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The Concept of Corporate
Social Responsibility

Class Instructor: Ms. Marion Pia B. Calderon

B U S I N E S S E T H I C S
The Concept of Corporate Social Responsibility
Lesson Objectives

At the end of this lesson, the students should be able to:

1. Define corporate social responsibility (CSR);

2. Distinguish between CSR and business ethics;

3. Give some simple business illustrations of CSR; and

The Tragic Case of the Bhopal Disaster

In Bhopal, India, a chemical plant operated by Union Carbide of India Limited (UCIL), a
subsidiary of UCC, used highly toxic chemicals, carbon monoxide, chlorine phosgene (mustard
gas), monomethylamine and methyl iso-cyanate (MIC) to produce carbamate pesticides. On the
night of Sunday 2 December 1984, water entered an MIC storage tank, setting in process an
exothermic reaction. Unknown quantities of hydrogen cyanide, nitrous oxide and carbon
monoxide spewed into the atmosphere. Between 200,000 and 450,000 local people were
exposed to the toxic fumes; some 60,000 were seriously affected with impaired lung functions,
severe gastrointestinal damage, and other ailments. More than 20,000 people have been
permanently injured and up to 10,000 people have died as a consequence of the tragedy. Sight,
respiratory, and fertility problems persist for many Bhopal residents.

Source: Wong, Loong. (2008). “Revisiting rights and responsibility: The Case of Bhopal”, Social Responsibility
Journal

Corporate Social Responsibility (CSR) and its difference from Business Ethics

Business ethics is sometimes confused with corporate social responsibility or CSR.

Although the two are related, they are not quite the same. It is important to understand how
they are different from as well as how they are related to each other. We will begin by clarifying
what corporate social responsibility is because this will help us understand how business
ethics and corporate social responsibility are related.

The phrase corporate social responsibility refers to a corporation’s responsibilities or

obligations toward society, CSR, as defined by the World Business Council for Sustainable
Development (WBCSD), is “a continuing commitment by business to behave ethically and
contribute to economic development while improving the quality life of the workforce and their
families, the local community and the society at large. There is some disagreement about what
those obligations include. Do companies have a responsibility to donate to charities or to give
their employees higher wages and customers safer products? Or are they obligated to
maximize profits for their shareholders or stockholders?

At one extreme is the view of the late economist Milton Friedman. Friedman, basing
himself on assumptions of private property and the free market, famously said that the only
social responsibility of business is to increase its profits. He argued that corporate executives
work for the “owners” of the company, and today these “owners” are the company’s
shareholders. As their employee, the executive has a “direct responsibility to run the company
in accordance with their desires and in their best interest, which generally will be to make as
much money as possible while conforming to the basic rules of the society. On Friedman’s
view a company’s only responsibility is to legally and ethically “make as much money as
possible” for its owners (i.e., to maximize shareholder returns). We can call his view the
shareholder view of corporate social responsibility. The main reason why Friedman holds this
theory is that, in his view, shareholders own the company. Since the company is theirs and only
theirs’ property, only they have the moral right to decide what it should be used for. These
“owners” hire executives to run the business for them, so the executives have a moral
obligation to do what the stockholders want, which, he claims, is to make them as much
money as possible. Friedman does not say, however, that there are no limits to what executives
can do to make stockholders as much money as possible. Executives, he explicitly says, must
operate within the rules of society including both the rules of the law and the rules of ethical
custom.

According to Friedman’s shareholder view of corporate social responsibility, a manager

has no right to give company money to social causes when doing so will reduce shareholder’s
profits because that money does not belong to the manager but to the shareholders. Friedman
argues that the exercise of social responsibility by a corporate executive is:

(1) unfair, because it constitutes taxation without representation;

(2) Undemocratic, because it invests governmental power in a person who has no general
mandate to govern;

(3) Unwise, because there are no checks and balances in the broad range of governmental
power thereby turned over to his discretion;

(4) A violation of trust, because the executive is employed by the owners as an agent serving
the interests of his principal;

(5) Futile, both because the executive is unlikely to be able to anticipate the social
consequences of his actions and because, as he imposes costs on his stockholders,
customers or employees, he is likely to lose their support and thereby lose his power.

Although Friedman does not think managers should use company resources to benefit
others at the expense of shareholders, he does think that companies ultimately provide great
benefits for society. He argues that when a company tries to maximize stockholders’ profits in
a “free-enterprise” economy, competition will force it to use resources more efficiently than
competitors, to pay employees a competitive wage, and to provide customers with products
that are better, cheaper, and safer than those of competitors. So when managers aim at
maximizing profits for stockholders in competitive markets, the companies they run will end up
benefiting society.

Friedman has had many critics. Some object to his claim that the manager or executive
is the employee of shareholders. Legally, these critics point out that the executive is the
employee of the corporation and so the executive is legally required to serve the interests of
the corporation—his true employer—not of its shareholders. Others have criticized Friedman’s
claim that stockholders are the “owners” of the corporation and that the corporation is their
“property”. Critics point out that shareholders only own stock and this gives them a few limited
rights, such as the right to elect the board of directors, the right to vote on major company
decisions, and the right to whatever remains after the corporation goes bankrupt and pays off
its creditors. But shareholders do not have all the other rights that true owners would have and
so they are really not owners of the corporation. A third objection criticizes his claim that the
executive’s core responsibility is to run the corporation as stockholders want it to be run. In
reality, the executive probably has no idea how stockholders want the company to be run, and
legally, anyway, he is required to run the company in ways that serve many other interests
(including employee interests and consumer interests) besides those of stockholders. Finally,
some have argued against Friedman’s view that by seeking to maximize shareholder returns,
the corporation will best serve society. Sometimes competitive forces fail to steer companies in
a socially beneficial way and, instead, lead them to act in a socially harmful manner. For
example, a company might knowingly pollute a neighborhood with substance that is not yet
illegal, in order to save the costs of reducing its pollution and thereby be more competitive.

Source: Business Ethics and Social Responsibility by Aliza Racelis