The H. B. Fuller Company made glue that Central American teenagers were sniffing to get high. The kids were becoming brain-damaged and some even died. The company was apparently breaking no laws. Does the company nonetheless have some kind of responsibility to do anything about the misuse of its product?
Consumer sentiment in Europe in 2007 has settled this question largely in favor of corporate social responsibility (CSR). Ethical failures of corporations are taken seriously by European consumers. A moral lapse in the supply chain can mean reluctance to buy among big supermarkets. Increasingly, European ethical positions are affecting American producers and awareness is growing in the United States and Asia of positive or negative contributions to corporate brands from CSR issues. Large companies are responding to consumer supply-chain concerns by seeking to do more than local laws in developing countries require.
The unsettled questions revolve around standards, verification and reporting. How high should a company set its social and environmental standards? How long should it allow itself to comply? Does a company have a responsibility to report weaknesses in its own supply chain? The various NGO agents pushing for CSR have different views about how much should be spent for changing corporate performance and ensuring verification. The issues may be looked at from different ethical perspectives. So we first look at the ethical theories and then at how they might apply.
Three ethical approaches have evolved as the focus of ethical systems: virtue ethics, duty ethics and consequence ethics. Virtue ethics, associating ethics with personal habits, is associated with Aristotle. Duty ethics is associated with religious beliefs, although Kant tried to create a system of duties independent of belief in God. Consequence ethics is associated with the quest for rationalism during the Enlightenment, and especially with the Utilitarians. For more about the Three Ethical Approaches, click here.
Corporate social responsibility is the conduct of business according to both ethical standards and the law, the sum of financial responsibility, environmental responsibility and social responsibility. The Corporate Charter as a “License to Operate”
The joint-stock corporation emerged as a bargain between a monarch and an entrepreneur or business. The charter gave the joint-stock company certain rights, in return for certain commitments by the company to serve the interests of the Crown:
- When Columbus went to royalty for a charter and money for his search for a western route to the Indies, finally succeeding with the King and Queen of Spain, he dangled the prize of a greater imperial reach for Spain.
- Nearly 200 years later, two French fur traders petitioned England’s King Charles II for an exclusive charter to trade in the Hudson Bay area. In return, they promised to represent the King in the New World. With the backing of a group of London merchants and the King’s cousin Prince Rupert, the King in 1670 granted a charter to the joint-stock Hudson’s Bay Company.
States originally required U.S. corporations to undertake certain commitments in return for their charter. The State of Delaware won out as the corporate-headquarters state of choice by demanding very little, and it is now the favorite corporate headquarters location in the United States.
Does it matter that corporate charters no longer require a social mission?
Adam Smith seems to have thought not. He saw the marketplace as a mysterious catalyst that transformed selfish tendencies of business people into products and services useful to society. He called it the Invisible Hand, a kind of karma that made good outcomes from markets independent of the motives of the buyers and sellers in these markets.
But he had had certain assumptions. He makes clear in his writing that he assumed that buyers would be vigilant, that the laws would be enforced, and that the culture supported laws through social disapproval of fraud.
Many companies seem to feel the need for a social mission. Whether because of pretence or a deeply felt corporate culture, many multinational companies say that their mission extends to serving employees, customers, communities and many shareholders. CSR is featured in about half of all corporate annual reports.
Friedman 1970. Milton Friedman in a 1970 article in the New York Times Sunday Magazine viewed CSR as a distraction from the duty of corporate executives to serve shareholders. The focus of CSR in 1970 was on air and water pollution and equal opportunity employment. He argued against voluntary efforts by executives to achieve environmental or nondiscrimination goals. He framed the debate as contention between shareholders and managers. Managers who championed CSR, in his view, were putting at risk the free and voluntary character of the marketplace. He feared creeping collectivist influence and intervention, i.e., pressures on business represented by “the iron fist of Government bureaucrats.” But Friedman supported CSR of a negative sort—not engaging in deception and fraud. He accepted the idea of managers maximizing long-run profits, but objected to this being called CSR.
In January 2005, The Economist featured a skeptical look at CSR that seems to have been inspired by Matthew Bishop, the business editor, who in 2004 was saying that company CSR initiatives “could - diminish shareholder returns, - distract business leaders from their focus, and often - allow companies to continue bad behavior in the shadows.” Like Friedman 35 years before, Bishop argued CSR distracts from the manager’s job of making money for shareholders, if it is not simply PR (which Bishop considered acceptable, as did Friedman). Pressure put on businesses by non-governmental organizations (NGOs) to “create social as well as financial benefit” may, he argued, have the opposite effect. But the argument against CSR has shifted since 1970. Bishop says:
Corporations at the 2004 World Economic Forum were cowed by NGOs arguing for CR. Nestlé’s Peter Brabeck-Letmathe, he said, was the only CEO willing to go on record that his primary goal is profit maximization.
Companies are funding CSR initiatives just to get NGOs off their backs. Nestlé spent millions to improve social conditions in their factories, yet Bishop argues that it gets little credit in the press because the company has recently worked outside of the CSR movement. (Nestlé tried to work inside the CSR movement in 1982-83 to counter a boycott of its products for its marketing of infant formula in Third World countries, setting up the Nestlé Infant Formula Audit Commission, reporting quarterly. The International Baby Food Action Network organized a boycott in 1976.)
The NGOs have legitimate issues but they should take them to the media and the public to shift the pressure back to governments. Pressuring companies lets government and politicians off the hook.
In other words, unlike Friedman, Bishop sees a tradeoff between CSR – which he considers unfair to corporations – and government regulation, which he considers reasonable. He compares using company money to further socially responsible causes with a CEO deciding to buy a corporate jet for reasons not directly related to the bottom line. Friedman opposed CSR in part because he saw it as leading to more government regulation.
Public polls in recent years have suggested growing support for CSR. MBA Students: More than three-fifths of MBA students and graduates surveyed in 2004 said they thought American business is not "honest and ethical." The figure for women MBAs alone was t.Comment: This suggests that MBA students care about the ethics of a company they are thinking of working for. How do they find out? One way is to look at the annual report and see what the company says about its mission and how well it carries it out. Is an ethical statement central to the company’s statement of mission? Another way is at a job interview. In many Wall Street firms, both interviewers and interviewees are asking questions about employee ethics. “A prospective employer wants to see what you are made of, but you have the right to see what the boss and the company are made of, too.”
How does the company solve problems relating to ethical “gray areas”.
How does it try to meet its sales goals? How do they try to attract accounts from a competitor?
Is this a company that keeps its budgetary and scheduling commitments?
If the company has CSR goals and objectives, is the achievement of these goals included in performance reviews and linked to compensation and advancement?
By joining organizations like Net Impact or Starting Bloc, students can share information about companies with other MBA students or alumni.
CEOs: In the 2004 PricewaterhouseCoopers CEO survey, more than two-thirds (68 percent) of CEOs said they believed the regulatory environment was making companies risk averse. Almost half (49 percent) of U.S. CEOs saw over-regulation as a big threat. In the 2005 survey the burdens of Sarbanes-Oxley and other regulatory requirements were at the top of CEO concerns. Junior Employees: Employees in a 2004 CNN/Money survey said they thought that their immediate co-workers and supervisors were ethical, but they saw serious moral lapses in senior management’s ethics, in the form not of fraud or theft but of hypocrisy, favoritism and disrespect for employees. In the survey, 72 percent of employees strongly agreed that their immediate boss behaves with honesty and integrity versus 11 percent who strongly disagreed. Only 3 percent say they have an immediate boss who's guilty of dishonest financial deals. But top managers were considered guilty of hypocrisy (62 percent agreed), favoritism (60 percent), dishonesty (53 percent), promise-breaking (52 percent), and disrespect (37 percent). Just 56 percent agree that top brass at their companies acts in an honest manner while 16 percent strongly disagree with that sentiment. Distrust in top brass may spell potential trouble for companies if they want to retain a loyal workforce. According to Society for Human Resource Managers, more than eight out of 10 employees planned to look for work elsewhere when the economy recovers. Other studies have found high levels of employee stress. Comment: Perspectives on ethical issues vary with the position of the stakeholder, even within a company. Lower-level employees often do not believe themselves to have enough latitude to make significant ethical decisions, but they doubt that higher management is behaving ethically. The perception that senior managers are less ethical than junior ones was supported by the Bagel Man, who uses an honor system to provide bagels and finds a payment rate of about 89 percent and “believes employees further up the corporate ladder cheat more than those down below.” General Public: A Business Week/Harris Poll asked Americans which of the following two propositions they support more strongly:
·Corporations should have only one purpose--to make the most profit for their shareholders--and pursuit of that goal will be best for America in the long run. Or ·Corporations should have more than one purpose. They also owe something to their workers and the communities in which they operate, and they should sometimes sacrifice some profit for the sake of making things better for their workers and communities. An overwhelming 95 percent of Americans chose the second proposition. These views are reflected in consumer surveys, so that some companies have used their CSR practices as a marketing tool. In Cone/Roper Cause Report, 85 percent of Americans polled say they are likely to consider a company’s reputation foraddressing social issues when shopping. In some cases, a cause program is essential to the company’s brand viability. Think of Ben & Jerry’s (now part of Unilever), Stoneyfield Farms (now part of Danone), the Body Shop (now part of L'Oreal), Aveda.
A product-safety case – probably the H.B. Fuller/Resistol case – was taken up in a class at the Harvard Business School. In this case the issue of potential liability to consumers seemed minimal because the teenage consumers were sniffing the glue, not a purpose for which the product was sold. The instructor asked the class: “To what extent is a corporation responsible for one of its products after being shown to be harmful to the health of, or potentially fatal to, consumers?” After several students struggled to define the extent of a corporation’s responsibility, a student named Jeff Skilling put his hand up and said, "I'd keep making and selling the product. My job as a businessman is to be a profit center and to maximize return to the shareholders. It's the government's job to step in if a product is dangerous." A few other students in the class nodded in agreement. In March 2006, Mr. Skilling was on trial, having been President of Enron for several months in 2002, the year the company was found insolvent.
A product doesn’t have to be physically dangerous to be a social hazard. Do you see any connection between teenagers sniffing Resistol and the misuse of credit cards by some U.S. consumers? Do credit-card issuers have no responsibility for customer use of credit? Do government disclosure requirements end corporate responsibility? Provide an answer based on a deontological or a consequentialist answer, or both, but explain which type of answer you are providing.
Capital market texts explain that U.S. and U.K. financial systems are based on an open-market model in which companies may raise capital in public markets if they obey certain rules that are mostly designed to protect the investing shareholder. A U.S. public company that offers shares to more than a limited number of sophisticated investors must register such offered shares with the SEC. The New York (NYSE, NASDAQ) and London stock exchanges support creation and growth of new corporations and provide a mechanism for marking to market—i.e., recognizing continuing corporate losses and gains, facilitating the efficient process of creative destruction of capital assets. Open financial markets mean shareowners can sell their shares at a known price—and this makes potential investors more willing to buy stocks. Since the market price of shares is what investors collectively think a company is worth, if management is perceived as weak the company’s share price will fall and large shareholders may step in the install new management. Small investors entrust their savings with corporate management partly as free riders on the due diligence they assume is taking place by larger investors and by Wall Street analysts.
In the theory of the U.S. firm prevailing until 2002, companies serve shareholders through a system of corporate governance—a Board of Directors is accountable to shareholders and employees including the CEO are accountable to the Board. Shareholders elect directors and an independent auditing firm. Directors elect the company CEO and have the power to replace the CEO. They also hire and have direct contact with an independent auditing firm. The CEO hires managers and staff and is given incentives to encourage them to focus on shareholders’ interest in higher profits and a higher stock price. Within company management, certain officers are entrusted with special fiduciary responsibilities—i.e., responsibility to speak up directly to the Board or regulatory agencies if the CEO is seriously violating laws. Such managers include the top financial officers (CFO, Treasurer, Controller) or legal staff (Counsel, Secretary). Wall Street analysts provide independent reports; their independence is monitored by the SEC. Accounting standards are updated by the Financial Accounting Standards Board. Independent auditing firms operate according to ethical standards and are subject to peer reviews.
A problem with greater shareholder accountability is that it can lead to short-term pressures for earnings growth. Socially responsible investors (SRIs) seek to influence corporate managers to take a longer view of profitability. SRIs avoid investing in companies with a poor CSR record or vote for proxy resolutions calling on companies to take a long view. In the 1970s, SRIs threatened to sell stocks in companies that were not considered responsible (e.g., by investing in apartheid South Africa). Wishing to avoid investing in companies profiting from the Vietnam War, religious groups began CSR campaigns in the 1960s. SRIs in 2005 fall into two groups:
Large institutional investors such as pension funds or churches that need diversification and avoid selling companies just because of CSR shortcomings, but both initiate and vote CR-oriented proxy resolutions (proposals submitted under SEC Rule 14a-8 by shareholders to other shareholders for their vote by mail ballot).
Individual shareholders and SRI mutual funds, which are more open to selling shares in a CR-challenged company, as well as voting proxies.
An irony of the Sarbanes-Oxley law, the July 2002 congressional backlash against accounting practices in public corporations is that SRIs for years engaged in proxy battles to ensure improved corporate governance, led by municipal-employee pension funds. SRIs were ignored even when they have won proxy campaigns, i.e., obtained a majority of shareholder votes. Even after the scandals of 2002, American managers rate the bottom line higher than their company having good CSR practices. The most commonly cited benefit from CSR by U.S. respondents is "improving brand image," followed by "increased sales." (Improving brand image could be interpreted as substantive response by a bitten brand rather than simply a public relations gestures.) By the year 2000, one of every eight U.S. dollars invested – about $1 trillion – was managed with a social screen of some kind. Some SRI funds have a religious origin, like the Roman Catholic Order of Notre Dame, which has $70 million in two funds. Similarly, many Quaker funds seek to avoid investing in companies profiting from making weapons. The Church of England has avoided investing any of its ₤3.9 billion endowment in weapons, pornography, gambling, alcohol, tobacco or newspapers, but its commissioners in 2004 were asking if these policies were “overscrupulous” and contributed to the endowment’s loss of ₤70 million since 1998. Divestment. The nuns of Notre Dame do remove companies from their investments if they continue to ignore the nuns’ request for change, and a recent survey indicates that if investors paid attention to the corporate governance practices of companies they invested in during the 1990s, they would have done much better to divest themselves of companies with poor records. However, if all SRIs sold their holdings of companies with an unfavorable CSR record, it would create new problems. Pension funds tend to avoid selling stocks on the basis of bad news about a company’s behavior, because for these large institutions it is important to be diversified and every company eliminated from the fund because of a CSR issue creates fewer options for diversification. Also, the funds invest for the long term and an increase in fees for short-term buying and selling because of concerns about the CSR of current management would raise costs. Dialog. The sophisticated SRI also may seek to influence management with letters, telephone calls or personal visits. If management is not responsive, SRIs may choose to use proxies under SEC Rule 14a-8. Lewis Gilbert and Wilma Soss were the initiators of using annual meeting questions and threatening proxy battles to force companies to pay more attention to individual shareholder interests. Starting in the 1960s, the use of proxies for raising social issues has become popular. The proxy route has proven effective in getting management attention, and proposers of resolutions have been persuaded to withdraw them in return for some related management concessions.
Proxy Battles. Historically, proxy battles were about control of the corporation. When a company is “in play,” socially oriented proxy resolutions are extraordinarily powerful. The late Rev. Leon Sullivan developed the Sullivan Principles in the 1960s to encourage U.S. companies to challenge the apartheid principles in South Africa. The MacBride Principles originated in the office of the NYC Comptroller in the 1980s. Investors and consumer groups have ways to motivate corporations to make permanent changes in their business practices. The three main sources of pressure are: (1) Direct pressure from SRIs, (2) Pressure from SRIs via proxies, and (3) Pressure from consumers (which can be business buyers including retailers), as shown in Table 1-1.
Table 1-1. Key Sources of Pressure on Companies to Improve Their Responsibility
Type of Pressure (or Influence)
From SRIs via CSR Screens
From SRIs via Proxies
Benefit Offered Company
Environmental audit, Social audit
Negotiation in lieu of proxy battle
Seal of approval
Analysts for SRI funds
Pension funds and other proxy activists
How Audience Is Reached
Media and direct contact with KLD et al.
Direct contact with NYCERS, ICCR et al.
Media, bookstores, supermarkets
Buyers of Benefit
Ben & Jerry’s (1989-), Shell (2000), Body Shop
Independent (consultant) certifiers
Certifiers for FSC, SA8000
Calvert, EIRIS, GRI, KLD
Proxy advisers or proposers (ICCR)
Seals for certified social/ environmental audits
CERES, Rainforest Alliance, SA 8000
NYCERS pressure for compliance
“Shopping for a Better World” and alonovo.com
Source: The authors. FSC is the acronym for the Forest Stewardship Council. SRIs=Socially Responsible Investors. KLD=Kinder Lydenberg Domini, which provides research to SRIs. EIRIS is another researcher for SRIs. CERES is an environmental coalition.
Some activist groups complain that most corporations set their standards for social responsibility too low, that progress is too slow, that systems of verification allow too many problem situations to continue. Every incident of corporate failure becomes a media event. From the perspective of the activist group, outrage may simply be their emotional reaction (think deontological, Kant’s categorical imperative)… or it may be a calculated strategy to obtain the best opportunity for media coverage. From the company or industry-wide perspective the situation looks very different. An executive may agree that workplace or environmental abuses must be corrected, but the question is how quickly such improvements must be made. In situations where the abuses are widespread, it may take years to meet even minimal CSR standards.
A company and its executives – or an industry-wide coalition of companies seeking to improve practices – must therefore decide how much to invest in CR, i.e., how high the voluntary standards should be set and how long member companies have to comply without being censured by their colleagues or expelled from the CSR group. The company and industry response will depend only partly on the ethical concerns of its executives. It will depend also on how deeply rooted existing practices are and how expensive it might prove to take the high road.
The first, most basic step, is to articulate a company code or mission – or, for an industry-wide group, an industry code or mission. This costs very little and is smart public relations whether or not it goes any further. But it could also be the beginning of a long path toward high standards.
The mantra of Larry Page and Sergey Brin when they started Google in 1998 was “Don’t be evil.” Google was determined not to follow competitors’ exploiting visitors with a barrage of ads. Instead, Google focused on being good – i.e., an easy-to-use search engine. Google’s vision of itself has grown along with the company, taking in a greater part of the community. It must take into account their responsibility for environmental and social (workplace and community) issues that are integral to what the companies do. Google’s willingness to cooperate with the Chinese government on certain issues in 2005 and 2006 has disappointed some of its admirers. What are its choices?
The company code typically articulates its mission in a way that recognizes that it sits at the intersection of three circles – markets, ethics and law. A company must make a profit, must obey the law and in addition it must operate in an ethical way.
Markets are the natural habitat of corporations. To survive, companies must attract more revenue than they spend earning it. Ben & Jerry’s was started by two men motivated by a social mission (which they used to help sell their product). But the first two of the three parts of its corporate mission statement are about creating a good product and generating revenue, their “product mission” and “economic mission.”
Ethics vary among regions and are guided by religious and secular principles. These norms are codified in international conventions, such as those on human rights and the environment that have been issued by the United Nations and signed by member countries. If markets are games, ethical standards are agreements about what constitutes fair play.
Law is the formal boundary of fair play. Usually in a democracy laws are created by legislators, though many laws evolve out of custom (“common law”) and interpretations of judges. Judges make new laws by recognizing such business standards as weights and measures, types of negotiable instruments and accounting principles.
Laws must be obeyed or violators go to jail. Governments have sought to regulate businesses to ensure a basic standard of fairness. Waves of corporate regulation in the United States the standards have occurred:
·At the beginning of the 20th century, when Republican President Theodore Roosevelt got laws passed to outlaw cartels.
·In the 1930s, when Democratic President Franklin D. Roosevelt introduced reforms to end certain financial practices that contributed to the 1920s bubble, the Crash of 1929 and the subsequent economic downturn that we call the Great Depression.
·In the decades since the 1960s, when new regulations and new approaches to CSR have sought to address financial, environmental and social problems – seeking to require or encourage corporations to “internalize” (pay for or stop) the cost of “externalities” such as environmental pollution or workplace inequities.
Ethical companies obey laws whether or not they are vigorously enforced, and at the same time encourage their employees to adhere to ethical standards higher than those required. A major challenge for multinational companies is how to operate where (1) bad laws, e.g., those perpetuating racial or gender discrimination, are enforced, or (2) good laws relating to corporate behavior are not enforced (i.e., a “culture of compliance” is lacking).
Some try to minimize the role of ethics, arguing that a corporate manager’s job is simply to stay out of jail and increase shareholder profits. But even extreme advocates of this position understand that the law is not enough, that it is essential that the company “stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
But how the rules of the game apply in a particular case is not always clear. The right thing to do may be illegal. The wrong thing may be legal. The law is not always a clear guide to ethical behavior. See Table 1.1.
Table 1.1. The Ethics vs. Legality of a Proposed Action
Action is Legal
Action is Illegal
Action is Right
No conflict between ethical (right) action and legal action.
Conflict: Obey an unethical law that forbids something that is right, e.g., nondiscrimination? Or seek ways to evade/change the laws?
Action is Wrong
Conflict: Should one do something wrong even if it is legal, e.g., sell an unsafe (banned in USA) product overseas?
No conflict between unethical (wrong) action and illegal action.
So from both a personal and an institutional perspective, the manager must consider what it means to be an ethical corporation.
The difficulties of coping with ethical issues in a global world lead to reliance on various forms of social contracts. Especially useful from the corporate perspective are the political solutions (tell us what everyone’s rights are, make it a law, so we all know where we stand) and voluntary consensus-building approaches (let’s all figure out a fair way to deal with the issues).
Chart 2-2. Two Concepts of Social Contracts: Rights and Fairness
Social Contracts - Rights vs. Fairness (Both Deontological in Origin)
Rights-Based (Duty Leading to Law)
Fairness-Based (Community Consensus)
Politically protected rights of all human beings – “inalienable” (Locke)
Egalitarianism – status-blind social design – a system one would design not knowing where one would be born. (Rawls) Implications for corporate salary ratios.
Voluntaryconsensus –building standard-setting by groups
Consensus-Based Standards: Political vs. Voluntary
National and state government consensus on regulatory standards. Standards for purchase, accreditation, investment.
International – U.N. conventions – human rights, environment – WTO, ILO
Professional association ethical standards (ABA, state bar associations AICPA). Corporate codes. Industry standards – toy industry, apparel industry.
Multi-stakeholder national and global standards. Draw on U.N. conventions. Accredited certification systems. (ISEAL)
A common response of corporations to meet the challenge of global CSR in their internal operations is to create a company code of conduct, which is usually a list of ethical goals by which the company plans to operate and make decisions. Creating a code of conduct has little downside risk for the corporation and bears the possibility of upside potential both in its effect on employees and the signal it sends to investors and other stakeholders. It is a useful first step toward creating a culture of compliance to reduce risk and committing to higher voluntary standards. Business for Social Responsibility (BSR) offers a good set of guidelines for corporations seeking to implement CSR principles. Codes of conduct, however, can be viewed as halfway measures, raising issues of comparability, regularity, transparency and verification: ·Comparability. Since each company creates its own code, there is a danger that the code will be tailored to the strengths of the corporation, or will give this impression. The more difficult CSR areas could be omitted from the code or the code could be too vague to manage or ensure compliance. If a code is idiosyncratic, rather than taking the form of standards set on an industry-wide, multi-industry or multi-stakeholder consensus basis, comparisons among companies are hard to make. ·Regularity, Transparency and Verification. Without regular and transparent reporting and verification of compliance, codes lack credibility. The principles may be admirable, but questions remain as to whether and how they are implemented.
To make codes of conduct more manageable and credible, corporations invite external monitors to review their adherence to their own codes. This is a useful management approach for generating improvement, but monitors are consultants. Without some assurance about the procedures and credibility of these consultants (virtually impossible to establish for individual codes), their reviews do not have the same credibility as rigorous reviews against widely adopted standards by certification bodies accredited, or licensed, to perform such reviews against a common standard.
CSR Standards and Certification – Industry vs. Multi-Stakeholder Corporate executives are increasingly viewed as managing an entity that is accountable not only to stockholders and the government but also to its stakeholders, including employees, the community, suppliers and customers. In response to this increased public scrutiny, many corporate and brand strategies now include a long-term affirmative policy on CSR, with implementation and reporting to stakeholders on the company’s performance using the triple bottom line: - Financial - CSR programs such as improvements in corporate disclosure or responsiveness to proxy issues can increase investor confidence and interest. - Environmental - CSR programs, such as increasing efficiency of combustion or recircling, avoiding penalties for violations of the law, and building in environmental considerations when facilities are built or modernized rather than retrofitting can save money. Bottom-line benefits can also be derived from designing products and services for the environment in the product development phase and from protecting the value of the company’s reputation. - Social - CSR programs, such as improvement of workplace conditions, protection of human rights, can lead to higher labor productivity, reduced turnover, higher retention rates and higher-quality products and reputation. CSR standards have emerged to level the playing field, avoid confusing duplication and gain credibility. They can apply to a single industry or across industries, depending on the coverage of the standards, and can be local (national) or global. Local (National) Standards: ·Single Industry: National standards often start at the single-industry level through industry associations based in a single country. For example, the American Apparel and Footwear Association (AAFA) created the Worldwide Responsible Apparel Program (WRAP) for work conditions at suppliers. ·Multi-Industry: Multi-industry national standards focus on social or environmental standards that can be applicable across industries. For example, the UK’s Ethical Trading Initiative (ETI), is a study group with a model code covering decent labor conditions. ETI was formed by a large group of retailers, NGOs and trade unions. Global Standards: ·Single-Industry: These are developed primarily by international associations of national industry associations, such as the World Federation of Sporting Goods Industry Associations (WFSGA) and the International Federation of Football Associations (FIFA). Others are developed by NGOs. For example, the Forest Stewardship Council (FSC) developed standards for sustainable forestry management and the International Federation of Organic Associations Movement developed standards for organic farming. ·Multi-Industry: Multi-industry global initiatives are developed either by the International Standards Organization (ISO) or by multi-stakeholder organizations. The most credible in the CSR field are the members of the International Social and Environmental Accrediation and Labeling Alliance (ISEAL). SAI developed and oversees SA8000, which is a multi-stakeholder international workplace standard and has an associated verification system. It combines a management system with facility performance.
Table 2.3 Developers of CSR Standards
Type of Standard
Environmental and Social: Single-Industry
FLA, TIA, AAFA (Social)
FSC, MSC, MAC, WFSGA, FIFA
Environmental and Social: Multi-Industry
For a global firm, does ethical behavior mean applying the same standards in every locality of operation? Or should a firm operate according to local laws and customs? For example:
In a country where women are not permitted to drive a car or to appear in public unveiled, should these local laws and customs be followed/enforced by corporations or should international conventions (e.g. United Nations conventions and declarations, international treaties) be followed that call for equal treatment of men and women?
If local laws require racial or religious or gender segregation, does the corporation obey them or abide by international conventions?
How does a corporation that believes in freedom of association behave in a country where all unions are banned except the one sanctioned by the state?
How does a U.S. corporation behave in a country where local laws provide more benefits or protections than in the USA, such as shorter work weeks, longer paid maternity leave, a limit to overtime hours, or ban on hiring children younger than 18 full time.
To gain greater credibility with stakeholders and to reduce inefficient duplication, many corporations are choosing certification, independent verification that a facility is in compliance with a particular standard, issued by an accredited certification body. Certification bodies (CBs) are groups of specialized auditors who are licensed by an accreditation agency to issue certificates that attest to compliance with a standard. They can be organized as a business or as a non-profit. The accreditation agency could be a state authority or it could be a regional, national or international organization established to license and oversee certification agencies.
Table 2.4 Verification: Accreditation Bodies
Members of the International Auditing Foundation (IAF)
Members of the International Standards Organization (ISO) and International Social and Environmental Accreditation and Labeling (ISEAL) Alliance
Note: For International Standards Organization (ISO) and Social Accountability (SAI) standards, certification bodies (CBs) are subject to an accreditation system to assure compliance with guides for certifying compliance against standards. ISO/IEC Guide 62 for management systems certification audits guards against conflicts of interest, including consulting activities. Neither the FASB nor the AICPA has endorsed a standard to accredit accounting firms and AICPA does not accredit members.
Mallen Baker in Issue 49 of Business Respect, his online CSR newsletter, argued that Shell Canada and the Body Shop pioneered with “New Model” stakeholder reports. John and Alice Tepper Marlin responded as follows:
The term "stakeholders" is not new, having been used to describe corporate “owners” more broadly than shareholders at least as long ago as 1989, in the first stakeholders report, issued by Ben & Jerry’s. More generally, the audited stakeholder report is the second phase of an evolution that has now moved on to a more advanced third phase. First Phase – Single-Focus PR Reports Since 1970. The first phase of CSR reporting was primarily one of public relations and focus on a single aspect of CR, the environment. Corporate PR specialists composed annual-report sections in the 1970s that paid homage to the environment and the company’s care of it. These reports had few links to corporate performance… except for a few isolated corporate efforts such as the 1972 Abt Associates pilot report (pioneering, never imitated) adding measures of employee pollution to its annual financial statements. Some companies were making serious environmental efforts, but their reporting by was not of equal seriousness. The Journal of Accountancy in February 1973 published proposed ways of reporting on pollution, including a model environmental report with a hypothetical Auditor's Opinion, but it was 30 years before this proposal was implemented by two large accounting firms with the Shell Report. Second Phase – Audited Stakeholder Reports Since 1989. The second phase of CSR reporting is what Mallen Baker calls the “new model” report, referring to the Body Shop and Shell Canada reports. It is a stakeholder report, covering more than the environment. But stakeholder reports actually began many years earlier with the Ben & Jerry's annual report covering the year 1988, for which B&J commissioned a "social auditor" to work with the company’s staff, interview employees for two weeks. The social auditor was encouraged to speak with suppliers such as the local dairy processor, and with public and private representatives of the community. The social auditor gave the report its name as a “Stakeholders Report” and it became the first-ever annual report formally addressed to all stakeholders, divided into the major stakeholder categories: Community (Community Outreach, Philanthropic Giving, Environmental Awareness, Global Awareness), Employees, Customers, Suppliers and Investors. It was the first time that B&J added Suppliers to its stakeholders. To the report was added a signed “Report of Independent Social Auditor” with the opinion that “the Stakeholders Report fairly describes the performance of the company in the area of social responsibility for the year 1988 with respect to the five stakeholder groups.” Third Phase – Stakeholder Reports Certified against Standards. The third phase of CSR reporting formalizes stakeholder reporting with third-party certification of compliance with auditable standards. Such reports are comparable among companies adhering to the same standard, thereby facilitating trend analysis. Certification against specific stanards both strengthens and circumscribes the role of the independent social auditor. Third-party certification bodies are overseen and accredited by accreditation agencies that operate in a consistent, highly procedural manner.
GRI is an independent institution dedicated to developing sustainability reporting guidelines for corporations to report on their economic, environmental and social performance. GRI’s goal in creating unified sustainability reporting guidelines is to:
·“present a balanced and reasonable account of economic, environmental, and social performance, and the resulting contribution of the organization to sustainable development; ·facilitate comparison over time; ·facilitate comparisons across organizations; and ·credibly address issues of concern to stakeholders.” Early issues relating to GRI included the following: ·No mechanism for verification. ·Lack of coverage of intangibles reporting. ·Social and environmental indicators only based on external, societal codes. ·Labor relations indicators include participation in “tripartite bodies,” giving credit simply for more worker-representation mechanisms. As of early 2006, the GRI has been attempting to combine gaining more consensus for its reporting system with fundraising. The result seems to be a focus on obtaining consensus from those who will help fund the effort – not necessarily an unreasonable accommodation to the needs of survival, but not what some of the early advocates for the GRI had in mind. Mallen Baker early on was concerned that legislators moving onto this territory will use the GRI as a crude tool to meet compliance objectives – an example being actions by the JSE in South Africa. Mallen Baker, “Redefining CSR as a Process that Starts at the Heart of the Company,” Dispatch 60, July 2003. Baker cites Mark Goyder, “Redefining CSR", UK Centre for Tomorrow's Company, 2003.
How can a company use CSR to market itself? Pick a company with a CSR section in its annual report (42 percent of Fortune 500 companies have 2004 CSR sections). Review it from the following perspectives: (1) Does it identify the standards of performance the company is seeking to comply with? (2) Does it show improvement over time? (3) Does it identify the nature of the
challenge the company faces? (4) Does it do the job as marketing vehicle?
Adam Smith observed a tendency among business leaders to seek ways to limit price competition. At the end of the 19th century, some big businesses were successful in doing this by eliminating their competitors entirely. Theodore Roosevelt (1858-1919), the 26th president, who took office after McKinley was assassinated, took up progressive issues with deontological fervor. Teddy Roosevelt became a leader of reform Republicans in the New York State Assembly in the early 1880s. Although often described as a trustbuster, he was more interested in regulating large corporations than dissolving them. He created the Bureau of Corporations and strengthened railroad regulation. He supported regulation of the food and drug industries, and by the end of his second term he had endorsed proposals for graduated income and inheritance taxes. After the excesses of the 1920s culminated in the crash of 1929, widespread unemployment and poverty led to a call to rein in business. In response, President Franklin Delano Roosevelt in 1933-1934 created the Securities and Exchange Commission to regulate financial markets, just as the Federal Reserve had been created in 1913 to bring order to the banking system. FDR, like TR before him, was interested in tightening the rules around corporations, not encouraging them to reform themselves. Beginning in the 1960s, levels of activism rose in the US, and consumer and investor scrutiny of business practices rose along with it. NGOs sought to hold companies to a higher standard than compliance with law. Three waves of NGO interest and activity can be identified:
The headlines of protest in the 1960s were about violent clashes over civil rights or demonstrations against the War in Vietnam and in the 1970s, with Earth Day, on the environment. At the same time a series of peaceful reforms were initiated to respond to issues such as civil rights, auto safety, the environment, and apartheid in South Africa. In the space of a decade many new laws were created, such as the Civil Rights Act of 1969 and the Clean Air and Clean Water Acts of the early 1970s. Institutions were created that had a significant impact in the next 30 years:
Starting in the 1960s, the National Organization of Women (NOW) and Catalyst sought to advance the position of women. NOW focused on activisim to expose discrimination and to give women access to jobs with a lessened pay gender gap. Catalyst concentrated on placing women as corporate directors or top managers.
Beginning in about 1965 with his Unsafe at Any Speed (which argued for mandatory seat belts in cars), Ralph Nader initiated a series of campaigns, studies and organizing groups.
Project GM was started to improve the environmental and civil rights record of General Motors, in part by electing certain outside directors to the GM Board.
The Council on Economic Priorities was founded in 1969 as a broad-based service to rate corporate social and environmental practices for investors and managers and to inform consumers. This organization was the leading flag-carrier for CSR research for many years.
In the 1970s five key CSR institutions were started: The Interfaith Center on Corporate Responsibility, to initiate proxy resolutions on social and environmental subjects; the Investor Responsibility Resource Center and the UK Ethical Investment Research and Information Service (EIRIS) to review and advise on proxy resolutions; the Social Venture Network and (later) Business for Social Responsibility to provide a forum for socially responsible businesses.
Named after Leon Sullivan, the first black director of GM, the Sullivan Principles for fair employment practices in South Africa were adopted by hundreds of companies, and adherence to them was audited by the consulting firm Arthur D. Little, which thereby became the first CSR certification agency.
A second wave of reform, primarily focused on the environment, occurred at the end of the 1980s and in the early 1990s:
As a result of the Exxon Valdez oil spill, which put 11 million gallons of crude oil into the ocean and contaminated 1,300 miles of coastal shoreline and killing countless marine wildlife, a set of corporate environmental principles were drawn up in 1989. At first called the Valdez Principles, they were subsequently renamed the CERES Principles.
The socially responsible investing (SRI)movement attracted many new investments in the early 1990s. By the start of the third Millenium, there were nearly 200 social investment funds in the US and growing numbers in Europe. One in every eight investment dollars are under some sort of SRI management.
Shopping for a Better World sold a million copies in the US and similar guides were published in other countries (including UK, Germany, Japan, and the Netherlands).
Most criticisms of multinational corporations are for violations of law. But corporations can no longer assume that if they abide by the laws in every country in which they do business, they are beyond the ken of consumers and Non-Governmental Organizations (NGOs). The growth in NGOs has been rapid. Worldwatch Institute has reported that up to 70 percent of the estimated 2 million U.S. NGOs were established since 1970 and approximately 24,000 of them are now active at the international level.
The rapid growth of these NGOs stems from the same causes as globalization – easier travel and communication (broadcast media like CNN, the Internet, email). Globalization has provided consumers and investors with the tools to understand how and where their money is spent. How well large companies fulfill social and environmental responsibilities has become a key measure for consumers, investors and NGOs. In response, investors and NGOs have become more persistent in tracking corporate behavior and compliance as well as in publicly protesting irresponsible actions of corporations.
With pervasive and instantaneous communication consumers are now more aware of where their products come from and NGO activists – even in remote locations – can affect the brand-choice decisions of consumers. Such negative publicity can inflict serious damage to company and brand reputations (e.g., Nike, Shell and Kathy Lee Gifford). Today, NGOs not only act as corporate watchdogs but also fill an important role in helping corporations identify and address new ways of doing business that improve the bottom-line and meet the demands of financial, environmental, and social concerns.
Although CSR is a voluntary expression of individual corporate policies, governments often view CSR with approval because the job of government regulators is easier when standards evolve rather than being created artificially. One of the problems with government regulation is that when corporate misbehavior attracts political attention, governments pass laws swiftly. These laws often turn out to have unintended consequences and corporations have no escape from them. CSR is voluntary, which leaves room for experimentation.
The development of CSR has been encouraged by governments in at least six ways:
1.Require all corporations to meet minimum standards. Regulation helps level the playing field for CSR leaders. Government standards could be set significantly below the CSR standards and still have an impact. For example, if the CSR standard for corporate governance is that at least half of directors of a public company should be non-management directors, the SEC could require that a minimum standard is one-third. CSR initiatives should not be used or seen as the initiator of additional regulation.
2.Increase enforcement of laws. It’s not fair to the companies that comply with laws when others are allowed to ignore them. Governments should consider whether to step up enforcement of laws, if they are good ones, or to rewrite or eliminate laws that are not enforced because they were not well conceived.
3.Encourage business partnerships with a CSR aspect. In the economic development area, public-private partnerships have often worked to the benefit of the public. The danger here is that objectives that are entirely private are pursued in the name of partnership.
4.Fund CSR capacity-building. Governments can fund training programs with unions, companies and localities to learn about CSR financial, social or environmental programs that are considered publicly desirable.
5.Provide incentives for companies to engage in CSR programs. Governments have a range of incentives they can offer to companies to undertake CSR programs or pass CSR certifications. The U.S. Small Business Administration has guaranteed bank loans to small-businesses. Public employee pension funds have initiated proxy resolutions calling on the companies they own to adopt CSR policies. In Italy, five regions (including Tuscany, Umbria and Lecce) have offered procurement incentives to companies that comply with SA 8000 standards, and others are following suit. Cambodia in 2001 was given a higher export quota in return for implementing labor standards in line with International Labor Organization conventions (see www.ilo.org).
6.Promote CSR principles through public-employee pension-fund proxies. This is discussed at greater length under the heading of CSR in Finance.
Some see CSR as solving problems relating to the “dark side of modernity” – i.e., the tendency of modern culture and technology to dissolve previous moral and cultural foundation, leaving only (1) western cultural images from movies and television, and (2) the subjective ego of each individual as the standard of truth and meaning. The leader of the Caux Round Table cites as his favorite articulator of these issues the German philosopher Jurgen Habermas and his book, The Philosophical Discourse of Modernity. Habermas argues that the arch of anti-religious culture rests on two pillars: (1) Adam Smith’s free market where anything holds true that can be priced and sold and (2) a Hobbesian bureaucratic administrative state that imposes order by wielding a monopoly of violence and power. These twin forces ignite the fury not only of fundamentalist Islam but of those to who cling to transitional cultural values. Poster children for the excesses of me-me capitalism include Dennis Kozlowski and Mark Swartz of Tyco and Jeff Skilling of Tyco. For examples of power-seeking on overdrive, Washington is abrim with poster children. Habermas concludes that modernity must “create its own normativity out of itself” and cannot take its criteria from the models supplied by earlier epochs. Habermas wants to find a philosophy that (1) will provide conditions of truth and (2) will check the powers of bureaucratic hegemony and ameliorate the selfish extremes of market capitalism.
CSR is a possible solution because it starts from multi-stakeholder principles that resonate with many cultures and religions – both a set of moral constraints on public power and a set of guidelines for the responsible practice of market capitalism. But Habermas’s prescription – “creating normativity out of itself” – sounds like a dispiriting exercise. Jacques Ellul argues that reason should recognize its limitations and content itself with critically appreciating and refining or rejecting poetic, religious or other sources of inspiration. Ellul argues that we need to appreciate what history can tell us and to continue to derive inspiration from religious or poetic sources, especially from the Torah/Bible.
Coca-Cola adds to its brand by helping to teach Kenyan children how to test drinking water for contamination and by providing water-purification systems for some of the country's most poverty-stricken areas.  Starbucks is addressing sanitation-related health problems in India by donating $1 million to WaterAid, helping a few of the 1.1 billion people who lack access to clean drinking water.
Such efforts add to the respect shown to brands. Sixty percent of U.S. adults over 18 said "knowing a company is [responsible] makes me more likely to buy their products and services," according to Lifestyles of Health & Sustainability (LOHAS) Consumer Trends Database, released by the Natural Marketing Institute (NMI), Harleysville, Pa. The survey of 2,000 adults via the web gauged (1) company adherence to CSR and (2) how these perceptions impact their buying decisions. The study concluded:
-57 percent of consumers said they feel more loyal to companies that are socially responsible
-52% said they were more likely to talk to their friends and families about such corporations.
-38 percent said they'd be willing to pay extra for products produced by socially responsible companies
-35% said they were more likely to buy stock in such corporations.
"Consumers are more likely to be brand loyal,” said Steve French of the 17-year-old Natural Marketing Institute. Many companies who do good, do a bad job of promoting the fact.
The NMI combined its findings with KLD’s rankings to create the LOHAS Index of top 50 companies that are high both on CSR and on communication. Of companies they were familiar with, 50 percent of consumers surveyed weren't aware of their social or environmental practices. Wal-Mart fared worst at 40 – 62 percent of respondents were unaware of its recent green initiatives or paid more attention to its workplace diversity and human rights issues.
Microsoft was first, doubtless because of the well-publicized contributions of the Bill and Melinda Gates Foundation to health care and poverty reduction. McDonald's was fourth – its global CMO Mary Dillon said: "Social responsibility [is] part of our corporate DNA." Target was 15, in the first tier of companies. The second tier begins with Ford at 16 and ends with Avon at 29. Dell ranked 18. General Electricwas 25th despite its green-tinged "Ecomagination" campaign, because it still suffers from its environmental legacy (like the "issue they had with PCBs in the Hudson River," said French). Intel was 39th. For the complete LOHAS Index top 50, go to www.Brandweek.com.
- Grayson and Hodges, Everybody’s Business, “The Global Economy,” 28-39. - Lydenberg, Steven D., Corporations and the Public Interest: Guiding the Invisible Hand (San Francisco: Berbrett-Koehler Publishers, Inc., 2005), ix-xvi on history of SRI, 57-138 on data evaluation by SRI analysts.
- McIntosh, Leipziger, Jones and Coleman, Corporate Citizenship, 37, 50-55, 172-173, 205-206, 286-287, especially “Shareholders/stockholders,” “Externalities” and “Globalization”
Endnotes 1-8 appear at end of the philosophical introduction (Three Types of Ethics).  The theoretical basis for current approaches to ethics approach to ethical reasoning is outlined in Terry Halbert and Elaine Ingulli, Making an Ethical Decision and Ronald M. Green, Neutral, OmnipartialRule-Making (NORM).
with a high proclivity to regulate , and hence came to be called leaders of the “Chicago School” of economics.
 Friedman, “The Social Responsibility of Business…,” previously cited, 1970.
 Source: Survey of MBA students and graduates by The Committee of 200 (women business owners), reported by Kevin Salwen, “Winning the War for Talent,” Worthwhile Magazine, October 6, 2004,. Net Impact also surveys MBA opinion on this topic.
 Source: The 2002 PricewaterhouseCoopers survey of CEOs showed overwhelming agreement with the statement that CSR “is vital to the profitability of any company.” Further discussion of these issues may be found at World Economic Forum, Business Roundtable and Conference Board web sites. Ethical companies have a market advantage in areas that are effectively regulated or where such regulation is anticipated.
Bernard Saffran, “Recommendations for Further Reading,” Journal of Economic Perspective, Fall 2004, 219, citing Stephen J. Dubner asnd Steven D. Levitt, “What the Bagel Man Saw,” New York Times Magazine, June 6, 2004.
Cone, Inc., a consulting firm, tracks “cause branding trends” annually.
 Summary from John LeBoutillier, “From Harvard to Enron,”New York Times, January 10, 2002. Skilling’s nickname at Enron was “Darth Vader”.
 Is it ethical to sell a product in a foreign country that is barred as unsafe in the United States? The Chartered Financial Analyst (CFA) code of ethics stipulates that an action that may be legal in a foreign country is not acceptable if forbidden by the code. But if the foreign country's laws are stricter, these laws supersede the code.
The UK-US modelderives from British joint-stock mechanisms that facilitated decentralized corporate ownership in a broad public market for securities. These mechanisms financed trading companies like the Hudson Bay Company and later the Erie Canal. See Peter L. Bernstein, Wedding of the Waters: The Erie Canal and the Making of a Great Nation (W. W. Norton & Co., 2005).
 Sophisticated investors may be solicited to invest in hedge funds and unregistered companies. The practical test of the “sophisticated investor” is not IQ but income (investors must earn more than $250,000 a year) and assets (investors must have a net worth of more than $1 million).
Joseph Schumpeter, Capitalism, Socialism and Democracy.
Rule 14a-8 of the Securities Exchange Act of 1934 permits eligible shareholders to submit proposals containing items to be voted on at the next annual or special meeting of shareholders. An eligible shareholder must (1) be a beneficial owner of at least 1% or $1,000 in market value of securities; (2) have owned these securities for a year or more; (3) continue to own them through the date of the meeting; and (4) attend the meeting. Rule 14a-8 provides an means for communication among shareholders and companies. Companies must include the proposal unless the shareholder has not complied with the rule's procedural requirements or the proposal falls within one of 13 substantive bases for exclusion.
By contrast, U.K. executives said the main benefit of CSR was a more basic "license to operate" – and increasing sales came in seventh. U.K. respondents were generally confident that their corporations are not open to scandal; Americans were not. U.S. and U.K respondents agreed that CSR features such as "ensuring trustworthy financial reporting," "business ethics," and "ensuring good governance" are key company needs, but almost one-fifth said their companies have taken no steps to address them. BABi-Peppercom survey. Lisa Yoon, CFO.com, January 9, 2003.
M. Simons, “Sister Nicole Fights the Good Fight as Financier,” New York Times, April 14, 2003, pA4.
 See Donald E. Schwartz, “Corporate Governance,” in Thornton Bradshaw and David Vogel, Corporations and Their Critics: Issues and Answers to the Problems of Corporate Social Responsibility (McGraw-Hill, 1981), 221-234.
 An example was a proxy resolution to encourage Lockheed not to discriminate against Catholics in Northen Ireland; Lockheed agreed to adopt the resolution, partly because it was at the time under threat of a hostile takeover.
 Staff members working on the MacBride Principles in the 1980s includedDeputy Comptroller Steve Newman and Proxy Unit Manager Pat Doherty (an attorney). They recruited the late Nobel Peace Prizewinner Sean MacBride to name the Principles. Nearly half of the 80 listed U.S. firms operating in Northern Ireland had signed on as of 2004, and proxy resolutions supporting the MacBride Principles have been supported by more than 100 U.S. states and localities.
The European Union Green Paper on CSR defines it as "doing more than the law requires". But in countries where labor or environmental laws are not uniformly enforced, and other companies are ignoring them, it is a matter of CSR for a company to comply with them. (There is the special case in apartheid South Africa or in theocratic nations where laws conflict with international norms.)
 Milton Friedman, Capitalism and Freedom, used as the closing sentence in Friedman, “The Social Responsibility of Business is to Increase its Profits”, New York Times Magazine, September 13, 1970.
 This name was invented by John Elkington, founder of SustainAbility. Subscribers to a strict “agency” theory of corporate management – i.e., the theory that managers have an overriding obligation to shareholders – accept only one bottom line, financial. For them, the other two “bottom lines” are just ways of thinking about policies for long-run profit maximization.
If Guide 62 had been followed by CPA firms in the United States, the Big Five accounting firms would not now be just the Big Four. The Big Five had a “peer review” system that was clearly no substitute for a body with the power to withdraw accreditation. The Public Company Accounting Oversight Board, created by the Sarbanes-Oxley Act, has taken on the function of reviewing accounting-firm practices.