Evaluating Corporate Social Responsibility

A model for evaluating corporate social performance is presented in Exhibit 4.7. The model indicates that total corporate social responsibility  can be subdivided into four primary crite- ria: economic, legal, ethical, and discretionary responsibilities.50   These four criteria fit to- gether to form the whole of a company’s social responsiveness. Managers and organizations typically are involved in several issues at the same time,  and a company’s  ethical  and discre- tionary responsibilities  are increasingly considered to be as important as economic and legal issues. Social responsibility has become an integral  topic on the corporate agenda in light of corporate scandals, concerns about globalization, and a growing mistrust of business.51

Note the similarity  between the categories in Exhibit 4.7 and those in Exhibit 4.1. In both cases, ethical  issues are located  between  the areas of legal and freely discretionary re- sponsibilities. Exhibit 4.7 also has an economic category, because profits  are a major reason for corporations’ existence.

1. ECONOMIC RESPONSIBILITIES

The first criterion of social responsibility is economic responsibility. The business institution is, above all, the basic economic unit of society. Its responsibility is to produce the goods and services that society wants and to maximize profits for its owners and shareholders. Economic responsibility, carried to the extreme, is called the profit-maximizing view, ad- vocated by Nobel economist Milton  Friedman. This view argues that the corporation should be operated on a profit-oriented basis, with its sole mission to increase its profits  as long  as it stays within the rules of the game.52

T. J. Rodgers, CEO of Cypress Semiconductor, is a strong  proponent  of the profit- maximizing view. Rodgers believes that businesses should  exist for one purpose: to make a profit. He points out, though, that the long-term pursuit of profits necessitates being a good corporate 53  The purely profit-maximizing view is no longer considered an adequate criterion of performance in Canada, the United States, and Europe. This approach means that economic gain is the only social responsibility and can lead companies into trouble.

2. LEGAL RESPONSIBILITIES

All  modern  societies lay down ground rules, laws, and regulations that businesses are expected to follow. Legal responsibility defines what society deems as important with respect to appropriate corporate behavior.54  Businesses are expected to fulfill their economic goals within the legal framework. Legal requirements are imposed by local town councils, state legislators, and federal regulatory agencies.

Organizations that knowingly  break the law are poor performers in this category. Manag- ers at numerous  companies learned in recent  years that organizations  and managers ulti- mately pay for ignoring  legal responsibilities. Between mid-2002  and mid-2005,  the U.S. Justice Department  charged more than 900 individuals in more than 400 corporate fraud cases.55  Other examples of illegal acts by corporations include intentionally  selling defective goods, performing  unnecessary repairs or procedures, and billing clients for work not done. Tenet Healthcare paid $54 million to settle a federal lawsuit  charging  that one of its hospitals was cheating Medicare by performing unnecessary cardiac procedures.56   The press release in Exhibit 4.8 describes the punishment imposed on another company that broke the law.

3. ETHICAL RESPONSIBILITIES

Ethical responsibility includes behaviors that are not necessarily codified  into law and may not serve the corporation’s direct economic interests. As described earlier in this chapter, to be ethical, organization  decision makers should act with equity, fairness, and impartiality, re- spect the rights of individuals, and provide different treatment of individuals only when rel- evant to the organization’s goals and tasks.57 Unethical behavior occurs when decisions enable an individual or company to gain at the expense of other people or society  as a whole.

One firm in the food packaging industry, for example, ordered tens of thousands of dol- lars in goods from a supplier,  even though managers knew the company’s finances were shaky and it might never pay for them. As another  example, a doctor  at Louisiana State University Health Sciences Center  got into trouble for accepting significant  annual pay- ments from a medical device company and heavily promoting its products to his patients.58

4. DISCRETIONARY   RESPONSIBILITIES

Discretionary responsibility is purely voluntary and is guided by a company’s desire to make social contributions  not mandated by economics,  law, or ethics. Discretionary  activities include generous philanthropic contributions that offer no payback to the company and are not expected.  An example  of discretionary  behavior  occurred  when Emigrant Savings deposited $1,000 into the accounts of customers living in areas hit hardest by Hurricane Katrina. CEO Howard Milstein thought only a few hundred customers lived in the area, but he stuck by his decision even when he learned that the number of customers was nearly 1,000.

The total donation cut straight into the company’s bottom line, but Milstein believed it was the right thing to do.59 Discretionary responsibility is the highest criterion of social responsi- bility because it goes beyond societal expectations to contribute to the community’s welfare.

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.