In a discussion post, respond to the articles in this week’s reading assignment with your thoughts on the influence of corporate social responsibility. Consider the challenges of designing a CSR plan in a small company vs. a large company, and the benefits of a CSR plan in companies of varying sizes. What financial concerns should you consider when designing, or choosing not to design a CSR plan?

· From the SMUMN library, Business Source Premier Database: Orlitzky, M. (2013). Corporate social responsibility, noise, and stock market volatility. Academy Of Management Perspectives, 27(3), 238-254. doi:10.5465/amp.2012.0097

· (optional) From the SMUMN library, EBSCO Database: Hardy, M. C. (2016). Schaltegger, S., & Burritt, R. (2018). Business Cases and Corporate Engagement with Sustainability: Differentiating Ethical Motivations. Journal Of Business Ethics, 147(2), 241-259. doi:10.1007/s10551-015- 2938-0

· CHAPTER 9Corporate Social Responsibility

· Introduction

· Thus far, we have emphasized ethical behavior “inside” the organization. We have discussed why ethical behavior is important at work and how individuals who aim to be ethical can make good ethical decisions. We have also discussed the psychology of ethical decision making, including why individuals with the best of intentions can find it difficult to do what’s right. We have outlined what organizations can and should do to create strong ethical cultures that support employee ethics and what managers can and should do, within those cultures, to lead their employees in an ethical direction.

· In this chapter’s discussion of corporate social responsibility (CSR), we extend beyond the organization to focus on the relationship between the organization and its external stakeholders. In today’s highly interconnected, global and transparent world, corporations are finding that social responsibility is essential to fundamental business strategy. They are also discovering that it is difficult to separate “internal” organizational ethics from “external” social responsibility. Although most large companies have separate people and structures to deal with “internal” ethics and “external” social responsibility issues, these efforts are overlapping more and more because both depend on a solid set of ethical values and an organizational culture that supports doing the right thing. For example, making business decisions today to invest in environmentally sustainable business practices is a strategy that is consistent with the organization’s value of respect for the community and the natural environment while also signaling to employees that the organization cares about people, the community, and its longer‐term legacy. And, because so many organizations are embedded in complex supply chains, they must attend to both ethics and social responsibility issues with their business partners. Finally, because many CSR issues stem from the global nature of business today, we focus more extensively on global CSR issues in .

· Why Corporate Social Responsibility?

· A rich literature on corporate social performance suggests three reasons that corporations should care about social responsibility: a pragmatic reason, an ethical reason, and a strategic reason. These reasons are not mutually exclusive and can and do overlap.

· The pragmatic reason is based on the recognition that business must use its power responsibly in society or risk losing it. Corporations exist as legal entities with certain advantages (such as limited liability) because society allows them to do so, and these corporate rights and advantages can be removed from firms that are perceived to be irresponsible. That’s exactly what happened to Arthur Andersen, formerly one of the “Big Five” auditing firms, when it lost its license to operate after being involved in the infamous Enron scandal.

· The perception of the corporation as a responsible societal actor is dependent on a stakeholder view of the firm. Recall that we defined a stakeholder in  as “any party (e.g., customers, employees, suppliers, the government, stockholders, the community) who is affected by the business and its actions and who has a stake in what the organization does and how it performs.” In , we used the concept of stakeholders a bit differently to refer to the people or groups affected by a particular ethical decision. There, we said that a good ethical decision considers harms and benefits to multiple stakeholders, and the best ethical decision is one that creates the greatest societal good.

· Here, at the level of the corporation, the stakeholder view provides a particular lens on the firm that is broader than the view offered in many other courses you may have taken (e.g., marketing highlights customers, finance highlights shareholders, management highlights employees). With the stakeholder perspective, the assumption is that a responsible executive will take the needs of multiple stakeholders into account in decision making and will find ways to balance and serve their needs and concerns simultaneously.

· In August, 2019, the Business Roundtable (an influential group that represents nearly 200 CEOs from recognizable large companies such as JPMorgan Chase, Apple, Walmart, Amazon, and more) made very big news by challenging the shareholder maximization conventional wisdom when they released a 300‐word statement redefining the purpose of a corporation. Shareholder maximization had always come first for this group. But this new statement clearly advocates a stakeholder perspective, saying that corporations should commit to delivering value to customers, invest in employees, deal fairly and ethically with suppliers, support their communities, and, finally, deliver long‐term value for shareholders. This statement was welcome news to those who have been pushing the stakeholder perspective since the 1980s.

· Perhaps most importantly, the commitment to a stakeholder perspective clearly contradicts those who have long said that such a commitment violates management’s fiduciary responsibility to shareholders first. We assume that these very large corporation CEOs would not have signed on to such a statement without consulting their corporations’ lawyers.

· Some argue that this sharp change emerged from the realization that public support for corporations was waning. Many in American society no longer favor capitalism particularly after the 2008 financial crisis shone a light on income inequality, stagnating wages, and other social ills. Young people, in particular, had been turning toward socialism and young employees are expecting their employers to take good care of their employees and be engaged in doing good for society. It remains to be seen whether this new statement by the Business Roundtable represents a seismic shift or a façade. Many will be watching to see.

· If you are interested in checking in on what companies are actually doing, you may want to access information from a not‐for‐profit organization called Just Capital (see Justcapital.com). Just Capital states its mission this way on its website. “The mission of JUST Capital is to build an economy that works for all Americans by helping companies improve how they serve all their stakeholders – workers, customers, communities, the environment, and shareholders. We believe that business and markets can and must be a greater force for good, and that by shifting the resources of the $19 trillion private sector, we can address systemic issues at scale, including income inequality and lack of opportunity. Guided by the priorities of the public, our research, rankings, indexes, and data‐driven tools help measure and improve corporate performance in the stakeholder economy.” Just Capital, through its research on companies, provides a lot of information that can provide a foundation for decision making about which companies one might want to work for, buy from, or invest in. The organization also puts together current information related to how organizations are responding to the Covid‐19 pandemic.

· So, what exactly is the stakeholder perspective? The stakeholder perspective places the corporation at the center of a web of constituents (or stakeholders; see ) who are affected by the actions of the business, but who can also affect the business in dramatic ways that can interfere with a firm’s autonomy, economic success, and license to operate. Maltreated employees can strike, protest, or post negative comments on social media or sites such as Glassdoor; dissatisfied customers can boycott products; interest groups can create harmful (or helpful) publicity; owners can bring shareholder resolutions; and the government can pass laws and regulations that limit a firm’s activities or even put the firm out of business. As a case in point, Google’s employees protested the company’s attempts to rekindle its relationship with the U.S. military. In 2018, about 5 percent of the company’s full‐time employees signed a petition denouncing project Maven, a drone AI imaging program. Google finally agreed to stop working on the project once its contract expired and not to apply for a lucrative cloud computing contract with the military in 2019. It has also now adopted ethical principles for its AI work. So, especially in an environment in which companies compete for the best talent (as they do in the United States’ Silicon Valley), companies are contending with employees as powerful stakeholders who are flexing their muscles through protests. Therefore a pragmatic reason for being responsible is that corporations must anticipate multiple stakeholder concerns simultaneously and act defensively to protect their reputation and viability.

·

·  Stakeholder Perspective on the Firm.

· It can be costly not to anticipate stakeholder concerns. With the power of instantaneous electronic communication, social networking, cell phone cameras, Twitter, Instagram, and YouTube videos, even relatively small stakeholder groups can get the word out quickly about their concerns and have a huge, usually negative, impact on very large companies. For example, when the organization People for the Ethical Treatment of Animals released a hidden camera videotape from a West Virginia chicken slaughterhouse showing workers stomping on chickens, squeezing them to death, and flinging them against the wall, the company acted quickly, sent in inspectors, and told the contractor that owned the plant to fix the problems or lose its contract. The contractor fired 11 employees and made every remaining employee at its 25 plants pledge to treat animals humanely.

· Although a frequent corporate response to such a charge is denial or resistance, KFC and its parent Yum Brands responded quickly to the challenge from an important stakeholder group. Taco Bell, a fast‐food Mexican restaurant, is also a Yum Brands company. After Mexican tomato pickers led a boycott, hunger strike, and protest against the chain, the company agreed to pay a penny more per pound of Florida tomatoes, to monitor suppliers, and to adopt a code of conduct that would allow the company to drop suppliers who abuse farmworkers.

· Another case in point is the environmental organization Rainforest Action Network (RAN; www.RAN.org), which has influenced well‐known companies such as Citigroup, Home Depot, Lowe’s, Staples, Office Depot, and Chevron. In the short term, it may be hard to make the business case for the “green” practices that RAN promotes. But when companies believe that their reputations as good corporate citizens are at risk, the calculation quickly changes. And once they seriously consider the organization’s environmental concerns, executives often adopt them as their own. For example, years ago, RAN targeted Home Depot for sourcing wood from endangered forests. In fact, the company realized that it didn’t even know where its wood came from at the time. Now, the company knows the source of all of its wood; on its website (www.corporatehomedepot.com), it claims to be integrating environmental planning into its business, including sustainable forestry practices and recycling. Smart CEOs have benefited from opening a dialogue with reasonable reform groups. They cite as success stories Home Depot’s eco‐friendly lumber supply program, developed with RAN, and Starbucks’ work with Conservation International to purchase coffee from farmers who preserve forests.10

·

· So with the pragmatic approach to CSR, a firm’s managers scan the environment and are on alert to act in ways that avoid economic harm, maintain legitimacy, and ensure a good corporate reputation.11 But this approach can be risky if it is mostly reactive, acting on stakeholder concerns only after they are voiced. Sometimes stakeholders are not deemed worthy of attention until after negative publicity has already substantially damaged the firm and its reputation. Then, the firm has to play catch‐up to repair the damage. This may be what happened with Apple and its Foxconn supplier in China, where iPhones and iPads are assembled. When an explosion and fire at a Foxconn facility in May 2011 killed two and injured others, Apple was harshly criticized for the working and living conditions at the facility, including excessive overtime, crowded living conditions, underage workers, and use of harmful chemicals.12 As a result, stakeholders began to watch the company and its suppliers more intently. Apple does have a code of conduct for suppliers and publishes an annual report of their compliance.13 If violations are not corrected, the supplier is terminated. But, as other firms have learned, it takes more than codes of conduct and audits to avoid the kind of bad publicity that faced Apple in this situation.

·

· Constructive engagement with stakeholders, including a company’s critics, offers an increasingly popular approach. Executives are learning that the plea to “just trust us” rarely works in a world plagued by regular corporate scandals and cynicism. Rather, a better approach is proactively analyzing the stakeholder landscape and working with selected stakeholders who are willing to engage in constructive dialogue. Goldman Sachs actually brought Rainforest Action Network into the company to help draft its plan to become more environmentally responsible, and Dell included environmentalists on a task force to craft a recycling strategy.

· These efforts are in line with a more proactive, ethical reason for CSR, which argues that businesses, as part of society, have a responsibility to behave ethically. In this view, responsible executives have an ethical duty to care about multiple stakeholders because it is simply the right thing to do. It might also be pragmatic to do so, but the focus here is on the ethical intention to “do the right thing.” Social responsibility becomes as integral to the business as is economic performance. With this perspective, deciding which issues and stakeholders a firm should prioritize is an ongoing process of executive ethical decision making. Consistent with our earlier discussions about how ethical decisions should be made, executives weigh the harms and benefits to multiple stakeholders (including shareholders) of the firm’s activities, and they aim to make decisions that benefit the societal greater good. They prioritize their organization’s ethical values and apply moral rules. And they consider their intentions, how the broader society would react to a contemplated behavior, and what a “virtuous firm” would do.

·

· This ethical perspective is more likely to support proactive corporate policies and practices that extend beyond current legal or regulatory requirements, such as the development of quality products that contribute to societal welfare (whether or not these are the most profitable), human resources practices that treat all employees fairly and respect human rights everywhere, business processes that protect the environment beyond current government regulations, and philanthropic contributions that help the community. It also supports constructive engagement with stakeholders. As we discuss later, these proactive policies and practices may “pay” in the long term. For example, the very best employees may be attracted and committed to firms that treat people well. In addition, organizations that act in values‐based ways often avoid legal costs and other negative outcomes. But those who argue for the duty‐based perspective contend that the positive ethical duty exists whether or not an economic payoff is likely to result.14

·

· In an interview in 2009, John Allison, former Chairman of Branch Banking and Trust Corporation (BB&T), talked of how ethical values affected his business.15 Along with others, BB&T’s values include honesty, integrity, and justice. Allison said that the company decided not to be in the business of negative amortization mortgages. These mortgages (where the payment is less than the interest and the mortgage balance actually increases) became popular for a while (before the financial crisis), and they were highly profitable. But BB&T avoided the business because they didn’t think it would be right for customers. According to Allison, “we got beat up in the market. We also lost a number of mortgage producers who could make more money working for Countrywide. . . . We believe that doing our best to help our clients make the right financial decisions is good for BB&T. I believe that while there may be short‐term trade‐offs by sticking to your values, you are never making a sacrifice in the long run.”16 By sticking to its values, the company not only protected its clients, it avoided contributing to the broader financial crisis as well.

·

· Honda provides another excellent example of a company with strong ethical values that drive its business. The company is guided by its founder’s visionary principles, called “the Power of Dreams.” On the company website (http://corporate.honda.com), “The Honda Philosophy” says: “We see things from a global perspective, always striving to create and produce products of the highest quality at a reasonable price for worldwide customer satisfaction. . . . We see it as our responsibility to serve humanity through our global commitments to helping protect the environment and enhancing safety. . . . In every endeavor we pursue, we strive to be a company that people all over the world want to exist.” In an interview in 2005, Honda’s chief engineer said, “everybody at Honda is fired by the dream of creating great products that are the most fuel efficient in their class.”17 So even when SUV sales were booming, the company was committed to fuel economy. That meant that Honda was late getting into the truck market; and when they eventually did, they aimed to do it with better fuel economy. Certainly, the company lost out on potential profit. But, according to the chief engineer, “The point is not that customers demand it [fuel economy] or don’t demand it, because that’s absolutely not the viewpoint of Honda. When you are a philosophy‐driven company, you don’t ask the customer if they agree with your philosophy. . . . [At Honda] you are never going to get anything approved by the board . . . without proving you have the best fuel economy in class. That’s it.” So at Honda, protecting the natural environment is a core principle guiding business decisions—one that has proven to be costly in the short run but is likely to pay off in the longer term.

·

· Another great example of the ethical perspective comes from Lincoln Electric, a multinational welding company that operates by following very simple ethical guidance—the Golden Rule (see Chapter 2). Notably, the company has been on the cutting edge of employee‐friendly efforts since it was founded by John C. Lincoln in 1895. In 1923, it was among the first firms to offer company paid vacation; in 1925, it was among the first to offer employee stock ownership plans; the first employee suggestion program was implemented in 1929; and Lincoln employees received incentive bonuses beginning in 1934. Perhaps the most controversial of its programs, however, is its guaranteed employment plan: after three years of continuous employment with Lincoln Electric, workers are guaranteed their jobs. In the early 1980s, however, the company experienced tremendous hardship. As a result of inflation, higher energy costs, and a recession in the United States, Lincoln’s sales plummeted 40 percent and the company was severely tested. However, not one Lincoln employee was laid off. The company’s loyalty to its employees was returned in 1993, when Lincoln urged its employees to attain record levels of sales and production. Employees voluntarily postponed 614 weeks of vacation in order to meet customer demands. Layoffs are extremely rare at Lincoln; between 1948 and 2008, there were none. The global financial crisis of 2008–2009 created great hardship for the company, and Lincoln offered buyouts to employees, reduced work hours, cut management salaries by 20–45 percent, and eliminated merit raises and all outside hiring. Even after the financial crisis, Lincoln seemed to be able to spread the pain across all ranks in an effort to survive the horrible economic conditions. Although austerity measures were needed, Lincoln still did not lay off anyone. The company continues to grow and succeed financially by following this operating principle: Operating by a higher standard to build a better world. It has worked!18

·

· A third reason to be socially responsible is a strategic one. Because Michael Porter is a world‐renowned business strategy scholar, writer, and consultant, many observers were surprised to find him writing a major Harvard Business Review article about CSR in 2006.19 But, with coauthor Mark Kramer, he outlined a strategic approach to CSR that begins by emphasizing the interdependence of business and society. The authors rely on the premise that business needs a healthy society because only a healthy society can produce a productive workforce and the rules of the road that make productive business transactions possible. A healthy society also needs business to innovate; create jobs, goods, and services; and pay the taxes that support societal activities. Therefore, the best CSR initiatives will be simultaneously good for the business and for society.

·

· Importantly, the strategic approach to CSR offers managers a strong basis for making decisions about which stakeholders and social responsibility issues should garner the most attention and resources given the multitude of options available. Porter and Kramer proposed that each firm should carefully analyze its own business in search of two very different things: those places where the firm is doing harm and those initiatives where the firm can do good by providing unique opportunities to create shared value—value for the business and for society simultaneously. Companies can begin the harm reduction part of this analysis by scrutinizing the social impacts of the company’s value chain. The value chain, a concept Porter introduced earlier to strategic management, describes all the normal business activities of a firm that add value as a product or service passes from one part of the business to another.

·

· For example, in a manufacturing operation, one would consider inbound logistics (e.g., raw material acquisition and transportation), manufacturing operations, outbound logistics, marketing and sales activities, and post‐sales support. Support functions such as human resources management and firm infrastructure undergird the entire value chain and should also be considered. Managers involved in the firm’s daily operations are asked to look carefully at the value chain and consider where in the chain the firm creates harm or has the potential to do so, with an eye toward reducing such harm. Therefore, a natural resources company would need to focus more on environmental issues while a company that sells toys might need to focus more on child safety issues or labor conditions in its overseas plants.

·

· Value chain activities should be considered prime candidates for a firm’s CSR initiatives because they can benefit society by reducing harm (or doing social good) and can also help the company by reducing costs or by improving its reputation. According to Porter and Kramer, the firm should study best practices for addressing these issues, create clear goals and evaluation criteria, and implement the initiatives. The authors call this approach “responsive CSR.”20

·

· When contemporary companies think about the potential harm that exists in their value chain, they need to ask a lot of questions, with lots of attention to their supply chain (where their raw materials or product components come from). Automobile companies learned this lesson the hard way when they discovered that the Takata airbags they had been buying and installing in their cars for years had the potential to explode and maim or kill drivers and passengers (see Chapter 10 for more information on this case). Chipotle learned a similar lesson when, in 2015, at least 500 people across multiple states were seriously sickened by bacteria in their food. Chipotle had built its business in part on a social mission—to serve healthier fast food, “food with integrity.” But the company may not have been paying enough attention to the potential for food contamination in the fresh food that it was sourcing from its 100 suppliers. The company attacked the problem head‐on and appears to have it fixed, but it took a significant hit to its bottom line nevertheless. 21 So companies should consider suppliers when they think about the potential for harm from their products. And they should ask themselves whether they can trust that their suppliers care as much about “doing no harm” as they do. If not, they should be looking for new suppliers.

·

· The second part of Porter and Kramer’s strategic CSR analysis goes beyond identifying the potential for harm. It attempts to identify where the company has the potential to do social good because of its unique knowledge and expertise. For example, one could say that FedEx is in the dependability business. Packages need to arrive at their destination no matter what the weather or other contingency, so the company prepares itself to to handle these contingencies. Such preparation made the company invaluable after Hurricane Katrina. It had prepared by positioning ice, water, generators, and facility repair kits in key locations. The company was also ready with 60 tons of Red Cross provisions, something it does routinely in advance of such disasters. The company was able to repair a FedEx radio antenna in New Orleans, thus providing rescuers with reliable radio communications that had been lacking for days.22

·

· To further this approach toward creating social good, Porter and Kramer argue that firms should also consider how they can leverage potential CSR initiatives in a way that also helps the company succeed in its competitive environment. Such initiatives contribute to societal good while strengthening the company’s competitive position. They add a social dimension to the firm’s overall competitive strategy. For example, Porter and Kramer note that Toyota did this quite successfully by devoting significant resources to developing its Prius hybrid car. Given societal need for more fuel‐efficient cars and reduced carbon emissions, it made a lot of sense for a car company to focus resources on developing a more environmentally sustainable automobile and to do so in a way that enhanced its reputation with customers as an innovator. Not only did Toyota have the expertise to do this work, but being among the first to offer affordable hybrid cars helped the company’s competitive position and its bottom line. It also helped that consumers liked the car’s styling. Toyota’s CSR situation was complicated by a number of safety problems with its vehicles that received much attention from multiple stakeholders including the government, media, and, of course, customers. However, the company seems to have remedied the problems, and the Prius remains a good example of strategic CSR.

·

· Another example is Whole Foods, a supermarket chain and “purpose‐driven company” that was founded on the notion that natural and organic foods were better for people’s health, and that serving employees, customers, and the community was essential to the company. Whole Foods has done much to reduce harm in its value chain. But it is also doing “good” in ways that also keep it strategically competitive. As just one example, in 2012, Whole Foods shocked many observers by building a store in downtown Detroit, then known as a “food desert” because of the lack of access to healthy food for the poor residents of the area. The store has exceeded management’s expectations and is seen as a precursor to Whole Foods stores in other inner‐city locations that will serve a population much in need of healthy food and the jobs that come with the addition of a Whole Foods store to the community.23 With Amazon’s acquisition of Whole Foods, it will be interesting to see if this “purpose‐driven company” will retain its commitments.

·

· Yet another example is Unilever. Its sustainability plan (see https://www.unilever.com/sustainable‐living) targets a number of areas where the company can potentially do harm. But, on the positive side, the CEO recently tasked executives with finding an explicit social mission for each of its brands. For example, Dove soap has been focused on improving women’s self‐esteem and Ben & Jerry’s ice cream has focused attention on climate change through its Baked Alaska flavor. These “purposeful” brands contributed a large percentage of the company’s revenue and sales growth in 2019, and the CEO is committed to continuing this strategy.

·

· The strategic approach is more proactive and affirmative than the pragmatic approach because it asks companies to identify and acknowledge company activities that can do harm (or that can be particularly helpful) and encourages firms to scrutinize their practices and address potential harms by focusing on their own value‐chain activities. In this way, companies need not wait for stakeholders to identify issues for them and then react. They are proactively out in front of the issues, dealing with them before they become reputational problems. This approach also provides guidance for how an organization can make tough choices about where to focus resources, thus targeting social responsibility issues that they can and should do something about given their expertise rather than just following the crowd. Companies that follow this strategic approach will also not limit their CSR efforts to only those that will enhance their bottom line because focusing on the value chain requires firms to address the harms they cause. This approach challenges businesses to be innovative, to think about how they can be socially responsible in ways that leverage their unique competencies and help the business and society simultaneously, and to encourage businesses to actually measure the social impacts of their efforts.

·

· But we would like to offer a caveat: This approach can give the false impression that social responsibility always has the potential to be profitable. In a book about managing “ethics,” it’s important to acknowledge that socially responsible business practices are sometimes costly; but for ethical reasons, companies should do them anyway. Students are often surprised to learn that many companies make decisions that they know, at least in the short term, will reduce their financial bottom line—and they do it simply because it is consistent with their values and because they have decided that it’s the right thing to do. BB&T’s decision to forgo the negative amortization mortgage business is one example. Many more such examples come from the overseas business environment. For example, a company may decide not to venture into a potentially profitable overseas market (say Russia or Nigeria) because it would have to engage in corruption in order to do so, and such behavior goes against its corporate values of honesty and transparency. Or a company that has committed itself to sustainable business practices will adhere to its more expensive U.S. guidelines when disposing of toxic wastes in developing countries despite little in the way of local regulation or oversight. They do this because respect for human health is a fundamental value that has no national boundaries. Therefore we believe that, in addition to assessing the company’s value chain and the competitive environment, companies need to identify the core values that will help them make tough ethical decisions about what they will and will not do, and where to focus social responsibility resources.

· We offer one final caveat about the strategic approach. Social responsibility efforts can backfire if the public perceives that the company engages in CSR programs only if and when it can profit from doing so. We routinely find that students are cynical in reaction to efforts that are perceived in this way. An interesting question to ask yourself (and to discuss in class) is how you perceive such corporate efforts and what influences your perceptions and those of your classmates. How do you feel about companies such as Ben & Jerry’s or Patagonia that integrate CSR and sustainability into their DNA and then market themselves accordingly? Do you feel differently about these firms compared to those that seem to treat CSR as something “nice to do” that may garner goodwill with customers? Understanding your own and others’ perceptions can yield important insights that can help you later when you’re in a position to make these kinds of management decisions. It may also enter your calculations when you are deciding whether to join a particular company as an employee.

·

· Types of Corporate Social Responsibility

· Another way to think about CSR is to think of it in terms of multiple types of responsibility. CSR has been conceptualized as a pyramid constituting four types of responsibility that must be considered simultaneously: economic, legal, ethical, and philanthropic (Figure 9.2).24

FIGURE 9.2 Corporate Social Responsibility Pyramid.

Source: Reprinted from Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, July–August 1991, pp. 39–48, with permission from Elsevier.

Economic Responsibilities

The economic responsibilities of a business involve its primary function of producing goods or services that consumers need and want, while making an acceptable profit. This responsibility is considered to be primary and the bedrock of CSR because without financial viability, the other responsibilities become moot issues. Fulfilling this responsibility effectively is considered to represent an important ethical purpose of business because it provides good jobs and important products and services and contributes to a vibrant economy.

The late economist Milton Friedman remains the best‐known proponent of the 40‐year‐old argument that management’s sole responsibility is to maximize profits for shareholders (which has now been countered by the new Business Roundtable statement discussed earlier). Yet people often forget what Friedman actually said—that management should “make as much money as possible while conforming to the basic rules of society, both those embodied in the law and those embodied in ethical custom.”25 So, maximizing profits was never the sole responsibility of a corporation after all, even for a staunch free‐market economist like Friedman. Interestingly, the statement above tacitly embraces two of the three other components of the CSR pyramid: legal responsibility and ethical responsibility. This statement also means that some businesses simply should not exist because society has deemed them to be harmful no matter what their potential for profit. An example might be child pornography, which is illegal in the United States and many other countries. Most of us agree that no matter how many people it might employ, or how much potential profit exists, child pornography is not a socially responsible activity and organizations that engage in it should not be allowed to exist.

Legal Responsibilities

Beyond its economic responsibilities, the pyramid shows that business is expected to carry out its work in accordance with the current law and government regulations. The law guiding business practice can be viewed as a fundamental precept of the free enterprise system and as coexisting with economic responsibilities. As we said in Chapter 1, the law can also be viewed as representing the minimum norms and standards of business conduct agreed upon within a society. But not every societal expectation has been codified into law, and laws vary from state to state in the United States and even more from country to country, making doing business legally more challenging than it may seem.

Ethical Responsibilities

Ethical responsibilities go beyond legal responsibilities to encompass the more general responsibility to avoid harm and do what’s right, again relying on ethical decision‐making processes to make these decisions. It’s illegal to advertise or sell cigarettes to minors in the United States. But a firm can continue to do so in countries that have no such legal restrictions. In fact, that is what tobacco companies do in many parts of Asia. Still, a tobacco company taking its ethical responsibility seriously would cease advertising to minors everywhere because of the long‐term harm to health caused by tobacco addiction.

There are many good examples of companies going beyond legal requirements to fulfill what they perceive to be their ethical responsibilities. A recent one is Dick’s Sporting Goods decision to stop selling assault‐style rifles (which are legal to sell in the United States). As one of the top firearms sellers in the country, this was certainly going to hit the company’s bottom line. But the CEO said that the company was becoming part of the problem of gun violence and the harm it was doing rather than part of the solution. (Dick’s sold the gun to the shooter in the 2018 Parkland high school shooting). Guns had been completely removed from 125 of 727 stores as of November 2019, and the company is reviewing its entire hunting business and pursuing alternatives such as experiential experiences in its stores and targeting serious athletes. CVS made a similar decision in 2014 when it decided to give up selling tobacco products. As a company devoted to health, selling cigarettes seemed hypocritical and was clearly harming customers.26 Thus the ethical responsibility category places expectations on businesspersons to function at a level above the law.

Levi Strauss was the first multinational company to develop a comprehensive code of conduct designed to ensure that the company’s workers wherever they work in the world are safe and treated with dignity and respect. Furthermore, the company’s commitment to diversity began in the 1940s, well before the U.S. Civil Rights Act of 1964. The company also became the first Fortune 500 company to extend full medical benefits to employees’ domestic partners in 1992. That benefit was controversial at the time and certainly not required by law, but the company believed it was the right thing to do and consistent with its value of courage.

Philanthropic Responsibilities

Philanthropic responsibilities center on the corporation’s participation in activities that promote human welfare or goodwill, generally through donations of time and money or products and services. Because many people consider philanthropy to be a completely voluntary or discretionary aspect of CSR, failure to be philanthropic is generally not considered as unethical; some may question whether it is a corporate “responsibility” at all. But, at least in the United States, those with wealth (including wealthy businesses) are expected to share their good fortune and are offered tax incentives for doing so. Andrew Carnegie, a nineteenth‐century steel baron who gave millions to charity (it would be over $7 billion today), said, “He who dies rich dies thus disgraced.” He believed that the rich were morally obligated to give their riches to the community and should do so during their lifetime.27

In a more recent version of the same belief, Bill Gates (the cofounder of Microsoft) and his wife, Melinda, created the world’s largest (multibillion‐dollar) endowment. Gates stepped away from playing a day‐to‐day management role at Microsoft in 2008 to focus full time on philanthropy. Bill and Melinda Gates have decided to give away 95 percent of their wealth. They are particularly interested in health (AIDS, malaria, tuberculosis), agricultural development, and education. The foundation has been credited with much of the progress in research on malaria, one of the world’s worst killers. The Gates endowment is now supplemented by many more billions pledged to the foundation by Warren Buffett, who decided to speed up his own philanthropy when he learned that Gates was going to focus on the foundation full time28 (see www.gatesfoundation.org). These modern‐day philanthropists are actively involved in tackling huge global ills, and they demand accountability and results.29

These previous examples are of philanthropic individuals from business. Many companies also engage in philanthropy routinely, often through foundations that they create. It is difficult to know how much companies actually give because public disclosure is not required. But many firms now voluntarily disclose this information in their CSR reports, and Businessweek and Fortune both publish annual lists of corporate giving. Some companies, such as Target and Whole Foods, regularly donate a set portion of their profits to charity. Whole Foods stated in its mission statement that it would donate 5 percent of its net profits, something it has done annually since 1985. Target has been doing the same since 1962, and, interestingly, it surveys customers to find out where it should give. Some companies donate a percentage of sales (not profits) to charity. For example, Patagonia and over one thousand other companies donate 1 percent of sales to environmental causes.30 Many companies will also match employee giving or give employees time off to contribute in their communities. And some companies are inventing entirely new models for their philanthropy. Consider Los Angeles–based Tom’s, for example. Tom’s initiated the one‐for‐one model of philanthropy that has been imitated by other companies. “Sell a shoe, give a shoe”—for every pair of shoes it sells, the company donates a pair of shoes to a needy person in a developing country. Tom’s has been quite successful and has even expanded beyond shoes to other products such as purses and backpacks. Importantly, it studies the impact of its giving as well, not willing to settle for good press. It has learned that giving children shoes can prevent health problems such as hookworms, but it may also reduce self‐reliance. So, the company is experimenting with using shoes as an incentive for mothers to bring their children to vaccination clinics. It has also built factories in some of these developing countries, creating jobs for locals. As a learning organization, Tom’s seems committed to continuing to test itself and its one‐for‐one model as it moves forward.31

These companies may think of philanthropy from a stakeholder perspective. They see philanthropy as allowing them to improve relations with employees, communities, customers, or other stakeholders by giving to particular causes. However, philanthropy can also be aimed at causes that are strategically tied to a company’s competencies and business. As an example of a philanthropic effort tied to its business, Boston’s Bain & Company provides heavily discounted management consulting to charities through a nonprofit it created, something it is particularly competent to do. Similarly, many pharmaceutical companies either give drugs away to those who can’t afford them or slash prices to make them more affordable.32

When the tsunami of 2004 hit Southeast Asia, FedEx jumped in to help. The firm quickly chartered a plane at company expense to send 344,000 pounds of Pedialyte to rehydrate children in need. Over 100 companies (mostly in the United States) sent an estimated $178 million in cash and medicine. Companies also used their distinctive competencies to help. For example, Coca‐Cola offered the use of bottling facilities and pledged to deliver 500,000 bottles of water in Thailand. Colin Powell said that the aid gave the Muslim world the “opportunity to see American generosity, American values in action.” Many of these companies helped quietly, not announcing or commenting on their contributions.33

In September 2005, corporations responded similarly to Hurricane Katrina victims in Louisiana, Mississippi, and Alabama. In fact, Walmart responded so quickly, efficiently, and generously to hurricane victims that many observers felt the company should play an official role in U.S. federal emergency management response efforts because of its logistics expertise. Walmart donated over $20 million in cash to Hurricane Katrina relief and donated 1,500 truckloads of free merchandise, food for 100,000 meals, and the promise of a job for all of its displaced workers. The company’s response was so unparalleled that one observer said, “Wal‐Mart has raised the ante for every company in the country. This is going to change the face of corporate giving.”34

Such philanthropic efforts are generally seen in a positive light. However, observers can also respond cynically if the intentions and motivations of the giver appear to be selfish. For example, critics have raised questions about the efforts of pharmaceutical companies in the United States to help poor people pay for drugs through patient assistance programs that are managed by co‐pay charity programs funded by the pharmaceutical companies (through gifts that may be tax‐deductible). Recently, headlines have highlighted dramatic increases in pharmaceutical costs that appear to have nothing to do with the cost of discovering or making the drug. Companies may calculate that they will look better if they can point to their contributions to these charities and their patient assistance programs. But critics argue that the programs simply represent a way to deflect the criticism about high drug costs. So companies that are concerned about their reputations should take care to evaluate their intentions as well as how their philanthropic efforts are likely to be perceived by a somewhat cynical public.35

An interesting question to discuss in class is whether corporations that engage in philanthropy should publicize their philanthropic efforts. For example, Berkeley business school students advised Birkenstock to stop giving quietly to a pediatric AIDS foundation as the company had done for years, and instead to sponsor walks for causes that could be publicized to advance the shoe company’s image. But the CEO at the time rejected this advice, suggesting that the meaning of the word responsibility is lost if social responsibility is just about making money.36 Similarly, we heard the CEO of Lens Crafters speak about the company’s efforts to collect customers’ old eyeglasses and fit them on needy individuals in the United States and overseas. He showed a heartwarming video about the work and its meaning to employees, the company, and most of all to the recipients (many of whom could see well for the first time). When asked if the company would be willing to share the video for use in business ethics classes, he was obviously uncomfortable, saying that he would prefer not to do so because the company doesn’t engage in this work for publicity purposes. On the other hand, the philanthropy is an important part of the organization’s culture and, in his view, creates an important sense of unity and employee commitment.

In our teaching, we often encounter student cynicism in response to corporate philanthropy efforts, especially when students perceive that companies are engaging in philanthropy in an attempt to compensate for other clearly harmful activities. For example, people know that Enron was very philanthropic in the Houston community and that Philip Morris touts its philanthropic activities while avoiding the fact that its product, cigarettes, causes lung cancer and kills millions. If observers perceive that a company is simply attempting to polish its image, cynicism is likely to result. Therefore, the decision to engage in corporate philanthropy should be separate from management decisions about whether and how to publicize such giving. What do you think? Should companies publicize their philanthropic efforts externally? Or should they treat philanthropy as more of an internal matter?

If one believes that philanthropy is a responsibility for corporations, many other questions remain about what types of initiatives make the most sense (how closely they should be tied to the company’s business, for example), how much to invest in them, how to monitor and evaluate them, and whether to pay for philanthropic initiatives through a firm’s operating budget or a foundation. Unfortunately, little research exists to help us answer these questions.37 Fortune magazine reports corporate gifts as a percentage of revenue. Others suggest that a better measure would be donations as a percentage of pretax or after‐tax income or net earnings. Whatever the best measure, it is clear that most U.S. businesses are serious about their responsibility to give back to the community through philanthropy.

Triple Bottom Line and Environmental Sustainability

An increasingly popular way to think about CSR is in terms of what has been referred to as the triple bottom line—a firm’s economic, social, and environmental impacts. We have already discussed the economic bottom line, which refers to the economic impacts of a firm. The social dimension refers to a firm’s impacts on multiple stakeholders such as employees, customers, suppliers, and the broader community. The third dimension of the triple bottom line is the environmental dimension. It recognizes the impact of business on the natural environment. The term sustainability has sometimes been used to represent harmony among these three dimensions. At other times, sustainability has come to be associated with environmental impact—“long‐term growth that doesn’t deplete natural resources and lowers emissions of greenhouse gases.”38 Sustainable development has been defined as “meeting the needs of the present without compromising the ability of future generations to meet their needs.”39

Some companies are using sustainability as an umbrella term to encompass all CSR efforts that make business more viable in the long term, including environmental efforts. Others use corporate social responsibility as the umbrella term (as we do) and sustainability to represent their social responsibility efforts aimed at preserving the natural environment. Whatever the terminology, it’s clear that more and more attention is being paid to this type of corporate effort. In 2008, Fast Company published a list of 50 ways companies are greening their businesses—everything from Ford’s process for applying three coats of paint at one time to Enterprise Rent‐A‐Car’s increasing the miles per gallon of its fleet to Staples’ modifying thousands of its private‐label products to be more eco‐friendly.40

In 2015, Forbes magazine created a list of the top 50 “most sustainable” companies in the world.41 Biogen, a U.S. biotechnology company, led the list. They noted that Intel almost doubled its commitment to green power even during the economic downturn, a remarkable accomplishment. And Intel ties every employee’s annual bonus to the company’s sustainability performance. As we noted in our discussion of culture in Chapter 5, this is a surefire way to get employees to focus on particular ethics‐related goals. Whole Foods was in the Forbes top 10, as was Starbucks, Cisco Systems, and Kohl’s Department Stores, all companies that say they want to be part of the effort to “drive a new U.S. green economy.”

Newsweek publishes a list entitled “Greenest Global,” that ranks the 500 largest publicly traded companies worldwide based on environmental footprint, management, and transparency.42 The top companies represent a wide variety of industries, including information technology, telecommunications, retail, pharmaceuticals, and financial services. Well‐known names such as Johnson & Johnson, Best Buy, and Apple were all in the top 10 in 2017. Cisco topped the list.

Despite being criticized in many CSR arenas (e.g., employee relations, overseas bribery), Walmart has had a huge impact on the sustainability initiatives of its suppliers by announcing in 2009 that it was working to create a “Sustainability Index” that would help its customers evaluate products based on their sustainability. In 2011, as a pilot program, the company developed an index for six different product categories and accompanying category scorecards. Walmart buyers then used these scorecards to evaluate products and worked with suppliers on improving their products in accordance with the scorecards. The stated goal was to develop scorecards to cover 100 product categories by the end of 2012.43 By 2019, Walmart reported that 80 percent of Walmart and Sam’s Club suppliers were participating in the sustainability index program and that suppliers had increased their index scores by 28 percent compared to 2017. The company also reported that 78 percent of waste was being diverted from landfills and 28 percent of their electricity was coming from renewable sources.44

Early environmental efforts date back to concerns about air and water pollution reduction that began in the 1960s and then to concerns in the 1970s about chemicals called chlorofluorocarbons (CFCs) that, when released into the environment, were eating away the earth’s ozone layer. Although ongoing concerns remain, efforts to reduce pollution have been quite successful, particularly in Western countries. More recent attention has focused on global climate change. A consensus exists among the most respected climate scientists around the world (including those at the first author’s institution, Penn State University) that global climate change is real and is influenced by human‐generated emissions of greenhouse gases. In early 2007 the UN Intergovernmental Panel on Climate Change, including the world’s leading scientists on the subject, issued a report documenting that climate change exists, that human activity is a key driver, and that the many resulting likely threats to humans include water shortages, dropping crop yields, rising sea levels, and harsher storms. The report resulted from a review of hundreds of peer‐reviewed scientific studies. Insurers are certainly taking notice, especially after the increasing number and intensity of recent storms and devastating wildfires. Swiss Re is the world’s largest reinsurance company and it is taking climate change seriously because its losses from natural catastrophes that are linked to climate change are becoming more costly and unpredictable. The company is busily studying climate change models and is using that knowledge to make business decisions about whom it will and will not insure.45 Although climate scientists acknowledge that no single event can be attributed to climate change, Jonathan Foley, director of the University of Minnesota’s Institute on the Environment, put it this way in a tweet following Superstorm Sandy that hit the U.S. Northeast in 2012: “Would this kind of storm happen without climate change? Yes . . . Is [the] storm stronger because of climate change? Yes.”46