Ethics for CEOs - Why Corporate Social Responsibility is Good for Businesses and Countries

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Before we define CSR more precisely and before we explore in depth a number of case studies that illustrate aspects of the ethical role of corporations, we first need to understand exactly what corporations are, why they exist, and why they have become so powerful. Today, the global role of corporations rivals that of national or local governments. In , it was reported that, of the largest economic organizations in the world, 51 were corporations and 49 were countries.

In , Walmart was the twenty-fifth largest economic organization in the world, putting it ahead of countries. For corporate employees, as for citizens living in communities dominated by large corporations, the corporation is arguably the most important form of social organization.

For people such as corporate executives and shareholders, whose lives depend directly on corporations, it is not surprising that company politics often are considered more relevant than national or local politics. For devoted fans of iconic brands like Nike, Apple, Mercedes, or Louis Vuitton, the corporation can occupy a psychological niche very much like that of a member of the family. Similarly, those parents might also be loath to part with their cherished products. Dad would not easily say goodbye to his Chevrolet Corvette or Bose stereo, and Mom might not be easily persuaded to part with her Yamaha piano or Rossignol skis.

Let us begin with a brief review of the nature of corporations. There were no corporations in ancient Egypt, Greece, or Rome; or in imperial China or Japan; or among the precolonial kingdoms of the Zulu or Ashanti. It is true that in some classical and traditional societies there were certain forms of communal and religious organizations that anticipated the organizational capacities of corporations, but strictly speaking, they were not corporations.

History of Corporate Social Responsibility

Corporations are a relatively modern social innovation, with the first great corporations dating from about Since then, the growth of corporations has been phenomenal. What explains it? Why has the corporate structure been so successful, profitable, and powerful? Here are a few of the distinguishing characteristics of corporations. The first point to make about corporations is that they are not informal organizations or assemblies. In order to exist at all, corporations must be authorized by state or national laws. In their daily operations, corporations are regulated by a specific set of laws.

Every country has laws that stipulate how corporations can be created; how they must be managed; how they are taxed; how their ownership can be bought, sold, or transferred; and how they must treat their employees.

What is corporate social responsibility (CSR)?

Consequently, most large corporations have large legal and government affairs departments. Since the laws and rules that may constrain corporations are written and enforced by the government, most corporations consider it of vital importance to seek influence over governmental regulators and lawmakers. In most countries, the very largest corporations have privileged access to top decision makers. The extent and reach of corporate influence over governments is one of the most controversial aspects of corporate existence.

The first great benefit of corporations is that they provide an organized vehicle for pooling cash and capital from a large number of investors so that they can undertake major enterprises. Thus, one great stimulus to the growth of corporations was the rapid growth of international trade between and CE. In that era, sending a large vessel across the oceans was a major financial and logistical undertaking, which was also extremely risky; ships were often lost in storms. These early commercial ventures required such large capital investments that, at first, funding them was only within the reach of royalty.

However, as new ocean trading routes were established and the vast potential for profits from trading spices became known, the first modern corporations were formed: the English East India Company, chartered in , and its archrival, the Dutch East India Company, chartered in Not all businesses or companies are public corporations.

For example, in the US, it is legal to operate a business in your own name this is called a sole proprietorship or with partners a partnership. Corporations also come in a bewildering array of forms. In the UK, the term company is preferred to corporation, and we will notice that the names of most large UK companies followed by the designation plc or PLC public limited company , as in Rolls-Royce plc, while smaller companies often have the designation Ltd private limited company.

All of these terms define two basic aspects of corporations: 1 their limited liability which applies to all corporations , and 2 their status as a public or private company. Public companies are allowed to sell their shares on public stock markets and tend to be the larger type of company. The answer is found in the concept of liability , which refers to the risk of loss for debts incurred by the business, or for damages caused by the business. Unfortunately, in the first month of operation, one of your drivers negligently causes a car accident and severely injures a family driving in another car.

The result can be quite different for a corporation. A shareholder of a corporation only risks the stock that the shareholder owns. When a corporation suffers an adverse legal judgment and does not have sufficient funds to satisfy the judgment, the corporation simply goes bankrupt. The party or parties who have been injured cannot sue the owners—the shareholders—of the corporation because the corporation acts as a shield from liability.

Why does society allow the shareholders of a corporation to retreat behind the corporate shield, while we do not allow the same for owners of a so-called mom-and-pop business in the form of a sole proprietorship? The main purpose of the liability-shield is to encourage investment in corporations. The underlying implication is that corporations and corporate investment provide important benefits for society, which explains why governments have been willing to adopt laws that protect and encourage corporate ownership. As many U. Corporations may enhance the ability of the local economy to compete with foreign economies that are supported by the productivity of their own corporations.

In many instances the ability of corporations to retreat behind the corporate shield has been controversial. For example, several major airlines notably American Airlines have been accused of choosing to declare bankruptcy over finding a way to pay high wages to their pilots and cabin personnel. Such corporations are able to benefit from an option provided by US bankruptcy law, known as Chapter 11 reorganization , which allows them to enter bankruptcy temporarily. While all corporations possess limited liability, not all of them are permitted to raise money in the stock market or have their shares traded in stock markets.

Here, we find the important distinction between public corporations , which may have their shares traded on stock markets, and private corporations , which may not have their shares traded on stock markets. As a rule, large corporations and multinational corporations choose to do business as public corporations because big companies have such enormous capital needs that they may best raise funds by placing stock for sale in public stock markets. However, this is not always the case; there are some very large corporations that choose to remain private, which means that they raise money directly from investors rather than from making stock available on stock markets.

On the whole, ownership of a corporate interest in the form of stocks is more freely and easily transferable than ownership of an interest in a sole proprietorship or partnership. If you want to sell a mom-and-pop store, you generally have to sell the whole business; you cannot sell a small portion when you need to raise money. If you are one of the members of a partnership and you want to sell your share, you will generally have to get prior approval from the other partners; needing to do so may discourage possible investors because they may not want to go to the trouble of seeking approval from your partners.

This ease of transferability also encourages people to invest in stock instead of in other businesses, because it is so easy to sell corporate stock as needed. First, the corporation will often distribute a portion of its profits to the shareholders in the form of dividends , a certain annual payment per share of stock. Second, if a corporation is growing rapidly and is expected to be very profitable in the future, more investors will want to own its stock and the price of that stock will increase. Thus, ownership of stock is an investment vehicle that provides many advantages over other types of investments.

For one thing, you can own stock without having to personally take part in the management of the company. In addition, you can sell all or part of your ownership when you need the funds. Finally, if the corporation is very successful, it will not only pay a steady revenue stream—through dividends—but your shares will become more valuable over time. Stock exchanges are like enormous flea markets for stock, because you can either buy or sell stock there. Unlike the goods available in ordinary markets, though, the price of stocks fluctuates constantly, literally minute by minute. Thus, stock markets are also somewhat like casinos or lotteries, because they allow investors to speculate on the future.

Speculation has its pros and cons. The potential for wealth creation through stock ownership has spawned an important industry that employs hundreds of thousands of people and generates vast profits: financial services. Stock brokerages, investment banks, and trading houses have arisen to provide expert guidance and services to investors. American colleges and universities have developed a highly collaborative and perhaps even symbiotic relationship with the financial services industry. For one thing, since there are many jobs and professional occupations in financial services, virtually all universities offer courses and majors in finance or financial economics, and many also have graduate business schools that prepare students for careers in the financial services industry.

Perhaps equally importantly, most colleges and universities depend on private and charitable donations to help defray the cost of running the institution and, consequently, to keep tuition rates and fees lower although many students will find it hard to imagine how tuition could be any higher. When wealthy individuals and corporations make donations or charitable contributions to colleges and universities, they often do so by giving corporate stock. Even when they make a cash donation, the university may find that it is most financially convenient to use that cash to acquire corporate stock.

As a result, the largest universities have amassed vast holdings of corporate stock, among other investments. The financial resources of a university are often held in the form of a special trust known as an endowment. Universities prefer not to sell off parts of the endowment but rather seek to cover costs by using the interest and dividends generated by the endowment. At times, the corporate holdings of universities have become quite controversial. For example, in the s and s, a growing student movement called on universities to divest to sell all their stock in any corporations that did business with the racist apartheid regime that controlled South Africa at that time.

It is possible but rare for family-owned businesses to remain sole proprietorships for several generations; more commonly, they eventually become corporations, or they are sold or transferred to a new business operator.

What Is Corporate Social Responsibility?

Even in successful, family-owned businesses where a child or relative of the founder inherits the business, it still happens that after a generation or two, no further family members are qualified or wish to join the business, and the business must be sold. However, corporations are structured from the outset to have a potentially perpetual existence, because corporations do business through their officers and executives rather than through their owners.

Although it is possible for owners to have dual roles as shareholders and as executives, it is not necessary. One common scenario is for the founder of the corporation to act as its chief executive officer CEO until such time as the corporation becomes so large and successful that the shareholders prefer to transfer management responsibility to an executive with specific professional experience in running a large corporation. One potential disadvantage of the corporate form from the point of view of its founders is that, as the corporation grows, the original founders may lose control and even be pushed out of the corporation by newcomers.

This situation can arise because, as a company grows, the founders may be tempted to part with some portion of their equity by selling stock to new investors. Corporations are ultimately controlled by the board of directors, who are voted into office by the shareholders. Although the tremendous growth in the number and size of corporations, and their ever-increasing social role, is due in part to their advantages as an investment vehicle, there are some financial disadvantages worth mentioning.

One of the most important is so-called dual taxation, which refers to the practice in most countries of taxing corporate profits twice: once when the corporation declares a certain amount of profit, and again when the corporation distributes dividends to shareholders. The complexity of corporate tax regulations is such that even small corporations must frequently employ specialized accountants and attorneys to handle their tax returns.

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Another disadvantage applies only to publicly traded corporations. Although all corporations are subject to a number of government regulations, the highest degree of regulation applies to public corporations, which raise capital by selling stock in stock markets. Large corporations are often willing to submit to these burdensome regulations because there are strong benefits to being traded on a stock exchange, the most important of which is the ability to raise a great deal of initial funding when the stock is first made available for trade.

Despite the allure of additional financing, a company that is traded on a stock market must make a great deal of financial information publicly available, usually on a quarterly basis, four times per year. This obligation can be quite onerous because it requires the corporation to employ a number of internal accountants as well as outside auditors.

In light of these disadvantages, it is not surprising that some public corporations decide to take their shares off the stock markets in a process that is known as going private , which is the opposite of an IPO. Other corporations simply avoid going public in the first place. Thus, there are also some very large corporations, such as the multi—billion-dollar engineering firm Bechtel, which prefer to remain private even though they could raise investment capital with an IPO.

Such companies prefer to raise capital by other means to avoid the requirements of quarterly earnings reports and therefore not revealing financial information to competitors.

Why Starbucks' Billionaire CEO Pushes Social Responsibility - Forbes

In this book, we will make continual reference to the concept of corporate social responsibility, but it is important to realize that CSR is an evolving concept that can be analyzed from multiple perspectives. The term CSR may be used quite differently depending on whether a given speaker is looking at it from the point of view of a corporation, a government, a charity sponsored by the corporation, a citizen employed by the corporation, a citizen who has been harmed by the corporation, or an activist group protesting abuses of corporate power.

We define CSR simply and broadly as the ethical role of the corporation in society. Corporations themselves often use this term in a narrower, and less neutral, form.

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At a minimum, most corporations expect that their donations will be publicly attributed to the corporation, thus generating positive public relations. When corporations make large cash gifts to universities or museums, they are usually rewarded with a plaque, or with a building or library named after the donor. Stakeholder capitalism refers to a conception of the corporation as a body that owes a duty not only to its shareholders the predominant American view but also to all of its stakeholders , defined as all those parties who have a stake in the performance and output of the corporation.

Stakeholder capitalism is a concept that was largely developed in Europe and reflects the widespread European attitude toward corporate governance, which accepts a great degree of government and social oversight of the corporation. This is intended to oblige the corporation to be more cognizant of worker needs and demands, and to ensure that corporate strategies are not concealed from workers.

Corporate social responsibility - Wikipedia

An example is provided by the famous Red campaign, in which corporations such as Gap pledged to contribute profits from the sale of certain red-colored products to a program for African development and alleviation of AIDS-related social problems. The basic idea of cause-related marketing is that the corporation markets its brand at the same time that it promotes awareness of the given social problem or civic organization that addresses the social problem. In addition to marketing products with the pink-ribbon symbol, Estee Lauder has made support for breast cancer awareness one of the defining features of its corporate philanthropy.

Sponsorship can be considered a form of marketing communications because it seeks to raise awareness and appreciation of the corporation in a given target audience. Arguably, of course, sponsorship benefits society, because society appreciates sports, art, and entertainment. However, in the case of sponsorship, as opposed to philanthropy, the sponsors expect a clear return. Indeed, many corporations carefully analyze the benefits of their sponsorship activities in the same way they measure the impact of their marketing and advertising.

Many prominent global sponsors are companies that find it difficult to advertise through other channels. Philip Morris has long been the number one sponsor of Formula 1 race car competitions, and it is impossible for a spectator to watch one of these races without observing, consciously or otherwise, huge billboards and banners featuring the famous red-and-white Marlboro logo. Similarly, since alcohol advertising is also increasingly scrutinized, it is not surprising that Budweiser has followed a similar tactic and become the principal sponsor of NASCAR racing.

Sustainability has become such an important concept that it is frequently confused with CSR. Indeed, for some companies it seems that CSR is sustainability. This is perhaps not surprising, given the growing media attention on issues related to sustainability. Sustainability is therefore a very challenging goal, and many environmentalists maintain that no corporation today operates sustainably, since all use energy leading to the gradual depletion of fossil fuels while emitting greenhouse gases and all produce waste products like garbage and industrial chemicals.

No corporation or corporate executive today will be heard to say that they do not really care about the environment. However, if we observe their actions rather than their words, we may have cause for doubt. We will explore specific cases related to sustainability in later chapters.

However, without evidence of obvious problems, it can be easy for CEOs to presume that their corporate values and actions are congruent. Making sure that values are in line with actions requires hard work. It makes sense, for example, to do regular monitoring involving first line managers and others who are talking to small employee groups, letting them know that matching values and actions matters at every level.

A company becomes vulnerable when it assumes employees share a common understanding of what the values mean. Values well explained can create common ground with stakeholders. For example, a survey of 1, American adults indicated that 47 percent of Millennials ages 18 — 36 expect CEOs to speak up in issues important to society; in contrast, only 28 percent of those aged 37 to 71 agree with that.

An education process can help good communication bridge the gap. Research suggests that stakeholders broadly understand the importance of speaking out. A study of over adults indicated nearly 8 in 10 Americans support corporate positions on race relations, while about 6 out of 10 support taking positions on immigration reform and LGBT equality. Nearly 80 percent agreed that companies can be successful and take a stand on important issues, with 7 out of 10 believing it can help the bottom line. So, while speaking out may not always be easy, corporate America may have turned a corner.

Which of the following is the most important current corporate responsibility issue? View Results.