Week 3: Corporate Social Responsibility (CSR) In South Africa CSR activities sometimes referred to as corporate social investment (CSI)

) What is a corporation? An entity legally separate from its owners which: Owns assets and liabilities May choose to retain profits Can sue and be sued Non-profit companies and state-owned companies For-profit companies (limited liability businesses) Private Public Closed corporations Personal liability

Limited Liability members of a corporation are financially liable for corporate debts only up to the extent of their investments. Corporate stakeholders (entities affected by corporations): Owners/shareholders Employees Customers Suppliers Creditors Community Society-at-large Natural and social resources

What is CSR? Corporations have legal and moral duties to stakeholder. They are therefore legal agents. Moral agent an entity that has moral rights and duties. Are corporations moral agents? I.e. Have moral rights and duties to make moral decisions and can be praised/blamed/punished. A: The problem with punishment is that financial penalties can impact innocent parties such as workers being fired, plant closures and higher prices for consumers. A: diffusion of responsibility can mean that no particular person/persons are held morally responsible. Narrowest view of CSR: Corporations have moral duties to maximize profits for owners only

 Whether a company does something illegal (deception/fraud) should be based on weighing the risk vs. return basis. Therefore behavior that is illegal is justified provided expected return justifies risk.

If an activity is profit objective then there should be no disagreement about the following situations: Promotion of green products and animal friendly products Refusals to pay bribes Provision of HIV/Aids clinics

Problem with the narrowest view is that it ignores the moral minimum. Moral Minimum: Some argue that corporations should maximize profits while obeying the law (Friedman referred to it as the rules of the game), but: Some laws are immoral Some laws are trivial Many laws are not clear-cut Some laws are passed only after there is general awareness of the problem (disposal of toxic waste) Formulating appropriate laws and designing effective regulations is difficult. Enforcing the law is often burdensome. Expensive and can drag on for many years.

Therefore because of this corporations are constantly pushing the envelope of the law.

Classical model (Narrow view) of CSR: Corporations responsibility to maximize shareholder wealth outweighs any other obligations.

Milton Friedman : the social responsibility of business ... [is] to increase its profits so long as it ... engages in open and free competition, without deception or fraud. Elaine Sternberg: businesses should maximize long-term owner value while satisfying distributive justice and ordinary decency.

Theodore Levitt (1958): business has only 2 responsibilities to obey the fundamental canons of face-to-face civility (honesty, good faith, and so on) and to seek material gain.

Arguments for Adam Smiths Invisible-Hand Argument when each of us acts in a free-market environment to promote our own economic interests we are led by an invisible hand to promote the general good. Let-Government-Do-It Argument - It is the governments responsibility through regulation to make sure the market works. Visible hand of the government. But is the government a credible guardian of morality? Business-Cant-Handle-It Argument corporations lack the expertise to address nonbusiness matters and corporations will impose their values on us. Corporate executives (directors) have a fiduciary duty to act in the best interest of the owners.

Sternberg: Telepathy - The defining purpose of business is to maximize owner value over
the long term. Organizations without this goal are not businesses. Any non-profit goals are telepathic.

Arguments against Invisible hand argument is economically unrealistic.

Markets can be manipulated by companies in such a way as to reduce market efficiency. Mistrust between corporations and its stakeholders will lead to transaction costs.
Rights - one persons right is another persons duty. Theory of moral duty = deontology

Broader View of CSR: An alternative way to see the purpose of a business is to provide quality goods or services, to create jobs, to contribute to a sustainable world, and make a reasonable profit for the owners. Corporations have responsibilities that go beyond making a profit and should contribute actively and directly to the public good.

Stakeholder Model: The stakeholder model requires that all of the parties affected by management decisions - shareholders, management, employees, customers, suppliers, communities - in which the company operates and the environment from local to global, all must be considered as fairly and justly as possible. There are two main justifications for mixed economy capitalism: - Utilitarianism and individual rights - It fails to defend the classical model Stakeholder model requires that people are treated equitably and the interests of all stakeholders are balanced. This is an incredibly difficult task. Therefore its made on a case-by-case basis. Utilitarianism - "The greatest good for the greatest number." based on the principle of utility which proposes that if in a situation where one is faced with a moral choice one should do that which results in the greatest number's happiness".

Note: Most studies indicate that financial success and socially responsible corporate behavior is positively correlated. The most profitable companies treat their consumers, employees and business partners ethically. It therefore then gives companies a self interested reason not merely to pretend to have broad sense of social responsibility but, rather, to become the kind of company that really does want to make a positive difference. To make ethics a priority corporations should do 4 things: 1. acknowledge the importance of conducting business morally 2. Make an effort to encourage their members to take moral responsibilities seriously. 3. Corporations should end their defensiveness in the face of public discussion and criticism. They should invite outside opinions and conduct an ethical audit for their organizational policies, priorities and practices. 4. Corporations must recognize that the actions of one group may invariably affect the interest of others.