some event or action.
 A third sense involves attributing liability or accountability for
some event or action and creates a responsibility to make things
right again.

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The Nature of “Responsibility”
 Reference to corporate social responsibility denotes those duties or
restrictions that bind us to act in one way rather than another.
 Responsibilities are those things that we ought, or should, do, even if we
would rather not.
 Responsibilities bind, or compel, or constrain, or require us to act in
certain ways.
 To talk about business’s social responsibilities is to be concerned with
society’s interests that restrict or bind business’s behavior.
Social “responsibility” is what a business
should or ought to do for the sake of society.

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What should a business do?
 Business has the social responsibility to obey the law.
 Philosophers would contend that we have responsibilities
beyond the law and they distinguish between different types
of responsibilities, on a scale from more to less demanding
and binding.
 First, we have responsibilities not to cause harm to others.
 A second, perhaps less binding responsibility, is to prevent harm
even in those cases where one is not the cause.
 Finally, there might be responsibilities to do good.
 (See next slide)

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Philosophical priorities in CSR
 Do good
Maximize economic, social
and environmental value
 Do no harm
Even in those cases
where one is not the cause
 Do no harm
Avoid economic, environmental and social harm

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Corporate “Responsibilities”
 Even when not explicitly prohibited by law, ethics would
demand that we not cause avoidable harm. In practice, this
ethical requirement is very close to responsibilities
established by the precedents of tort law.
 Beyond the responsibility to obey the law, a second level of
responsibilities would hold that business has a social
responsibility not to violate anyone’s rights.
 But there are also cases in which business is not causing
harms, but could easily prevent harms from occurring. A
more inclusive understanding of corporate social
responsibility would hold that business has a responsibility to
prevent harms.

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A Responsibility
to “Do Good?”
 Perhaps the most wide-ranging standard of CSR would hold
that business has a social responsibility to do good things and
to make society a better place.
 Many of the debates surrounding corporate social
responsibility involve the question of whether business really
has a responsibility to support such good causes.
 Some people argue that, like all cases of charity, this is something
that deserves praise and admiration, but it is not something that
every business ought to do.

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A Responsibility
to “Do Good?”
 Philosophers sometimes distinguish between
obligations/duties and responsibilities to make exactly this
point.
 We may have a responsibility to be charitable, but it is not
obligatory nor is it a duty.
 Others argue that business does have an obligation to support good
causes and “give back” to the community.
 This sense of responsibility is more akin to a debt of gratitude
and thankfulness; something less binding than a legal or
contractual obligation perhaps, but more than a simply act of
charity.

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Hmmmm.
 Who is to decide what is “good” or “responsible?”
 Who decides where money should go, what it means to do
“good” for society, or what is “harm?”

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Exploring Enlightened Self-Interest:
Motivation for CSR (Insert obj. 5)
 There are a variety of arguments to motivate a socially responsible firm.
 The impact on the bottom line may stem both from customer preference
as well as from employee preference.
 The problem with a focus on preference, however, is that social
responsibility becomes merely social marketing.
 A firm may use the image of social responsibility to garner customer
support or employee loyalty while the facts do not evidence a true
commitment.
Are motivations relevant? Can a firm
have only one motivation?

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Does Motivation Matter?
 The practice of caring for the “image” of a firm is sometimes referred to
as reputation management.
 There is nothing inherently wrong with managing one’s firm’s reputation,
but observers might challenge firms for engaging in CSR activities solely
for the purpose of impacting their reputations.
 The challenge is based on the fact that reputation management often
works!
 If a firm creates a good image for itself, it builds a type of trust bank
where consumers or other stakeholders seem to give it some slack if they
then hear something negative about the firm.
 Similarly, if a firm has a negative image, that image may stick, regardless
of what good the corporation may do.

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Personal versus professional
choices/reputation
 Why does an individual choose to be a good citizen?
 Is it different from why a firm might so choose?
 “Saying she was impressed by how much they have
contributed to the community, US District Judge Manning
declined to impose the maximum 3 year terms on Andreas
and Wilson.” (ADM scandal, from Chicago Tribune)

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"The way to gain a good reputation is to endeavor to be what
you desire to appear." -- Socrates (Greek philosopher, 470? -
399 B.C.E.)

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“Reputation Management or . . . ?”
 “Reputation is an idle and most false imposition; oft got
without merit and lost without deserving.”
- Shakespeare (Othello)
 ‘The judgment good does not originate with those to whom
the good has been done. Rather is was the ‘good’ themselves,
that is to say the noble, mighty, highly placed and high-
minded who decreed themselves and their actions to be
good.”
- Nietzsche

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Does Good Ethics = Good
Business? (Insert obj. 6)
Let us take a look at the evidence
– It is somewhat persuasive but
one needs to weigh it for one’s
self.

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Vogel says “only a niche market”
 David Vogel contends that, while there is a market for firms with strong
CSR missions, it is a niche market and one that therefore caters to only
a small group of consumers or investors.
 He argues that CSR is one option for a business strategy that might be
appropriate for certain types of firms under certain conditions, such as
those with well-known band names, with reputations that are subject to
threats by activists.
 He warns of the exposure a firm might suffer if it then does not live up to
its CSR promises.
 He also cautions against investing in CSR when consumers are not
willing to pay higher prices to support that investment.
Does Good Ethics = Good Business?

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SustainAbility concludes
“it does pay!”
 Though this perspective is persuasive, a review of the scholarly research
on the subject suggests the contrary on numerous counts, most
predominantly the overall return on investment to the corporation.
 Another study found that, in emerging markets, cost savings,
productivity improvement, revenue growth and access to markets were
the most important business benefits of sustainability activities.
 The report concludes that it does pay for businesses in emerging markets
to pursue a wider role in environmental and social issues, citing cost
reductions, productivity, revenue growth, and market access as areas of
greatest return for MNEs.
Does Good Ethics = Good Business?

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Additional Positive Relationships
 In addition, studies have found that there are a number of
expected – and measurable – outcomes to ethics programs in
organizations.
 Some people look to the end results of firms that have placed
ethics and social responsibility at the forefront of their
activities, while others look to those firms who have been
successful and determine the role that ethics might have
played.
 Each of these quantifiable measurements can perhaps serve as
proxies for success, to some extent, or at least would be
unlikely to occur in a company permeated by ethical lapses.
Does Good Ethics = Good Business?

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Records on Social Issues =
Positive Financials
 Moreover, a landmark study by Professors Stephen Erfle and
Michael Frantantuono found that firms that were ranked
highest in terms of their records on a variety of social issues
(including charitable contributions, community outreach
programs, environmental performance, advancement of
women, and promotion of minorities) had greater financial
performance as well.
 Financial performance was better in terms of operating
income growth, sales-to-assets ration, sales growth, return on
equity, earnings-to-asset growth, return on investment, return
on assets and asset growth.
Does Good Ethics = Good Business?

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Good Corporate Citizen =
Good Financial Performance
 Another study by Murphy and Verschoor reports that the overall financial
performance of the 2001 Business Ethics Magazine Best Corporate
Citizens was significantly better than that of the remaining companies in
the S&P 500 index, based on the 2001 BusinessWeek ranking of total
financial performance.
 A follow-up study to validate these findings was conducted by the UK-
based Institute of Business Ethics. The IBE found that, from the
perspectives of economic value added, market value added and the price-
earnings ratio, those companies who had a code of conduct out
performed those who did not over a five year period.
Does Good Ethics = Good Business?

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Discussion of Opening Decision
Point: Does Motivation Matter?
 The opening Decision Point asks whether you care about why a
firm engages in a particularly socially conscious endeavor.
 The ethical decision-making process suggests that you make sure
that you have all of the relevant facts in order to reach a
conclusion.
 Are we asking whether it is important to know a firm’s
motivation, or whether a particular motivation is better than
another?
 If the latter, do you know the motivation behind a specific action
of an organization? If you are going to judge whether you value
the motivation, let’s be sure that we are clear on what it is.

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Discussion of Opening Decision
Point: Does Motivation Matter?
 If we care about the motivation, why do we care? Why is
motivation important when we consider, for instance, a firm’s
decision to sponsor an event or an organization?
 If you are clear on why this is important to you, then you may
be better prepared to find one motivation more desirable than
another.
 Who are the stakeholders when we are considering a firm’s
motivation?

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Discussion of Opening Decision
Point: Does Motivation Matter?
 The next inquiry involves the alternatives a firm may have with
regard to the way in which it engages in sponsorship.
 One firm might opt to simply add their logo to a program or display a
flag, while another firm might have its name on every element
involved in the particular activity.
 Some firms might involve their own executives or employees in an
activity, while others leave the hands-on involvement to an non-
governmental organization (NGO) or community organization.
 Do we respond differently, depending on the nature of the firm’s
involvement? Why? How do the alternatives compare, how do the
alternatives you have identified affect the stakeholders?

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Discussion of Opening Decision
Point: Does Motivation Matter?
 What are the consequences of offering greater support to
companies that support causes that are important to you? If
you support a firm that, in turn, supports your causes, then
you are encouraging them to continue to do that. There is an
argument that the firm can have a larger impact than any one
individual so, by supporting the firm, you are going quite a
ways in supporting your particular cause.
 What is your conclusion? Do you care?

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Chapter Five Vocabulary Terms
 After examining this Chapter, you should have a clear understanding of the
following Key Terms and you will find them defined in the Glossary:
 Corporate citizenship model of CSR
 Corporate social responsibility
 Enlightened self-interest model of CSR
 Ethical custom
 Reputation management
 Social contract model of CSR