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Corporate Social Responsibility

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Good Governance

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Corporate Social Responsibility

  1. 1. Corporate Social Responsibility This chapter:  Defines the idea of corporate social responsibility and explains how it has expanded in meaning and practice over time.  Explains more about how corporations carry out their social responsibilities. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  2. 2. Corporate Social Responsibility  The duty of a corporation to create wealth in ways that avoid harm, to protect, or enhance societal assets. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  3. 3. The Evolving Idea of Social Responsibility  The fundamental idea is that corporations have duties that go beyond carrying out their basic economic function in a lawful manner.  Over time the doctrine has evolved to require more expansive action by companies largely because:  Stakeholder groups have gained more power to impose their agendas  The ethical and legal philosophies underlying it have matured McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  4. 4. Social Responsibility in Classical Economic Theory  Classical capitalism has been the basic inspiration for business.  In this view, a business is socially responsible if it maximizes profits while operating within the law.  The idea that markets harness low motives and work them into social progress has always attracted skeptics.  Today the classical ideology still commands the economic landscape, but ethical theories of broader responsibility have worn down its prominences. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  5. 5. The Early Charitable Impulse  Most colonial era businesses practiced frugality, yet charity was a coexisting virtue.  The wealthy endowed social causes as individuals, not through their companies.  Steven Girard changed the climate of education in the United States by bequeathing $6 million for a school to educate orphaned boys. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  6. 6. Stephen Girard  was French born naturalized American Philanthropist and banker. He personally saved the US government from financial collapsed during the War of 1812 and became one of the wealthiest people in America estimated to have been the fourth richest American of all time based on his ratio of fortune to contemporary GDP McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  7. 7. The Early Charitable Impulse  John D. Rockefeller systematically gave away $550 million over his lifetime.  Andrew Carnegie gave $350 million over his lifetime to causes that would elevate the culture of a society.  Carnegie believed fortunes should not be wasted by paying higher wages or giving gifts to poor people. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  8. 8. John D. Rockefeller  Born July 8, 1839, in Richford, New York. He built his first oil refinery near Cleveland and in 1870 incorporated the Standard Oil Company. By 1882, he had a near monopoly of the oil business in the U.S. but his business practices led to the passing of antimonopoly laws. Late in life Rockefeller devoted himself to philanthropy. He died in 1937(www.biography.com) McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  9. 9. Andrew Carnegie  Born on November 25, 1835, in Dunfermline, Scotland. After moving to the US, he worked a series of railroad jobs. By 1889 he owned Carnegie Steel Corporation, the largest of its kind in the world. In 1901, he sold his business and dedicated his time to expanding his philanthropic work including the establishment of Carnegie-Mellon University in 1904 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  10. 10. The Early Charitable Impulse (continued)  People such as Andrew Carnegie and Herbert Spencer believed in the doctrine of social Darwinism when it came to charity.  Social Darwinism held that charity interfered with the natural evolutionary process in which society shed its less fit to make way for the better adapted.  Additionally, courts consistently held charitable gifts to be ultra vires (beyond the law) because charters granted by states when corporations were formed did not expressly permit them. 5-10 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  11. 11. Social Responsibility in the Late Nineteenth and Early Twentieth Centuries  Giving, no matter how generous, was a narrow kind of social responsibility often unrelated to a company’s impacts on society.  During the Progressive era, three interrelated themes of broader responsibility emerged:  Managers were trustees  Managers had an obligation to balance multiple interests  Many managers subscribed to the service principle McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  12. 12. Social Responsibility in the Late Nineteenth and Early Twentieth Centuries (continued)  Henry Ford – touted citizenship but was ultimately unconcerned about the welfare of his employees.  General Robert E. Wood – believed in responsibility to customers, the public, employees, suppliers, and finally stockholders.  1920s and beyond, organized charities began forming to which corporations contributed:  Community Chest  Red Cross  Boy Scouts McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  13. 13. 1950–The Present  Contemporary understanding of corporate social responsibility formed during this period.  Social Responsibilities of the Businessman  Dissenters to this theory were conservative economists who claimed that business is most responsible when it makes money efficiently, not when it misapplies its energy to social projects.  1971 – Bold statement by the Committee for Economic Development outlining three concentric circles of responsibilities.  1981 – Statement on Corporate Responsibility from the Business Roundtable. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  14. 14. General Principles of Corporate Social Responsibility  Corporations are economic institutions run for profit.  All firms must follow multiple bodies of law.  Managers must act ethically  Corporations have a duty to correct the adverse social impacts they cause.  Social responsibility varies with company characteristics.  Managers should try to meet legitimate needs of stakeholders.  Corporate behavior must comply with norms in an underlying social contract.  Corporations should also accept a measure of accountability toward society. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  15. 15. Are Social and Financial Performance Related?  A recent review of 95 studies over 30 years found that a majority (53 percent) of businesses showed a positive relationship between profits and responsibility, while only 5 percent showed a negative one.  Results inconsistent and ultimately inconclusive due to methodological questions.  Safe to say corporations rated high in social responsibility are no less profitable than lower rated firms. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  16. 16. Corporate Social Responsibility in a Global Context  By the end of the twentieth century the doctrine of corporate social responsibility had been widely accepted in industrialized nations.  Recent debates over the duties of corporations in their international operations.  International law is weak in addressing social impacts of business.  Giant corporations may not be subject to strong laws and regulations in foreign countries.  In adapting to global economic growth corporations have used business strategies that distance them from direct accountability or social harms.  More national regulation of multinational corporations is unlikely. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  17. 17. Corporate Social Responsibility in a Global Context (continued)  Extraterritoriality – enforcement is problematic.  Nongovernmental organizations (NGOs) – voluntary organizations becoming powerful advocates of restricting corporate power outside the borders of industrialized nations.  Pushed for UN-sponsored conferences on the environment, population, human rights, social development, and gender.  Soft law – statements of philosophy, policy, and principle found in nonbinding international conventions McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  18. 18. Global CSR: Development of Norms and Principles  Norm – a standard that arises over time and is enforced b social sanction or law  Principle – a rule, natural law, or truth used as a standard to guide conduct  Milestones in the development of norms  U.N. Universal Declaration of Human Rights  Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy  Norms on the Responsibilities of Transnational Corporations McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  19. 19. Global CSR: Codes of Conduct  Codes of conduct set forth aspirations, principles, guidelines, and rules for corporate behavior.  Created by companies, trade associations, NGOs, governments, and international organizations.  The target is the corporation  The code’s effectiveness depends on how the corporation carries it out.  Many codes are weak because they lack the force of law McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  20. 20. Global CSR: Reporting and Verification Standards  Sustainability reporting – the practice of a corporation publishing information about its economic, social, and environmental performance  Two problems of sustainability reporting:  Defining and measuring social performance is difficult  Reports are not comparable from company to company McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  21. 21. Global CSR: Labeling and Certification Schemes  Influence the market on the demand side.  Criteria for labels set by industry, NGOs, unions, and sometimes governments.  Certifications promote many ideals including human rights, fair trade, and campaigns against child labor. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  22. 22. Global CSR: Management Standards  Eco-Management and Audit Scheme (EMAS)  International Standards Organization (ISO) McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  23. 23. Global CSR: Social Investment and Lending  U.N. Principles for Responsible Investment require signatories to consider a company’s environmental, social, and governance performance when they invest.  FTSE4Good Global Index is intended to set the world standard for investors seeking “companies that meet globally recognized corporate responsibility standards.”  International Finance Corporation (IFC) seeks to promote development and reduce poverty by funding projects for corporations. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  24. 24. Global CSR: Government Actions and Civil Society Vigilance  Governments advance corporate responsibility through binding regulation and by actively promoting voluntary actions.  NGOs watch multinational corporations and police actions they see as departing from emerging norms. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  25. 25. Assessing the Evolving Global CSR System  As multinational corporations grew in power with the expansion of global trade, a perceived deficiency in regulation was countered by action within civil society.  No company can remain aloof from the emerging global CSR system that promotes and enforces corporate adherence to international CSR standards  An important issue is whether or not the emerging system is the most appropriate way to regulate large corporations. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved
  26. 26. Concluding Observations  Historically, corporations have been motivated primarily by the central focus on profits.  Corporations are now being pressured to alter this focus.  The idea of corporate social responsibility has continuously expanded in meaning.  The power of stakeholders to define corporate duty has increased.  The explosive growth of global trade and global corporations has created new standards and practices of social responsibility tied to global norms. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

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