Origins and development of Corporate Social Responsibility and Stakeholder Theory
I've wondered for a long time how the belief in Shareholder Value came to dominate corporate thinking. I started reading around this topic to try to understand how this came to be. Clearly it is related to what each of us see as the purpose of corporations.
In a previous post, I wrote about Art Kleiner’s ‘Age of corporate dominance’. We’ve been arguing about the purpose of corporations ever since.. Do they exist solely to make a profit and serve their shareholder owners or do they have a social responsibility to other stakeholders as well?
In 1979, A.B.Carroll wrote:
The modern era of social responsibility, however, may be marked by Howard R. Bowen’s 1953 publication of Social Responsibility of the Businessman, considered by many to be the first definitive book on the subject É By the mid-1950s, discussions of the social responsibilities of businesses had become so widespread that Peter Drucker chided businessmen: “You might wonder, if you were a consciencious newspaper reader, when the managers of American business had any time for business” (p 497)
Stakeholder Theory came into being a decade later. Freeman & Reed suggest the term ‘stakeholder’ was “coined in an internal memorandum at the Stanford Research Institute in 1963” while they trace discussions of the social responsibilities of the modern corporation back to Berle and Means in 1932 who “were worried about the ‘degree of prominence entitling (the corporation) to be dealt with as a major social institution.’” and
Chester Barnard [who] argued that the purpose of the corporation was to serve society, and that the function of the executive was to instil this sense of moral purpose in the corporation’s employees. (Ibid.)
They note that Igor Ansoff included a discussion of the new [stakeholder theory] concept in his 1965 book, commented that systems theorists “led by Russell Ackoff ‘rediscovered’ stakeholder analysis” in the mid-1970s and in 1975 Dill “sought to move the stakeholder concept form the periphery of corporate planning to a central place.” (Freeman & Reed, again)
By the mid 1970s the term “corporate social responsibility” had come into common use (eg Sethi in 1975) and was used to cover the same ground as stakeholder theory. Also by this time, issues of definition and the terms meaning different things to different people had come into play:
The phrase corporate social responsibility has been used in so many different contexts that it has lost all meaning. Devoid of an internal structure and content, it has come to mean all things to all people. Business executives, academic scholars, government regulators, and social activists view the corporation's social role within their respective frames of reference, thereby allowing the evaluator maximum discretion as to the amount of funds expended, the nature of the activities engaged in, and the types of groups whose needs are responded to. (Sethi)
Indeed Sethi represents an early attempt to resolve this divergence of views by introducing the concept Corporate Social Performance. Carroll takes this further by developing a three-dimensional model in which Corporate Social Performance (CSP) is based on both Corporate Social Responsibility (CSR1) and Corporate Social Responsiveness (CSR2)
Throughout this phase, an important distinction began to develop. As Mitchell et al note
In 1978 William C. Frederick observed that business and society scholarship was in transition from a moral focus on social responsibility (CSR1) to an amoral focus on social responsiveness (CSR2). When stakeholder theory focuses only on issues of legitimacy, it acquires the fuzzy moral flavor of CSR1. Focusing only on stakeholder power, however, as several major organizational theories would lead us to do, yields the amorality and self-interested action focus of CSR2. Instead we propose a merger.
That is, some scholars and practitioners began promoting the view that business had to take stakeholders into account, not for any moral responsibility they had to these stakeholders, but rather because they had to manage the risk to the firm due to the influence activist group now had the power to exercise. Social performance was seen as a way of demonstrating the company’s responsiveness to social trends.
It was in this context that Freeman & Reed made an attempt to resolve these dilemmas in part by focusing on the political nature of stakeholder power and its implications for corporate governance:
We have hesitated to suggest particular strategies for directors that find themselves in one of the conflict situations we have explored. Our goal has been, rather, to counterbalance the great weight of attention expended on changing the (perceived) status quo and mandating certain types of board structure of behavior with attention placed on a realistic appraisal of the current situation and a sensitive elaboration of the potential lines of action currently available.
In other words, there is no simple formula that managers or directors can apply to determining what they need to do. Rather they have to exercise their judgment in each situation and on each issue.
As noted above, Mitchell et al (1997) made an important contribution in this phase as well. In Corporate Social Responsibility (and its derivatives — CSR2 and CSP) the question had been around whether to take a wide or narrow view of a corporation’s responsibilities (ie did they extend beyond economic and legal?) while in stakeholder theory there was a similar dilemma regarding the definition of ‘stakeholder’. The business rationalists defined stakeholder narrowly as ‘stockholder’ while other views include
The Narrow Sense of Stakeholder: Any identifiable group or individual on which the organization is dependent for its continued survival. (Freeman & Reed,)
and
The Wide Sense of Stakeholder Any identifiable group or individual who can affect the achievement of an organization’s objectives or whi is affected by the achievement of an organization’s objectives. (Freeman & Reed)
Mitchell et al’s contribution was twofold. First they attempted to answer the questions “Who is a stakeholder and what is at stake?” (Mitchell et al, 1997) by identifying stakeholders and their influence along the dimensions of Power; Legitimacy, Urgency and Salience. Secondly they make the important call for
empirical research that answers these questions: Are present descriptions of stakeholder attributes adequate? Do the inferences we make herein hold when examining real stakeholder-manager relationships? Are there models off interrelationships among the variables identified (and possible others) that reveal more subtle, but perhaps more basic, systematics? (Ibid.)
Unfortunately, it appears their call for empirical research in this area has largely gone unheeded.
Clarkson claims to present results from a 10 year research program but rather presents conclusions without data and, at best, sketchy details of his methodology.
Jones (1995) cites studies by Alexander and Buchman (1978), Cochran & Wood (1984) and Sturdivant & Ginter (1977) but concludes “none has been based on a credible theory.”
In my next post in this series, I will look at the origins of Agency Theory and Shareholder Value.
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