Lecture Five

Theories on Corporate SocialResponsibility

12/26/2019

Overview

Shareholder ViewStakeholder ViewTriple-Bottom Approach

© 2016 H. K. Mensah (PhD) 2

SHAREHOLDER THEORY

AKA…Stockholder ViewRooted in economics and Championed by MiltonFriedman.Basis in Economics

Adam Smith: the need for a balance between supply anddemand in markets leads to an efficient resourceallocation, maximise market profit and maximise thebenefit for society.Market Imperfection has necessitated the emergence offirms (companies) whose basic interest is to effectivelyallocate scarce resource to generate maximum profitsfor resource owners.© 2016 H. K. Mensah (PhD) 3

Milton Friedman (1970) The only Social responsibility of business

is to increase its profits

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What is Friedman’s argument, in a nutshell (or 4 steps)?

‘business’ cannot have ‘responsibilities’(only individuals/managers do)…

The managers of the corporation arethe Agents of a Principal (the shareholders)

The shareholders want Max profit…

CSR is taxation without representation…

Therefore, the only social responsibility of managersis to maximize profits!

Milton Friedman (1970)

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“The only social responsibility ofbusiness is to use its resources and

engage in activities designed toincrease its profits…

…so long as it stays within the rulesof the game, which is to say,

engages in open and freecompetition, without deception or

fraud”.

THE STAKEHOLDER APPROACH

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Stake - An interest or a share in an undertaking.Claim : A demand for something due or believed to be due

Can be categorized as:

An Interest A Right Ownership

Legal Right

Moral Right

Stakeholders

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Stakeholder -Any individual or group who can affect or

is affected by the actions, decisions,policies, practices, or goals of theorganization.Stakeholder is a variant of the concept of

stockholder – an investor/owner ofbusinesses.

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Primary & SecondaryStakeholders

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Primary stakeholders -Have a direct stake in the organizationand its success.

Secondary stakeholders -Have a public or special interest stakein the organization that is more indirect.

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Social Stakeholders

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Primary social stakeholders Secondary socialstakeholders

Shareholders and investors Government regulatorsEmployees and managers Civic institutionsCustomers Social pressure groupsLocal communities Media and academic

commentators

Suppliers and other businesspartners

Trade bodies

Competitors

Nonsocial Stakeholders

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Primary nonsocialstakeholders

Secondary nonsocialstakeholders

Natural environment Environmental interestgroups

Future generations Animal welfare organizations

Nonhuman species

A Typology of StakeholderAttributes

Legitimacy -Refers to the perceived validity or appropriateness of thestakeholder’s claim to a stake.Power -Refers to the ability or capacity of a stakeholder toproduce an effect.Urgency -Refers to the degree to which the stakeholder’s claimdemands immediate attention or response.Proximity -The spatial distance between the organization and itsstakeholders.

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Stakeholder Approaches

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Strategic approach -Views stakeholders primarily as factors managers shouldmanage in pursuit of shareholder profits.

Multifiduciary approach -Views stakeholders as a group to which management hasa fiduciary responsibility.

Stakeholder synthesis approach -Considers stakeholders as a group to whommanagement owes an ethical, but not a fiduciary,obligation.

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Triple Bottom Approach

AKA …..”Triple Bottom Line” Traced to the history of “Sustainability”and Sustainable Development Expanding the discourse to integrate ecological and social performance inaddition to financial performance.

© 2015 Cengage Learning 13

History of Sustainability

1970:First Earth Day celebration – April 22ndNixon establishes EPA

Fueled by industrialization and overpopulationimpacts

1972: First UN conference on the HumanEnvironment in Stockholm, Sweden

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History of Sustainability

1983 – UN establishes World Commissionon Environment and Development

Purpose: examine world’s critical environment anddevelopment problems and formulate solutions

1987: Brundtland Commission Report3 components of Sustainable Development:Environmental protection, Economic growth,and Social equityDefined Sustainable Development as…

“Development that meets the needs of the present without

compromising the ability of future generations to meettheir own needs.” 15

History of Sustainability

1992: Rio Earth SummitOver 178 governments adopted…

Agenda 21: a global blueprint and plan of action forsustainable development in the 21st centuryThe Rio Declaration on Environment and Development

27 principles that express the rights andresponsibilities of nations as they pursue humandevelopment and well-being

The Forest PrinciplesA guide for the management, conservation, andsustainable development of all types of forests

2002: Third UN conference on Environmentand Development, Johannesburg, South Africa

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The Triple Bottom Line

People, planet, and profitsEquity, environment, economyTBL coined by John Elkington of “SustainAbility”(UK) in 1995

Cannibals With Forks: The Triple Bottom Line of 21stCentury Business (1997)The Chrysalis Economy: How Citizen CEOs and theirCorporations Can Fuse Values and Value Creation(2001)www.sustainability.com

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Profit/Economy

Planet/Ecology People/Society

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A business enterprise takes place around three kinds of valuewhich interact.A sustainable business will have three positive balances.The Triple Bottom Line focuses attention on three kinds of addedvalue – economic, human / social and environmental.

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financial value

ecologicalvalue

human &socialvalue

sustainability

PEOPLE"People" (human capital) pertains to fair and

beneficial business practices towardlabour and the community and region in

which a corporation conducts its business.

A TBL company conceives areciprocal social structure in which the

well-being of corporate, labour and otherstakeholder interests are interdependent.

PLANET"Planet" (natural capital) refers to sustainable

environmental practices. A TBL company endeavors to benefit the natural

order as much as possible or at the least do noharm and curtail environmental impact.

A triple bottom line company does not produce

harmful or destructive products such asweapons, toxic chemicals or batteries containingdangerous heavy metals for example.

PROFIT"Profit" is the economic value created by the

organization after deducting the cost of all inputs,including the cost of the capital tied up.

This is often confused to be limited to the internal

profit made by a company or organization (whichnevertheless remains an essential starting pointfor the computation).

Interdependence