symposia

The concept of being a good corporate citizen has such a wide spectrum of thoughts and opinions with proponents and opponents for any given stance in this spectrum. Broadly speaking, there are two viewpoints: the shareholder and the stakeholder models of corporate social responsibility (CSR). There is, as Mintzberg (2001) points out, much middle ground in this debate. CSR can be viewed very much like politics – the stakeholder viewpoint mapping to the socialist left, shareholder with right-wing politics and everything else in between. But what exactly are these viewpoints in the context of corporations?

Friedman (1988) postulated that businesses had no responsibility to anyone but their shareholders. He justified this by stating that managers are employed by their owners, the shareholders, to increase profits therefore increasing shareholder value. Essentially, this viewpoint only takes into account of one of many stakeholders in the stakeholder model. In this model, the needs of various groups that are affected by the company’s operation are taken into consideration equally as a fiduciary duty and that no stakeholder would suffer undue cost without equal compensation (Evan & Freeman, 1995). However, using Freeman’s model of stakeholder CSR, Goodpaster (1991) determined that this model could be further broken down into two distinct forms being the strategic and the multifidicuary stakeholder models (the latter being most similar to the Freeman description).

These models represent the broad spectrum of viewpoints on CSR. But which model best represents the manner that corporations act in practice? And is there a correct and proper way to behave as a good corporate citizen? The short answer is no, as attempting to apply one template unilaterally across all companies is destined to fail. Using the political analogy represented earlier, there is no one universally accepted political ideology. Each organisation must devise a suitable strategy to CSR to suit the environment which they operate in. In particular, they must also work within the guidelines and legislation, as defined by the respective government.

The shareholder model, as introduced earlier, does not allow for any form of altruistic motive when it comes to CSR. It states that by simply maximising profits, corporations are already fulfilling their social obligations (Arrow, 1973). He states that “profit really represents the net contribution that the firm makes to the social good…therefore [profit must] be made as large as possible”. The model further justifies itself by stating that managers are not in the position to decide the best way to contribute to society (Friedman, 1988). Firstly, managers are employed in order to increase the value of the company to the owners. If they were to suddenly give out money to what society would call worthy causes, Friedman’s view was that they were effectively spending someone else’s money. More importantly, however, managers are typically not sufficiently involved in the opposing point of view on societal issues to be able to manage them effectively and fairly. As Friedman (1988) stated “it is hard for ‘evil’ people to do ‘evil’, especially since one man’s good is another’s evil”.

However, the shareholder model does not mandate absolute and utter disregard for the other stakeholders. It does allow corporations to contribute to society provided that it can be shown to improve the company’s bottom line (Mintzberg, 2001). For example, if a bank were to give a large grant to a children’s hospital, it could expect to receive a large deal of positive publicity which would result in profits. This type of behaviour is linked to a form of the stakeholder model known as the strategic stakeholder model. The premise of this model was to strike a balance between the two models where companies attempt to maximise profit whilst minimising costs to all stakeholders. It is also prescribes that a corporation that committed itself to this form of CSR strategy lost money to begin with, but would reap the rewards of its ‘investment’ in the long term (Burke & Logsdon, 1996) in the form of positive publicity and reputation by being seen as a ‘socially responsible and ethically sound corporation’. However, this form of CSR cannot be viewed as purely altruistic as there is in fact a profit motive beneath the seemingly philanthropic actions. Regardless, this is the model that businesses base their CSR approach on as it allows them to contribute to society whilst engaged in a sustainable business.

On the other extreme, there is Freeman’s model of multifidicuary responsibility to stakeholders. This is where shareholder interests are partially shunned in the name of balance and fair compensation to all stakeholders. This model was developed based on legal and economic arguments. Law has evolved over the last century to benefit the community as a whole as well as the individual person (Evan & Freeman, 1995). It has restricted the pursuit of shareholder’s ends at the cost of other stakeholders. Laws have been enacted by government which regulate how stakeholders can be affected by the actions of a company such as environmental protection, workplace relations, trade practices et cetera. There has also been a movement from caveat emptor (buyer beware) to caveat venditor (seller beware). This is evidenced in the concept of product safety recalls by manufacturers, in order to prevent potential liability claims. Doing this is clearly not in the interests of the manufacturer as it will negatively affect their profitability – but this is done in the interests of their stakeholders. A scandal resulting from inaction in this situation could be perceived by customers as bad or incompetent service on the manufacturer’s part, potentially impacting sales in the long-term (Storbacka, Strandvik, & Grönroos, 1994 ).

However, the economic argument in favour of this model states that the pursuit of economic goals clouds managerial judgement of the social issues – such as the issue of the “tragedy of the commons” (Evan & Freeman, 1995). This is where a common good, such as water or air, is damaged by companies. These companies have no financial incentive to prevent or rectify this damage. Furthermore, they justify inaction on the basis of the insignificance of any contribution that the firm may make in dealing with the costs they may incur to other stakeholders. The end result is complete inaction.

The real problem with this model, though, is how the model in its entirety is at odds with the goals of business. At the end of the day, businesses are formed with economic goals in mind (Goodpaster, 1991). The concept of sacrificing profit at the hands of other interested parties is not one that business would be eager to warm to. While this could become part of an ultimate utopia as far as CSR is concerned; it is an unsustainable model for business in its current state.

That said, most corporations are aware of the implications of CSR on their business, and actively develop policies in order to improve and measure their compliance. At the same time, they do not wish to undermine their company’s profitability as that would create a cascade of events that could lead to an organisation’s demise (Evan & Freeman, 1995). Therefore, corporations try to strike a balance between the two viewpoints by applying some form of strategic stakeholder model to their CSR policy. This model favours economic goals, but attempts to minimise harm to other stakeholders.

This is the way that companies should and, for the most part, do behave. Because it is a balanced approach to CSR, it allows for business to continue pursuing the goals of profit whilst taking into consideration the needs of the stakeholders. This means that organisations can indeed aid towards the needs of society, financial or otherwise, provided that they plan to return a profit from such activity. As a result, entities exterior to the organisation and its owners can benefit from the organisation’s philanthropy, even though the company may have a profit motive behind their contribution.

The problem is how much weighting do we need to give to each of the metaphorical scales so as to have all stakeholders in equilibrium? It would be a grave error to assume that a rigid weighting of attention to stakeholders would apply to each and every organisation in any location. In addition, other factors such as the cultural and legal context of the society which the organisation operates in and any professional ethical codes that the organisation has to abide by (Arrow, 1973), must be considered.

Regardless of how far right in the CSR spectrum an organisation sits on, it cannot forget that they are still required to follow any laws and regulations that have been set by the government. Likewise, those with a far left viewpoint also cannot forget that business have fiscal goals which drive the core of the business (Mintzberg, 2001). Culture of the society has a major influence on the representatives in government who enact these regulations. Furthermore, a society’s culture would breed the various pressure, advocacy and activist groups that seek to point out issues affecting them caused by the corporation whilst it is operating in that society. A company that wishes to set up operations in a new location would have to abide by these exterior factors when it comes to dealing with their responsibilities in that society.

Thus, it can be inferred that culture plays a significant effect on how corporations handle CSR in various societies. For example: when we consider the employer-employee relationship between a firm in a developed country and a firm in a developing one. Using the manufacturing sector in China as an example, it is shown that the annual salary in this industry was on average 9,774 Yuan which equates to, using today’s exchange rates as we are only concerned with the concept of pay disparities rather than precise economical analysis, approximately A$1,553p.a in 2001 (Cooke, 2004). Contrast this with Australia, where a manufacturing worker earned between A$700 and A$900 per week (ABS, 2002). This makes it very clear that stakeholder relationships to the organisation, using the employee in their capacity as a stakeholder, can differ significantly between organisations operating in different cultural environments.

Professional ethical codes are a major factor in determining certain organisation’s approach to CSR, most notably in professional services, medicine and real estate. An ethical code is a set of universally accepted definitions of acceptable behaviour. These definitions are not legally binding, nor do they necessarily have to follow a person’s conscience. This approach to corporate social responsibility is applied where there is an imbalance of product knowledge, such as that between a doctor and their patients. A doctor, having this additional knowledge, is in a position to abuse this relationship by unfairly charging their patients. This is why these ethical codes have been developed over the centuries to assure to the purchaser of these services that they are not being exploited (Arrow, 1973). Often, these are codified by professional bodies out of general consensus in the respective professional communities. While these codes are not always followed to the letter (Arrow, 1973), they are relatively successful in ensuring that the professional does not invoke undue and unethical burdens on the purchaser.

Aside from the stakeholder groups that have already been discussed in detail, there is a large stakeholder that plays a serious role when a corporation looks at its CSR. This group is the government. We have already discussed how the government plays its role by enacting laws and regulations that reflect the desires of the community at large. But what is involved with that, and what else do governments do when it comes to CSR? The mechanism of government involvement in the regulation of corporate behaviour can be described as sluggish at best – it tends to be a reactive response rather than a proactive one (Mintzberg, 2001). This is not to mention the bureaucracy involved in passing regulation through parliament. Often, governments rely on activist groups to expose society’s concerns regarding companies, as discussed earlier, in order to control their behaviour if appropriate. The other problem with legislation is that it tends to only set a bare minimum standard for corporate behaviour, with some brave enough to covertly ignore it altogether (Mintzberg, 2001).

This is not to refute the concept of using legislation to regulate corporations altogether, as it certainly does have its place; for example, dealing with the kinds of pollution a company releases, and controlling the amount. The harrowing fact about legislation and business, as Mintzberg (2001) states, is that business has fought every piece of legislation that would have a negative effect on business since the Child Labour Act. Even though these laws have been passed with the support of the public, it has been constantly objected by businesses. This could explain why legislation had not been sufficiently effective as the businesses would have only been applying the bare minimum requirements of the legislation (Mintzberg, 2001). However, regardless of their opposition, business still must abide by legislation when passed by government – even if it is at a bare minimum. This makes government legislation a clumsy, but useful, tool in ensuring companies behave in a socially appropriate way.

As shown earlier, unrestricted profit maximisation has negative effects on a number of stakeholders in the form of an uncompensated cost burden. As Arrow (1973) states, there has to be some movement to change this behaviour of imposing costs on stakeholders without compensation within firms. The government can play a role in achieving this, by imposing levies in order to indirectly compensate these stakeholders and the environment by directing the revenue into socially worthwhile projects. This is occurring in our society today with the introduction of a congestion charge in London’s CBD as well as the planned introduction of carbon credits through the Kyoto Protocol. Also, these schemes are enacted by governments in order to give financial incentive to corporations to behave in a way that is seen to be socially acceptable, bearing in mind that those who enacted the laws are representatives for the community. This is in addition to the compensation, in the form of levies, can be re-invested back into the community by the government.

Several of the positions and models that have been developed in regard to CSR have been examined. These range from the strategic and multifidicuary stakeholder models, where the needs of stakeholders in the company are taken into consideration, to the shareholder model, where the aim is return maximum profit to shareholders. However, as Mintzberg points out, there is no black and white answer when it comes to CSR. Like politics, there are shades of grey in between each model of CSR. In practice, organisations are striving to strike a balance between making a profit and being seen as a socially responsible company. They have also learnt the value of positive reputation – that being a good corporate citizen can lead to increased profits, mitigating any losses that may have been incurred in creating this public image. Excluding the various shades for simplicity, the strategic stakeholder model would be the best model for business to follow when devising how to approach CSR as it allows for organisations to pursue philanthropic means, even if it is for a profit end. While pursing profit, it allows business to support social goals – without the sustainability issues of the utilitarian multifidicuary stakeholder model and the restrictive, profit-focused shareholder model. The role of government in dealing with CSR issues is to enact regulation as representatives of the community. This paper has found that the mechanism of government regulation can be seen as inefficient, but necessary in certain situations. However, government can aid to the goals of CSR by enacting regulation to set the minimum standards that corporations must behave, as opposed to no standards, as well as providing a means of compensation for stakeholders who have suffered costs at the hands of companies.

References

ABS. (2002). Employee Earnings and Hours, Australia, Preliminary. Canberra: Australian Bureau of Statistics.

Arrow, K. (1973). Social Responsibility and economic efficiency. Public Policy, vol. 21, , pp. 303-317.

Burke, L., & Logsdon, J. (1996). How corporate social responsibility pays off. Long Range Planning , vol. 29, no. 4, pp. 495-502.

Cooke, F. (2004). Public-sector pay in China. International Journal of Human Resource Management , vol. 15, no. 4&5, pp. 895-916.

Evan, W., & Freeman, R. (1995). Stakeholder theory of the modern corporation: Kantian capitalism. In Business ethics: readings and cases in corporate morality (pp. 145-154). McGraw-Hill.

Friedman, M. (1988). The social responsibility of business is to increase its profits. In B. A. Bowie, Ethical Theory and Business (pp. 87-91). Prentice Hall.

Goodpaster, K. (1991). Business ethics and stakeholder analysis. Business Ethics Quarterly , vol. 1, no. 1, pp. 53-73.

Mintzberg, H. (2001). Who should control the corporation? In Business ethics: readings and cases in corporate morality (pp. 204-217). McGraw-Hill.

Storbacka, K., Strandvik, T., & Grönroos, C. (1994). Managing customer relationships for profit: the dynamics of relationship quality. International Journal of Service Industry Management , vol. 5, no. 5, pp. 21-38.

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