In the monthly "Ethical Inquiry" series, we examine ethical questions, highlighting a broad array of opinion from journalism, academia, and advocacy organizations. Our intent is to illuminate and explore the complexity of some of the most vexing ethical questions of our time.

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Ethical Inquiry: November 2013

Cover of "Ethics at Work" by Ethics Center Director Dan Terris

Cover of "Ethics at Work" by Ethics Center Director Dan Terris


The Ethics of Corporate Social Responsibility

There is a trend among businesses in the United States and around the world, to engage in practices of corporate social responsibility (CSR), also known as "corporate citizenship," "sustainable responsible business," and "corporate social performance." The World Bank defines CSR as “the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders to improve their lives in ways that are good for business, the sustainable development agenda, and society at large".

An increasing number of businesses are attempting to achieve ethical business standards, as well as display more transparency through reports on their achievements. More than a third of large companies have voluntarily requested external certifications for meeting social or environmental standards, and more than half of Fortune Global 250 firms now provide regular public statements exclusively discussing CSR. Professionally managed investments are also joining the effort with nearly 11 percent now designated as socially responsible.

Yet despite this rise in CSR, corporations are still receiving backlash for the negative externalities their business practices may cause.

In this “Ethical Inquiry” we explore the ethics of corporate social responsibility (“CSR”). Do businesses have an ethical obligation to embrace CSR? Why or why not?

Why CSR?

There is a range of reasons businesses and others support corporate social responsibility efforts.

Helpful for people and the environment

Business decisions and actions can greatly harm people and the environment. More businesses are acknowledging stakeholders, instead of just focusing on share prices. Stakeholders, including employees, customers, suppliers, lenders, and the broader society, are affected by business enterprises.

To take stakeholders into account, businesses use a “triple bottom line” framework that incorporates social and environmental performance with the traditional financial performance model. The triple bottom line is also commonly called “the three Ps:” people, planet and profits. Triple bottom line reporting can be an important tool to support sustainability goals.

Positive public image

Many contend that involvement in corporate social responsibility is not only beneficial to society, but also to a company's success. Businesses that engage in CSR can create positive publicity through press coverage, which attracts employees, consumers, and investors. Businesses with quality products and services, positive treatment of women, respect for issues of diversity, and concern for the environment, for example, may have a competitive advantage in hiring employees.

Corporate social responsibility can also help create positive work environments that build a sense of community and teamwork that leads to happier, more productive employees.

The positive public image that corporate social responsibility creates can also attract the long-term institutional investors who help finance businesses and keep them running. Institutional investors consider low-CSR firms to be riskier investments because of the possibility of consumer boycotts or costly sanctions from violations of business regulations.

A company's involvement in corporate social responsibility attracts consumers and helps with sales. More than half of American consumers say that a company's social reputation influenced their purchase decisions. Consumers' knowledge, as well as their perception, of a business as socially responsible is positively linked to their commitment to and purchase of the business' products. Consumers are increasingly more concerned about the social reputation of a company, as seen in Fleishman-Hillard and the National Consumers Leagues' study where 52 percent of respondents reported that they sought information about companies' CSR records.

This increase in concern has been so powerful that promoting a product by using a social cause has become more effective than using a price discount.

Profitability

Many studies have shown that corporate social responsibility and the resulting improvement in a firm's reputation and relationship with external stakeholders results in increased financial performance. The study "Corporate Social and Financial Performance: A Meta-Analysis," compiled by researchers Marc Orlitzky, Frank L. Schmidt and Sara L. Rynes, yielded encouraging data that suggested a positive link between "corporate social performance" and increased profits.

In addition to this positive connection, market forces generally do not penalize high corporate social performance companies; therefore, managers can afford to be socially responsible without the fear of losing money.

Avoiding bad PR

Preventing negative externalities is better than trying to fix them. Bad public relations resulting from environmental and societal harm can ruin corporate profitability, and can even threaten the very existence of a business.

In the case of the 2010 BP Gulf of Mexico oil spill, for instance, BP executives are still working to fix their public image.

Corporations that place an emphasis on corporate social responsibility typically have an easier experience when dealing with the politicians and government regulators, who are reinforcing and tracking the obedience of business standards and regulations, because of the corporations' previous good behavior and positive reputation.

Businesses can also avoid negative public campaigns that non-governmental organizations create to condemn harmful business practices.

Critiques of CSR

Responsibility to shareholders

A major aspect of a business' existence is their relationship with the shareholders who fund their enterprises and help with their expansion and success.

Renowned economist Milton Friedman wrote in Capitalism and Freedom, “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, which is to say, engages in open and free competition without deception or fraud". This philosophy contends that as long as a business is not breaking a concrete law, it has no duty to go beyond what its shareholders want.

UCLA Law Professor Stephen Bainbridge writes, "The social obligation of business is to sustainably maximize long-term profits for shareholders. Nothing more. Nothing less." The true responsibility of a business belongs to the shareholder. In addition, critics contend, CSR consumes resources such as money and employee time, which takes away from a business' profits, therefore taking away from its shareholders.

The nature of a capitalist society

Is it the responsibility of the government to set more ethical regulations that businesses have to follow? Would this result in a socialist system? Many argue that within a free-market, capitalist system, the main concern of a business is to survive and make a profit. This pursuit helps both businesses and the rest of the economy thrive.

The concept of the “invisible hand" theorized by 18th century economist and "father of modern capitalism" Adam Smith states that individuals pursuing their own best self-interest results in the greatest overall good to society, and that only the free market should determine what and how goods and services are offered. Companies that do everything they can to boost profits will end up increasing social welfare, because the demand for healthy foods, medicines, and other beneficial products result in businesses' creating innovative and helpful goods or services.

In a 1970 New York Times article titled “The Social Responsibility of Business is to Increase its Profits” Milton Friedman wrote that "...the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses." A corporation is socially responsible when it maximizes shareholder value within the bounds of the law, and anything beyond that is voluntary and unnecessary, Friedman argues. Any additional obligations imposed upon businesses undermine stockholders' interests and impede economic growth.

Problems not completely solved

Another critique is that corporate social responsibility is not the ultimate solution to societal or environmental problems, and can in fact be a façade that impedes real systemic change. Codes of conduct, compliance programs and audits do more to collect information than to actually solve problems, it is argued.

In addition, businesses might only comply with minimal requirements of standards or certification that neglect well-rounded, sustainable solutions.

Some raise a concern is that CSR could mislead consumers and stockholders because they are proposing voluntary, market-based solutions to social and environmental crises, while claiming to be very committed and responsible. CSR gives businesses immense power to solve issues, rather than seeing them as an obstacle. Instead of reforming the general, allowed business practices or instead of challenging the economic system, CSR reinforces the status quo and adds social and environmental concerns as a less important afterthought.

Difficult to monitor and define

Corporate social responsibility is a very broad and vague term that can be hard to track and identify.

In this context, companies, instead of society, define "responsibility", which some contend can result in the twisting of words to fit corporate concerns. Though a company may engage in a form of CSR, it may still engage in harmful business practices – or even produce a harmful product.

For example, in 2008, Dutch energy giant Shell misled the public about the environmental effects of its oil sands development project in Canada by advertising that its efforts where to "secure a profitable and sustainable future." Shell later acknowledged that "sustainable" is "used and understood in a variety of ways by government and non-governmental organizations, researchers, public and corporate bodies and members of the public."

CSR can also backfire if consumers believe a business is engaging in "green-washing," which is when ads and labels promise more environmental benefit than they deliver. The advertising consultancy TerraChoice Environmental Marketing reported that while there has been a 79% increase in companies' reports of their products being "green," 98% of those products were found to be guilty of green-washing – having no proof of certification, making vague or false claims, or using false labels.

In some cases their specific claim may be true within the product category, but still distracts the consumer from the greater health or environmental impacts of the category as whole. For example, businesses that sell tobacco and alcohol products may engage in CSR to help their reputation, but still sell products that are damaging to one's health.

Final Thoughts

When considering corporate social responsibility, it is interesting to think about which group holds the most influence over a business' practices and guidelines. Is it the responsibility of the corporation to set ethical business standards, or is it the responsibility of the government to create regulations? Are investors responsible for pressuring corporations to be socially responsible and sustainable? Do the consumers have the responsibility to create a demand for ethical products and to shop responsibly? Do all of these groups have power and the opportunity to influence business ethics? And to what degree?

Have suggestions for additional content that looks at the ethical issues surrounding corporate social responsibility? Let us know:

This installment of "Ethical Inquiry" was researched and written by Kristina Jacobs '15.