After years of growing concern over the reach and power of multinational corporations (MNCs), there has been increasing interest in a variety of means to improve their transparency and accountability. In particular, many people have focused on the responsibility of MNCs for their environmental and social impacts, including impacts on vulnerable stakeholder groups. The notion that corporations have an obligation to engage in socially responsible business practices and consider their impacts on stakeholders is generally known as corporate social responsibility (CSR). Alongside concerns over globalization, environmental degradation, and exploitation of cheap labor in developing nations, the past decade has seen an explosion of interest in CSR, from the legal, governance, and operational standpoints.
While CSR efforts were once voluntary, they are now required by law. Yet there is a lack of consistency—or even direct conflict—among various definitions of CSR and understandings of the moral and ethical obligations corporations owe to their stakeholders. In our new article Redefining Corporate Social Responsibility in an Era of Globalization and Regulatory Hardening, we study this phenomenon from a number of angles. First, we identify key aspects of conflict in the definition of CSR, which point toward areas of controversy in its use and implementation at the public and private level. We then consider what we call the “legalization” of CSR, and attempt to trace the possible motivations behind it. We identify the way what we now call “CSR” might actually undermine genuinely motivated socially responsible activities. Finally, we offer an alternative definition of CSR to resolve some of these conflicts and start to repair the damage that has been done to the moral and ethical notion of corporation social responsibility.
By legalization of CSR, we mean regulatory efforts to require companies to engage in CSR efforts. Our analysis of public and private CSR regulation evidences a global trend toward legalization of CSR. The examples reach from industry self-regulation, via the growing number of financial and non-financial disclosure laws, to mandatory, substantive obligations. While disclosure dominates the capital markets-oriented law of the United States, public regulation that specifically identifies actions or obligations as CSR is growing internationally. An example of public regulation that includes substantive obligations is the 2013 India CSR law, which mandates corporate donations of 2 percent of profits to a defined list of causes designated as CSR.[1] A new French law creates a substantive obligation for some French companies to monitor subsidiaries and suppliers to prevent grave violations of human rights and basic liberties.[2] These laws render mandatory what previously would have been voluntary and call into question traditional notions of CSR and the role of the firm in society.
Our study of CSR began with the realization that the term means very different things to different groups. Perhaps most crucially, in the United States, and increasingly abroad, CSR can be interpreted as entirely consistent with shareholder primacy (that the only moral responsibility of the corporation is to its shareholders). This form of CSR, which we might call “win-win” CSR, posits that engaging in socially responsible behavior is good for the bottom line, so there is no reason a corporation cannot be entirely focused on making money for shareholders and engaging in CSR. This theory of CSR has spawned numerous articles in business journals attempting to measure the impact of CSR on firm performance, in an effort to justify its existence in a shareholder-driven corporation. The problem with this perspective is that it divorces CSR from the opposite notion that the corporation does owe a moral and ethical duty to stakeholders that is entirely independent of shareholders.
Under win-win CSR, socially responsible activities will always be subject to a financial assessment. Presuming it is legal, corporations can conclude they have no responsibility not to dump hazardous chemicals into a river—unless refraining from doing so creates some kind of positive financial value, either in the form of savings or in improved image. In the absence of any moral or ethical duties, firms will only behave as good citizens if legally obligated or financially incentivized.
Another problem with win-win CSR is that it communicates to customers that corporations’ positive social activities are, in fact, motivated by profit. Studies suggest that when consumers perceive CSR efforts to be inauthentic or motivated by profit, they become skeptical of the activities, undermining their success and increasing mistrust. In contrast, when companies engage in CSR that appears sincere, and associated with the corporation’s mission (rather than profit), it can increase customer loyalty.
While it may be tempting to view mandatory CSR as a global shift from shareholder primacy, our research suggests this is not the case. Although we observe a growing trend in European corporate governance toward mandatory disclosure, these rules actually may be nothing more than a reaction to the growing importance of private investment in economies, in which the capital markets historically have played a less important role than in the United States. Even if these regulations represent an attempt to push back against shareholder primacy, we see no evidence that they have been successful in this regard.
In light of this research, we suggest a new definition of CSR: one that explicitly recognizes that socially responsible corporate behavior must be driven by a recognition of corporations’ moral and ethical duties to stakeholders—duties that are not simply a win-win of profit and purpose or extensions of the corporation’s duty to maximize profits for shareholders. We believe it is essential in today’s marketplace for corporations to identify their environmental and social impacts, not because they can make more money by doing so, but because they recognize that this is their moral and ethical obligation. We believe that failing to do so furthers an extension of the shareholder primacy agenda, and ultimately undermines and delegitimizes all CSR activities, whatever their motivation.
ENDNOTES
[1] Companies Act, No. 18 of 2013, INDIA CODE (2013), at 87, sec. 135, http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.
[2] Assemblée Nationale, Proposition de loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre, Feb. 21, 2017, http://www.assemblee-nationale.fr/14/ta/ta0924.asp (Fr.).
This post comes to us from Professor Inara K. Scott at Oregon State University’s College of Business and Professor Gerlinde Berger-Walliser at the University of Connecticut’s School of Business. It is based on their recent article, “Redefining Corporate Social Responsibility in an Era of Globalization and Regulatory Hardening,” available here.