Kendra Boell Business and Its Environment Professor Linda Enghagen 18 July 2011 What is the Social Responsibility

of Corporate Management? From a company perspective, social risk, like any other risk, arises when the behavior of managers or the actions of others in its operating environments creates vulnerabilities. In the case of social risk, Kytle and Rugie state that stakeholders may identify those weaknesses and apply pressure on the corporation for behavioral changes through earnings drivers such as corporate image or reputation. As the ability to listen to corporate stakeholders perspectives on social issues becomes a competitive necessity, managing social risks will need to become more fully implanted in corporate strategy.1 The emergence of social risk can have wide-ranging impacts on various aspects of the business from sourcing to public relations to global operations. Social risk may be transmitted to various divisions of a company from any number of stakeholders. Customers may request changes in a companys environmental policies, while investors may create shareholder resolutions to evolve or change company policies. Employees may raise concerns about jobs being outsourced to other nations, and suppliers may request to participate in a firms healthcare plan. Kytle and Rugie maintain that while most of these issues are familiar to large companies, it is the more recent emergence of societal scrutiny and its resulting social risks with which corporations are less familiar and least equipped to manage.1 Baron places the responsibility of nonmarket strategy on managers because of its importance for organizational performance. Managers are in the best position to design and

implement both nonmarket and market strategies as they build relationships with stakeholders, partner with NGOs, negotiate with interest groups, meet with activists, serve on government advisory panels, lobby government, communicate with the media, and address the public on issues. Successful management requires infrastructure for dissecting issues and developing strategies for addressing them. Managers must ultimately evaluate issues, interests, institutions, and information to make decisions regarding the firms profitability, long-term survival, and responsibility to its stakeholders.4 Social risk management strategies can be extremely complex undertakings that must account for and balance numerous conditions, perspectives, and variables across the business enterprise. The very nature of social risk places management teams in the challenging position of setting clear direction for a diffused function.1 Baron emphasizes the importance of nonmarket positioning for avoiding problems and attracting benefits, as well as building a platform on which both nonmarket and market strategies can be constructed.4 For the complex and evolving area of social risk, corporate social responsibility (CSR) represents an excellent mechanism for addressing these challenges across the business enterprise.1 Coelho, McClure, and Spry give emphasis to the idea that the term CSR is clever as its definition is somewhat ambiguous having a component of legal liability, a facet of socially responsible behavior in a moral sense, participation in charitable contributions, and an awareness of public perception. As such, CSR has the potential to become an effective marketing tool because its meaning is so vague.2 Open interpretation does not, however, give firms an excuse for a lack of transparency in their decision-making processes. It is transparency which plays a large role in determining how the public reacts to ethical issues. Post agrees that transparency is encouraged through Securities Laws and the many stock exchanges, and goes on to point out

ample regulatory agencies such as DOT, FAA, and FDA promote ethical behavior in their overseeing industries within their jurisdictions.3 Positioning in legal space affects both a firms market and nonmarket strategies as well as the liabilities to which a company is exposed.4 From a civil society perspective, a company may deserve criticism it receives for its social practices. Kytle and Rugie found, ironically, that a sound business decision may be the driving force behind the social risk. The concept of social risk is not necessarily centered on independent normative judgements of corporate right- and wrong-doing. Analytically, social risk is parallel to other risks that companies face, expressing a companys perception of an external factor, and an undesirable outcome. An example of this would be the negative impact on a companys reputation for refusing to adhere to recommendations put forth by an NGO. In the presence of social risk, companies have a large degree of discretion to establish appropriate responses based on a companys risk appetite. Stakeholders are more empowered than ever before and often unite forces around social issues.1 CSR should not only examine what companies do with their profits, but how they make them, as well as how the companies manage their stakeholders in the workplace, marketplace, supply chain, community, and public policy realm.1 Milton Friedman asserts a somewhat narrow explanation of CSR in that it equals profit maximization.4 In serving the corporate shareholders by creating maximum wealth one must ask if this would be possible if the management were to ignore social issues which led to public boycotts of goods and services. Friedman would say that actions taken to satisfy public demand in order to avoid public imposed sanctions would maximize profits in the end and therefore would not satisfy the ethical or moral definition or intention of CSR. Post takes a different view suggesting that improvements and clarifications in defining who is a stakeholder makes CSR a valuable means by which to advance corporate governance.3

Coelho, McClure, and Spry identify three means by which revenue seeking serves public interest: Because demanders and suppliers of legally sanctioned products are members of society voluntarily transacting business, we expect that the public interest has been served by each exchange. If we accept the notion that serving the public interest in the sine qua non of social responsibility, then it follows logically that legal profit seeking (with neither fraud nor deception) is socially responsible. Consequently, ethical corporate agents are being socially responsible in their efforts to fulfill their fiduciary obligations to the shareholders.2 Post puts forth the argument: It is my view that management decisions ought to be based upon three different dimensions: economic-Is this profitable?; legal-Is this legal?; and ethical-Is this right? While external constraints imposed by free market capitalism and the statutory and common law making up the legal system usually answer the first two questions, the third question is of a different dimension and is only answered by internal reflection.3 It is Posts contention that Friedman does not go on to ask the third question assuming that if the corporate decision is both legal and profitable, then it becomes socially responsible. In order for this to be true, the law itself must always be ethical, and the corporation must have no CSR beyond increasing profits for its shareholders. Post goes on to observe that corporate decisions are not infrequently made on the basis of ethical consideration even when doing so would not enhance corporate profit or share holder gain. Such behavior is not only appropriate, but desirable.3 Post states in todays business enterprise, shareholders are simply beneficiaries who own stock, but none of the legal elements required to establish an agency relationship are present. According to The Restatement of Agency an agency relationship (where one party acts as a fiduciary on behalf of another, acting exclusively in their interest and on their behalf) can only exist where (1) there is consent to the relationship, (2) the agent acts on the principals behalf and

(3) the principal controls the agent.3 None of these components exist between shareholders and management. This is an additional reason Post rejects Friedmans premise that managements ultimate responsibility lies with the beneficiaries of profits. While shareholders assume the legal risk by purchasing stock, management assumes no legal disadvantage in the exchange of shares; that is there is no contract entered into between parties. Post contrasts this with stakeholders in a business: stakeholders in a business have to be people with a role specific, strong or weak, morally legitimate claim to have their interests served by that business.3 A companys vulnerability and threat for any type of risk can be reduced through better internal and external sensing, reporting, and monitoring. Gaining knowledge of social expectations from better connections with stakeholder groups, increased understanding of social standards and norms by which a company should abide, and smarter allocation of resources are all enabled through linking a CSR program to a risk management program. When these various dimensions are combined, social risks can be better managed. At the same time, partnering with other social actors, including civil society organizations, companies can also work to improve the contextual conditions which impose emerging risks for them in the first place.1 Using Friedmans definition of CSR, ethical executives include in their fiduciary responsibilities to shareholders a firms interactions with any person or group who may affect profitability. This would not generate conflict between the pursuit of profit and other goals. To suggest that a business has a duty to operate in a manner other than for the purpose of increasing shareholders wealth is redirecting profits thereby increasing the principle-agent problem between managers and shareholders, and as such set up for managerial corruption.2 Post questions what are the ethical obligations of a corporation to society and to whom are these responsibilities to be allocated.3 The contretemps centers upon where corporate management

should give their priority interests: the shareholder owners, or the divergent view, that corporate management should give equivalent, comparable attention for others such as suppliers, customers, employees, and the local community in addition to shareholder owners. Post argues that Friedmans view is factually inaccurate in its several legal bases, overly simplistic and morally untenable in the modern pluralistic society in which democratic capitalism functions today.3 There is a real danger for companies in not partnering with social actors. Simply because a social risk may initially be picked up by an internal CSR watch group, there is no guarantee that it will stay there. Many social risks have begun as concerns that were primarily understood and addressed in CSR departments. However, as those social risks continue to gain attention with civil society, public policy, and media outlets, over time senior managers are also forced to pay attention, as core business operations become impacted.1 Post points out that this is because economic considerations and legal rules do not always resolve ethical questions.3 Post supports this citing Kants principle of respect for (all) persons as ends in themselves. Using a broad definition of stakeholders, the corporation may not forfeit as a means to an end another stakeholder group without participatory rights. This follows the idea that a corporation is a round table for stakeholder dealings. The interests of the majority outweigh the interests of any one stakeholder group. The fiduciary responsibility of management is to the entire forum. Management must settle differences among the groups by considering varying opinions, facilitating negotiations, and coming to decisions while carefully weighing the interests of all stakeholders.3 The challenge lies within balancing all relationships rather than merely siding with its own shareholder interests as Friedman would suggest. From Posts perspective this approach places the corporations long-term survival at the forefront. Friedman instructs management to consider only the profitability to shareholders. Post states that management must go farther by

negotiating differences after learning the positions of different groups in an open forum before making its decisions. That is what management is paid to do anyway, only now it must consider more interests under a different set of guidelines. Yet, in the end there is always a tiebreaker that determines the interest to be weighted most heavily, the long-term survival of the corporation.3 Baron discusses the role of the media coverage in the arena of CSR making six key points in which media coverage can: (1) Alert the public, activists, interest groups, and government officeholders to nonmarket issues; (2) Raise concerns about the policies and practices of firms; (3) Provide information about the likely effects of alternative courses of action; (4) Enhance a nonmarket strategy by conveying information provided by an interest group; (5) Reduce the cost of collective market action and (6) Represent certain interests and principles consistent with the news medias perception of its role in society.4 The aim of media coverage is to give stakeholders a straightforward presentation of facts and depiction of events and an interpretation of those events. The media may then go on to explore the potential magnitude and ramification of the action(s) and advocate for a specific course of action. Corporations would be remiss in their stakeholder responsibilities including profitability if they failed to anticipate issues and address media interactions. Many of the points made by debating scholars seem to annul one another, and as such leave much interpretation for managers to make decisions regarding corporate social responsibility. Management is left with first defining who their stakeholders are and will be, and then determining the impact of CSR, or lack thereof, on both its profitability and defined stakeholder groups. Once the former are established managers appoint CSR groups and policies including media relations to formulate and implement strategies to serve those stakeholders inclusive or irrespective of paradigms and theories.

References: 1. Kytle, B. and Rugie, J. G., Corporate Social Responsibility as Risk Management: A Model for Multinationals, Corporate Social Responsibility Initiative, Kennedy School of Government, Working Paper #4 March 2005. 2. Coelho, McClure & Spry, The Social Responsibility of Corporate Management: A Classic Critique, American Journal of Business, Spring 2003: Vol. 18, No. 1. 3. Post, A Response to The Social Responsibility of Corporate Management: A Classical Critique, American Journal of Business, Spring 2003: Vol. 18, No. 1. 4. Baron, David P., Business and Its Environment, 6th Ed., Pearson Prentice Hall: 2010.