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Chapter 5: Corporate Social Responsibility Chapter Objectives After reading this chapter you will be able to: 1. Define corporate social responsibility. 2. Describe and evaluate the economic model of corporate social responsibility (CSR). 3. Distinguish key components of the term responsibility. 4. Describe and evaluate the philanthropic model of corporate social responsibility. 5. Describe and evaluate the social web model of corporate social responsibility. 6. Describe and evaluate the integrative model of corporate social responsibility. 7. Explain the role of reputation management as motivation behind CSR. 8. Evaluate the claims that CSR is “good” for business. OPENING DECISION POINT Walmart’s Ethics On April 21, 2012, The New York Times reported that a six-year internal investigation by Walmart had uncovered widespread evidence of bribery and corruption within its Mexican operations. The investigation discovered that Walmart employees had paid more than $24 million in bribes to promote the expansion oof its business in Mexico. Furthermore, the Times reported that Walmart executives in Mexico not only were aware of the bibes, but had intentionally hidden them from the Walmart corporate offices in the United States. More damaging than even the reports of bribery in Mexico, The New York Times report also alleged that when the internal investigation was shared with corporate headquarters, Walmart executives terminated the investigation. Th Times also reported that only upon learning of the newspaper’s own investigation and plans to write a story did Walmart executives notify legal authorities. As a result, the U.S. Justice Department began an investigation into possible violations of the U.S. Corrupt Foreign Practices Act in 2011. Few corporations generate as much controversy and have as many vocal critics and defenders as Walmart. Few corporation would generate as much debate as Walmart on the question of corporate social responsibility. Part of this no doubt is due to its sheer size and influence. Walmart is the world’s largest retail business and claims to have more than 200 million customer visits per week at more than 8,100 retail stores in 15 countries. Its total sales for fiscal year 2011 were $418 billion. Worldwide, Walmart employs more than 2.1 million people. It is the largest private employer in both the United States and Mexico, and the single largest employer in 25 separate U.S. states. In many ways, Walmart is a socially responsible corporation, describing itself as a business that “was built upon a foundation of honesty, respect, fairness and integrity.” What is described as the “Walmart culture” is based on three “basic beliefs” attributed to founder Sam Walton: respect for individuals, service to customers, and striving for excellence. Defenders point out that Walmart is regularly recognized as among the “most admired” companies in Fortune magazine’s annual survey. By all accounts, Walmart is among the most financially successful companies in the world. Defenders would point out that this economic success itself is social responsibility. Walmart has created immense value for shareholders, consumers, suppliers, and employees. Stockholders – both individual and institutional investors – have received significant financial benefits from Walmart. Consumers also receive financial benefits in the form of low prices, employees benefit from having jobs, many businesses benefit from supplying Walmart with goods and services, and communities benefit from tax-paying corporate citizens. Beyond these economic benefits, Walmart regularly contributes to community and social causes. The Walmart Foundation, a philanthropic arm of Walmart, is the largest corporate cash contributor in the United States. For fiscal year 2009, Walmart donated more than $378 million in cash and in-kind gifts to charitable organizations. Walmart contributed more than $45 million to charities outside of the United States, and its in-store contribution programs added another $100 million to local charities. Walmart has focused its charitable giving in areas such as disaster relief, food and hunger programs, and education. More recently, Walmart began an initiative to promote sustainability both in its own operation and in the products it sells. In 2005, Walmart announced major sustainability goals for its own operations, including becoming more energy efficient, reducing its carbon footprint, reducing wastes and placating, and finding more sustainable sources for its products. Despite these positive aspects, not everyone agrees that Walmart lives up to high ethical standards. The allegations of widespread bribery in Mexico are only the most recent charges that have been raised against Walmart’s ethical standards. In contrast to Fortune magazine’s claim, critics portray Walmart as among the least admired corporations in the world. Ethical criticisms have been raised against Walmart on behalf of every major constituency – customers, employees, suppliers, competitors, communities – with whom Walmart interacts. For example, some critics charge that Walmart’s low priced goods, and even their placement within stores, are a ploy to entice customers to purchase more, and higher-priced, goods. Such critics would charge Walmart with deceptive and manipulative pricing and marketing. But perhaps the greatest ethical criticisms of Walmart have involved treatment of worse. Walmart is well known for its aggressive practices aimed at controlling labor costs. Walmart argues that this is part of its strategy to offer the lowest possible prices to consumers. By controlling labor costs through wages, minimum work hours and high productivity and by keeping unions away, Walmart is able to offer consumers the lowest everyday prices. One of the most infamous cases of employee treatment involved health care benefits. In October 2005, The New York Times published a story detailing a Walmart internal memo that outlined various proposals for reducing health care costs paid for Walmart employees. The memo recommended two major areas for action: (1) increase reliance on part-time workers who do not qualify for health care benefits and (2) seek ways to encourage healthier and discourage unhealthy job applicants and employees. The memo also acknowledged long-standing criticism of Walmart’s treatment of its employees and offered suggestions for a public relations strategy that would deflect criticism of these proposed changes. The memo was written by Susan Chambers, Walmart’s executive vice president for employee benefits, and pointed out that Walmart employees are “getting sicker than the national population, particularly in obesity-related diseases,” including diabetes and coronary artery disease. In one passage, Chambers recommended that Walmart arrange for “all jobs to include some physical activity (e.g., all cashiers do some cart-gathering)” as a means of deterring unhealthy employees and job applicants. “It will be far easier to attract and retain a healthier work force than it will be to change behavior in an existing one,” the memo said. “these moves would also dissuade unhealthy people from coming to work at Walmart.” Recognizing that young workers are paid less and require fewer health benefits than older workers, and are equally productive, the memo recommended strategies – including reducing 401(k) contributions and offered education benefits – for attracting younger employees and discouraging older employees. The memo stated “the cost of an associate with seven years of tenure is almost 55 percent more than the cost of an associate with one year of tenure, yet there is no difference in his or her productivity. Moreover, because we pay an associate more in salary and benefits as his or her tenure increases, we are pricing that associate out of the labor market, increasing the likelihood that he or she will stay with Wal-Mart.” The memo pointed out that 46 percent of the children of Walmart’s 1.33 million U.S. employees were uninsured or on Medicaid. “Wal-Mart’s critics can easily exploit some aspects of our benefits offering to make their case; in other words, our critics are correct in some of their observations. Specifically, our coverage is expensive for low-income families, and Wal-Mart has a significant percentage of associates and their children on public assistance.” Walmart has also been criticized for paying its workers poverty-level wages. The average annual salary for a Walmart sales associate in 2001 was $13,861, and the average hourly wage was $8.23. For the same year, the U.S. federal poverty level for a family of three was $14,630. Walmart offers health care benefits to full-time workers but, relative to other employers, Walmart employees pay a disproportionately high percentage of the costs. According to critics, these low wages and benefits result in many Walmart employees qualifying for government assistance programs such as food stamps and health care, effectively creating a government subsidy for Walmart’s low wages. Walmart has also been sued by employees in nine separate U.S. states for illegally requiring employees to work overtime without pay and to work off-the-clock. The U.S. National Labor Relations Board filed suit against Walmart stores in Pennsylvania and Texas, charging illegal anti-union activities. Maine Department of Labor fined Walmart for violating child labor laws. Walmart has also been sued in Missouri, California, Arkansas, and Arizona for violating the Americans with Disabilities Act. Walmart employs more women than any other private employer in the United States. Women comprise more than 70 percent of Walmart’s sales associate, but men hold 90 percent of the store manager position. Less than one-third of all managerial positions are held by women, significantly lower than the 56 percent among Walmart competitors Target and K-mart. Only one of the top 20 positions at Walmart is held by a woman. In June 2004, a federal judge in California ruled that a class-action lawsuit could proceed on behalf of all female employees of Walmart, noting that “plaintiffs present largely uncontested descriptive statistics which show that women working at Wal-Mart stores are paid less than men in every region, that pay disparities exist in most job categories, that the salary gap widens over time, that women take longer to enter management positions, and that the higher one looks in the organization, the lower the percentage of women.” U.S. federal agents raided 60 Walmart stores in 20 states in October 2003. The raids resulted in arrests of more than 250 illegal aliens who were working as janitors at Walmart stores. All of the workers were employed by third-party subcontractors that Walmart had hired for overnight janitorial services. A lawsuit was filed on behalf of several of these workers, claiming that Walmart knowing employed illegal workers as part of a scheme to pay below minimum wages, deny overtime pay, and otherwise exploit their illegal status. Many local communities also criticize Walmart as a major factor in the demise of small towns and local businesses. Small retail businesses find it difficult to compete with Walmart’s pricing and marketing strategies, and local communities suffer when Walmart builds giant stores in suburban and rural locations. This not only encourages sprawl and places additional burdens on roads and transportation, it can undermine the local tax base. Further, the loss of local business has a trickle-down effect when local suppliers and professionals such as accountants, lawyers and banks suffer the loss of local business to Walmart’s national and international suppliers. The problem is compounded when Walmart receives tax subsidies and tax breaks offered by local governments hoping to attract a Walmart store. Walmart’s aggressive strategy to lower costs is also criticized for the harm it can cause suppliers, both nationally and internationally. Walmart has been known to forced suppliers to bid against each other in a type of “reverse auction,” in which suppliers compete to see who can offer their products at the lowest costs. Because Walmart controls such a large market segment, many suppliers cannot survive if Walmart declines to carry their product. This practice has cause some businesses to go out of business, and most others find ways to send production offshore. One result is that Walmart, which promoted a “Buy American” marketing campaign in the 1980’s, is responsible for the loss of uncounted American jobs as American businesses have been forced to outsource their production as the only means available to meet Walmart’s price targets. Finally, Walmart’s suppliers in China, Central America, and Saipan have all been accused of sweatshop conditions in factories manufacturing clothing produced for Walmart. Students are asked to consider the following questions when reflecting on the issues in this scenario: • Based on the cases described, how would you describe the managerial philosophy of Walmart? What principles are involved? What are the overriding aims, values, and goals of Walmart? • How would you decide, in any of the cases mentioned, if Walmart had been acting in a socially responsible way or not? What considerations would help you to decide? • Does it matter to you, as a potential customer or a potential employee, if Walmart has acted unethically? Why or why not? • For a corporation as complex as Walmart, with some activities that can be described as unethical and some as ethical, is it ever possible to make a blanket ethical judgment about its operations? • How might Walmart executives defend their actions after they learned of the bribery in Mexico? Would your judgment change if bribery was a common business practice in Mexico? I. Introduction a. This chapter addresses: the nature of Corporate Social Responsibility (CSR) and how firms opt to meet and demonstrate their fulfillment of this perceived responsibility. i. What Responsibility Does Business Have? At a minimum, it is indisputable that business has a social responsibility to obey the law. 1. Economists might also say that business has a social responsibility to produce the goods and services that society demands. 2. If a firm fails to meet society’s interests and demands, it will simply fail and go out of business. ii. We can say that the primary question of CSR is the extent to which business has social responsibilities that go beyond producing goods and services within the law. *Chapter Objective 1 Discussed Below* b. Corporate Social Responsibility: Refers to the responsibilities that a business has to the society in which it operates. i. From an economic perspective, a business is an institution that exists to produce goods and services demanded by society and, by engaging in this activity, the business creates jobs and wealth that benefit society further. ii. The law has created a form of business called corporations, which limits the liability of individuals for the risks involved in these activities. *Chapter Objective 2 Discussed Below* iii. The economic model of CSR, holds that business’ sole duty is to fulfill the economic functions businesses were designed to serve. 1. On this narrow view, the social responsibility of business managers is simply the pursuit of profit within the law. 2. Because profit is an indication that business is efficiently and successfully producing the goods and services that society demands, profit is a direct measure of how well a business firm is meeting its society’s expectations. 3. Corporations are expected to obey the legal mandates established by the society. 4. This economic model of CSR denies that business has any social responsibilities beyond the economic and legal ends for which it was created. iv. Profit-Based Social Responsibility: Milton Friedman’s 1970 New York Times article “The Social Responsibility of Business Is to Increase Its Profits” is perhaps best known as an argument for this economic model, or profit-based, social responsibility of business. 1. Friedman does not ignore ethical responsibility in his analysis; he suggests that decision makers are fulfilling their responsibility if they follow their firm’s self-interest in pursuing profit. 2. Friedman explains that a corporate executive has a responsibility to conduct business in accordance with his/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. v. This view of corporate social responsibility has its roots in the utilitarian tradition and in neoclassical economics. 1. As agents of business owners, the contention is that managers do have social responsibilities – their primary responsibility is to pursue maximum profits for shareholders. By pursuing profits, a business manager will allocate resources to their most efficient uses. 2. Consumers who most value a resource will be willing to pay the most for it; so, profit will continuously work toward the optimal satisfaction of consumer demand which, in one interpretation of utilitarian, is equivalent to maximizing the overall good. c. Debates concerning CSR start with alternatives to the narrow view expressed by Friedman and others. i. As alternatives to the economic model, we describe three models that provide a helpful way to understand debates surrounding corporate social responsibility: the philanthropic model, the social web model, and the integrative model. II. Ethics and Social Responsibility *Chapter Objective 3 Discussed Below* a. The words responsible and responsibility are used in several different ways i. When we say that a business is responsible we might mean that it is reliable or trustworthy. ii. A second meaning of responsible involves attributing something as a cause for an event or action. iii. A third sense involves attributing liability or accountability for some event or action creating a responsibility to make things right again. 1. For example, that a business is responsible for a polluted river is not only to say that the business caused the pollution but that the business is at fault for it and should be held accountable. iv. Laws regarding product safety and liability involve many of these meanings of being responsible. 1. When a consumer is injured, for example, a first question is to ask if the product was responsible for the injury, in the sense of having caused the injury. 2. For example, several years ago, a controversy developed over the drug Vioxx – some evidence suggested that Vioxx was responsible for causing heart attacks in some users. The debates that followed addressed two questions: Was Vioxx the cause of the heart attacks? Was Merck at fault, i.e., should it be held legally liable for the heart attacks? 3. Both ethics and tort law involved the question of liability or fault for causing harm. *Reference: Figure 5-1 – Responsible and Responsibility v. It is the sense of responsibility as accountability that is at the heart of CSR. Corporate social responsibility refers to those actions for which a business can be held accountable. 1. We can think of responsibilities as those things that we ought, or should, do even if we would rather not. 2. Responsibilities bind, or compel, or constrain, or require us to act in certain ways. 3. We can be expected to act in order to fulfill our responsibilities; and we will be held accountable if we do not. 4. To talk about corporate social responsibility is to be concerned with society’s interests that should restrict or bind business’ behavior. 5. Social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost. vi. Philosophers often distinguish three different levels of responsibilities in this sense on a scale from more to less demanding or binding: 1. The most demanding responsibility is the responsibility not to cause harm to others: often called duty or obligation, obliges us in the strictest sense. For example, a business ought not to sell a product that causes harm to consumers, even if there would be a profit in doing so. 2. The second, less binding, responsibility is to prevent harm even in those cases where one is not the cause. These are so-called good Samaritan 3. Finally, there might be responsibilities to do good, such as volunteering and charitable work. vii. Is there a duty not to cause harm? 1. The strongest sense of responsibility is the duty not to cause harm. Even when not explicitly prohibited by law, ethics would demand that we not cause avoidable harm. 2. If a business causes harm to someone and, if that harm could have been avoided by exercising due care or proper planning, then both the law and ethics would say that business should be held liable for violating its responsibilities. 3. In practice, this ethical requirement is the type of responsibility established by the precedents of tort law. When it is discovered that a product causes harm, then business can appropriately be prevented from marketing that product and can be held liable for harms caused by it. a. For example: Businesses are restricted in marketing products that have been proven to cause cancer and other serious medical harms. viii. Is there a responsibility to prevent harm? 1. There are other cases in which a business is not causing harm, but could easily prevent harm from occurring. 2. A more inclusive understanding of corporate social responsibility would hold that business has a responsibility to prevent harm. 3. Example: Merck’s drug, Mectizan, prevents river blindness, a disease prevalent in tropical nations – infecting between 40 and 100 million people annually. A single tablet of Mectizan administered once a year can relieve the symptoms and prevent the disease from progressing. Mectizan would not be a very profitable drug to bring to market considering the low demand and the target audience being among the poorest people living in the poorest regions of Africa, Asia, Central America and South America. However, in 1987, Merck started a program to provide Mectizan free of charge, forever. Merck’s actions were explained in part of its corporate identity statement: “We are in the business of preserving and improving human life.” 4. Clearly, Merck was not responsible for causing river blindness, thus, according to the standard of CSR, they had no social responsibility, but their executives saw this issue differently. They felt that they did have a social responsibility to prevent a disease easily controlled by their patented drug. ix. Is there a responsibility to do good? 1. The third, and perhaps 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. 2. Corporate philanthropy would be the most obvious case in which business takes on a responsibility to do good. 3. Corporate giving programs to support community projects in the arts, education, and culture are clear examples. Some corporations have a charitable foundation or office that deals with such philanthropic programs. *Reference: “Reality Check – Corporate Philanthropy: How Much Do Corporations Give?”* 4. Many of the debates surrounding corporate social responsibility involve the question of whether business really has a responsibility to support these valuable causes. 5. Some 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. 6. Others argue that business does have an obligation to support good causes and to “give back” to the community, as a sense of gratitude and thankfulness – something less binding than a legal or contractual obligation, but more than a simple act of charity. *Reference: “Figure 5.2 – Models of Corporate Social Responsibility”* *Chapter Objective 4 Discussed Below* III. Philanthropic Model of CSR a. As the name suggests, the philanthropic (or philanthropy) model of CSR holds that, like individuals, business is free to contribute to social causes as a matter of philanthropy. i. Business has no strict obligation to contribute to social causes but it can be a good thing when they do so. 1. Just as individuals have no ethical obligation to contribute to charity or to do volunteer work in their community, business has no ethical obligations to serve wider social goods. 2. But, just as charity is a good thing and something that we all want to encourage business should be encouraged to contribute to society in ways that go beyond the narrow obligations of law and economics. 3. This is especially common in small, locally-owned businesses where the owners also often play a prominent leadership role within their local community. ii. There are occasions in which charity work is done because it brings the firm good public relations provides a helpful tax deduction and builds goodwill and a good reputation within a community. *Reference: “Reality Check – Putting Your Money Where Your Mouth Is?”* 1. Peruse the program at a local art gallery museum theater school event and you will likely see a list of local businesses as donors or sponsors who have contributed to the event. The social contribution is as much an investment as it is a contribution since the business gets recognition and advertising in the program. iii. There are also cases in which business contributes to social causes without seeking any reputational benefits. 1. Some firms contribute to charity anonymously. 2. Some support causes that have little or no business or financial payoff as a matter of giving back to their communities. 3. One may contend that corporate support for these social causes is done imply because it is the good and right thing to do. 4. Others would suggest that the business has concluded that the society in which the firm does business is a stronger or better one if this particular activity exists. iv. Situations where a business supports a social cause for the purpose of receiving a business benefit in return are not much different from the economic view of CSR. 1. In these cases, a business manager exercises managerial discretion in judging the social contribution will have economic benefits. 2. There is a great deal of overlap between decision makers who engage in the philanthropic model for reputational reasons and those who follow the economic view of business’ social responsibilities. v. The philanthropic model in which business support for a social cause is done simply because it is the right thing to do differs from the reputational version only in terms of the underlying motivation. 1. In one case, the social good is done as a means to economic ends. 2. In the other case, the social good is done as an end in itself. 3. From the perspective of the economic model, only philanthropy done for reputational reasons and financial ends is ethically responsible. 4. From the perspective of the philanthropic model, philanthropy done for financial reasons is not fully ethical and not truly an act of social responsibility. *Chapter Objective 5 Discussed Below* IV. Social Web Model of CSR a. The social model of CSR contains a variety of perspectives which all share in common the view that business exists within a web of social relationships. i. Views business as a citizen of the society in which it operates and, like all members of a society, business must conform to the normal ethical duties and obligations that we all face. 1. While producing goods and services and creating wealth and profits are among business’ responsibilities, they do not trump other ethical responsibilities that equally bind all members of a society. ii. Philosopher Norman Bowie has defended one version of CSR that would fall within this social web model. 1. Bowie argues that beyond the economic view’s duty to obey the law business has an equally important ethical duty to respect human rights. 2. Respecting human rights is the “moral minimum” that we expect of every person whether they are acting as individuals or within corporate institutions. 3. Bowie identifies his approach as a “Kantian” theory of business ethics. He begins with the distinction between the ethical imperatives to cause no harm to prevent harm and to do good. a. People have a strong ethical duty to cause no harm, and only a prima facie duty to prevent harm or to do good. b. The obligation to cause no harm, in Bowie’s view, overrides other ethical considerations. 4. Bowie accepts the economic view that managers are the agents of stockholder-owners and thus they also have a duty to further the interests of stockholders. 5. According to Bowie, as long as managers comply with the “moral minimum” and cause no harm, they have a responsibility to maximize profits. 6. Bowie would argue that business has a social responsibility to respect the rights of its employees, even when not specified or required by law. 7. But the contractual duty that managers have to stockholder-owners over-rides the responsibility to prevent harm or to do (philanthropic) good. b. Example of a Social Web Model: Stakeholder Theory i. Stakeholder Theory is perhaps the most influential version of CSR that would fall within the social web model. 1. Stakeholder theory begins with the recognition that every business decision affects a wide variety of people benefiting some and imposing costs on others. 2. Business decisions produce far-ranging consequences to a wide variety of people. Every decision involves the imposition of costs, in the sense that every decision involves opportunities forgone, choices given up. 3. Stakeholder theory recognizes that every business decision imposes costs on someone and mandates that those costs be acknowledged. 4. Any theory of corporate social responsibility must then explain and defend answers to the questions: for whose benefit and at whose costs should the business be managed? ii. The economic model argues that the firm should be managed for the sole benefit of stockholders. This view is justified by the appeal to the rights of owners, the fiduciary duty of managers, and the social benefits that follow from this arrangement. iii. Stakeholder theory argues on factual, legal, economic, and ethical grounds that the economic model is an inadequate understanding of business. 1. R. Edward Freeman has offered a defense of the stakeholder model in his essay, “Managing for Stakeholders.” He describes both a narrow and a wider understanding of the concept of a “stakeholder.” a. In a narrow sense, a stakeholder includes anyone who is vital to the survival and success of the corporation. b. More widely, a stakeholder could be “a group or individual who can affect or be affected by the corporation.” 2. As a descriptive account of business the classical stakeholder model ignores over a century of legal precedent arising from both case law and legislative enactments. 3. As a matter of law, it is simply false to claim that management can ignore duties to everyone but stockholders. 4. Corporate management must limit their fiduciary duty to stockholders in the name of the rights and interests of various constituencies affected by corporate decisions. 5. Factual, economic considerations also diminish the plausibility of the economic model. The wide variety of market failures in economics show that even when managers pursue profits, there are no guarantees that they will serve the interests of either stockholders or the public. iv. The economic model appeals to two fundamental ethical norms for its justification: 1) utilitarian considerations of social well-being; 2) individual rights. v. The stakeholder theory requires management to balance the ethical interests of all affected parties, much like utilitarianism requires management to consider the consequences of its decisions for the well-being of all affected groups. 1. According to the rights-based ethical framework, the overriding moral imperative is to treat all as ends and never as means only. vi. The stakeholder theory argues that a wider “stakeholder” theory of corporate social responsibility is proven ethically superior. vii. Freeman argues that the “stakeholder” theory does not give primacy to one stakeholder group over another, although there will be times when one group will benefit at the expense of others. viii. Firms exist in a web of 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. V. Integrative Model of CSR a. Much of CSR literature assumes a tension between the pursuit of profit and social responsibility. But, there have always been organizations that turn this tension around and pursue social ends as the very core of their mission. b. There is growing recognition that some for-profit organizations have social goals as a central part of the strategic mission of the organization. i. In two areas in particular, social entrepreneurship and sustainability, we find for-profit firms that do not assume a tension between profit and social responsibility. 1. The Grameen Bank is one example of the growing movement of social entrepreneurship. 2. Firms that make environmental sustainability as central to their mission, such as Interface Corporation, are an example of sustainability. *Reference: “Reality Check – “Browsing for Social Good”* ii. Because these firms bring social goals into the core of their business model and fully integrate economic and social goals, we refer to this as the integrative model of CSR. 1. Even defenders of the narrow economic model of CSR, such as Milton Friedman, would agree that owners of a firm are free to make the pursuit of social goals a part of their business model. They would just disagree that these social goals should be part of every business’s mission. 2. For a clear articulation of arguments surrounding each of the CSR models, see the article “Rethinking the Social Responsibility of Business,” reprinted at the end of this chapter. iii. Social entrepreneurs demonstrate that profit is not incompatible with doing good, and therefore that one can do good profitably. *Reference: “Reality Check – Fairness in a Cup of Coffee: Example of the Integrative Model”* iv. However, there are some who would argue that the ethical responsibilities associated with sustainability are relevant to every business concern. 1. Sustainability offers a model of CSR that suggests that ethical goals should be at the heart of every corporate mission. c. The Implications of Sustainability in the Integrative Model of CSR: As a topic within CSR, sustainability holds that a firm’s financial goals must be balanced against and perhaps even overridden by environmental considerations. i. Defenders of this approach point out that all economic activity exists within a biosphere that supports all life. ii. They argue that the present model of economics, and especially the macroeconomic goal of economic growth, is already running up against the limits of the biosphere’s capacity to sustain life. iii. Fundamental human needs for goods such as clean air, water, nutritious food, and a moderate climate are threatened by the present dominant model of economic activity. 1. From this perspective the success of a business must be judged not only against the financial bottom line of profitability but also against the ecological and social bottoms lines of sustainability. 2. A firm that is financially profitable, but that uses resources at unsustainable rates and that creates wastes at rates that exceed the Earth’s capacity to absorb them is a business or industry that is failing its fundamental social responsibility. 3. A firm that is environmentally unsustainable is also a firm that is financially unsustainable in the long-term. iv. A business model that ignores the biophysical and ecological context of its activities is a business model doomed to failure. *Reference: “Reality Check – Will Sustainability Reports Replace the Annual Financial Reports?”* *Teaching Note: Engage students in a discussion about whether or not they would use a company’s sustainability report to evaluate a company that they were considering working for. Why or why not? Also ask the students whether or not they would use the sustainability report to evaluate the company if they were thinking of investing in it. Again, discuss why they would or would not consider the sustainability report when making this decision. *Chapter Objective 7 Discussed Below* VI. Exploring Enlightened Self-Interest: Does “Good Ethics” Mean “Good Business?” a. “If business does not serve society, society will not long tolerate our profits, or even our existence.” CSR not only provides benefits to society but it can also benefit an organization by securing its place within a society. b. But are there other reasons self-interested and economic for a business to engage in socially responsible activities? Can we make a “business case” for CSR? For more on this topic, see Reading 5-3, “The Link Between Competitive Advantage and Corporate Social Responsibility,” by Michael E. Porter and Mark. Kramer. i. Perhaps the most obvious answer to this question is that CSR can improve a firm’s reputation within a community, which can improve profitability by improving a company’s standing among its stakeholders, including consumers and employees. ii. Some evidence suggests that employees who are well treated in their work environments may prove more loyal and more effective and productive in their work. 1. Liz Bankowshi director of social missions at Ben & Jerry’s Homemade Ice Cream Company claims that 80 to 90 percent of Ben & Jerry’s employees work there because “they feel they are part of a greater good.” 2. The positive impact on the bottom line, therefore, stems from customer preference and employee preference. iii. The problem with a focus on reputation, however, is that social responsibility can then become merely social marketing. iv. 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. 1. Paul Hawken cofounder of Smith & Hawken gardening stores and an advocate of business social responsibility reminds us that: “[y]ou see tobacco companies subsidizing the arts then later you find out that there are internal memos showing that they wanted to specifically target the minorities in the arts because they want to get minorities to smoke. That’s not socially responsible. It’s using social perception as a way to aggrandize or further one’s own interests exclusively.” 2. Procter & Gamble Co. was harshly criticized by respondents to a survey seeking to rank firms on the basis of their corporate philanthropy. Respondents contended that P&G did “absolutely nothing to help” after the September 11 tragedy. However in truth P&G provided more than $2.5 million in cash and products but simply did not publicize that contribution. c. Reputation Management: practice of caring for the “image” of a firm. i. There is nothing inherently wrong with managing a 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! *Reference: “Figure 5-3 – The Construction of Corporate Reputation” 1. If a firm creates a good image for itself it builds a type of trust bank—consumers or other stakeholders seem to give it some slack if they then hear something negative about the firm. 2. Similarly if a firm has a negative image that image may stick regardless of what good the corporation may do. 3. Plato explored this issue when he asked whether one would rather be an unethical person with a good reputation or an ethical person with a reputation for injustice. You may find that if given the choice between the two, companies are far more likely to survive under the first conception than under the second. *Reference: “Reality Check – “Enron and BP as ‘Most Admired’”* ii. Check out the perspectives of various consumer and advocacy groups in connection with well-known businesses at any of the following web sites: • www.ihatestarbucks.com • www.starbucked.com iii. In some ways, reputation may often be more forceful than reality. 1. For example: Shell Oil has publicized its efforts toward good citizenship in Nigeria; but it has an unfortunate record in terms of its responsiveness to spills, and its community development projects have created community rifts in areas around oilfields. iv. Is good ethics also good business? The larger question involves the possible correlation between profits and ethics. 1. One important justification offered for CSR, what is often called enlightened self-interest, presumes that it is or at least it can be. 2. Theorists continue to dispute whether ethical decisions lead to more significant profits than unethical decisions. 3. While we are all familiar with examples of unethical decisions leading to high profits there is general agreement that in the long run ethics pays off. However, the measurement of that payoff is a challenge and sometimes the long-term value is not as evident or obvious. *Chapter Objective 8 Discussed Below* d. Is there a business case for a return on investment from ethics? i. There is evidence that good ethics is good business; yet the dominant thinking is that if it cannot be measured, it is not important. As a result, efforts have been made to measure the bottom-line impact of ethical decision making. ii. Measurement is critical because the business case is not without its detractors. For example, David Vogel, a political science professor at Berkeley, 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. 1. Vogel argues that CSR should be perceived as one option for a business strategy that might be appropriate for certain types of firms under certain types of conditions, such as well-known brand names whose reputations are subject to threats by activists. 2. He warns of the exposure a firm might suffer if it does not live up to its CSR promises. 3. Vogel also cautions against investing in CSR when consumers are not willing to pay higher prices to support that investment. 4. While this argument is persuasive, research suggests the contrary to be true on numerous counts, most predominantly, the overall return on investment to the company. iii. Evidence of Impact: A recent study entitled “Developing Value: The Business Case for Sustainability in Emerging Markets,” provides evidence that in emerging markets, cost savings, productivity improvement, revenue growth, and access to markets were the most important business benefits of sustainability activities. 1. Environmental process improvements and human resource management were the most significant areas of sustainability activities. 2. 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 multinational enterprises (MNEs). e. Outcomes to Ethics Programs: Studies have found a number of expected and measurable outcomes to ethics programs in organizations. i. Some people look to the end results of the firms that have placed ethics and social responsibility at the forefront of their activities, while others look at the firms that have been successful and try to determine the role that ethics may have played in that success. *Reference: “Reality Check - So They Say”* ii. 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. iii. Link to Financial Performance? 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. iv. Another study by Murphy and Verschoor found 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 Business Week ranking of total financial performance. 1. The researchers also found that these same firms had a significantly better reputation among corporate directors, security analysts, and senior executives. 2. The same result was found in a 2001 Fortune survey of Most Admired Companies. 3. The UK-based Institute of Business Ethics did a follow-up study to validate these findings and found that from the perspectives of economic value added, market value added, and the price-earnings ratio, those companies that had a code of conduct outperformed those that did not over a five-year period. 4. The higher performance translated into significantly more economic value added, a less volatile price/earnings ratio, and 18% higher profit/turnover ratios. 5. This study “gives credence to the assertion that ‘you do business ethically because it pays.’” f. Does a Social Responsibility of Business Exist? i. The responsibility may be based in a concept of good corporate citizenship, a social contract, or enlightened self-interest. ii. It is impossible to engage in business today without addressing CSR. iii. Despite substantial differences among companies, research demonstrates that almost all companies will confront CSR issues from stakeholders at some point in the near future. *Reference: Opening Decision Point Revisited – Walmart’s Ethics* • This Decision Point explains that more damaging than the reports of bribery in Mexico, The New York Times report also alleged that when the internal investigation was shared with corporate headquarters, Walmart executives terminated the investigation. The Times reported that only upon learning of the newspaper’s own investigation and plans to write a story, did Walmart executives notify legal authorities. As a result, the United States Justice Department began an investigation of possible violations of the U.S. Corrupt Foreign Practices Act in 2011. o How does the fact that Walmart’s corporate executives knew of the bribery in Mexico change any judgments you made in the Opening Decision Point? o How might those executives defend their actions? Suppose bribery was a common business practice in Mexico? • In a famous essay on corporate social responsibility, economist Milton Friedman claimed that “[f]ew trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” o How would you judge the business practices of Walmart in light of this quote from Friedman? Instructor Manual for Business Ethics: Decision Making for Personal Integrity and Social Responsibility Laura P. Hartman, Joseph R. Desjardins, Chris MacDonald 9780078029455, 9781259060588, 9781259417856
