Two competing models of corporate social responsibility

Two competing models of corporate social responsibility

Although external influences such as government regulations and public clamour have resulted in the popular acceptance of corporate social responsibility, it is important to remember that this initiative remains a decision made based on the prerogative of the management. To be specific, depending on the attitude of the management, the determined social responsibility of a business organisation might take either of the two competing schools of thoughts or models—the economic model or the socioeconomic model of corporate social responsibility.

The economic model of corporate social responsibility

Tradition suggests that a business exists solely to respond to market demand, produce quality product based on the demand, and generate profits. This traditional view has been the basis for the economic model of corporate social responsibility. Accordingly, this school of thought argues that society will ultimately benefit on the success of a business organisation. It further holds that maximum social benefit will transpire only if businesses are free to produce and market products that the society needs.

Nobel Prize-winning economist Milton Friedman introduced the Friedman doctrine of social responsibility in his 1962 book “Capitalism and Freedom” and in a 1970 seminal article published in The New York Times. He argued that the sole social responsibility of a corporation is to uphold the interest of the shareholders by maximising profitability while also remaining obedient to the laws of the jurisdictions in which it operates.

Responsibility that extends unto the community defeats the purpose of a free-market economy according to Friedman. He said totalitarianism transpires when businesses concern themselves with the community rather than profitability.

The economic model nonetheless argues that social responsibility is the job of others—particularly the government, non-profit organisations, and other social institutions. It would be unfair for shareholders to have their invested money channelled to expenditures that would not yield returns. Furthermore, this model also argues that businesses are already paying taxes and the government used these payments to meet the needs of the society. Successful businesses are indirectly fulfilling their social responsibility through taxation.

The socioeconomic model of corporate social responsibility

Modern proponents of corporate social responsibility believe that businesses have a responsibility not only to shareholders but also to stakeholders—including customers, employees, suppliers, and the public. This view has been the basis for the socioeconomic model of corporate social responsibility. As described, this school of thought recognises the fact that the operation of a business has an impact on the society. It also argues that business organisations should always consider this impact when making business decisions.

American philosopher and business management professor R. Edward Freeman introduced an alternative to the Friedman doctrine about maximising profit to promote the interest of shareholders. He specifically introduced the Stakeholder Theory in his 1984 book “Strategic Management: A Stakeholder Approach” to provide a groundwork for addressing the moral obligations of a business organisation. The theory holds that apart from shareholders, a business has a responsibility to promote the interests of varied parties: From employees, suppliers, and customers, to the government, community, and trade organisations.

Michael E. Porter, a leading authority on competitive strategy and a professor at Harvard Business School, and Mark R. Kramer, a professor at Kennedy School in Harvard University, also introduced the concept of creating shared value. In their initial article “Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility” followed by the related article “Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society” both published in the Harvard Business Review, the two argued that the competitiveness of a business organisation and the health of the community it serves are mutually dependent. Recognising and capitalising on this association creates a win-win solution for both a business and the society.

Companies are now preferring the socioeconomic model of corporate social responsibility for varied reasons. For public corporations for example, there is a strong requirement to become social responsible to promote and maintain an ideal public image. Funding from these corporations after all comes from the public. Another reason is that it would be in the best interest of businesses to be socially responsible because of the current business and legal landscapes. Doing so would help them avert problems arising from legal actions that might come from their stakeholders. A more interesting reason is that companies are now taking corporate social responsibility seriously. They take part of their platforms and programs because they believe it is their way of giving back to the society.

EDITOR’S NOTE: A version of this article appears on Profolus.com with the title “Theories of corporate social responsibility.”

RELATED POSTS