Chapte

r 5
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 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

 Merck & Co., Inc. Opening
Case
 For centuries river blindness, or onchocerciasis, has
tortured humanity in tropical regions.
 In 1975 scientists at Merck discovered a compound that
killed animal parasites. Introduced as a veterinary drug,
they believed it could also help humans.
 Neither those in need nor their governments could afford
to buy the drug.
 In 1987, Merck decided to provide the drug at no cost.

Merck’s donations of medicine are a stellar example of old-

fashioned philanthropy the way it has been done in America
since the rise of big companies.
McGraw-Hill/Irwin 5-3 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 The Evolving Idea of Social
Responsibility
 The fundamental idea is that Corporate social
corporations have duties that go responsibility is
beyond carrying out their basic the duty of a
corporation to
economic function in a lawful create wealth in
manner. ways that avoid
harm to, protect,
 Over time the doctrine has evolved or enhance
to require more expansive action by societal assets.
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 5-4 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Social Responsibility in
Classical Economic Theory
 Throughout American history, classical capitalism
has been the basic inspiration for business.
 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 5-5 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 The Early Charitable Impulse
 Most colonial era businesses practiced frugality, yet
charity was a coexisting virtue.
 Charity by owners continued into the early
nineteenth century.
 Steven Girard changed the climate of education in the
United States by bequeathing $6 million for a school
to educate orphaned boys.
 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.

McGraw-Hill/Irwin 5-6 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 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.
 Spencer’s arguments to this end moderated charity
by business leaders and retarded the growth of a
modern social conscience.
 Additionally, courts consistently help charitable gifts
to be ultra vires because charters granted by states
when corporations were formed did not expressly
permit them.

McGraw-Hill/Irwin 5-7 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 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 5-8 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 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 5-9 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 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.
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 Basic Elements of Social
Responsibility

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 General Principles of Corporate
Social Responsibility
 Corporations are economic institutions run for profit.
 All firms must follow multiple bodies of law.
 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 stakeholders and publicly report on their market,
mandated, and voluntary actions.

McGraw-Hill/Irwin 5-12 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 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 5-13 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Corporate Social Responsibility in
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 5-14 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Corporate Social Responsibility in
Global Context
 Extraterritoriality – enforcement is problematic.
 Alien Tort Claims Act – allows foreign citizens to
bring civil actions in American courts.
 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.

McGraw-Hill/Irwin 5-15 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 International Codes of Conduct for
Corporations
 Sullivan Principles
 Helped bring and end to apartheid, but failed to
satisfy the expectations of global anti-apartheid
activists.
 Inspired subsequent efforts to codify standards of
conduct for corporations.

McGraw-Hill/Irwin 5-16 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Corporate Codes
 Corporate codes of conduct set forth aspirations and
principles of action for operations in emerging
economies.
 Companies in the apparel and toy industries have
been targeted by progressive and union activists.
 Companies obsessively cultivate brand images, and
loss of brand reputation among consumers is
disastrous.
 Some companies have invested heavily in making
their codes work.
 Most companies reject outside monitoring, simply
McGraw-Hill/Irwin 5-17 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Industry Codes
 Why industry codes?
 Similar competitive forces and external pressures
 Create a “level playing field”
 Avoids the disorder of multiple codes
 Examples of industry codes:
 The Equator Principles
 The Free Labor Association Workplace Code of
Conduct

McGraw-Hill/Irwin 5-18 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 The United Nations and the Global
Compact
 The Global Compact is a way Global Compact
of getting companies to A set of 10 voluntary
voluntarily apply widely principles based on
agreed upon principles to international norms
administered by the
individual situations. United Nations.
 Problems: Member companies
are to follow the
 Underparticipation principles in every
 Mixed support from global country in which they
do business.
activist groups

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 Other Codes
 The Caux Round Table Principles for Business
 The Code of Ethics on International Business for
Christians, Muslims and Jews
 The Business Charter for Sustainable Development
 The OECD Guidelines for Multinational Corporations
 The Calvert Women’s Principles
 The CERES Principles

McGraw-Hill/Irwin 5-20 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Assessing the Codes
 Corporate conduct codes are a fundamental
mechanism of the global drive for corporate social
responsibility.
 Problems:
 Promote mainly standards of the developed world and
hold these superior to different political and social
customs in other regions.
 Codes are based on the agendas of the entities that
create them.
 The rise of codes and the international expansion of the
corporate social responsibility doctrine has failed to
placate critics.
McGraw-Hill/Irwin 5-21 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 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 5-22 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.