Corporate Social Responsibility

Lectures 5 and 6
 The Socially Responsible Corporation is the
Good Corporation
• Meaning and scope of this statement.
• Under which circumstances can someone be
considered socially responsible?
• Should it be based on the purpose of the
corporation?
• Doesn’t the institution have to be good in itself
in order to apply the principle of functionality
(something is good if its fulfills its purpose)?
• For many, the view that the purpose of the
corporation is to make a profit for stockholders
is beyond debate and is accepted as a matter
of fact (Arnold et. Al. 46). Discuss
 Back to Friedman
Some Guidelines
• Stockholders own the corporation, thus profits belong to them.
• Managers don’t have any right to manage income for other
purpose beyond stockholders’ profit.
• General welfare is the responsibility of the government (not
strictly Friedman’s view or that of libertarians or most
neoliberals).
• Stockholders are entitled to profit because they are the one’s
risking capital.
• Each party in the manufacture process receives what has freely
accepted (managers, consumers, employees, shareholders).
 6

Response 1: Friedman’s view is circular

• Neither the agent-employer relationship, nor the
agreements this involves, nor the social role of managers
gives rise to an unlimited obligation to serve the
shareholders’ interests.

• The limits are given by ethical and/or legal constraints, in

part inherent in the role/the relationship. But then
Friedman’s view becomes circular: the manager is only
morally permitted to act in the interests of the
shareholders if this is indeed morally permitted!
 Contractarianism
1. Political
- Hobbes, Leviathan (1651)
- Jean Jacques Rousseau, The Social Contract (1750)

2. Moral (and legal)

Two main norms that validate private contracts:

- Parties must enter the contract voluntarily (freely)

- Parties must be fully aware of implications and scope of the contract
 8

Response 2: Friedman’s view also presupposes

moral limits
• The sort of “invisible hand” (Adam Smith) ethics that
Friedman advocates presupposes a certain level of ethical
conduct.
• Observe: Friedman talks about “the rules of the game” –
law infused with morality. “Open and free competition,
without deception or fraud”.
• It is also typically accepted that this “moral minimum”
includes an obligation to engage in business without
inflicting injury on others.
• This, however, opens the door to all sorts of requirements.
 9

Response 3: The market malfunctions

It is far from clear that maximizing profit leads to highest
levels of overall welfare. Consider these:
① Externalities: several ways of increasing profits injure society by
injuring groups who were not part of any market transaction.
② Information asymmetries: buyers do not possess complete
information about the products they buy and, crucially, they
possess less information than the sellers.
③ Imperfect competition: most markets are not perfectly
competitive, but monopolistic or oligopolistic. Hence in these
markets companies can make profits with inefficient production
as well.
④ Public goods: there are goods that solely self-interest driven
agents cannot produce and maintain.
 The Role of Free Speech
• Opposing voices are heard in books, in the
press, or on television so long as there is a
profit to be made (Arnold et. Al. 47) Discuss
 Capitalism and Freedom (1962)
• Capitalism is the necessary condition for
freedom.
• Democracy can turn into the tyranny of
majority rule.
• The market allows the consumer to act freely
(abstain from participating or fully embrace a
product).
• Freedom in your wallet? Discuss
 Friedman’s defense
• “there is one and only one responsibility of
business – to use its resources and engage in
activities designed to increase its profit so long
as it stays within the rules of the game, which
is to say, engages in open and free
competition without deception or fraud”
(Friedman in Arnold et. Al. 47).
 Criticisms
• The legal structure of corporations is morally
questionable and implicitly paves the road for
fraud.
• The consequences of such frauds are the
destruction of the environment, health
problems and death (see Whyte on VITAL).
• The Dodge vs. Ford Motor Company case
 14

Response 4: The “taxation” argument does not work

• It is far from clear that shareholders are owners of the
corporation: they do not nearly possess all the rights that
true owners would have.
• Managers of a corporation do not have an obligation to
earn the greatest amount of profit without regard for the
means used.
• The obligation of managers is not merely to secure the
maximum return but also to preserve the equity invested
in the corporation.
• The interests of shareholders are not narrowly economic;
corporations are generally expected by their owners to
pursue some socially desirable ends.
 15

Response 5: Shareholder ethics can accommodate

CSR
• CSR contributes to profitability because the market
rewards responsible behavior and punishes a company’s
lapses.
• There is a market for virtue: there is a market demand for CSR
created by consumers, employees, investors, NGOs, peer
companies and government.

• CSR can be a source of competitive advantage if it is

integrated into the company’s strategy in a proper and
efficient way.
• Companies can do this either by locating opportunities in their
standard business operations or by transforming the competitive
environment to create new opportunities.
 A Tangential Question
• Some critics believe that CSR is just a
marketing strategy. Notice that “marketing
strategy” here stands for a synonym of
deceiving the public. Marketing students,
what is the goal of marketing?
• Theodore Levitt argues for it.
• Edward Bernays too (see documentary on
Bernays, VITAL).
 A Brief Review
The Structure and its Consequences
• Business (corporation)
• Shareholder focus. The corporation is legally bound to serve
shareholder profit.
• Limited liability. Shareholders and managers can wage their
responsibility and avoid criminal charges.
• Personhood. The person held responsible is abstract, thus
only liable for fines.

Conclusion: It might be profitable to break the law and the

consequences (externalities) are paid by the public and
government.
 The Simple (and simplistic)Logic this System
Allows
• Business Opportunity
CSR as a
marketing strategy?

In compliance with the law, ok! It breaks the law…

Externality (environment, health,

inequality, workers rights)

It’s profitable, ok! It’s not profitable, leave it.

 VW Case
• We are talking about an engine here, a lump of metal, not some interpretation
or shade of meaning. Volkswagen did all it could to hide the fact that its diesel
engines were highly contaminating. How can the head of CSR deny he knew
anything about what was going on? Either that person wasn’t doing their job, or
they were colluding. The conclusion can only be that for Volkswagen, CSR is a
marketing exercise.

• But the sad truth is that this conclusion applies to the vast majority of
companies: a head of CSR is appointed, given an air of respectability, and runs a
department the job of which is to keep the company’s image clean, despite the
filth it is mired in, as is clearly the case with Volkswagen. Once again, we have
allowed ourselves to be duped into believing that companies can and will
regulate themselves, when of course the sordid reality is that as their actions
show, beyond the occasional symbolic act, their sole objective is to maximize
profit, and by any means (Erique Dans, Forbes, 2015).
 Friedman once More
• In his defense; the manager may not do anything to
maximize profits. The existence of a strong democracy
prevents such frauds.
• Problems with revolving doors.
• The neoliberal paradigm was first experimented in
fascist Chile.
• What about lobbying and campaign financing?
• The 2008 crash shows that irresponsibility was the
norm and that banks and corporations had to be bailed
out by governments (tax payers).
• If wages can be cut to generate profit, they
should be cut. Discuss
• As a practical matter, the manager can usually
generate profits only if she teats employees,
customers, and suppliers well (Arnold et. Al.
p.48). Discuss
 A.P. Smith Manufacturing v. Barlow
(New Jersey, 1953)
The directors of AP Smith Manufacturing, approved
donation of $1500 to Princeton University.
“In the light of all of the foregoing we have no hesitancy
in sustaining the validity of the donation by the plaintiff.
There is no suggestion that it was made indiscriminately
or to a pet charity of the corporate directors in
furtherance of personal rather than corporate ends”
(Judge Jacobs).
An act that contributes to welfare can be in the interest
of the corporation.
 Regulations?
• Even in the most traditional interpretation,
managers have a fiduciary obligation to
stockholders interests. But many U.S. states
have laws that permit managers to take into
account the needs of the other stakeholders;
and in Europe and Japan, consideration for
employees, the community, and the
environment are not only permitted by are
expected (Arnold et. Al. p. 48).
 24

Edward Freeman (1951-)

“Corporations shall be managed in the interests of its

stakeholders, defined as employees, financiers, costumers,
and communities.”
(A Stakeholder Theory of Modern Corporation)
 25

Stakeholder ethics
• This approach does not give priority to a particular group
of stakeholders, in particular, to shareholders. Instead,
ethical management consists in keeping the relationships
and the benefits for the diversity of stakeholders in
balance.
• Three ways to understand the theory:
① As a descriptive thesis about how modern corporations work.
② As an instrument or tool that helps decision makers to conduct
their daily business (even if the primary aim of that is to
maximize profit).
③ As a normative thesis about what should be of value for a
corporation.
 26

Stakeholder mapping
 27

Justifying stakeholder ethics

• With a stake in the corporation, a right gets grounded:
stakeholders’ interests have intrinsic value giving rise to
rights and obligations.

• We have to change our conception of what a corporation

is: it is not merely a discontinued simple entity with stable
interests, but an interconnected complex entity with
multidimensional, dynamic interests.

• The right form of corporate governance is one that sees

the corporation as a public or social institution that serves
the interests not only of its owners but also of the wider
society.
 28

Objections to stakeholder ethics

• The identification problem. Who belongs to the group of a
company's stakeholders? All potentially affected? To act
ethically, does a manager really have to manage in the
interests of these groups?
• The indeterminacy problem. What precisely does it mean to
manage in the interests of stakeholders? Different groups
have different interests, giving rise to different and conflicting
imperatives and duties. How to adjudicate among these?
• The governance problem. The best way to serve
stakeholders’ interests in a just (fair) way is by allowing
managers to maximize shareholder wealth while leaving
distribution to the market and protection to contracts and
legal rules.
 A bit of critical reading
• What is Pearson? Wanna do your little
research?
• Are the views held biased?
• Is the focus on the stakeholder “alternative”
and “fashionable”?
• What do you understand by “alternative” and
“fashionable”?