Corporate Social Responsibility (Chapter 5) Professor Charles H. Smith Spring 2010

 Read this case study on pages on your own before class and discuss the following questions with small groups in class  What were the advantages gained by Merck when it distributed this drug for free?  What were the disadvantages suffered by Merck when it distributed this drug for free?

 Also known as CSR, corporate citizenship, stakeholder management, and sustainability.  No precise definition, though text (page 119) says that it is “the duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets.”  Premise is that companies have obligations beyond those imposed by law.  However, what are those additional obligations? – Student examples.

 It is a moral duty to promote social justice because it is the “right thing to do.”  Social responsibility has concrete benefits such as good publicity for those outside the company and good morale for those inside the company.  Student examples.

 Social responsibility is an unwarranted cost.  Management focus should be profit- maximization for the benefit of ownership.  CSR has no definitive meaning – reasonable people disagree about if and how a company should be socially responsible.  CSR is more politics than business – market, not politics, should direct company.  Student examples.

 Inclination was to be thrifty, but charity thrived, too.  Great fortunes made by individuals who were generous givers; e.g., Steven Girard, John D. Rockefeller, Andrew Carnegie.  However, charity often influenced by “social Darwinism” (Herbert Spencer) – best to donate for benefit of large institutions (e.g., universities) or to build grand projects (e.g., concert halls) instead of giving to poor individual; what supports this sort of “impersonal” charity?

 Progressives had three themes  Managers are trustees who have to act in favor not just ownership but also other stakeholders such as employees, consumers and communities.  Managers should balance these competing interests.  Many managers believed in the service principle which held that aggregate success of all businesses would serve society by eliminating society’s ills.  Examples – Henry Ford (pages ), General Robert E. Wood (page 125).

 Competing outlooks on CSR  Howard R. Bowen – felt public had expectations that went beyond profit-maximization; basic arguments for CSR on page 125.  Milton Friedman – maintained that sole responsibility of company was to maximize profits while acting legally.  Committee for Economic Development – “three concentric circles of responsibilities” (pages ).  Which one do you prefer?

 Responses to competitive forces found in markets.  Always dominant – company’s response to market fulfills its primary social responsibility.  Example – Unilever Indonesia (pages ).  Student examples.

 Government regulation – laws imposed on business by government entities according to the state’s authority; e.g., local zoning statute, Supreme Court decision interpreting Constitution.  Civil or private regulation – demands made by private entities (such as activists and consumers) and failure to comply will result in reputation or financial damage; e.g., boycott of goods made using child labor, advertisements about bad side effects of using product.  Student examples of both.

 These actions go above and beyond legal requirements (“legal plus”).  Example – charitable giving.  Student examples.  How does a company benefit from voluntary actions?

 Companies are economic institutions run for profit  First obligation is to make a profit.  Need financial incentive to undertake socially-responsible activity.  All companies must follow multiple sets of laws  Many laws (local, state, federal, foreign, international) govern all businesses.  Law is minimum requirement and reacts to cutting-edge issues.  Management must act ethically  Not just according to the law but also ethics.  Must establish policies and procedures for company.  Student examples of all.

 Companies have a duty to correct adverse social impacts they create  Should internalize external costs (which are usually borne by society).  CSR varies with company characteristics such as size, industry, location, etc.  Social obligation will vary due to many factors.  Management should try to meet legitimate needs of multiple stakeholders  Fiduciary duty owed to ownership but not possible or legally required to meet their interests only; other stakeholders have legitimate and even legally-required needs.  Student examples of all.

 Companies’ behavior must comply with norms in the underlying social contract  Understanding nature of and possible changes in social contract necessitates understanding of national and international laws and customs.  Companies should accept a measure of accountability toward society  Public reporting on CSR by independent party.  Student examples of both.

 What is this relationship?  Some studies indicate CSR and profits go together.  Others indicate mixed, inconclusive or negative findings!  Difficulties in doing these studies include  No certain definition of CSR, so no objective ranking system possible.  While profitability would seem more objective, this also can be interpreted – or manipulated – in more than one way (e.g., last quarter’s profits vs. value of stock vs. assessing value of long-term profitable assets like intellectual property).

 CSR is not just an American concept – it is accepted worldwide in the following ways  Europe – employee rights and environmental protection.  Japan – paternalism toward workers.  India – those who accumulate wealth hold it in trust for society; analogize to Progressive theory of “managers as trustees.”

 Read “The Jack Welch Era at General Electric” on pages on your own before class and then discuss the questions on page 152 with small groups in class.