Corporate Social Responsibility And Stakeholder Theory

Introduction

Organisations have well-defined economic and legal responsibilities. There is however a growing recognition of an extended responsibility outside of these obligations, with responsibilities towards the society in which the business operates. This is a term which has become known as corporate responsibility. [1] This has come to encompass a perceived responsibility in areas such as the environment, community involvement and protecting the welfare of workers and other members of society. [2] 3This essay takes a closer look at the concept of corporate responsibility and discusses whether this is a form of ethical business operation or an integral component of corporate strategy. This essay first presents an overview of the concepts of the corporate responsibility and stakeholder theory, discussing the link between the two. The essay then culminates in a discussion over whether business’ approach to corporate responsibility is strategic or ethical.

Stakeholder Theory and Corporate Responsibility

Stakeholders may be defined as those individuals or groups with which the organization interacts on any level, or any individual or group who may be affected by the actions of the organization. [4] Figure 1 provides a comprehensive view of the different stakeholders of any organization under the stakeholder model. Essentially, stakeholders inherently have the ability to benefit or damage the company. [5] This is represented in Figure 1 by the bidirectional arrows connecting each stakeholder group to the organization. This differs from the traditional input-output model of the company, which suggested that investors, suppliers and employees provided input, while customers received the output. [6] Although all stakeholders are represented equally in Figure 1, they are generally split into two groups. Primary stakeholders are those such as employees, customers and shareholders, whose involvement in the firm is necessary for survival of the firm. The other groups of stakeholders, who have more of a peripheral involvement, including government and community members, are classed as secondary stakeholders. [7] 

Figure 1: The stakeholder model of the organisation [8] 

Phillips states that stakeholder theory “is a theory of organizational management and ethics”. [9] Phillips claims that this makes stakeholder theory somewhat unique among organizational management theories, as although most contain some moral aspects, morals and values are a central feature of stakeholder theory. Although the precise definition of stakeholder theory may differ depending on the economic perspective of the firm, [10] stakeholder theory essentially involves protecting the interests of all stakeholders in the organization. This of course includes maximizing shareholder profit as shareholders are primary stakeholders, and this is consistent with traditional theories of the firm. [11] It also goes beyond this however to include attending the interests and well-being of all groups of stakeholders, including secondary stakeholders and primary stakeholders who are non-shareholders, such as employees and customers. [12] 

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Corporate Responsibility

Many different definitions have been proposed for the term ‘corporate responsibility’, also known as corporate social responsibility (CSR). Blowfield and Murray suggest however that the vast variety of activities presented within these definitions indicates that no one single definition may be suitable. [13] This is also supported by Carroll and Buccholtz, who recognize the ambiguity or limitation inherent in many available definitions of CSR. [14] Blowfield and Murray do however recognize that all the definitions evaluated share the common theme of the responsibility which companies have for protecting the public good. They therefore propose that corporate responsibility is somewhat of an umbrella term for understanding the way that the company’s relationship with society is defined, managed and acted on. [15] 

The Link between the Concepts

Clearly, the concept of CSR has aspects in common with stakeholder theory, as both have underlying moral and ethical principles. There is however an integral link between the two concepts, which is based on the supposition that stakeholder theory is part of the motivation for businesses to be responsible. [16] This is however not necessarily the case, as while some authors would agree that this is always true, others would argue that CSR goes beyond stakeholder theory. For example the very suggestion that CSR involves protecting the ‘public good’ [17] may indicate a responsibility outside of the stakeholders, depending on the perspective taken by the company of who constitutes a ‘stakeholder’. If this were true then this would indicate that CSR-based decisions formed moral and ethically grounded action, which although potentially beneficial, is based predominantly on protecting the interests of the public. It would however be argued that the ‘public’ which the organization seeks to serve is in fact always comprised of stakeholders, as by the very definition, a stakeholder is any person affected by the decisions of the organization. This is supported by others who have argued that corporate action is always motivated instead by strategic motives. [18] This is consistent with stakeholder theory, as the motives are based on ensuring that benefit derived from these stakeholders is maximized and the damage is limited. In spite of this however, again referring back to the definitions given earlier in the chapter, stakeholder theory itself is based in ethical and moral principles, which should indicate that there may remain some ethical component to CSR decisions, even where this action is guided by stakeholder theory. The remainder of the essay further explores this argument, examining whether business’ approach to corporate responsibility is strategic or ethical.

Strategic vs. Ethical

Ethical Principles of Stakeholder Theory

In order to better understand the influence of ethical principles in CSR, it is first necessary to delineate the underlying ethical principles of stakeholder theory.

The discussion may here return to two core components of the concept of CSR as described by Blowfield and Murray which are important in the discussion which follows. The first of these is the idea that companies have a set of values which guide their actions. The second is that businesses inevitably play some role in society, even where this is unintentional. [19] Under the second of these assumptions, businesses are faced with an ethical dilemma, as defined by understanding whether the moral or amoral course of action should be selected. [20] The moral course of action is that in which the welfare of wider society is protected, the path which would be considered inherently ‘right’ by that society. [21] That which is widely considered to constitute ‘ethical behaviour’ is a moral approach in which the guiding values are not entirely self-interested. Instead, an ethical business is one which would act in a trustworthy way in situations which a self-interested person would not. [22] 

Yet there are other influences which may prevent an organization from opting for this moral course of action and the concept of morality with regards to corporations is inherently complex. [23] The main influence is likely to be the set of values on which the business has established itself, as it is assumed that all businesses have such a set of values which guide their actions. [24] The formation of these values is however in itself likely to have been influenced by different factors. For example a self-interested business may base its values entirely on those of self-interest. Following self-interest in this manner may in fact form the most natural course, based on the inherent selfishness of human nature, although forms what in modern business would be considered an amoral approach. [25] Under stakeholder theory however, the formation of these values is likely to be heavily dependent on the values held by the stakeholders which the business wishes to serve. Therefore the level of morality involved in business decisions is likely to reflect that held in the values of these stakeholders. [26] Given that most organizations have, under stakeholder theory, multiple different stakeholders on which to base their decisions, [27] ensuring that the values of each group are upheld would be expected to be far from simple.

The most important ethical principle in stakeholder theory which sets it aside may therefore be that these general ethical approaches are adopted in a fair manner. This means that organizations need to have a fair way of deciding which groups constitute legitimate stakeholders and need to ensure that decisions impact across the different stakeholder groups in a fair manner. [28] This is in contrast to conventional stockholder models, in which the company was ultimately answerable to the shareholder above anyone else. [29] It is in fact this sense of fairness and equality between stakeholders which has led some authors to promote the concept as one with a sound ethical basis. The fact that some perceive this approach to take account of welfare above all else has led to the belief by some that stakeholder theory forms the pursuit of a moral cause as opposed to an aspect of business strategy. [30] Yet upon a closer inspection of the motivations behind following such an ethical approach, it becomes apparent that this may not be so.

Motivations to Behave Ethically

The very pursuit of ethical behaviour itself may however be a strategic move. It has been suggested by economists that those who behave in an honest manner, even when there is no danger of being detected for deceit, fare well in economic terms. [31] It is not entirely clear as to how this occurs. The economic gain may however be mediated by building trusting relationships. For example where the company behaves in an ethical manner, this may encourage people to seek a partnership with that organization when trust is important. [32] This links into the concept of building a reputation, something which most organizations would seek to do. Building a ‘good’ reputation may however depend on continued ethical conduct, as reputation may be adversely affected when an organization engages in opportunism. This means that while the prudent company may opt for the short-term gains seen in opportunistic behaviour, while an ‘honest’ company would base their decisions on the long-term gains of cooperation, even though these may heavily discounted compared to the immediate pay-off. [33] This would therefore indicate that the very act of engaging in moral behaviour may in fact form a part of long-term strategy.

Does CSR Remain Strategic?

Based on the discussion thus far, it would certainly appear that CSR remains a strategic objective if it is based on stakeholder theory and this is a position argued by several authors who have reviewed the current evidence available on the concept. [34] 35Looking after stakeholders in itself could of course be argued to be part of corporate strategy. For example Gibson states that “stakeholders have the potential to harm the company”. [36] They also have the ability to benefit the company through the mechanism of relationships built on trust, generated by the engagement of the organization in moral behaviour. [37] 

Under reconciliation theory, it could however be argued that it is possible to do well and do what is ethically correct at the same time. Gibson suggests that this is in fact the way in which most individuals make decisions about their own lives. Many choose to do what is considered ‘right’ based on fear of the consequences of punishment for behaving in the incorrect way. [38] It is unlikely that organizations would make decisions which are ethical purely on this basis, with no consideration given to the strategic implications. This position may be further supported by examining a number of different examples of CSR, all of which may essentially be argued to have underlying strategic motivations.

Protecting the Environment

There are two different perspectives which may be taken towards the action required for organizations to meet their corporate responsibilities. The first of these is the notion of protection, which implies that organizations should strive to engage in actions which do not damage society. The second is the notion of improvement, in which organizations engage in actions which actively improve society. [39] Many organizations are currently opting to pursue protectionist policies, particularly with regard to the environment. While this may create an initial image of an organization which is taking moral responsibility for its impact on the environment, it may be understood in a different light via stakeholder theory. The actual welfare effects associated with many environmental protection initiatives adopted by businesses have been found to have little overall effect on the welfare of society, which is what many businesses would have you believe they are adopting these policies for. [40] Many businesses may in fact even be using these initiatives as they do perceive there to be a benefit. Yet there are clear financial benefits also to ensuring that the interests of different stakeholders are addressed.

One example of this may be seen with regards to packaging choices made by a company producing food. If the company chooses to use excessive packaging, this is commonly acknowledged as non-environmentally friendly, but may be expected to benefit the product by making it more appealing. This would be expected to improve profits for the primary stakeholders in the company. Secondary stakeholders, such as a national environmental group, may however target the organization over this decision, drawing attention to the fact that their packaging is contributing to environmental damage. This has in fact occurred a number of times in recent years. For example in 2006, the Women’s Institute launched a campaign against UK supermarkets due to their accounting for approximately 70 percent of excess packaging. [41] This may then damage the reputation of the firm, which may impact on profits, therefore leading the company to endanger their protection of their shareholders’ wealth. [42] In the example of the Women’s Institute for instance, a national membership of 205,000 members, many of which may be women who run the family shopping budget, [43] has the potential to make a sizeable impact in profits, before even considering the additional support a media campaign may have generated. This then saw supermarkets pledge to reduce packaging in response. This therefore shows consistency with CSR, as supermarkets recognized and acted on their environmental impact, but also with stakeholder theory, as they recognized the need to take a fairer account of the interests of shareholders and community members or customers. Overall though, the financial benefits would still have ultimately served in the interest of the shareholders. As there remains some strategic advantage to placating secondary stakeholders, it may then be argued that decisions made on this basis are not truly ethical, but are in fact self-interested. [44] 

Welfare Protection

A further aspect of CSR pursued by many companies is that of welfare protection, although here too many of the initiatives taken may be shown to have underlying strategic motivations. Gibson provides one supposed example of this, in the form of Johnson and Johnson. [45] In 1982, the company recalled 31 million bottles of Tylenol after seven people died as a result of the product being spiked with cyanide. It was believed that the contamination had actually occurred in the local store itself as opposed to at the source, yet Johnson and Johnson still recalled the entire batch of product. While Gibson claims that this is an example of the company spending $50 million to meet a moral obligation, there may however still be clear strategic benefits to this action. Sales of the product would clearly be impacted by this event, as there would undoubtedly be at least some people were unaware of the localization of the problem. By removing the entire batch of the product and widely publicizing this, it should however make the public feel that the danger had been removed. Therefore confidence should be restored and sales be less adversely affected in the long-run. What is more, the positive image created by the organization in their ‘ethical’ stance may further improve public opinion and therefore improve sales. Therefore, even in this seemingly moral decision, there could be argued to lie at the heart a strategic motive.

Conclusions

Stakeholder theory provides an alternative means of decision-making in business, which is grounded in ethical and moral principles. This means that the interests of the many different stakeholders in the company should be served as opposed to only those of the shareholders. Business’ approach to corporate responsibility, grounded in stakeholder theory, should therefore also share this same ethical approach. However, while this is the image which may be projected, it is likely that there is an ulterior, strategic motivation to effectively managing corporate responsibility. Acting in an ethical and trustworthy manner, and ensuring greater fairness in the consideration of different stakeholders, may allow the organization to form relationships based on trust which result in long-term profit. What is more, placating different stakeholders may be necessary to prevent them potentially damaging the business. Therefore it is difficult to separate the concepts of corporate responsibility and strategy, although this demonstrates that the organization is likely to benefit overall be ensuring that corporate responsibility is considered in the decision-making process.