Chapter 3 Stakeholders and Corporate Social Responsibility

51

environment, or individual freedoms, NGOs use their resources to bring these issues to
the attention of various stakeholders, including employees, customers, governments, and
.

soc ety. NGOs will usually target large corporations, if possible, for information dissemi
nation and activism, to capture attention by the media and other interested stakeholders.
The common goal of most NGO campaigns is to use customer and public pressure to

f rce the corporation to adjust its strategic focus. There are three factors for firms to con
sider when addressing the issues related to NGOs: transaction costs, brand impact, and
competitive position. Transaction costs refer to the costs to the firm to adjust its strategy
in order to address the issues identified by the NGOs. This could include manufacturing
costs, plant costs, and equipment costs. Brand impact refers to how much of a threat
a public protest would be to brand reputation and sales of the firm's products and the
threat of the consumers shifting to a competitor's brand. Competitive position refers to
the threat that a firm's competitive advantage may weaken if its competitors do not have
a strategic focus that concerns the NGOs.32 Some of the most famous NGOs are Amnesty
International, Care International, Greenpeace, Civil Society and Governance, Human
Rights Watch, Oxfam International, and World Vision International.33

Local Community and Society as Stakeholders

The interest of local communities and society as a whole primarily focuses on issues in
which "quality of life11 can be negatively affected. For example, firms that release high lev
els of pollution into the air or into the water are of concern to the local communities. In
addition, health and safety issues that could affect the well-being of the people living in
the .community also would raise concerns. A firm's action may have the most significant
effect o n the day-to-day operations of the firm's local facility in the local community.
Every firm should consider its stakeholders in any decision process. A formalized
tool to aid in this evaluation is the Stakeholder Analysis Tool.34 This five-step process
incorporates the expected impact the action taken by the firm will have on various
stakeholders. Step 1 is to identify the specifics of the firm's project or activity and iden
tify key goals and milestones. Step 2 involves identifying all vested stakeholders who
would be affected by the project and could affect the firm's success of completing the
project. Step 3 involves identifying both interests and expectations of the stakeholders.
The project is evaluated as having either a positive or negative impact on the needs of
each stakeholder. Step 4 involves rating the level of importance of each stakeholder
relative to the success of the project. And finally, step 5 involves identifying the actions
needed to satisfy the interests and expectations of the stakeholders.35
From a stakeholder's perspective, a number of interests and expectations need to be
addressed by the firm36 include accessibility to communicate with the firm's ability to get
information in a timely manner, forthrightness and honesty of the firm, being treated in a
welcoming manner and with warmth by the firm, being accommodating and reasonable
to the needs of the stakeholders, and receiving accurate and transparent information.37

The Role of Corporate Social Responsibility

Although components of corporate social responsibility can been seen in the 1930s
with the interchange between Berle and Dodd (mentioned earlier in this chapter),
52 Part I From Ethical Foundation to Addressing
Stakeholder Needs

. z ies
Responst'b,'l't ' of the Businessman
by Howard
sider the boo k Soci al
:b
man y scholar s con . ret the concept of
develop :.d mt
comprehe nsive attempt t?
Y.
Bowen to be the first e obligation com
corporate social responsibility.JS Corporate ?
social resp ns1 n
nt cour ses of action t
1 1n social issues that
pan ies have to deve lop and impleme
. .l1ty is ued b cor orations
. l respons1b1
affect society. As a result, the term corpor te soc1

to signify several topics for corporations, mcludm
. fa
g legal respons1bill'ty,
duc rY duty,

legitimacy, and charitable contributions.39 b ased o n

of corporate performance
Carroll presented a three-dimensional model
answering three questions:40
definition of corporate social
1. What components should be included in the
responsibility?
2 . What are the overall external social issues that
the firm must acknowledge?
operations?
3. How will the firm address the social issues that affect its

The Competitive Advantage of Corporate Social Responsibility

the
In the past, the perception of corporate social responsibility (CSR) was based on
belief that CSR would be a cost that would be higher than the perceived benefits.
By financially supporting "charity"-based initiatives, firms are not performing their
fiduciary duty to their shareholders. CSR yields a positive cost-benefit evaluation, and
it can greatly enhance the firm's competitive advantage.41 The four arguments in sup
port of firms focusing on CSR as part of their strategic focus are the following: moral
obligation, sustainability, license to operate, and reputation. Moral obligation .refers t o
the firm being a good corporate citizen whose actions are the "right thing t o do."
Sustainability refers to the ability of the firm to provide environmental and community
stewardship. License to operate refers to the "permission" given by the government, the
community, and other stakeholders to operate their business. Corporate reputation
can enhance the relationship between the firm and the stakeholders and can enhance
the firm's competitive advantage.42 Reputation is the establishment of a corporate image
in which stakeholders develop perceptions related to their commitment to CSR issues.

Components of CSR
Carroll argued that to understand the role CSR plays in the decision-making proce
ss
of the manager, there must be a clear, comprehensive definition based on a
number
of components. Carroll argued that total corporate social responsibilities are base
d on
economic , legal, eth1cal, and ct1scret
ionary responsibilities. He argued that the four
.
components are not necessanly mutually exclusive but rather repres
' ' ent a contmu um
in which CSR can be examined.

Economic Responsibilities Economic responsibilities

foundation of why a firm has been created, normally to
are based on the underlying

d v 1 p conom.c alue.
Economic responsibilities are based on the belief that the
a a esponsib1. hty o

fir
use the resources available to produce goods and services .
; !
for society
responsibilities lay the foundation for the firm to be . he economic
responsibilities. As a result, some specific components
able t s pport its ther
of a m s e onom1 ?
three
bilities could include maximizing earnings per share c responsi-
' genera/mg a high and consistent
 Chapter 3 Stakeholders and Corporate Social Responsibility
53

level o profitability, establishing and maintaining a strong competitive position, and
operatmg the firm at a high efficiency level.43

Legal Responsibilities Legal responsibilities are the laws and regulations that all firms
are expected to abide by as they perform their daily functions. Firms are expected
to b e able to fulfill their economic responsibilities while following the legal require
ments that have been established by society. Some specific components of a firm's

le al responsibilities could include having the firm perform in a way that is consistent
with government and legal expectations; displaying complete compliance with all
local, state, federal, and international regulations; and being a good, law-abiding cor
porate citizen. It is important that a definition of a successful firm be one in which all
of its legal obligations are fulfilled so that all the goods and services produced by the
firm meet at least the minimum legal standards.44

Ethical Responsibilities Ethical responsibilities are difficult to define and can

change over time because they are based on the expectations of society. As soci
ety changes over time, its expectations of what is considered ethical by firms also
changes. However, one constant is that society expects that a firm should have eth
ical responsibilities that are beyond just meeting the legal requirements established
b y society. Some components of the ethical responsibilities of the firm include
(1) making sure the firm performs in a manner that meets or exceeds the expectations
o f both social and ethical norms, (2) having an ability to adapt to new or evolving
ethical and moral norms within society, (3) ensuring that ethical norms are not
ignored or compromised so that the firm can achieve its objective, (4) behaving in
a manner commensurate with being a good corporate citizen based on its ethical
and moral conduct, and (5) realizing that corporate integrity and ethical behavior
go beyond the minimum legal and governmental standards.45

Discretionary Responsibilities Discretionary responsibilities are those responsibilities

in which society does not have a clear message to present to businesses what their
courses of action should be. These responsibilities are left in the hands of the managers
to exercise the proper judgment. Some examples of discretionary responsibilities include
having firms give to charity organizations, providing programs to help people who are
drug dependent, or providing day care centers to help families cope in a work environ
ment. These actions are considered discretionary, so if a firm does not want to participate
in these programs, the firm's lack of commitment would not be considered unethical.
Philanthropic components of a firm's CSR could include ensuring that the firm per
forms in a manner that is consistent with charitable and philanthropic expectations
from society, helping support causes such the fine arts and the performing arts to enrich
the cultural basis of society, ensuring that managers and other employees also become
involved by volunteering at various charitable organizations, providing financial and
nonfinancial assistance to educational institutions, and volunteering to support com
munity projects that enhance the overall quality of life for the community.46
Carroll concludes that CSR can be defined as how well a company meets its
economic, legal, ethical, and discretionary responsibilities. Carroll also presents a
CSR pyramid in which the profitability of the firm is the foundation that becomes
 .
Part I From Ethical Foundation to AddressIng Sta
keholder Needs
5&

iiMMifl E The Pyramid of Corporate Social

Respons ibilit

Philanthropic
Responsibilities
Be a Goo d
Corporate Citizen

Ethical Responsibilities
Be Ethical

Legal Responsibilities
Obey the Law

Economic Responsibilities
Be Profitable

Source: Areh.te carroll. rhe Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational
Stakeholders. Business Horizons (July-August 1991): 42.

intertwined with the firm's legal responsibilities. Those two components allow
the firm to develop its ethical responsibilities, which could lead to discretiona r y
responsibilities i n the form of philanthropic responsibilities. The pyramid is shown
in Figure 3.2.

A Global Approach to CSR

In his pyramid of Global Corporate Social Responsibility, Carroll exten
ds his CSR model
of economic, legal, ethical, and philanthropic responsibilities from _a
global perspective.7

Global Economic Responsibility

At the base of the pyramid, global economic responsibility
is represented by the firm
doing what is required by global capitalism. It is expecte
d that any global firm
any domestic firm, mst be profitabl in order to gua like
.
ability. However, w1thm a global setting, there cou
rantee its long-term su tain
ld be a wicle varian
;
an acceptable fina ncial performance of a firm's fore ce of what is
based 0n the
ign-based divisions
try
econonuc conditions
of the coun . '
 Stakeholders and Corporate Social Responsibility
55
Chapter 3

Global Le gal Responsibility

At this level of the pyramid,
firms address the issues related to doing what is required of
hem by global stakeholders.
As is the case with the firm's global economic responsibil
ity, the firm's global legal responsibilit
y must address the issues related to differences in
the legal environm ent in different
countries. Different laws and different perspectives
related to acceptable actions by individuals
in other countries make it imperative for
any global company to understand the differences
and levels of complexity in coun
tries that have a d ifferent legal system. In
addition, governments of countries may
always enforce the laws to protect the rights of the firms and the employees.

Global Ethical Responsibility

At this level of the pyramid, firms address the issues related to doing what is expected
by their global stakeholders. As was stated in the global legal responsibility compo
nent of the framework, the global ethical responsibility of the firm is critical because
governments and legal systems may not be consistent in enforcing the laws, and those
laws may not be consistent with the legal system of the United States. The firm's eth
ical responsibilities include ensuring that the ethical norms, standards, and expecta
tions are consistent globally. Because the home and host countries' ethical standards
m a y not match, the firm needs to reconcile this misalignment in order to present and
enforce a global ethical vision.

Global Philanthropic Responsibility

At the top of the pyramid1 firms address the issues related to the needs of the global
stakeholders. At this level, firms are expected to be involved in socially responsible
activities that have not been mandated by various stakeholders. The desired percep
tion i s to be proactive and anticipate what the future needs of the stakeholders will
be before they present them to the firm. As is the case in all the levels of the pyra
m i d , the expected socially responsiveness can vary significantly from one country to
a nother. For example, i n Finland the expected level of philanthropic responsibility i s
low because the Finnish people are taxed at a relatively high rate, and, therefore, i t i s
expected that the social needs of the individuals i n Finland will be addressed through
government programS.48

M odels of CSR49
There are three different models firms can use to develop a perspective related to CSR:
business case model, social values-led model, and syncretic stewardship model.

Business Case Model

case model view CSR as a means to generate financial
Firms that use the business
on the belief that because firms are driven to perform
results. The p h ilosophy is based
the only justifiable investments in CSR occur when
financi ally i n the short term,
financia l benefits for the investment. The value of CSR i s the
there are also short-term
competitive advantage, which results in higher financi al
enhancement of the firm's