Aligning Wealth Creation and Social Responsibility

Garriga and Mele´ suggested that it was possible and useful to create a classification of corporate social responsibility (“CSR”) theories based on the perspective of how the interaction phenomena between business and society are focused.  They argued that CSR theories could be classified into the following four groups:

  • Instrumental Theories: Theories placed in this group are based on the assumption that corporations are instruments for wealth creation and that this is their sole social responsibility. If this view is accepted, then CSR or any other social activity undertaken by the corporation is only a means to the end of profits and such activities should not occur unless they are consistent with wealth creation.
  • Political Theories: Theories placed in this group emphasize the social power of corporations and the obligation of corporations to accept social duties and rights and/or participate in certain social cooperation.
  • Integrative Theories: Theories in this group are based on fundamental argument that businesses, including corporations, depend on society for continuity, growth and survival and as such are obligated to integrate the demands of society into their operations.
  • Ethical Theories: Theories in this group see the relationship between business and society as embedded with ethical values and that corporations need to accept social responsibilities, such as CSR, as ethical obligations above any other consideration.

This article is adapted from material in Introduction to Corporate Social Responsibility: A Guide for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here).

The economic foundation of the instrumental theories of CSR was famously expressed by Friedman, who wrote in 1970 that ‘‘the only one responsibility of business towards society is the maximization of profits to the shareholders within the legal framework and the ethical custom of the country’’.  Using maximization of shareholder value as the supreme criterion to evaluate a specific suggested corporate social activity is consistent with the instrumental theories; however, corporations are still free to engage in an activity that might have a positive socio-economic objective provided that the investment in that activity would produce an increase in shareholder value acting without deception and fraud.  Friedman himself provided the following example of when investment in the local community would be permitted under his criterion: “It will be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That makes it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.”  However, if the cost of a project that would address social demands exceeds the projected increase in shareholder value the project should be rejected.

A group of theories within the larger category of instrumental theories focus on aligning pursuit of long-term social objectives with creating a competitive advantage, which presumably will lead to maximization of shareholder value in some future period.  Businesses often have the resources and knowledge to effectively take on a social issue and create greater social value in ways that individual donors and governments cannot.  For example, when a telecommunications company teaches computer network administration to students in the communities where the company operates it not only improves life in those communities and the company’s image in those communities but also provides the company with more skilled workers to choose from in the future.  Corporations can also use common CSR tools, such as stakeholder engagement, to enhance their reputation for responsiveness, trustworthiness and ethical behavior.  Strategies, such as “disruptive innovation”, aimed at the bottom of the economic pyramid have been put forward as a way for corporations to simultaneously serve the poor and generate profits from markets they have not previously been involved with.  Finally, corporations can engage in “cause-related marketing”, defined as “the process of formulating and implementing marketing activities that are characterized by an offer from the firm to contribute a specified amount to a designated cause when customers engage in a revenue-providing exchanges that satisfy organizational and individual objectives”, to leverage consumer concern for business responsibility as a means for securing competitive advantage (e.g., a reputation as an ethical and socially responsible firm) while facilitating benefits for charitable causes.

What does this all mean in practice?  The bottom line is that instrumental theories of CSR do not necessarily prohibit CSR activities; however, CSR programs and initiatives are seen as a means to the end of profits and thus should not be undertaken unless they are consistent with wealth creation.  The questions below demonstrate how certain of the instrumental theories can be integrated into decision making relating to a particular CSR program or initiative:

  • Does the project involve investment in an activity would produce an increase in shareholder value acting without deception and fraud?  For example, it may be worthwhile for a company that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government if the investment will make it easier to attract desirable employees, reduce the wage bill, lessen losses from pilferage and sabotage or have other worthwhile effects.
  • Does the project involve investment in an environmentally- or socially-responsible activity that will result in long-term maximization of the value of the company and satisfaction of certain interests of people with a stake in the firm (i.e., the “stakeholders”)?  This criterion assumes that “enlightened value maximization” has supplanted the traditional goal of “shareholder value maximization”.
  • Does the project involve a philanthropic activity consistent with the skills and resources that is aligned with the company’s mission and may enhance the company’s competitive advantage?  For example, when a telecommunications company teaches computer network administration to students in the communities where the company operates it not only improves life in those communities and the company’s image in those communities but also provides the company with more skilled workers to choose from in the future.
  • Does the project involve the creation and/or maintenance of social and ethical resources and capabilities which can be a source of competitive advantage?  Competitive advantage can be derived from implementing processes of moral decision-making and capacity for adaptation and the development of proper relationships with primary stakeholders such as employees, customers, suppliers and communities.
  • Does the project involve the development of new capabilities and resources to overcome anticipated constraints and challenges posed by the natural biophysical environment?  Important strategic capabilities include pollution prevention, product stewardship and sustainable development, and critical resources include the capacity for continuous improvement, stakeholder integration and shared vision.
  • Does the project implement strategies that can serve the poor and improve the social and economic conditions at the “base of the pyramid” while simultaneously making profits and creating a competitive advantage for the company?  Companies may attempt “disruptive innovation” through the development of products or services that do not have the same capabilities and conditions as those being used by customers in the mainstream markets and introducing them only for new or less demanding applications among non-traditional customers, with a low-cost production and adapted to the necessities of the population (e.g., a telecommunications company inventing a small cellular telephone system with lower costs but also with less service adapted to the base of the economic pyramid).
  • Does the project involve cause-related marketing that can enhance the company’s brand and reputation for reliability and honesty while helping customers satisfy their own individual objectives?  For example, the company may offer to contribute a specified amount to a designated cause when customers engage in a revenue-providing exchange.  Making such an offer enhances the company’s reputation, causes customers to view the company’s products as being high quality and secures a competitive advantage for the company.

A key source for this article, including the list above, is E. Garriga and D. Mele´, “Corporate Social Responsibility Theories: Mapping the Territory”, Journal of Business Ethics, 53 (2004), 51, 53-55 (see text of article for relevant citations for each of the questions above).

This article is adapted from material in Introduction to Corporate Social Responsibility: A Guide for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here).

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

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