CSR Theories

What is CSR?

CSR stands for Corporate Social Responsibility. It is a business approach that involves the voluntary integration of social, environmental, and ethical concerns into a company’s business operations and interactions with stakeholders.

Companies that adopt CSR aim to balance their economic goals with the well-being of society and the environment. This can involve initiatives such as reducing carbon emissions, supporting local communities, promoting employee diversity and inclusion, and ensuring ethical labor practices in their supply chains.

In order to contribute to a clarification of the field of business and society, it is important to map the territory in which most relevant CSR theories and related approaches are situated. The theories of CSR are developed on the basis of the extent of interaction between business and society.

CSR Theories

• Friedman’s Theory/Fundamentalist Theory
  
• Social Contract Theory
  
• Social Justice Theory
  
• Rights Theory
  
• Deontological Theory
  
• Stakeholder Theory
  
• Gandhiji’s Trusteeship Theory
  
• Statist Theory

Friedman’s Theory/Fundamentalist Theory

Friedman’s position is captured in his pronouncement that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud” (Friedman, 1983).

Friedman’s reference to the “rules of the game” suggests that social responsibility is derived from the general economic environment or context in which business operates. Friedman’s position on CSR has been characterised as “fundamentalism” and gathered under what has been called the “legal recognition” view.

“According to the legal recognition view, the corporation is an autonomous entity, … owned and run by a freely constituted group…. It is not a creation of society” (DeGeorge, 1990).

Thus the corporation has no special moral or social obligations. Corporations are fully private, economic institutions designed only to make money. According to Friedman, the “business of business is business.”

Believers in Friedman’s view consider investing marginal costs with regard to decisions regarding labour, waste management, installing environmental systems and so on.

Hence, it is likely that in order to minimise the expenses of the firm, they may take decisions that can normally create negative externalities on the larger society like creating environmental hazards, exploitation of labour and so on.

To amend these externalities we need government policies or other market-correcting interventions to restore the socially optimal equilibrium.

Social Contract Theory

The central tenet of social contract theory is that society consists of a series of explicit and implicit contracts between individuals, organisations, and institutions. These contracts evolved so that exchanges could be made between parties in an environment of trust and harmony.

According to social contract theory, corporations, as organisations, enter into these contracts with other members of society, and receive resources, goods, and societal approval to operate in exchange for good behaviour.

Davis (1960) was one of the first to explore the role of power that business has in society and the social impact of this power. In doing so, he introduces business power as a new element in the debate of CSR. He held that business is a social institution and it must use power responsibly.

Additionally, Davis noted that the causes that generate the social power of the firm are not solely internal of the firm but also external. Their locus is unstable and constantly shifting, from the economic to the social forum and from there to the political forum and vice versa.

Davis formulated two principles that express how social power has to be managed: “the social power equation” and “the iron law of responsibility”. The social power equation principle states that “social responsibilities of businessmen arise from the amount of social power that they have” (Davis, 1967, p. 48). The iron law of responsibility refers to the negative consequences of the absence of use of power.

In his own words: “whoever does not use his social power responsibly will lose it. In the long run those who do not use power in a manner which society considers responsible will tend to lose it because other groups eventually will step in to assume those responsibilities” (1960, p. 63).

So if a firm does not use its social power, it will lose its position in society because other groups will occupy it, especially when society demands responsibility from business.

Donaldson (1982) further extended on the work of Davis and assumed that some sort of implicit social contract between business and society exists and business will have to honour the contract as business is not just an economic institution, but also a social one. Hence the concept of ‘Corporate Citizenship’ was propagated.

Social Justice Theory

Social justice theory focuses on fairness and distributive justice – how, and according to what principles, society’s goods (here meaning wealth, power, and other intangibles) are distributed amongst the members of society.

Proponents of social justice theory argue that a fair society is one in which the needs of all members of society are considered, not just those with power and wealth. As a result, corporate managers need to consider how these goods can be most appropriately distributed in society.

Rights Theory

Rights theory is concerned with the meaning of rights, including basic human rights and property rights. One argument in rights theory is that property rights should not override human rights.

This means that while shareholders of a corporation have certain property rights, this does not give them license to override the basic human rights of employees, local community members, and other stakeholders.

Deontological Theory

Deontological theory deals with the belief that everyone, including corporate managers, has a moral duty to treat everyone else with respect, including listening and considering their needs. This is sometimes referred to as the “Golden Rule.”

CSR contributes to corporate sustainability by providing ethical arguments as to why corporate managers should work toward sustainable development: If society in general believes that sustainable development is a worthwhile goal, corporations have an ethical obligation to help society move in that direction.

Stakeholder Theory

Stakeholder theory was originally, and is still primarily a strategic management concept. The goal of stakeholder theory is to help corporations strengthen relationships with external groups in order to develop a competitive advantage.

The contribution of stakeholder theory to corporate sustainability is the addition of business arguments as to why companies should work toward sustainable development.

Stakeholder theory suggests that it is in the company’s own best economic interest to work in this direction because doing so will strengthen its relationship with stakeholders, which in turn will help the company meet its business objectives.

Gandhiji’s Trusteeship Theory

Gandhi’s efforts towards “spiritualising economics” are reflected in his concept of Trusteeship. Gandhi’s idea of Trusteeship arose from his faith in the law of non-possession. It was founded on his religious belief that everything belonged to God and was from God.

According to Gandhi, when an individual had more than his respective portion, he became a trustee of that portion for God’s people. If people could imbibe this principle in general, Trusteeship would become a legalised institution.

Basically, Gandhi suggested this concept as an answer to the economic inequalities of ownership and income, a kind of nonviolent way of resolving all social and economic conflicts prevalent in the world.

In concrete form, the Trusteeship formula reads as follows:

• Trusteeship provides a means of transforming the present capitalist order into an egalitarian one.
  
  
• It does not recognise any right of private ownership of property, except so far as it may be permitted by society for its own welfare.
  
  
• It does not exclude legislation of the ownership and use of wealth.
  
  
• Under State-regulated Trusteeship, an individual will not be free to hold or use his wealth for selfish satisfaction, in disregard of the interests of society.
  
  
• Just as in the case of a decent minimum living wage, a limit should be fixed for the maximum income that would be allowed to any person in society.
  
  The difference between such minimum and maximum incomes should be reasonable and equitable and variable from time to time, so much so that the tendency should be towards the obliteration of the difference.
  
  
• Under such an economic order, the character of production will be determined by social necessity and not by personal greed.

As man advances from a narrow sphere of personal satisfaction to the nobler concept of the welfare of all, he marches closer towards selfrealisation. The whole idea of possessing wealth only to guard it from being misused and to distribute it equitably, aims at protecting human dignity.

If it is possessed for any other objective, it is objectionable on moral grounds. Gandhi enjoins this moral obligation on the part of the trustees, as he is fully aware of the ills of capitalism that widen the gap between the rich and the poor.

The Gandhian concept of Trusteeship departs significantly from Marxian economic philosophy too. If Marxism is the child of the Industrial Revolution, Gandhian theory can be understood only in the context of certain basic spiritual values of the Indian tradition.

Marxian socialism aims at the destruction of the class called capitalists, whereas the Gandhian approach is not to destroy the institution, but to reform it. Gandhian socialism, being ethical, is different from Marxian socialism. Man to Gandhi, is an ethical being first and a social being later.

The most significant difference between Marxian socialism and Gandhian socialism lies in the method they recommend to achieve it. Whereas Marxian socialism harps on violence, Gandhian socialism aims at a change of heart on the part of the rich.

There is no place for violence, but only trust. The common man trusts his trustee and the latter plays the role of a custodian. Though this kind of socialism is difficult to achieve, Gandhi advocated it as he believed in the basic strength of the goodness of man and the value of morals.

Statist Theory

The statist theory traces its roots to Neo-Marxian thinking on the role of public sector institutions. The theory seeks to emphasise on the necessity of public sector institutions in taking the economy to “commanding heights.” This theory had found in application in India during the Nehruvian era and hence is at times also referred to as the Nehruvian theory of CSR.

Most emerging economies share a common economic and political history of having been subjected to colonialism. It is in this context that the theory proposes the active participation of government-run economic institutions in economic development.

Moreover it also stresses on the need to regulate and control corporate behaviour by means of restrictive licensing and permit mechanism. Private sector institutions are required to comply with the regulations and recommendations of government in order to stay active in business.

With gradual shift of emerging economies from command and control economy models to those of cooperation, this model has gradually faded away. There has been stinging criticism against governments of literally forcing corporations to comply with compliance, regulatory and governance issues.

Such type of compliance mode of corporate governance that is largely dominated by excessive legislative and judicial interventions has been known to stifle innovation and enterprise. Infosys chief mentor and CEO N R Narayana Murthy has referred to it as “governance at gun point.”