American philosopher and business professor R. Edward Freeman introduced the stakeholder theory of corporate governance in 1984 and argued that business organizations have a responsibility not only toward their owners and investors but also toward their employees, customers, suppliers, and the community.
Prominent business management scholars such as Michael E. Porter and Mark R. Kramer also introduced the “shared-value” model and argued that the success of an organization and the welfare of the community are fundamentally intertwined.
Both the stakeholder theory of corporate governance of Freeman and the shared-value model of Porter and Kramer represent the socioeconomic model and school of thought of corporate social responsibility. The entire model also highlights the importance and benefits that come from adhering to socially-responsible business practices.
However, as early as 1962, American economist and statistician Milton Friedman had already introduced a theory of corporate social responsibility. It represents the economic model and school of thought of corporate social responsibility.
Friedman argued that the only social responsibility of a business organization is to generate profits and maximize further its profitability while adhering to relevant laws or regulations to promote and protect the interest of its owners and investors. Failure to adhere to this view often highlights the disadvantages of corporate social responsibility.
Pros: The Advantages of Corporate Social Responsibility
The socioeconomic and economic models mentioned above have contrasting views regarding the extent or scope of the social responsibility of a business organization. It is still important to note that examining further the two competing schools of thought highlight the advantages or benefits of a CSR program or related initiatives.
Below are the specific advantages or benefits:
1. Promotes Adherence to Legal and Moral Standards: Having a specified and detailed CSR program forces a business to be intentional when it comes to adhering to laws and regulations, as well as to the prevailing and emerging moral and ethical standards in society. The program is integrated within its mission, vision, and value statements, as well as within its internal code of ethics and conduct.
2. Improves the Image of a Business Organization: The bargaining power of the consumers have become more pronounced because of the growing intensity of competition across different industries and the further emergence of sociopolitical awareness. These consumers can now demand that businesses act according to their sociopolitical views and values. Specific CSR programs and initiatives can help a business remain aligned with these prevailing or emerging views and values.
3. Functions as a Source of Competitive Advantage: Another advantage of corporate social responsibility is that it can be a source of competitive advantage. It can help a business resolve issues regarding human resource management, enhance further its relationship with its suppliers, reduce costs or enhance earnings, and ensure sustainability across its entire supply and value chains.
4. Attracts Certain Investors and Financiers: It can also help improve access to capital. Sociopolitical awareness has also emerged across the communities of investors and financiers. These individuals or entities want to invest in businesses that have the same views and values. Remember that CSR programs improve the image of a business. It can also be a source of positive publicity. Programs aimed toward sustainability also tell about the plans of a particular business organization.
Cons: The Disadvantages of Corporate Social Responsibility
Programs and initiatives that are not directly related to earning or generating profits should be avoided according to adherents of Freidman. The economic model is clear that business organizations are only responsible to their owners and investors, as well as for generating profits and maximizing their profitability.
Below are the specific disadvantages and limitations:
1. Requires Financial and Other Resources: A CSR program is resource-intensive. It requires appropriating a budget and assigning a team of individuals to implement the different tactics and initiatives under a program. Some business organizations do not have the relevant financial and other resources to spare for non-income-generating activities. This is one of the main criticisms of corporate social responsibility.
2. Creates a Principal-Agent Problem and Issue: Some CSR programs reflect the personal interests and biases of corporate executives instead of the interests of their stakeholders. Others have also noted that companies develop and implement different programs for the sole purpose of gaining positive publicity while also distracting the public from the issues arising from business operations. Critics have argued that these programs can have self-serving motivations.
3. Discourages Certain Investors and Financiers: Another disadvantage of corporate social responsibility is that it can also discourage investors and financiers. Some of them might not share the same views and values. Others might think that specific CSR programs and initiatives are useless and wasteful endeavors that do not bring actual value to a particular business organization.
4. Harms the Public Image of a Business or Brand: It can also be harmful to the public image of a business or its brand especially if done incorrectly. There are different advocacy groups established to scrutinize the practices of business organizations. A business that promotes alternative energy as part of its CSR program would be criticized if its carbon footprint remains high. Advocating for civil rights would be useless if discrimination is rampant within a particular workplace.
