The philosophy of CSR is largely based on stakeholder theory, which was originated by Freeman (1984). This proposes that managers should tailor their policies to satisfy a number of constituents, not just shareholders. Stakeholding is based on the idea that a company is responsible not just to its shareholders but to a plurality of groups. The inclusion of such groups assumes that they all have an interest in the operation of the company. Investors, employees, suppliers and customers come into this category.
The rationale for CSR as defined by Hillman and Keim (2001) is based on two propositions: first, there is a moral imperative for businesses to ‘do the right thing’ without regard to how such decisions affect firm performance (the social issues argument); and second, firms can achieve competitive advantage (achieving and sustaining better results than business rivals thus placing the firm in a competitive position) by tying CSR activities to primary stakeholders (the stakeholders argument). Their research in 500 firms implied that investing in stakeholder management may be complementary to shareholder value creation and could indeed provide a basis for competitive advantage, as important resources and capabilities are created that differentiate a firm from its competitors (the resource-based view). The
arguments identified by Porter and Kramer (2006) that support CSR are:
- The moral appeal – the argument that companies have a duty to be good citizens.
- Sustainability – an emphasis on environmental and community stewardship. As expressed by the World Business Council for Sustainable Social Development (2006: 1), this involves ‘meeting the needs of the present without compromising the ability of future
generations to meet their own needs’.
- Licence to operate – every company needs tacit or explicit permission from government, communities and other stakeholders to do business.
- Reputation – CSR initiatives can be justified because they improve a company’s image, strengthen its brand, enliven morale and even raise the value of its stock.
Much research has been conducted on the relationship between CSR and firm performance. Russo and Fouts (1997) found that there was a positive relationship with environmental performance and Waddock and Graves (1997) established that CSR results in an improvement in firm performance. But McWilliams and Siegel (2000) discovered only a neutral relationship between CSR and profitability.
The opposing view was expressed forcibly by Theodore Levitt, marketing expert. In a Harvard Business Review article, ‘The dangers of social responsibility’ (Levitt, 1958: 44), he emphasized that: ‘The essence of free market enterprise is to go after profit in any way that is consistent with its own survival as an economic system’. Milton Friedman (1970), the Chicago monetarist, expressed the same sentiment. His view was that the social responsibility of business is to maximize profits within the bounds of the law. He argued that the mere existence of CSR was an agency problem within the firm in that it was a misuse of the resources entrusted to managers by owners, which could be better used on value-added internal projects or returned to the shareholders.
But it can be argued, as do Moran and Ghoshal (1996), that what is good for society does not necessarily have to be bad for the firm, and what is good for the firm does not necessarily have to come at a cost to society. This notion may support a slightly cynical view that there is room for enlightened self-interest that involves doing well by doing good.