Corporate Social Responsibility: Concepts, Theory, and Sustainability

Introduction

In the realm of economics, corporate social responsibility (CSR) is a crucial managerial economics concept, particularly given the broad and pronounced implications it carries for economic entities. There appears to be general consensus that commercial enterprises ought to adhere to the laws and regulations established within the jurisdictions in which they operate. However, over the last few decades, debate has grown over what other responsibilities firms have beyond mere compliance with relevant laws and regulations. This paper concerns itself with the social responsibilities of firms. In so doing, it explores the concept of corporate social responsibility, assesses its theoretical frameworks, and highlights the extent to which it is sustainable.

The Concept of Social Responsibility

At the outset, it is worth noting that, as Akerlof and Kranton (2005) point out, some surveys conducted in the past have established that a firm's performance on the social front is one of the most significant considerations that customers and investors alike take into account before deciding whether or not to engage the firm. It therefore follows that CSR is increasingly being considered a key organizational ideal by managers. It is for this reason that many organizations today — including small and medium enterprises and multinationals — are actively seeking to be recognized for their CSR engagements via certifications such as ISO 14001, the Corporate Giving Standard, and others.

So what exactly is CSR? It should be noted that CSR does not have a single universally assigned definition; numerous definitions have been offered by various authors in an attempt to assign a concise meaning to CSR engagements. According to Paton (2005), CSR could be perceived as the various undertakings that enterprises engage in as part of corporate governance in an attempt to ensure that a company's activities are not only ethical but also of benefit to society. The World Bank (as cited in Kotchen, 2006) defines corporate social responsibility 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" (p. 79). This definition clearly indicates that CSR engagements extend far beyond the responsibilities mandated by law or regulatory standards.

In the past, various economists have sought to establish what CSR comprises and what the exact responsibility of firms is beyond what is mandated by the regulatory regime. As Paton (2005) observes, at the onset of the CSR debate, the main concern was whether the social responsibility of enterprises extends beyond the production of goods and services, profit maximization, and employment of personnel — which appeared to constitute the neoclassical borderlines of CSR engagements.

Among prominent economists who delved into this discourse was Milton Friedman. Paton (2005) points out that Friedman was of the opinion that profit maximization was the primary CSR role of an enterprise — specifically, the promotion and advancement of shareholder wealth and wellbeing. This can also be understood in terms of what Baye and Prince (2017) describe as "maximizing the value of a firm, which is the present value of current and future profits" (p. 14). According to Friedman, society was not on the radar of commercial enterprises insofar as CSR engagements were concerned. More specifically, Friedman was categorical that "an entity's greatest responsibility lies in the satisfaction of the shareholders" (Paton, 2005, p. 310). This perspective can be reconciled with that of Adam Smith, for whom the concept of profit maximization is not necessarily bad for society (Baye and Prince, 2017). Indeed, as Baye and Prince (2017) observe, Smith was of the opinion that the needs of society are met as a firm seeks to secure its own interest — that is, profit maximization. Paton (2005) further notes that Friedman's view was anchored on the assumption that the government was largely responsible for most of what we refer to as the advancement of social good and wellbeing.

To a large extent, this point of view could be referred to as the "for-profit" aspect of CSR. However, this perspective largely ignores other equally important stakeholders of an enterprise, including — but not limited to — consumers, the community, suppliers, and employees (both existing and potential). In merging the "for-profit" aspect of CSR with the "social" or "mission" aspect, we arrive at the idea of strategic CSR. Kotchen (2006) defines strategic corporate social responsibility as the inclusion "of a holistic CSR perspective within a firm's strategic planning so that the firm is managed in the interest of a broad set of stakeholders to achieve maximum economic and social value over the medium to long term" (p. 84).

Theoretical Frameworks for Strategic CSR

Strategic CSR can be understood through a number of theoretical frameworks, including public policy, private activism, financial markets, product markets, and labor markets. Each is considered in turn below.

When it comes to public policy, it should first be noted that CSR efforts are considered to go beyond the prevailing legal or regulatory mandates of the firm — meaning that mere compliance with rules and regulations is not considered a CSR engagement. With regard to public policy, firms may opt to engage in CSR activities so as to preempt the enactment of certain regulations — what Akerlof and Kranton (2005) refer to as the "overcompliance" strategy. This is especially relevant given that the enactment of certain rules and regulations by the government could come at a massive cost to firms in terms of adjustment expenses. With this in mind, firms engage in specific CSR activities as a signal of their willingness and ability to self-regulate, thereby effectively discouraging government intervention. As Akerlof and Kranton (2005) observe, it is indeed possible for formal government intervention to be crowded out by CSR in the form of enhanced self-regulation.

With regard to private activism (also referred to as social activism), the motivation for CSR engagement is a move to hedge against the risk of adverse publicity that could hurt a firm's standing in the business and social arenas. Negative publicity is a reality in the present day, particularly as a consequence of the growth of social media, where any dissatisfied activist could spread negative information about a company, effectively damaging its reputation and harming its bottom line. By engaging in CSR activities, a firm seeks to insure itself against such risk. This is one of the perspectives that Baron (2001) advances as a motivation for strategic CSR engagements, alongside altruism and profit maximization.

Strategic CSR in this context could also discourage an unethical activist from unfairly targeting a firm. An "evil" activist could serve as a "gun for hire" — an influential but unethical social media personality hired by a competitor to malign the firm's name. By embracing CSR activities and establishing a reputation as a responsible and ethical corporate citizen, the firm would be discouraging such efforts, as no bad-faith actor would invest in a campaign that is likely to fail from the outset.

Various authors have observed that the relevance of corporate social responsibility in financial markets has been growing over the last few decades. As McWilliams and Siegel (2000) point out, this has given rise to the concept of socially responsible investment (SRI), defined as "a strategy that considers not only the financial returns from an investment but also its impact on environmental, ethical or social change" (p. 604).

With investors becoming increasingly interested in the CSR record of commercial enterprises, it makes strong sense for firms competing for equity in the financial markets to actively engage in strategic CSR activities. A special class of investors — social investors — has also emerged. These investors, both corporate and individual, tie their financial involvement in a specific firm to that firm's social impact, distinguishing themselves from neutral investors whose only interest is financial performance. With the growing prominence of SRI, a firm keen on attracting equity investment and maintaining good standing in the stock market would be well motivated to engage in strategic CSR efforts.

Do consumers really care about a firm's CSR record? Surveys conducted in the past indicate that customers do indeed assess enterprises' CSR records and are likely to consume the services of, or buy the products of, a firm that is visible or active on the CSR front. According to Kotchen (2006), in one such survey, three out of every five respondents indicated that they favored enterprises that appeared concerned about societal wellbeing over those focused primarily on profit maximization. In another survey, corporate reputation and image were cited alongside brand quality and customer service as factors that influence people's decisions to choose one firm over another. It therefore follows that the relevance of CSR from the consumer perspective cannot be overstated. Kotchen (2006) also weaves into this discourse the argument that CSR can result in product differentiation — that is, it can be used as a strategy to distinguish a firm and its products or services from competitors, making those offerings more appealing to the target market.

In the labor market context, as Kotchen (2006) points out, moral hazard can be reduced by strategic CSR. For firms that want to attract high-caliber, motivated, and morally upright candidates, strategic CSR could serve as a viable motivator. Furthermore, some argue that a firm may be able to reduce labor costs and attract hardworking employees simply by increasing its CSR involvement. As Small and Zivin (2005) point out, "the cost of a firm's commitment to CSR may be offset by its appeal to motivated employees who work harder for lower wages" (p. 212). Surveys demonstrate that companies keen on CSR engagements are more likely to attract cooperative employees who are interested in being associated with a firm that takes its social accountability seriously — and who may not be primarily driven by compensation. Thus, according to Small and Zivin (2005), enterprises do indeed reap cost advantages from engagement in CSR activities.

Conclusion

In the final analysis, it should be noted that CSR has also been closely linked to the public relations exercises of commercial enterprises. This is to say that some firms lack a mission orientation in their CSR and instead subscribe to a profit orientation exclusively. In my opinion, there would be no harm in combining both orientations. As businesses seek to engage in undertakings that are both ethical and of relevance to society, they inevitably gain on the reputational front — which can translate to more customers and a better caliber of employees. It would, however, be prudent to note that further investigation is needed regarding the mode, conduct, and relevance of interactions between commercial enterprises and diverse stakeholders within the CSR framework.

References

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Kotchen, M. J. (2006). Green markets and private provision of public goods. The Journal of Political Economy, 114(4), 77–86.

McWilliams, A., & Siegel, D. S. (2000). Corporate social responsibility and financial performance: Correlation or misspecification? Strategic Management Journal, 21(5), 603–609.

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Small, A., & Zivin, J. (2005). A Modigliani-Miller theory of altruistic corporate social responsibility. Topics in Economic Analysis and Policy, 5(1), 211–219.

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