Corporate social responsibility, business ethics, corporate governance, shareholder, social contract, profit.
Business Ethics – ‘the study of business situations, activities, and decisions where issues of right and wrong are addressed’ (Crane and Matten, 2016).
Corporate Governance – ‘the direction, management and control of an organisation’ (Cadbury, 1992).
Corporate Social Responsibility (CSR) – ‘a concept whereby companies integrate social and environmental concerns in their business operations and in the interaction with their stakeholders on a voluntary basis’ (European Commission, 2011).
Legitimacy Theory – ‘a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions’ (Suchman, 1995).
Shareholder – ‘a person who owns shares in a company and therefore gets part of the company’s profits and the right to vote on how the company is controlled’ (Cambridge dictionary).
Social Contract – a ‘moral and civil’ (Boucher & Kelly, 1994), formal and informal, tacit and explicit agreement, ‘grounded to mutual consent’ (Boucher & Kelly, 1994), by individuals, organisations and the state, under which ‘people can be expected to keep their promises and cooperate with one another (Hobbes)’, and accept authority, to constrain their behaviour, with the expectation that others will be equally compliant, at risk of sanction, ostracization, and other consequences.
The position taken in this essay is that organisations do implement CSR practices and make ethical decisions primarily to increase shareholder profit.
An understanding of the social contract between society and business helps us frame the question of whether organisations implement corporate social responsibility practices and make ethical decisions due to wider social considerations or primarily to increase shareholder profit. We consider liberal market economies and the sociological perspective on how society creates the environment for business to operate, and how business contributes to society, starting with the purpose being solely to generate profit and then through how notions of corporate social responsibility have changed over time and how the distinct boundaries between business and society were challenged to form the permeable boundaries we see today. We look at some examples of business not adhering to the social contract and society’s response through regulation, and how the internal control mechanism of corporate governance changed over time and is becoming a less reliable means of driving ethical business decisions in the twenty first century. Consideration is given to the false dichotomy of CSR or profit and how both can be aspects of a strategy that leverages CSR for competitive advantage to increase profits for shareholders.
Society’s role in providing the right environment for business
Society sets the environment for businesses to operate in through establishing laws and regulations and by forming the social contract between society (which for the purposes of this essay includes the Public Sector and Welfare State) and business (a catchall term to describe all types of commercial organisations owned by individuals).
Hall and Soskice’s concept of ‘liberal market economies’ (Hall & Soskice, 2001), which are prevalent in countries such as the UK, US and Australia, describes how the coordination of the relationship between society and business (or “economic actors and institutions of a country” in their words) relies on market forces. Examples of these market forces include society assuming responsibility for creating a supply of skilled employees by providing vocational training, and business establishing a demand for commitment from workers whilst supplying low levels of trust between the employer and employee (Blyton & Turnbull, 2004).
The sociological perspective asserts that there is “a great deal of agreement that markets are social structures characterized by extensive social relationships between firms, workers, suppliers, customers, and governments” in which “repeated exchanges occur between buyers and sellers under a set of formal and informal rules governing relations” (Fligstein & Dauter, 2006).
It is in this environment of formal and informal rules, with a multitude of supply and demand relationships between a diverse and broad range of actors, that the social contract between society and business is formed. If the environment created by society is too hard on business, through harsh regulation, or too soft on citizens, through overly-lenient social security provision, then the social contract that exists between society and business fails.
Business’ role in contributing to society
The social contract framing allows us to consider how corporate social responsibility changes over time as the view of business as having defined boundaries separate from society shifts to a view of business as having permeable boundaries that interact with society in a variety of ways. This shift did not occur in a linear fashion, and as far back as the 1800’s with Cadbury (Idowu, 2011) there are examples of businesses taking on responsibilities in society, but we can consider the interplay of different ideas about the social contract that exists between society and business as the framing the change of opinion about CSR.
People-focused CSR in the sixties
In 1962 Friedman said “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Since then, this quote, and Friedman’s opinions, have been a guiding principle for business that focused on returning the maximum profit for its shareholders at the cost of any wider social considerations.
It underpins the view of shareholders as self-interested individuals who “adopt constraints on their behaviour in order to maximise benefits” (Boucher & Kelly, 1994). As owners of the business the shareholders, accepting of Locke’s premise to permit “individuals to appropriate, and exercise control rights over, things in the world” applying to the assets of the business, including its workforce, exercise the unequal power balance between themselves and the worker (often through managers), to command work to be performed that returns the greatest value to themselves.
The view that business focused purely on maximising their profits expressed and reinforced the clearly defined boundaries between business and society. This is a social contract where business accepts very little responsibility towards society, and regarding workers as assets, might see no value in treating workers in ways that society might regard as fair. As society considers this ill-treatment a breach of the social contract it looks to redress the balance through regulation such as the ‘Contracts of Employment Act 1963’ which required companies to give reasonable notice before dismissal, and through an increase in the expectations society has on business to take into account their human resources as something to be looked after (Frederick, 1960).
Formal CSR in the seventies
Introduced in the seventies, Sethi’s framework for analysing corporate social responsibility formalises a means of comparing CSR within a business in three specific stages: social obligation, or response to market or legal constraints; social responsibility, or congruence with current social norms and values; and social responsiveness, or anticipation of social change and problems, with development of appropriate policies to meet these needs (Sethi, 1975). Sethi splits the social norms aspects of the social contract between business and society from the market and legal constraints allowing business to understand their corporate social responsibility in the context of their industry and place in society, giving them the means to assess whether they are complying with the laws and regulations that apply to them, adhering to the expectations from the areas of society that are meaningful to them.
This formalised approach to matching CSR practices and activities to the norms, values and expectations of society helps us begin to regard CSR as a response to changes in the social environment in which businesses are operating.
Cynical CSR in the eighties
The eighties brings cynicism to CSR. The political economic thinking at the time was that “the state should create and protect private property rights (privatisation), encourage free trade and free markets (deregulation and liberalisation) and ensure that freely negotiated contracts are enforced (rule of law), but should not do much more.” (Pillay, 2015). This rational market approach focuses on generating increased profits for shareholders, and it is against this backdrop that CSR is considered as having more of a public relations purpose than contributing to wider social considerations, which is more effective when a company has a longer history of CSR activities (Vanhamme & Grobben, (2009).
A number of scandals and tragedies occurred throughout the eighties that drove a need for business to have more public CSR programmes. The Piper Alpha disaster in July 1988 in which 167 people lost their lives as a result of inadequate safety procedures (Cullen, 1990) demonstrates how business breaches the social contract to keep workers safe by pursuing profits instead.
Inclusive CSR in the nineties
The nineties sees the Pyramid of CSR (Carroll, 1991) attempting to pull together the different views of the relationship between business and society into a single picture. The pyramid says that business has a responsibility to society to be profitable (removing the duality and adversarial nature of the profit vs. wider social concerns discussion), and then builds on that with legal responsibilities, and then ethical and philanthropic responsibilities on top.
Social contract changes over time
Looking back over four decades we can see a shift in the social contract from one of clearly defined boundaries to one of society having higher expectations and business becoming more involved in social concerns, with CSR and ethical decision making in business becoming a means for business to demonstrate how it attempts to meet the expectations of the social contract.
Business and society succeed together
The change in the nature of the social contract is driven by needs on both sides. CSR, as an expression of business trying to meet the expectations of society, has gone from a focus exclusively on people to also including concerns for the environment, to having a model that includes making profit and philanthropic activities together. As that change has happened, demonstrating how business is adhering to the social contract has become more complex.
Legitimacy theory offers business a means to show society that it is upholding it’s part of the bargain. It “is a mechanism that supports organisations in implementing and developing voluntary social and environmental disclosures in order to fulfil their social contract” (Burlea & Popa, 2013). Those disclosures range from demonstrating compliance with laws, regulations and standards, implementing corporate governance that supports ethical decision making. The forms of CSR have expanded and developed as the boundaries between business and society have become more permeable.
In looking for evidence that the success of business and the success of society are closely linked, we could consider ‘life expectancy’ as an indicator of how society has progressed. In the UK specifically, life expectancy has risen 15% from 70.9 years in 1960 to 81.8 years in 2015 (Riley, 2005, Clio Infra, 2015, & UN Population Division 2019). Over the same period of time GDP increased 187% from £10,436 to £29,985 (Broadberry, et al., 2015 via Bank of England, 2017). Although not robustly causal, the increase in both a measure of how successful society is being in increasing life expectancy and how successful business has been in increasing GDP could be taken as an indicator of the obvious; that the success of both society and business are inextricably linked.
Change in society and business affects the social contract
The twenty first century sees repeated breaches and re-establishment of the social contract and result in both society and business trying to understand the change, and respond to it. In the case of business, how to utilise the new technologies whilst contending with the struggle to respond to the newly raised expectations, and in the case of society, how and when to regulate for these new ways of doing business. Some understanding of the push and pull of social contract negotiations is necessary for framing contemporary CSR as a means for business to demonstrate its attempt to meet the expectations of society.
Dot-com business in the early 2000’s
The dot-com era, from approximately 1994 to 2000’s saw a multitude of early internet-enabled businesses spring up and drive considerable investment causing the Nasdaq index to rise above 5000. Then, the crash saw the Nasdaq fall to just over 1000 in October in 2002. The business models, or lack of, has been suggested as a contributing factor to the dramatic failure of so many internet businesses at that time. Given that “business models play a complex range of roles and that they can even become products in their own right, often creating or transforming markets” (Hawkins, 2004) it’s useful to focus on the business model as the means by which new business has the most effect on society.
In the accepted trend of capitalism, we can accept the dot-com bubble bursting as a bust with a boom to follow in the form of internet businesses with more robust business models that utilise technology platforms to connect crowdsourced supply and demand for services. Businesses such as Uber and AirBnB provide platforms to connect those who have something to offer with those who are looking for those things.
This disruption of the usual supply and demand business model in which the business would be either providing the supply or creating the demand, these new businesses simply act as enablers for others to establish supply and demand relationships. In the case of Uber in London in 2018, Transport for London did not agree that Uber could separate itself from the responsibilities of an employer, finding them “not a fit and proper operator” and refusing to renew their license to operate until TFL had “developed a future regulatory position” (Ram, 2018). So, “..in changing the way that people do business, … they created unique regulatory challenges…” (Harris, 2017) that needed to be responded to by society. These new ‘platform-as-employer’ (Prassl & Risak, 2016) businesses were breaking the social contract and triggering a response from society.
Regulating new business models
Society’s response to the new platform-as-employers business that didn’t fit the norms of how business operates was to introduce regulation. In July 2019 the European Commission introduced legislation to tackle unfair and harmful practices that affect business users of online intermediaries and search engines (European Commission, 2019), and in a blog post post about the future of ways of working the Director General of DG Connect at the European Commission said, “We need to accept that platform work is here to stay and put the right legal framework in place to make sure that workers taking advantage of its flexibility are not in turn taken advantage of by operators exploiting loopholes in labour laws from another era.” (Viola, 2019).
The idea that regulation should be the dominant means of controlling these new business models is perhaps rooted in Keynesian economics that viewed markets as not inherently self-correcting and requiring government to play a role through introducing regulation (Keynes, 1973). However, given that these businesses are technology driven it seems more appropriate to consider them from the perspective of network theories of globalization and how it is the technology that drives the change in business model. Castells’ conclusion that “Networks constitute the new social morphology of our societies, and the diffusion of network logic substantially modifies the operation and outcomes in processes of production, experience, power and culture… the new technology paradigm provides the material basis for its pervasive expansion throughout the entire social structure.” (Castells, 1996) bring into question whether regulation is the right way for society to re-establish the social contract in the twenty-first century.
Corporate governance in platform business models
Corporate governance offers another means for society to exert some influence over business and for business to demonstrate its position on the social contract. Much of the discussion around business ethics is centred on corporate governance (Crane & Matten, 2016) and the ownership versus control power relationships between shareholders and managers of the firm.
Prior to the twentieth century the governance of companies most usually followed the owner-manager pattern (Crane and Matten, 2016) where the founder of the company managed it directly. In the twentieth century corporate governance changed to became one of separation between shareholder as owner and manager as controller. This separation is important in understanding how corporate governance is used as a mechanism for enabling business to uphold its part of the social contract.
Contractual Theory offers an economic theory of the firm based on Coase’s modeling of the firm as, “a nexus of contracts in which each corporate constituency… supplies some asset in return for some gain” (Boatright, 2002). Contracts, whether formal or informal, exist between shareholder and manager, manager and employer, and firm and customer. Given that “contracting is the principal means by which we conduct our economic affairs and structure economic relations” (Boatright, 2002), Coase, through Contracting Theory, tells us that whilst markets are coordinated by exchange, within a hierarchical firm coordination takes place by direct control (Boatright, 2002). It is easy to see how that direct control would operate between manager and employee but the locus of control is shifted between shareholders and managers with shareholders having “at best indirect and impersonal control” (Crane & Matten, 2016).
The shareholder responsibility for governance and control of the business, which they exercise through the managers of the company is not without its ethical and financial issues (Jensen & Meckling, 1976). Agency theory explains the nature of the issues as arising from the idea that all individuals (agents) act in their own best interest but when part of a firm agree to act on behalf of another person, referred to as the principal (Ross, 1973). This principal-agent relationship between shareholders and managers explains why in some cases managers may choose to advance their own self-interest over acting in the best interests of the company, such as making ethical business decisions that don’t increase profits or avoid social contract damaging scandals.
Corporate governance for platform businesses in the twenty-first century sees a return to founder as owner (and major shareholder) and manager. This drastically changes the traditional power balance and leads to the conflicted perception of modern day tech CEO’s such as Mark Zuckerberg of Facebook and Elon Musk of Tesla and SpaceX being both admired and despised (Bloom & Rhodes, 2018). Bloom and Rhodes describe how these CEO’s are “characterised at one and the same time as visionaries and realists; ethical innovators and moral hazards; generous benefactors and selfish hoarders”. Zuckerberg has 53% voting rights in Facebook and Musk has a 54% stake in SpaceX, which means that the usual balances of corporate power are becoming less relevant.
This weakening of corporate governance as a mechanism to drive ethical business decisions along with society’s acceptance of the modern tech CEO indicate a further shift in the social contract, one that at first glance seems to put the power in the hands of business to lead the redefinition.
Corporate social responsibility as response to changes in society
Shifting power shifts the social contract
The success of society and success of business are tightly interwoven. They succeed together. But, in the fast-paced and rapidly changing twenty-first century world, society is unable to regulate new business models quickly and effectively enough, and corporate governance cannot be relied upon to provide sufficient control mechanism for platform businesses. In this environment of a lack of clear boundaries between society and business, both look for ways for business to demonstrate legitimacy and maintain acceptance within society to continue to operate.
With the social contract re-negotiations taking place, the question of whether corporate social responsibility activities are undertaken by the twenty-first century business to turn into a competitive advantage. Rupp, Williams & Aguilera are worth quoting at length on the matter. They said, “In the organisational behaviour literature, a great deal of research has focused on the seemingly incongruent goals of wealth maximization and social responsibility. This research has suggested that these goals are not necessarily incompatible and that CSR may actually be leveraged to serve a strategic advantage. That is, empirical research has sought to determine if there is a significant link between corporate social performance and corporate financial performance. The first of these studies was conducted by Bragdon and Marlin (1972) who found a positive relationship between these two variables.” (Rupp, Williams & Aguilera, 2010). An important point to reiterate is that making profit and doing good for society don’t have to be incongruent goals. CSR can have a positive impact on society whilst also increasing profits. This leads us to questioning the motivations of business; do they undertake CSR activities primarily for the wider social considerations or to be leveraged as a competitive advantage to increase profits?
Corporate social responsibility and ethical business as a competitive advantage
CSR as a response to social pressures
The adoption of CSR practices and ethical decisions by business is a response to changes in society (Aguilera, et al 2007). Aguilera goes on to say that “corporations are being pressured by internal and external actors to engage in CSR actions to meet rapidly changing expectations about business and its social responsibilities.” Society’s expectations around social and environmental issues have changed over the decades, reforming the social contract between business and society, and Corporate Social Responsibility activities are business’ demonstration of legitimacy and adherence to the social contract.
CSR affects financial performance
In 2016 Volkswagen’s profits fell by 20% after they admitted installing software in cars to cheat emissions tests (Kollewe, 2016). This demonstration of not being a socially responsible business breached the social contract in a number of ways; environmental impact from vehicle emissions, cheating regulatory tests, and customer trust in the product, all of which contributed to the reduced profits. This, and many other examples, suggest that scandals of this nature lead to reduced profits.
After studying thirty years of data, Orlitzky, Schmidt and Rynes concluded that Corporate Social Performance is positively correlated with Corporate Financial Performance and that the reputational benefits appear to be an important part of explaining the correlation (Orlitzky, et al. 2003).
Given the statistically validity of that study and the anecdotal information from the Volkswagen scandal we can conclude that businesses that adopt Corporate Social Responsibility practices recognise commercial benefits from doing so (Bonini, 2009).
CSR can become a competitive advantage
Corporate Social Responsibility activities can be a differentiator for businesses, providing “hard-to-duplicate competitive advantage” (Melo & Garrido‐Morgado, 2011), and having an ethical stance can become a competitive advantage (Seifert, Morris, & Bartkus, 2003). Linking Corporate Social Responsibility practices to business objectives creates a competitive advantage (Porter & Kramer, 2006). Porter and Kramer call out the fragmented and disconnected approaches many businesses take towards CSR initiatives and how the notion of business and society as separate rather than interconnected entities fuels the opinion of CSR activities as a cost to the business rather than contributing to profits. They go on to make the point that if CSR activities were aligned with a business’ strategy they would be leveraged as a competitive advantage. As with any competitive advantage, the aim for business is to use it to increase profits for shareholders.
Organisations implement CSR practices and make ethical decisions primarily to increase shareholder profit as opposed to wider social considerations. Changes in society and business are causing a redefinition of the social contract, which causes business to look for other means of demonstrating its adherence to the social contract. CSR is rarely implemented by a business because of wider social considerations, but instead as a means of demonstrating its attempts at meeting the expectations within the social contract. A business that is able to make corporate social responsibility part of its strategy and so leverage the reputational and other benefits to create a competitive advantage can improve its financial performance and increase profit for shareholders.
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