Corporate social responsibility and shareholder interests trade-offs

The concept of corporate social responsibility (CSR) is challenging for many executives. While in some companies there is clear alignment between the interests of different stakeholders, in other companies there might not be, and that is where the issue of trade-offs because complex, and difficult to execute. The concept of corporate social responsibility reflects that corporations, as legal entities, have rights and responsibilities that include taking into account how their actions and strategies affect social and environmental outcomes, in addition to financial ones (Investopedia, 2017). The concept of CSR arose back in the 1960s when the growing environmental and social movements of the era focused their attention on corporations, uncovering things like unethical business practices and pollution, for which these companies were seldom held to account. In response to the move towards CSR, a countermovement arose that argued the area of responsibility that corporate executives have is to their shareholders, and that this responsibility consisted solely of enhancing shareholder wealth (Friedman, 1970). The entire legal structure of the corporate exists, after all, to gather shareholders and enhance their wealth. Since shareholders have options as to what company they invest in, a manager is only really doing his or her job by seeking to enhance that wealth. Boards are hired by the shareholders to hold managers to account for this role. There are a couple of major issues with the so-called Friedman doctrine. The first is that companies, despite being legal entities in their own right, are comprised of individuals. There is no such thing as a company that can commit an act; all acts committed in the name of a company are committed by individuals, and those individuals have social responsibility. If people don\\\'t have social responsibility, nobody does, and ultimately doing social or environmental harm on a mass scale is an abrogation of the social contract, one of the founding tenets of modern Western society (Lloyd & Sreedhar, 2014). The other major issue with Friedman\\\'s theory is that investors can and do value things other than making money. There exist ethical mutual funds, for example, that cater to the ethical needs of investors. Not all investors are strictly oriented towards profit at any cost. Each individual investor will have a different level of tolerance for questionable acts in the name of profit, but ultimately there are differences and Friedman\\\'s view expresses only one extreme end of that spectrum. For the business executive, however, catering to different needs can be quite difficult. The underlying theory of CSR is that by treating people well, and the environment well, a company can flourish. It will attract better workers, have fewer scandals, and ultimately perform better. Yet, there is no particular evidence that this is the case, excepting such egregious cases as Enron where clearly criminal acts were committed as a matter of business model. For most companies, there is always the question of whether CSR has a positive return on investment or not (Bliss, 2015). An additional challenge is that modern strategy tends to be metric-driven. Business is quite familiar with common accounting metrics, but has yet to develop common metrics for social and environment issues. Each company instead is left to develop its own, and there is no consistency. This does not facilitate a reality in which investors can compare companies and choose rationally between them in the same way that can easily be done using accounting measures. To integrate the issues of all stakeholders with those of one narrow stakeholder group, the shareholders, remains a challenge. Typically it requires understanding the links between performance in one area and financial performance. The greatest successes have been where the links are clear and measurable. For example, training programs that increase employee competency can be fairly easy to measure and over the long-run can be demonstrated to have financial impact. In other areas, implementation of this sort of CSR balancing is a bit trickier, because either the measures don\\\'t exist or the linkages are difficult to prove. At that point, the manager is merely acting on faith that focusing on stakeholders leads to improved performance for shareholders as well.