Kenneth dayton corporate social responsibility

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5Chapter Corporate Social Responsibility Business has to take account of its responsibilities to society in coming to its decisions, but society has to accept its responsibilities for setting the standards against which those decisions are made.1

Sir Adrian Cadbury

We are not in business to make maximum profit for our shareholders. We are in busi- ness . . . to serve society. Profit is our reward for doing it well. If business does not serve society, society will not long tolerate our profits or even our existence.2

Kenneth Dayton, former chair of the Dayton–Hudson Corporation

Make the World a Better Place Ben and Jerry’s corporate mission statement

Corporations are people. Mitt Romney, former governor of Massachusetts and U.S. presidential candidate

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A corporation is an organization created by law and treated as a legal entity, literally a legal “person,” that is separate from and independent of the individuals who are involved in it. As a legal person, a corporation has legal rights and duties that are primarily determined by the laws of the state in which the organization is incorporated. Forming a corporation has several benefits, including limiting legal liability, protecting personal assets, providing tax advantages, and ensuring organizational continuation beyond the life or involvement of individuals.

Traditionally, the state of Delaware has incorporation laws that provide very generous terms for shareholders. Over 50 percent of U.S. corporations and over 60 percent of the Fortune 500 corporations are incorporated in Delaware. Among the benefits provided by Delaware law are strong legal protections for the interests of corporate stockholders. In the words of the chief justice of the Delaware Supreme Court, “American corporate law makes corporate managers accountable to only one constituency—the stockholders.”3

This framework underlies what R. Edward Freeman (see Reading 5-2, “Managing for Stakeholders”) has called the “dominant model” of managerial capitalism. Under that model, business managers act as agents of corporate stockholders and, thus, their primary responsibility is to serve stockholders by maximizing profits. This view was famously summarized in the title of a 1970 New York Times article by economist Milton Friedman: “The Social Responsibility of Business Is to Increase Its Profits.”

Framed in this way, there is an inherent tension between the legal responsibility of business managers and the call for greater corporate social responsibility. Pursuing general goals of social responsibility would violate the primary legal responsibility of business managers to pursue profits. But what if the stockholders themselves choose socially responsible goals in addition to, and perhaps even superior to, profit maximization? Benefit corporations, a new legal model created by more than 20 states (including Delaware), aim to do just this.

Like any corporation, a benefit corporation is a legal entity with legal rights and duties created to achieve the general benefits of any corporation: limiting liability, protecting owner assets, achieving tax advantages, and so on. Importantly, benefit corporations are not nonprofits; they are for-profit businesses that create value for their stockholders as a by-product of creating values for a wide range of other stakeholders. Benefit corporations differ from traditional corporations in that their boards and managers are given the legal authority to pursue social and environmental goals in addition to the financial goals that corporations generally pursue. This means that benefit corporations are free to make social and environmental goals part of the very mission and identity of the corporation and therefore make the boards and managers accountable to wider social goals. The profit sought by stockholders thus becomes one among other equally legitimate goals sought by a range of corporate stakeholders. The tension that is thought to exist between social ends and profit disappears in the benefit corporation model.

One estimate is that there were over 2,000 active benefit corporations in the United States in 2015.4 Some of the best-known companies include King Arthur Flour, Patagonia, Kickstarter, Seventh Generation, and Plum Organics. These for- profit businesses recognize that without profitability they will neither remain in business nor attract the investment needed to grow. But profit is recognized as a

Opening Decision Point Benefit Corporations

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means, not an end in itself. Profits serve socially responsible ends by making the business financially sustainable so that it can pursue social ends.

A number of advantages are claimed for benefit corporations besides the normal financial benefits of any incorporation. Perhaps the most important is that the benefit corporation model allows corporations with socially responsible missions to protect that mission by giving both managers and boards the legal ability to prioritize mission over profits. Especially at a time when corporations and their managers are judged by short-term, quarterly earnings reports, normal corporate charters can create pressures on managers to back away from social missions in order to increase short-term profit. Recognizing that there can be different paths to profitability, benefit corporations hold management accountable for finding a path that also achieves socially responsible mission goals.

Advocates also claim that benefit corporations have the advantage of attracting employees, especially among a younger generation that is concerned as much with workplace quality as with such traditional benefits as salary and status. One study reported that businesses with a clear social mission and a reputation for creating social benefits were more successful in attracting and retaining millennial employees.5

Benefit corporations are also better positioned to attract socially motivated customers and investors. There is a growing market among socially conscious consumers for businesses that serve the common good. There is also a growing capital market among institutional and individual investors seeking socially responsible investments. Pursuit of socially responsible ends is part of the legal charter of benefits corporations and not something done simply as a public relations ploy.

As in any good business practice, benefit corporations have stimulated a movement to measure, assess, and certify businesses engaged as benefit corporations. Some choose to take an additional step and become certified as “B-Corps” by working with an independent nonprofit group, B-Labs, to assess the effectiveness of their strategy in serving socially responsible goals. Becoming a certified B-Corp provides a means for assuring consumers, investors, employees, and the general public that the company is successful in its mission. It is also possible for traditional corporations to meet the criteria established by B-Labs and become certified as a B-Corps without having the underlying legal structure of the benefit corporation.

Ben and Jerry’s was among the first and best-known corporations that adopted a strong socially responsible mission. From its earliest years in the 1980s, Ben and Jerry’s made its social responsibility goals part of its corporate mission. Although legally not a benefit corporation (the legal designation did not exist when the company was incorporated in 1984), its founding owners Ben Cohen and Jerry Greenfield committed the company to a range of social and environmental causes.

Ben and Jerry’s famously identified three fundamental goals as its corporate mission: to make the world’s best ice cream, to run a financially successful company, and to “make the world a better place.” It also started a foundation that was funded from 7.5 percent of the pretax earnings of the company. However, as a publicly traded corporation the fiduciary responsibility of Ben and Jerry’s management and board remained primarily a financial duty.

These issues came to a head in 2000 when Unilever, the multinational food and consumer product corporation, offered to buy Ben and Jerry’s for $43 per share, more

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than double its recent trading value of $17. Corporate buyouts by outside groups typically happen when the outsiders judge that the company is worth more than what is reflected by its share price. In this sense, the outside groups believe that the company is underperforming and worth more than how it is presently valued by the market. Both Ben Cohen and Jerry Greenfield opposed selling the company to Unilever. They feared that a corporate takeover would jeopardize the social mission of Ben and Jerry’s. But the corporate board had an independent duty to the stockholders.

• Does the Ben and Jerry’s board of directors have an ethical duty to sell the com- pany to the highest bidder, even if this risks a change in the corporate mission?

• Should the fact that Unilever has a reputation as a socially progressive and responsible business influence that decision? Would the decision be different if Unilever planned to change the nature of Ben and Jerry’s mission?

• If things had been different and Ben and Jerry’s had been incorporated as a benefit corporation, would an offer at more than twice the present value be enough to change the company mission?

• How do benefit corporations fit into the model of private property, free-market capitalism?

• Suppose shareholders objected not to the mission to “make the world a better place,” but to the mission to “make the world’s best ice cream” and claimed that Ben and Jerry’s could maximize profits by making mediocre ice cream. Should shareholder desire override that aspect of the corporate mission?

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.

3. Distinguish key components of the term responsibility.

4. Describe and evaluate the economic model of corporate social responsibility.

5. Describe and evaluate the stakeholder 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.

Introduction

This chapter addresses the nature of corporate social responsibility (CSR) and how firms opt to meet this perceived responsibility. No one denies that business has some social responsibilities. At a minimum, it is indisputable that business has a social responsibility to obey the law. A large part of this legal responsibility includes the

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responsibility to fulfill the terms of contract with employees, customers, suppliers, lenders, accounting firms, and so forth. Legal responsibilities also include responsi- bilities to avoid negligence and other liabilities under tort law. Economists might also say that business has a social responsibility to produce the goods and services that society demands. If a firm fails to meet society’s interests and demands, it will fail. But beyond these legal and economic responsibilities, controversies abound.

As Chris MacDonald explains in Reading 5-1, “BP and Corporate Social Respon- sibility,” there are ambiguities involved in each of the three terms corporate, social, and responsibilities. In general terms, we can say that the primary question of CSR is the extent to which business organizations and the managers who run them have ethi- cal responsibilities that go beyond producing needed goods and services within the law. There are a range of answers to this question and it will be helpful to clarify some initial concepts before turning to competing models of CSR.

Ethics and Social Responsibility

As a first step toward a better understanding, we should recognize that the words responsible and responsibility are used in several different ways. One meaning involves attributing something as a cause for an event or action. For example, poor lending practices were responsible for (i.e., the cause of) the collapse of many banks during the 2008 economic crisis; and the location of the gas tank was responsible for fires in the Ford Pinto. Being responsible in this causal sense does not carry any ethical attribution; it merely describes events. So, for example, we might say that the wind was responsible for the damage to a house or a particular gene is responsible for blue eyes.

In a second sense, to be responsible does carry an ethical connotation. When we say that business is responsible to someone or for something, we are referring to what a business ethically ought or should do. Ethical responsibilities establish limits to our decisions and actions. To say, for example, that a business has a responsibility to its employees is to say that there are ethical limits to how a busi- ness should treat its employees.

Laws regarding product safety and liability involve these various meanings of being responsible. When a consumer is injured, for instance, a first question to ask is whether the product was responsible for the injury, in the sense of having caused the injury. Several years ago a controversy developed over the drug Vioxx, produced by the pharmaceutical company Merck. Evidence suggested that Vioxx was responsible for causing heart attacks in some users. In the debates that fol- lowed, two questions required answers: Was Vioxx the cause of the heart attacks, and was Merck ethically responsible (i.e., should it be held legally liable for the heart attacks)? Once the causal question is settled, we then go on to ask if the manufacturer is responsible in the sense of doing what was expected ethically.

When we speak of corporate social responsibility, we are referring to the ethi- cal expectations that society has for business. Ethical responsibilities are those things that we ought, or should, do, even if sometimes we would rather not. We

OBJECTIVE

1

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are ethically expected to fulfill our responsibilities; and we will be held account- able if we do not. Thus, to talk about corporate social responsibility is to be con- cerned with society’s interests that should restrict or limit business’s behavior. Social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost.

Philosophers often distinguish between three different levels of responsibilities on a scale from less to more obligatory. First, there are ethical responsibilities to do good. Volunteering and charitable work are typical examples of responsibilities in this sense. While doing a good thing is ethically responsible and something that ethics encourages, we normally do not fault someone for choosing not to contribute to charity. To call an act volunteer work is precisely to suggest that it is optional; one does not have a duty to do it, but it is still a good thing to do. Examples of corporate philanthropy, as when a business sponsors a charity event or contributes to a school project, fit this sense of social responsibility. Ethical considerations would encourage business to support charities or the arts, but it is not something ethically mandatory or required.

A second, more obligatory sense of ethical responsibility is the responsibility to prevent harm. What are often referred to as Good Samaritan cases are examples of people acting to prevent harm, even though they have no strict duty or obliga- tion to do so. Thus, for example, we might say that a company has a responsibility to use renewable energy, even though its actions alone are not causing harm and fossil fuels are legal to use.

The most demanding sense of responsibility is the responsibility not to cause harm to others. Often called a duty or an obligation to indicate that they oblige us in the strictest sense, responsibilities in this sense bind, or compel, or require us to act in certain ways. Society expects fulfillment of these responsibilities and uses the full force of social sanctioning, including the law and legal punishment to enforce them. Thus, a business ought not to sell a product that causes harm to consumers, even if there would be a profit in doing so.

Is there a duty for business not to cause harm? Let us consider how each of these three types of responsibilities might be seen in business. The strongest sense of responsibility is the duty not to cause harm. Even when not explicitly prohib- ited by law, ethics would demand that we not cause avoidable harm. 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. By all accounts, this ethical duty not to cause harm overrides business’s pursuit of profit.

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. So, in the classic case of cigarettes, tobacco companies can be restricted in marketing products that have been proven to cause cancer even if this prevents them from maximizing profits for shareholders.

Is there a responsibility for business to prevent harm? There are also cases in which business is not causing harm, but could easily prevent harm from occurring.

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A more inclusive understanding of corporate social responsibility would hold that business has a responsibility to prevent harm. Consider the actions taken by the pharmaceutical firm Merck & Co. with its drug Mectizan. Mectizan is a Merck drug that prevents river blindness, a disease prevalent in tropical nations. River blindness infects between 40 and 100 million people annually, causing severe rashes, itching, and loss of sight. A single tablet of Mectizan administered once a year can relieve the symptoms and prevent the disease from progressing—quite an easy and effective means to prevent a horrendous consequence.

On the surface, Mectizan would not be a very profitable drug to bring to mar- ket. The once-a-year dosage limits the demand for the drug among those people who require it. Further, the individuals most at risk for this disease are among the poor- est people living in the poorest regions of Africa, Asia, Central America, and South America. However, in 1987 Merck began a program that provides Mectizan free of charge to people at risk for river blindness and pledged to “give it away free, forever.” Cooperating with the World Health Organization, UNICEF, and the World Bank, Merck’s program has donated billions of doses of Mectizan to tens of millions of peo- ple since 1987. The program has also resulted in the development of a health care sys- tem, necessary to support and administer the program, in some of the poorest regions of the world. Merck’s actions were explained by reference to part of its corporate identity statement: “We are in the business of preserving and improving human life.”6

Clearly Merck was not at all responsible for causing river blindness and, there- fore, according to the narrow model of CSR discussed earlier, Merck had no social responsibility in this case. The drug was not profitable and Merck had no legal obligation to provide it. In fact, the narrow economic model of corporate social responsibility might well fault Merck’s management for failing to maximize shareholder value. But, Merck’s management saw the issue differently. Given the company’s core business purpose and values, its managers concluded that they did have a social responsibility to prevent a disease easily controlled by their pat- ented drug. George Merck, grandson of Merck’s founder, explains, “We try never to forget that medicine is for the people. It is not for the profits. The profits follow and, if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”

Is there a responsibility to do good? The third, and perhaps the 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. Corporate philanthropy would be the most obvious case in which business takes on a responsibility to do good. 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. (See the Reality Check “Cor- porate Philanthropy: How Much Do Corporations Give?”) Small-business owners in every town across America can tell stories of how often they are approached to give donations to support local charitable and cultural activities.

Some people argue that, like all cases of charity, philanthropy is something that deserves praise and admiration; but it is not something that every business ought to do. Philosophers sometimes distinguish between obligations and responsibilities

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precisely in order to make this point. A responsible person is charitable, but donating to charity is not an obligation. Others argue that business does have an obligation to support good causes and to “give back” to the community. This sense of responsibility is more akin to a debt of gratitude and thankfulness—something less binding than a legal or contractual obligation perhaps, but more than a simple act of charity. Perhaps a clear way to understand the distinction is to compare it to your obligation to write a thank-you note for a birthday gift. You might not have a legal requirement to send the note, but nevertheless you have a responsibility to do so.

These considerations suggest that there are competing understandings of cor- porate social responsibility and management’s role in fulfilling these responsibili- ties. What we will call the narrow economic model of CSR directs managers to maximize profit and shareholder wealth and recognizes only legal limitations on the pursuit of profit. A variation of this model acknowledges that philanthropy is an ethically good thing that can indirectly contribute to profit by improving repu- tation and brand recognition.

Another model recognizes that there is a wide range of ethical responsibili- ties and duties that are owed to others and that management must balance these responsibilities against the responsibility to shareholders. What we will call the stakeholder model asserts that neither a business nor the individuals who work for it are exempt from the ordinary ethical responsibilities that everyone has to cause no harm, to prevent harm, and to sometimes do good.

Finally, some businesses might choose to make social responsibility part of its very purpose and mission. In what we will call the integrative model of CSR, part of the managerial responsibility to shareholders is to serve the social good. These three models are summarized in Figure 5.1.

Economic Model of CSR

Most involved in the business would accept the general definition of the term corporate social responsibility (CSR) as referring to the ethical respon- sibilities that a business has to the society in which it operates. From a narrow economic perspective, a business is an institution that exists to benefit society by producing goods and services and, by doing this, creates jobs and wealth that provide further social benefits.

OBJECTIVE

2

In 2011, total charitable giving in the United States was estimated to be almost $300 billion. Individual contribu- tions totaled more than $200 billion. Corporate giving totaled $14.5 billion, or 5 percent of the total giving rate that has remained flat over the past 40 years.

Source: “2012 Giving USA: The Annual Report on Phi- lanthropy for the Year 2011/Executive Summary” (June 18, 2012), www.givingusareports.org/.

Reality Check Corporate Philanthropy: How Much Do Corporations Give?

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The law has created a form of business called a corporation, which promotes these economic ends by limiting the liability of individuals for the risks involved in these activities. Legislatures thought that businesses could be more efficient in raising the capital necessary for producing goods, services, jobs, and wealth if investors were protected from undue personal risks. This fact reminds us that business organizations in general, and corporations specifically, are social institu- tions created by society to serve human ends.

What we shall refer to as the economic model of CSR holds that businesses’ sole social responsibility is to fulfill the economic functions they were designed to serve. This general model has direct implications for the proper role of busi- ness management. Corporations are understood to be a particular legal form of property which the owners get to use for their own ends. Managers are employ- ees, or agents, of those owners and must work to further the owners’ interests. In Reading 5-2, “Managing for Stakeholders,” as discussed at the beginning of this chapter, R. Edward Freeman identifies this perspective as the dominant model of CSR and refers to it as “managerial capitalism.”