Framing Business Ethics:Framing Business Ethics:Corporate Responsibility, Stakeholders, and Citizenship

Lecture 2

OverviewOverview

• Analyse the notion of responsibility forAnalyse the notion of responsibility for corporations;

• Distinguish the various concepts of CSR;g p ;• Present the stakeholder theory of the firm;• Outline the concept of corporate accountability;Outline the concept of corporate accountability;• Critically examine the notion of corporate

citizenship; c t e s p;• Discuss implications of these – mostly US-born –

concepts for different regionsp g

Towards a framework for business ethics

What is a corporation?

Key features of a corporationKey features of a corporation

• A corporation is essentially defined in termsA corporation is essentially defined in terms of legal status and the ownership of assets

• Corporations are typically regarded as p yp y g‘artificial persons’ in the eyes of the law

• Corporations are notionally ‘owned’ by p y yshareholders, but exist independently of them

• Managers and directors have a ‘fiduciary’ responsibility to protect the investment of shareholders

Can a corporation have social responsibilities?

• Milton Friedman’s classic article is “The social responsibility of business is to increase its profits” (1970)

• Friedman vigorously argued against theFriedman vigorously argued against the notion of social responsibilities for corporations based on three main arguments:

Onl h man beings ha e a moral responsibilit for– Only human beings have a moral responsibility for their actions

– It is managers’ responsibility to act solely in the interests of shareholdersinterests of shareholders

– Social issues and problems are the proper province of the state rather than corporate managersmanagers

Can a corporation be morally responsible for its actions?

• Evidence to suggest that legal designation of a gg g gcorporation makes it unable to be anything but self-interested (Bakan 2004)

• Long complex debate but generally support fromLong, complex debate but generally support from literature for some degree of responsibility accredited to corporations. Argument based on:

E er organisation has a corporate internal decision– Every organisation has a corporate internal decision structure which directs decisions in line with predetermined goals (French 1979)All organisations manifest a set of beliefs and values– All organisations manifest a set of beliefs and values that lay out what is generally regarded as right or wrong in the corporation – organizational culture (Moore 1999)(Moore 1999)

Corporate Social ResponsibilityCorporate Social Responsibility

Why do corporations have social responsibilities?

• Business reasons (‘enlightened self-interest’) ( g )– Extra and/or more satisfied customers– Employees may be more attracted/committed– Forestall legislation– Long-term investment which benefits corporation

• Moral reasons:• Moral reasons:– Corporations cause social problems– Corporations should use their power responsiblyp p p y– All corporate activities have some social impacts– Corporations rely on the contribution of a wide set of

stakeholders in society not just shareholdersstakeholders in society, not just shareholders

What is the nature of corporate social responsibilities?

Corporate social responsibility includes theCorporate social responsibility includes the economic, legal, ethical, and philanthropic expectations placed on organizations by society at a given point in time

(Carroll and Buchholtz 2009:44)

Carroll’s four-part model of corporate social responsibility

PhilanthropicR ibili i

Desired by society

Responsibilities

EthicalResponsibilities

Expected by societyp

LegalResponsibilities

Required by society

EconomicResponsibilities

Required by society

Source: Carroll (1991)Source: Carroll (1991)

CSR in an international contextCSR in an international context• CSR strong in US. Influence elsewhere is more recent. g

This is partly explained by explicit vs. implicit CSR• Regional differences exist with respect to all CSR levels:

– Economic responsibility• Focus in USA on shareholders; France has extensive responsibility for

employees; India has tradition of investment in the local community

Legal responsibility– Legal responsibility• State seen in Europe as key enforcer of rules; elsewhere government seen

with more scepticism (e.g. corrupt, interfering with liberty)

– Ethical responsibilityEthical responsibility• Wide range of local ethical values & preferences: expectations vary

– Philanthropic responsibility• Europe tends to compel giving via legal framework; elsewhere (e.g., USA,Europe tends to compel giving via legal framework; elsewhere (e.g., USA,

India, China), companies are expected to share their wealth.

CSR and strategy: corporate social responsiveness

• Corporate social responsiveness refers toCorporate social responsiveness refers to the capacity of a corporation to respond to social pressures (Frederick 1994)

• 4 ‘philosophies’ or strategies of social responsiveness (Carroll 1979)– Reaction– Defence

A d i– Accommodation– Proaction

Outcomes of CSR: corporate social performance

• Outcomes delineated in three concrete areas:– Social policiesSocial policies– Social programmes– Social impacts

Stakeholder theory of the firmStakeholder theory of the firm

Stakeholder theory of the firmStakeholder theory of the firm• Theory developed by Edward Freeman (1984)y p y ( )• A stakeholder of an organization is:

– …any group or individual who can affect, or is affected by, the achievement of the organization’s objectives (Freeman 1984:46)

• More precise definition of ‘affects’ and ‘affectedMore precise definition of affects and affected by’ (Evan and Freeman 1993)– Principle of corporate rights - the corporation has

th bli ti t t i l t th i ht f ththe obligation not to violate the rights of others– Principle of corporate effect – companies are

responsible for the effects of their actions on others

Stakeholder theory of the firm:Traditional management model

Shareholders Customers

Firm

EmployeesSuppliers

Stakeholder theory of the firmStakeholder theory of the firm

CompetitorsGovernment

Shareholders Customers

t

Firm

EmployeesSuppliersCivil

societysociety

Stakeholder theory of the firm:A network model

Customer

CompetitorsGovernment

stakeholder 1

Customer

FirmShareholders Customers

Customer stakeholder

3

Suppliers

Civil societyEmployees

Employee stakeholder

1

Supplier stakeholder

1 Civil society k h ld

Civil society stakeholder

Employee stakeholder

2

stakeholder 2

1

Why stakeholders matterWhy stakeholders matter

• Milton Friedman – businesses should only beMilton Friedman businesses should only be run in the interests of their owners

• Freeman - others have a legitimate claim on the gcorporation– Legal perspective

• ‘Stake’ in corporation already protected legally in some way (e.g. legally binding contracts)

– Economic perspectiveEconomic perspective• Externalities – outside contractual relationships• Agency problem – short term interests of ‘owners’ vs. long

term interests of managers employees customers etcterm interests of managers, employees, customers etc.

A new role for managementA new role for management

• According to Freeman, this broader view ofAccording to Freeman, this broader view of responsibility towards multiple stakeholders assigns a new role to management.

• Rather than simply being agents of shareholders, management has to take into account the rights and interests of all legitimate stakeholders:

St k h ld dSt k h ld d–– Stakeholder democracyStakeholder democracy–– Corporate governanceCorporate governance

Stakeholder thinking in an international context

• One could argue that although theOne could argue that although the terminology of stakeholder theory is relatively new in places like Europe or Asia, the general principles have actually been practised for some time:– German supervisory board includes employee

representatives– ‘Keiretsu’ system in Japan (Chaebol in Korea) aKeiretsu system in Japan (Chaebol in Korea), a

network of banks, manufacturers, suppliers and service providers

Different forms of stakeholder theoryDifferent forms of stakeholder theory

• Donaldson & Preston (1995):Donaldson & Preston (1995):– Normative stakeholder theory: attempts to

provide a reason why corporations should take into account stakeholder interests

– Descriptive stakeholder theory: attempts to ascertain whether (and how) corporations actuallyascertain whether (and how) corporations actually do take into account stakeholder interests

– Instrumental stakeholder theory: attempts to answer the question of whether it is beneficial for the corporation to take into account stakeholder interestsinterests

Corporate accountabilityCorporate accountability

The firm as a ‘political’ actor

Corporate accountabilityCorporate accountability

• Corporate accountability refers to whetherCorporate accountability refers to whether a corporation is answerable in some way for the consequences of its actions

• Firms have begun to take on the role of ‘political’ actors – taken up many of the functions previously undertaken by government because:

G t l f il– Governmental failure– Increasing power and influence of corporations

Reasons for the political role of the firmReasons for the political role of the firm

• Government failure– Risk society thesis

• Rise of ‘subpolitics’• ‘Organized irresponsibility’• Organized irresponsibility

• Corporate power on the rise– Liberalization and deregulation results in more power g p

and choice for private actors– Privatization of ‘public’ services

Responsible for employment decisions– Responsible for employment decisions– Globalization– Governments increasingly encourage self-regulationg y g g

The problem of democratic accountabilityThe problem of democratic accountability

• Who controls corporations?Who controls corporations?• To whom are corporations accountable?• Key to corporate accountability isKey to corporate accountability is

transparency• Transparency is the degree to whichTransparency is the degree to which

corporate decisions, policies, activities and impacts are acknowledged and made visible to relevant stakeholders

Corporate citizenshipCorporate citizenship

Defining corporate citizenship: three perspectives

• A limited view of CCA limited view of CC– this essentially equates CC with corporate

philanthropy• An equivalent view of CC

– this essentially equates CC with CSR• An extended view of CC

– this acknowledges the extended political role of th ti i i tthe corporation in society

Commitments to corporate citizenship

Company SourceCC statement (emphasis added)Industry & origin

Mining, Australia

BHP Billiton

originSustainability Report, 2008

… The Company’s community investment programs should create sustainable, long-term value for our host communities and demonstrate the Company’s citizenship. The critical question in regard to our success is whether we have managed to leave a lasting positive legacy in the communities where we operate.

Banking & financial services, USA

Software USAMicrosoft

Citibank 2007 Citizenship Report

We define citizenship as the positive impact that Citi has on society and the environment through its core business activities, philanthropy, diversity efforts, volunteerism and public policy engagement, as well as the philanthropic initiatives undertaken by the Citi Foundation.

CitizenshipMicrosoft’s endorsement of the UN Global Compact signifies that we are

Oil & gas,

Software, USAMicrosoft

CSR ReportTotal is committed to contributing to the sustainable development of hostTotal

Citizenship Report 2009

Microsoft s endorsement of the UN Global Compact signifies that we are committed to aligning our business operations and strategies with 10 established principles […] Principles – which correspond with Microsoft’s global corporate citizenship values – help guide our efforts to achieve greater accountability and drive continuous improvement of our business practices.

g ,France

Toyota

CSR Report, 2007

Sustainability Report 2008

Total is committed to contributing to the sustainable development of host communities around the world. In addition to being a normal part of good corporate citizenship, this policy fosters good relationships with neighbors and greater acceptance of our operations.

Total

Automobiles, Japan

The Corporate Citizenship Division was organized in January 2006 as a specialized division to reinforce corporate social contribution activities and Report, 2008Japan specialized division to reinforce corporate social contribution activities and integrate corporate social contribution functions that had been performed by multiple divisions.

Three views of corporate citizenshipThree views of corporate citizenship

Philanthropy, focused on

Extended view

Focus

Equivalent viewLimited view

Citizenship: social, political and All areas of CSR py,projects, limited scope

Local communities, employees

Focus

Main stakeholder

p , pcivil rights

Broad range of citizens; society in general

Broad range of stakeholders

Primarily philanthropic; also economic where citizenship is ‘strategic’

Motivation

group

PoliticalMixed – economic, legal, ethical, philanthropic

Reciprocity, i.e. ‘putting something back’

citizenship is strategic

Moral grounding

Grounding is not moral, but comes from changes in the political arena

Duty to be responsible and avoid harms to society

An extended view of CCAn extended view of CC

Corporate citizenship

Social role of the corporation in governing citizenship

Social rights corporation as provider/ignorerg p p g

Civil rights corporation as dis-/enabler

Political rights corporation as channel/blockage

Assessing corporate citizenship as a framework for business ethics

Extended view of CC adds something significantExtended view of CC adds something significant that helps us frame business ethics in new ways:

• Helps us better see the politicalpolitical rolerole of the corporation• Clarifies the demand for corporate accountabilitycorporate accountability• Helps to understand business in relation to common

citizenship rights within different cultures and some of the h ll d b l b li til b li tichallenges posed by globalizationglobalization

• The rights of citizenship have strong links to the goal of sustainabilitysustainability

• Provides a critical perspectivecritical perspective on corporations’ social role that is more in keeping with non-US ways of thinking about business ethics

SummarySummary• Business ethics is related to the social role of the

corporation• Confining corporations to commercial activities

too limitedtoo limited• Different perspectives and their relevance in

European context– CSR– Stakeholder theory– Corporate accountabilityCo po a e accou ab y

• Effects of globalization on role of corporation• Corporate citizenship is latest concept in the field