1. Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 5 Corporate Social Responsibility

2. 5-2 Merck & Co., Inc. o For centuries river blindness, or onchocerciasis, has tortured humanity in tropical regions o In 1975 scientists at Merck discovered a compound that killed animal parasites o Introduced as a veterinary drug, they believed it could also help humans o Neither those in need nor their governments could afford to buy the drug

3. 5-3 Merck & Co., Inc. o In 1987, Merck decided to provide the drug at no cost o Merck’s donations of medicine are a stellar example of old-fashioned philanthropy the way it has been done in America since the rise of big companies

4. 5-4 The Evolving Idea of Social Responsibility o Corporate social responsibility: The duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets o The fundamental idea is that corporations have duties that go beyond lawful execution of their economic function

5. 5-5 The Evolving Idea of Social Responsibility o Advocates of social responsibility, justify it with three basic arguments o It is an ethical duty to promote social justice o Social responsibility is practical o It is necessary because other forces do not force full responsibility on corporations

6. 5-6 Figure 5.1 - The CSR Spectrum

7. 5-7 The Evolving Idea of Social Responsibility o Over time the doctrine has evolved to require more expansive action by companies largely because: o Stakeholder groups have gained more power to impose their agendas o The ethical and legal philosophies underlying it have matured

8. 5-8 Social Responsibility in Classical Economic Theory o Throughout American history, classical capitalism has been the basic inspiration for business o In the classical view, a business is socially responsible if it maximizes profits while operating within the law o The idea that markets harness low motives and work them into social progress has always attracted skeptics

9. 5-9 The Early Charitable Impulse o Steven Girard changed the climate of education in the United States by bequeathing $6 million for a school to educate orphaned boys o John D. Rockefeller systematically gave away $550 million over his lifetime o Andrew Carnegie gave $350 million during his life to social causes

10. 5-10 The Early Charitable Impulse o Social Darwinism: A philosophy of the late 1800s and early 1900s that used evolution to explain the dynamics of human society and institutions o The idea of “survival of the fittest” in the social realm implied that rich people and dominant companies were morally superior

11. 5-11 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries o During the Progressive era, three interrelated themes of broader responsibility emerged: o Managers were trustees o Managers had an obligation to balance multiple interests o Many managers subscribed to the service principle

12. 5-12 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries o Trustee: An agent of a company whose corporate role puts him or her in a position of power over the fate of not just stockholders, but also of others such as customers, employees, and communities o Service principle: A belief that managers served society by making companies profitable and that aggregate success by many managers would resolve major social problems

13. 5-13 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries o Henry Ford – Touted citizenship but was ultimately unconcerned about the welfare of his employees o General Robert E. Wood – Believed in responsibility to customers, the public, employees, suppliers, and finally stockholders

14. 5-14 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries o 1920s and beyond, corporations organized charities began forming to which corporations contributed: o Community Chest o Red Cross o Boy Scouts

15. 5-15 1950 to the Present o Contemporary understanding of corporate social responsibility formed during this period o Social Responsibilities of the Businessman o Dissenters to this theory were conservative economists who claimed that business is most responsible when it makes money efficiently, not when it misapplies its energy to social projects

16. 5-16 1950 to the Present o 1971 – Bold statement by the Committee for Economic Development outlining three concentric circles of responsibilities o 1981 – Statement on Corporate Responsibility from the Business Roundtable

17. 5-17 Figure 5.2 – Motives for Social Responsibility and Their Evolving Magnitudes

18. 5-18 General Principles of Corporate Social Responsibility o Corporations are economic institutions run for profit o All firms must follow multiple bodies of law o Managers must act ethically o Corporations have a duty to correct the adverse social impacts they cause o Social responsibility varies with company characteristics

19. 5-19 General Principles of Corporate Social Responsibility o Managers should try to meet legitimate needs of multiple stakeholders o Corporate behavior must comply with an underlying social contract o Corporations should be transparent and accountable

20. 5-20 Are Social and Financial Performance Related? o A recent review of 95 studies over 30 years found that a majority (53 percent) of businesses showed a positive relationship between profits and responsibility, while only 5 percent showed a negative one o Safe to say corporations rated high in social responsibility are no less profitable than lower rated firms

21. 5-21 Corporate Social Responsibility in a Global Context o By the end of the twentieth century the doctrine of corporate social responsibility had been widely accepted in industrialized nations o Recent debates over the duties of corporations in their international operations o International law is weak in addressing social impacts of business

22. 5-22 Corporate Social Responsibility in a Global Context o Giant corporations may not be subject to strong laws and regulations in foreign countries o In adapting to global economic growth corporations have used business strategies that distance them from direct accountability or social harms o More national regulation of multinational corporations is unlikely

23. 5-23 The Problem of Cross-Border Corporate Power o Extraterritoriality: The application of one nation’s laws within the borders of another nation o Nongovernmental organizations (NGOs) – voluntary organizations becoming powerful advocates of restricting corporate power outside the borders of industrialized nations

24. 5-24 The Rise of New Global Values o Soft law: Statements of philosophy, policy, and principle found in nonbinding

25. 5-25 Figure 5.3 - A Global System of CSR Activity

26. 5-26 Global Corporate Responsibility: Development of Norms and Principles o Norm: A standard that arises over time and is enforced by social sanction or law o Principle: A rule, natural law, or truth used as a standard to guide conduct o Milestones in the development of norms o U.N. Universal Declaration of Human Rights o Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy o Norms on the Responsibilities of Transnational Corporations

27. 5-27 Global Corporate Responsibility: Codes of Conduct o Codes of conduct: Formal statements of aspirations, principles, guidelines, and rules for corporate behavior o Created by companies, trade associations, NGOs, governments, and international organizations o The target is the corporation o The code’s effectiveness depends on how the corporation carries it out

28. 5-28 Global Corporate Responsibility: Reporting and Verification Standards o Sustainability reporting: The practice of a corporation publishing information about its economic, social, and environmental performance o Two problems of sustainability reporting: o Defining and measuring social performance is difficult o Reports are not comparable from company to company

29. 5-29 Global Corporate Responsibility: Certification and Labeling Schemes o Criteria for labels set by industry, NGOs, unions, and sometimes governments o Certifications promote many ideals including human rights, fair trade, and campaigns against child labor o Fair trade: The idea that ethical consumers will pay a premium for commodities from producers in developing nations who use sustainable methods

30. 5-30 Global Corporate Responsibility: Management Standards o Management standard: A model of the methods an organization can use to achieve certain goals o Eco-Management and Audit Scheme (EMAS) o International Standards Organization (ISO)

31. 5-31 Global Corporate Responsibility: Social Investment and Lending o U.N. Principles for Responsible Investment require signatories to consider a company’s environmental, social, and governance performance when they invest o FTSE4Good Global Index is intended to set the world standard for investors seeking “companies that meet globally recognized corporate responsibility standards”

32. 5-32 Global Corporate Responsibility: Social Investment and Lending o International Finance Corporation (IFC) seeks to promote development and reduce poverty by funding projects for corporations

33. 5-33 Global Corporate Responsibility: Government Actions o Governments advance corporate responsibility through binding regulation and by actively promoting voluntary actions o NGOs watch multinational corporations and police actions they see as departing from emerging norms

34. 5-34 Assessing the Evolving Global CSR System o As multinational corporations grew in power with the expansion of global trade, a perceived deficiency in regulation was countered by action within civil society o No company can remain aloof from the emerging global CSR system that promotes and enforces corporate adherence to international CSR standards

35. 5-35 Assessing the Evolving Global CSR System o An important issue is whether or not the emerging system is the most appropriate way to regulate large corporations

36. 5-36 Concluding Observations o Historically, corporations have been motivated primarily by the central focus on profits o Corporations are now being pressured to alter this focus o The idea of corporate social responsibility has continuously expanded in meaning

37. 5-37 Concluding Observations o The power of stakeholders to define corporate duty has increased o The explosive growth of global trade and global corporations has created new standards and practices of social responsibility tied to global norms

38. 5-38 Figure 5.4 - The Evolution of Corporate Social Responsibility