2.1.1. Shareholder rights and interests

As we have seen, the notion of stakeholders was developed to distinguish between the interests of shareholders and those of other parties whose interest in the company needs to be taken into account. However, following the critical line laid down by Friedman, the idea that other stakeholders may have the same status as company shareholders, given that in fine the shareholders own the company, has provoked strong reactions, notably from authors concerned with the theory of agency¹.

This theory notes the existence of tension, i.e. partially conflicting interests, between shareholders (the principal), owners of the company’s capital, on the one hand, and executives (agents) who control the company’s means of action, make decisions concerning production and are accountable to the shareholders on the other hand. In a joint-stock company, the owners of company capital have the power to nominate, control and sanction executives; the executives have the power to manage the company’s means of action. This power is exercised at company annual general meetings (AGMs) via the right to vote attached to each share. The AGM validates the management report presented by the administrative committee, the members of which are elected for a defined period by the shareholders at the AGM. The spread of joint-stock companies in the early 20th Century in North America and Europe led, as Berle and Means indicated [BER 32a], to a dilution of capital (which may be held by large numbers of shareholders), resulting in the emergence of managerial powers with the capacity to impose decisions on owners and/or shareholders. This forms the starting point for agency theory, a rational decision theory in a context of informational asymmetry that aims to define the best strategy for shareholders to follow, given that, in delegating power to executives, they lose the capacity to monitor all movements and decisions. While task sharing improves the economic efficiency of companies (leaving the management of financial input to shareholders and that of the means of action to executives), it also makes it harder to identify the locus of responsibilities between executives and shareholders [DAV 67, p. 48].

This notion of the company underpins the idea, used by Friedman, that one of the raisons d’être of profit is to remunerate shareholders, for the risk taken in investing, through the purchase of shares. Without this dividend-based remuneration, the incentive to invest disappears, and with it the strength of the capitalist production system. The primacy of shareholder interests is thus justified by the vital nature of their financial contributions and by the risk they take in investing their capital; this risk must be remunerated, at the expense of the interests of other shareholders. In US commercial history, the judgment in the case of Dodge Bros. versus the Ford Motor Company issued by the Michigan Supreme Court in 1919 marks a point of reference. Henry Ford wished to reinvest a large part of the profits made by the Ford Motor Company into the company in order to increase production and employment, reduce the sales price of his products and, in fine, improve the lives of his employees (vehicle consumers). The Dodge brothers, who then held 10% of the company’s shares, brought a case against Ford to prevent him from reducing stakeholder dividends. The Michigan Supreme Court judged in favor of the Dodge brothers, forcing Ford to give up his spending plans and to hand the profits over to the company’s shareholders. This judgment was used for many years to justify the primacy of shareholder interests over other “social” objectives.

This raises the question of whether shareholders may legitimately be considered as the only owners of the company in question. Well before the emergence of the notion of stakeholders, this issue was the subject of debate between legal specialists² and led to the creation of a theory for relativizing the importance of shareholder rights, without denying the property regime.

From the 1930s, Adolf Berle and Gardiner Means contested the idea that only shareholders should be taken into account in a firm’s strategic decision making. They interpreted the fact that shareholder responsibility had been limited (via the limited company structure used in the United States and Europe) as giving rise to a corresponding requirement that the company should not be directed to further their interests alone [BER 32a, p. 355]. The creation of a regime of limited responsibility (such as anonymous societies in France) prevented shareholders from being personally responsible for a company’s debts; their losses cannot exceed the amount paid for their shares, and there is no liability in terms of their personal wealth³.

In this case, if shareholders cannot be held responsible for all of a company’s debts, how can they require the entirety of the firm’s means of action to be devoted to the pursuit of their own personal interests? For Berle and Means, shareholders are considered as the passive owners of the company: they possess company shares (which they may buy, cede or transmit), perceived as a right which is “an infinetisimal claim on massed industrial wealth and funneled income-stream” [BER 32b, p. 1370]. However, this does not grant them rights over the means of action (infrastructure, material, employees, etc.), which relate to an active form of property represented by “the farm, the little business, the collection of tangible property which the owner can himself possess, manage and deal with” [BER 32b]. As passive owners (owners of shares, but not of the means of production), shareholders only have a limited right to direct company strategy in connection with their remuneration (dividends) alone.

Evidently, the imposition of limits of this kind on shareholder primacy is probably more relevant in cases where large numbers of small shareholders each possess a small amount of capital (for example via pension funds) than in cases where there is a majority shareholder who has the de facto power to direct decisions made by the AGM. However, even in this latter case, shareholders cannot be considered to be in total possession of the company [CIE 13, p. 146]. Owning shares in Renault, for example, does not grant possession of one of the factories where the vehicles are made. Furthermore, as David Ciepley states, following Berle and Means, if shareholders were treated as owners, then their personal wealth could be seized in cases of bankruptcy in order to pay off the company’s debts; as we have seen, this is not the case [CIE 13].

The distinction between passive and active types of property forms a basis for the idea that shareholders have limited property rights over the company (rights over produced wealth, proportional to their investment, but not over the means of production). For this reason, they only have a limited right to impose their interests. In parallel, this distinction offers other interest groups the possibility to have their voices heard. This open space echoes an increasing pressure imposed on company directors in the 1930s by American public opinion to recognize their responsibility to those whose welfare might be affected by the company’s activities [DOD 32].

From these debates, we see that even in recognizing the rights of shareholders to share part of the fruits of the activity of a company, within an asset/share-based vision of the company, there is still space for “social” responsibility of organizations. The strategic development of a company cannot focus exclusively on the need to remunerate shareholders, as their financial responsibility is limited and they do not possess the means of production. Countering Friedman’s radical theory and without questioning the shareholder property regime, the theories put forward by Berle and Means or Dodd show that stakeholders have a legitimate right to expect their interests to be taken into account.

Debates in the legal sphere in relation to this question also raise issues with regard to definitions of a company as a moral entity, and more generally concerning the possibility of using constraints of a moral, rather than judicial, nature in regulating economic activity.

2.1.2. The company as a locus of responsibility

The definition of the company as an entity varies radically depending on the discipline and the focal points of the theory in question. In economic theories, the enterprise is often reduced to its function: for example, in neoclassical microeconomics, no difference is made between the enterprise and the entrepreneur. “Producers”, characterized by the function of production, and the “firm” are seen as synonymous: they share the same interests and the same objectives, in maximizing the profit function under technical constraints. Agency theory, an offshoot of new microeconomics, aims to open the “black box” of the neoclassical firm, considering the company as a nexus of contracts characterized by an agency relationship between a principal and an agent to whom power is delegated in order to accomplish a mission [JEN 76].

Nevertheless, this perspective does not give institutional “depth” to the notion of the company. For Jensen and Meckling [JEN 76], the firm is simply a “legal fiction which serves as a nexus for a set of contracting relationships among individuals” [JEN 76, p. 310]. The firm is understood as neither an individual nor an institution, and it is meaningless to speak of social responsibility. It would be equally meaningless to speak of company “behaviors”, except as the result of a complex balance between the conflicting objectives of different individuals – a balance created within the framework of contractual relationships [JEN 76].

In this way, the authors highlight the difficulty of assigning intentions and volition to a company, but these conditions are necessary to the establishment of any form of responsibility⁴. The firm is a nexus of contracts, and decisions concerning its organization can only be attributed to physical persons. In contrast to law, which assigns criminal responsibility to moral persons, this type of argument denies the possibility of legal (and a fortiori “social”) responsibility [ROB 09]. As responsibility can only exist if a person is free to make decisions in relation to their own actions [GIA 16], how can a company be considered responsible if it is not an autonomous, conscious entity with the freedom to make its own decisions? Similarly, from a legal perspective, the notion of “social” responsibility, which stresses the need to take account of the effects of a company’s activity on “society”, remains vague. “Society”, as a whole, has no legal status, and the legal status of stakeholders is hard to define [ROB 09]. What, then, in legal terms, are the social entities to which companies should be accountable?

Even from a less radical perspective, business entities are systems of power, with heterogeneous legal bases [ROB 09]. This can be seen in the differences between the realities covered and denoted by a business entity, understood as a mercantile economic entity and the different legal status it can take as a business, a company or a corporation. On the one hand, the focus is on a system or organization permitting the production of goods and services via the use of a production factor (labor, capital, etc.) with the aim of creating profit. On the other hand, there are different legal statutes that establish different structures of liability, ownership and moral/individual personhood.

For this reason, certain authors [ROB 09, LAM 16] recommend the use of a primarily legal notion of responsibility instead of the idea of moral responsibility, as moral standards are not sufficient, lying outside of what might be expected of an entity such as a corporation. Matthew Lampert, following John Ladd, shows that a corporation cannot be seen as a moral person; in this sense, the attribution of social responsibility is meaningless. He thus disagrees with the conception of corporate responsibility as an implicit contract between a corporation and society. For Lampert, this understanding is simply a palliative measure responding to legal shortfalls, an “ad hoc solution to an age in which the legal responsibilities of corporations have all but disappeared” [LAM 16, p. 95]. On the other hand, he considers that there is an urgent need for explicit constraints that companies must respect, expressed in a way to which they are able to respond, i.e. via legal coercion [LAM 16, p. 98]. As Jean-Philippe Robé has also stated:

“What we need to attain is legal responsibility: something which can be translated into compensation, payments, in short, measureable consequences imposed on the guilty parties in cases of proven liability, due to the violation of an obligation” [ROB 09, p. 176].

For these authors, the law precedes voluntary norms in ensuring that companies, their directors and their employees as a whole adopt morally desirable behaviors. Ethical standards in CSR are seen as being inefficient at best, or even illusory; they consider that only the law can have a real influence over corporate behaviors. The debate surrounding the prevalence of law over morality, i.e. the notion that the law has a greater capacity to regulate human behavior (in comparison to morality, seen as susceptible to subjective and unfounded variations), is nothing new; its most “modern” aspects have their origins in the work of legal positivists such as Hans Kelsen [KEL 67] on defining a pure form of law, independent of morality.

From a practical standpoint, the importance of this notion, and to a certain extent the hegemony of law over ethics, can be seen in the appearance of a new form of business in the United States: benefit corporations (BCs).

The BC status first emerged in 2010 in Maryland, and had reached around 10 other states by 2013. As of late 2015, 30 US states had integrated BC status into their legal apparatus. BC denotes a commercial (for-profit) business status that is similar in many ways to classic corporations, such as limited liability companies; however, they must explicitly state and pursue a mission of a social or environmental nature. Company statutes must explicitly include the idea of a social benefit stemming from their activity, i.e. something that furthers the interest of society as a whole, and not just that of shareholders.

Financial profitability aims are thus placed on a legal par with the company’s “qualitative” performance, relating to its actions intended to benefit employees, local communities or the environment. Thus, shareholders and directors have the right to take legal action if the company fails to pursue its social objectives, and if the defined behavioral norms are not respected. Moreover, the social mission of a company can only be revised with the consent of two-thirds of its shareholders. Finally, BCs are subject to transparency requirements; each year, they are obliged to publish an activity report, evaluated according to the standards of an independent third party, which reviews social and environmental performance⁵.

This judicial innovation gives unprecedented legal weight to the militant aims of executives [LEV 12], as shareholders are free to demand recentering of a company’s aims on a social mission than on financial interests alone: for example, mergers or acquisitions that do not respect this mission may be refused. This approach is illustrated by two well-known examples. The first case concerns Patagonia, one of the first companies to incorporate under the BC legal structure⁶. Even before the introduction of this specific legal status, Patagonia was particularly attentive to its ecological impact (for example using organic cotton for garments, recycling, etc.). It then broadened its social goals to include the provision of a good quality of life for employees (decent wages for all individuals involved in garment production, even in overseas factories; good working conditions in its factories) and a variety of philanthropic activities (such as donations to environmental associations). The acquisition of BC status simply institutionalized a long-established responsible approach.

In a different vein, Greystone Bakery, a cookie and brownie manufacturer and the main supplier of these ingredients for Ben & Jerry’s ice cream, focused on establishing an open recruitment policy to combat “classic” racial or sexual discrimination while aiming to employ marginalized individuals, generally excluded from the workplace: individuals with no professional experience and potentially difficult personal histories, marked by prison sentences, illiteracy, domestic violence, addiction or homelessness. The company’s profits are handed over, in their entirety, to the Greystone Foundation, which finances accommodation and provides healthcare, training and childcare services to the poorest families. This “social” policy is reflected in the company’s slogan: “We don’t hire people to bake brownies, we bake brownies to hire people”.

The difference between companies incorporated as BC and other militant or engaged firms lies in the fact that their social objectives form part of their statutes, obliging company directors to respect these aims in the same way as those concerning financial profitability. Profitability is still, of course, essential: as all proponents of CSR note, it ensures the viability and durability of a project. However, this new form of society eases the pressure for short-term profit creation, in favor of a more equitable balance between the two, sometimes contradictory, objectives (profit and social welfare). Although costly philanthropic or militant activities could previously give rise to legal sanctions determined by shareholders, as in the case of Ford versus Dodge, this status gives executives the right to make decisions intended to serve the company’s assigned mission, even if they may be detrimental to the short-term financial interests of shareholders [LEV 12, p. 196].

This development in the US law (which has also had effects in Europe, with the adoption of a similar form of business in Italy) has been seen by Levillain et al. [LEV 12] as a perfect illustration of the primacy of law over ethics. For these authors, a significant legal development, penalizing failures in the pursuit of social objectives in the same way as economic shortcomings, is the only way of effectively influencing corporate practice. The law is thus seen as having a greater power to effect behavioral change than engagements based on CSR, which are sometimes brushed off as mere PR exercises, known as “greenwashing” or “fairwashing”.

In our view, these examples of legal innovations are more significant in demonstrating the necessity of an articulation between moral and legal responsibility than in highlight shortcomings in the notion and application of moral responsibility. The introduction of a new legal status such as the BC is a positive development, as it protects economic actors with altruistic aims from the primacy of financial interests. However, the capacity for contextual adaptation offered by voluntary norms, alongside the specific power they exert over the actors who create and freely decide to follow them, cannot be ignored [MAE 01, LEN 03]. While regulatory developments are desirable, they are not sufficient to completely replace ethical norms, which are complementary, rather than opposed, to legal approaches. As Goodpaster states [GOD 83, p. 21], a regulatory environment aiming to completely replace corporate responsibility, i.e. overriding any voluntary engagement in terms of CSR, would “suffocate” the capacity for moral initiatives, i.e. the possibility of creating new standards offering the best possible response to a range of contextual issues. By removing the voluntary dimension of CSR, we would lose an important source of normative creation, one which plays a significant role in developing standards for specific contexts. The importance of normative innovation will be shown in greater detail in Chapter 3.

Three main points emerge from these debates, mostly carried out by legal experts. First, social responsibility may be conceived as a way of taking account of stakeholder interests, even in the context of a wealth-based approach to business. Second, companies have moral responsibility, despite the fact that they do not have the same unicity and will as individuals in a decision-making context; this echoes the situation encountered in criminal law. In a way, corporate social responsibility may be seen as a projection of individual responsibility, in spite of the differences between the two types of entity: companies have neither emotions nor, notably, the right to vote [GOO 83, p. 15]. Finally, the binary opposition between law and morality is unhelpful, and the two levels of responsibility should be understood and articulated together. There is nothing inherent to the nature of the company, its definition or operations, which justifies an ontological denial of moral and legal responsibilities. Nevertheless, simply demonstrating the possibility of social responsibility and its compatibility with company status does not justify its intrinsic necessity. Two types of arguments have been used to defend the obligation for companies to respect social norms above and beyond financial profit alone, making use of instrumental and normative justifications: these will be analyzed in the following sections.

2.2.1. Ethical principles and informational asymmetry

From a theoretical perspective, a first series of arguments has its origins in microeconomics as applied to imperfect markets (i.e. markets that do not satisfy all of the requirements for pure and perfect competition⁷) that require the application of ethical standards external to the market.

In the mid-20th Century, Kenneth Arrow and Gérard Debreu offered the first modern demonstration of the existence of general equilibrium in economics, subject to certain hypotheses [ARR 54]. Both authors had previously proposed their own demonstrations of the two “fundamental theorems of the welfare economy”, which connect general equilibrium with social welfare. The first theorem states that a social organization in which individuals (consumers and producers) are free to consume, exchange and produce in order to maximize their welfare, under conditions of pure and perfect competition, leads to a pareto-optimal distribution of resources, in which no one person can increase their utility without reducing that of at least one other individual. The Pareto optimum is considered as a desirable normative goal.

This theorem is crucial, as it is considered as one of the fundamental normative justifications for economic liberalism. It demonstrates that the doctrine of laissez-faire, within a context of respect for fundamental democratic rights and freedoms, for markets in pure and perfect competition, leads to the greatest social good. However, as Arrow points out [ARR 73], markets are not always perfect; there are cases of informational asymmetry (moral hazard⁸ and adverse selection⁹) in which the simple rule of profit maximization is no longer effective. These markets therefore require the application of non-economic standards.

For Arrow, the need for additional standards to regulate market operations is illustrated by two paradigmatic cases: the second-hand vehicle market¹⁰ and the case of polluting companies. Consider the second case: in the absence of tax or regulations, a company which pollutes a watercourse over which it has no property rights in the course of its activities is not liable for any of the cost to the community (or to other companies) of cleaning the river. Without specific regulation, there is no obligation to clean the contaminated watercourse. This creates an incentive for further pollution, beyond desirable levels. Arrow concludes that, when a company imposes costs on other economic actors, which cannot be easily offset by an appropriate pricing approach:

“Some effort must be made to alter the profit-maximizing behaviour” [ARR 73, p. 307].

Generally speaking, in cases of informational asymmetry between buyers and sellers (as in the case of the second-hand car market) or when a company does not pay the costs of the damage it causes:

“It is clearly desirable to have some idea of social responsibility, that is, to experience an obligation, whether ethical, moral, or legal” [ARR 73, p. 309].

Arrow put forward an idea that was relatively foreign to the microeconomics of his time, while using the same tools: he insisted on the necessity of introducing forms of ethical constraint alongside legal or economic limits in order to increase market efficiency in cases where, left to their own devices, they would result in suboptimal distribution of resources.

According to Arrow [ARR 73, p. 311], the law does not adapt quickly enough, and rarely has the flexibility needed to respond to this type of problem. Ethical codes are therefore necessary (notably in cases with implications for sanitary or environmental security) to improve economic efficiency and regulate practice. The author gives the example of medical ethics that have been in place for many years in order to ensure stable relations between patient and physician. Without these codes, the element of trust required for successful treatment might be threatened by informational asymmetries between medical staff, who possess specific knowledge, and patients, who consult doctors precisely because they do not have this knowledge. Finally, Arrow [ARR 73, p. 315] calls for collective construction of standards, supported by institutions (including governments, consumer organizations and pressure groups). In order for codes of practice to be widely adopted and to contribute to the improvement of economic efficiency, they must be developed “as a consensus out of lengthy public discussion of obligations”, discussion which may be held in several public arenas: “legislature, lecture halls, business journals, and other public forums”.

Through his analysis, Arrow justifies a minimal form of social responsibility, which is both rational and necessary in the case of imperfect markets. Opposing Friedman’s radical theory, he demonstrates the existence of certain cases where entrepreneurial freedom and the pursuit of maximum profit alone do not lead to a social optimum. To obtain better social organization of resources, ethical norms are needed, in association with certain guarantees to ensure they are followed. These norms should be created through broad agreement between concerned parties.

2.2.2. Promoting profitable ethics

Taking a more empirical approach, works by Porter and van Linden [POR 95], also classics in their field, aim to demonstrate the potential positive impact of ethical norms on economic profitability. Focusing on the specific area of ecological responsibility, the authors highlighted ways in which companies increased their competitiveness through innovation when confronted with an increase in legal environmental regulations. Using a broad definition of innovation (which may relate to the development of a product or service, the market segment in question, the way in which the product is sold or adopted) [POR 95, p. 98], the authors analyzed cases where the strengthening of environmental standards stimulated innovation by forcing companies to restructure production, for example through waste reduction or by changing the primary resources used. They concluded that these benefits (increased productivity and competitiveness) offset the cost to companies of ecological taxes or CO₂ emissions thresholds, meaning that these measures constitute a good for both the company and the community.

These works do not yet fully justify the rationality of CSR approaches, as the companies studied simply respond to an externally imposed legal standard (whereas CSR, as we have seen, involves a voluntary engagement to take account of stakeholder interests). However, they stress the capacity of companies to adapt to constraints and show that the existence of norms to ensure that forms of production conform better the social good, while desirable from a moral perspective, also have a positive impact in a strictly economic sense; when applied “intelligently”, they may stimulate creativity and innovation.

In a later article, Porter and Kramer [POR 06] claim that the mutual dependency between societies and businesses implies that choices made by the latter must benefit both parties. This is the shared value principle. The authors aim to show how it is in the best interest of companies to respond to certain demands by citizens, particularly those expressed by shareholders, but that this approach should only be taken if it results in an improvement in economic performance. Thus, CSR is not only a communication tool. It becomes (and should be) a strategic tool for companies, i.e. a means of taking a position in the market in relation to their competitors, with a fundamental influence on the choice of a product and the organization of production. Taking the automobile industry as an example, the authors compare the position of Volvo, which bases its competitive strategy on safety, with Toyota, which has recently focused on environmental impact via the development of the Toyota Prius and hybrid engine technology (gas and electric). These examples highlight the existence of different strategies for exercising social responsibility, born of different interpretations of consumer interests and demands (safety in one case, environmental concerns in the second¹¹).

Many other authors have taken a similar approach, attempting to demonstrate ways in which concern for the common good can be in the best interests of companies themselves. As in the example cited above, “responsibility” is often defined as a function of the goals and objectives of the company. Taking a line that appears similar to that observed in the case of the Grameen–Danone partnership, presented in Chapter 1, Prahalad [PRA 02a, PRA 02b] studied the way in which new opportunities for profit emerged in India when groups usually excluded from the market, due to their very limited financial means, began to be considered as commercial “targets”. In these cases, innovation resulted in an improvement in the quality of life of the poorest segments of society by increasing the accessibility of goods, and transformed them into a non-negligible source of profit (as seen in the case of Tata Group, Indian commercial giants specialized in the sale of low-cost vehicles and mobile telephones).

However, the notion of shared value has attracted criticism from within the pro-CSR camp based on the fact that sustainable pursuit of both financial and social goals is not always possible [CRA 14, p. 136]. Wilburn and Wilburn [WIL 14, p. 6] stress the fact that ethics tends to come off worst in the relationship between the two aims: companies who use the concept of shared value “may not have an intent to do good unless it provides profit” [WIL 14]. They are under no obligation to change their behaviors if new problems emerge that reduce their profits. There is thus a considerable difference between the social business model, as in the case of Grameen Danone, in which all profits are reinvested into the company, i.e. to serve the purpose defined by the partnership, and the approach taken by the various companies which make up the Tata Group, for which new, socially disadvantaged consumers are, primarily, sources of profit. The authors also note that in the case of projects embedded within a local environment, there is always a risk that a company may withdraw from the community leaving projects unfinished, or “create an environment in which the community must pay extra for services it did not want to begin with” [WIL 14]. Examples of this include problems created by companies launching waste reprocessing programs in disadvantaged communities, before pulling out abruptly due to insufficient profitability.

The debate surrounding the notion of shared value illustrates, once again, the intrinsic tension between economic and ethical objectives that is at the heart of both theory and practice in CSR, along with the positive or negative dynamics that may result. While the creation of a constant correlation between ethical constraints and financial profitability, as suggested by Porter and Kramer, seems difficult to achieve, their work remains useful in demonstrating the strategic advantage for companies of articulating the best interests of the company with social welfare aims based on the satisfaction of social standards. Ethical engagement and profitability may go hand in hand, although this cannot be seen to be a general rule (see section 2.2.4); it would be foolish to miss out on the positive dynamics created by certain forms of normative constraint in promoting innovation and efficiency.

2.2.3. Stakeholder interests and transaction costs

A final set of instrumental arguments in favor of CSR is drawn from stakeholder theory (SHT), in which the company is seen to form part of a network of affecting and affected actors (see Chapter 1). Taking account of stakeholders is one strategic challenge among others, with the capacity to improve the economic performance of the company [FRE 84, LAN 94] by reducing certain costs [JON 95, JEN 02]. This is the case for employee productivity, which is intrinsically linked to company performance, and which may be positively affected by the nature of relationships between employees and directors and by the existence of a positive company culture. The strategic relationships between a company and its clients, suppliers, local public authorities and local communities, which may be affected by its activities, are also important factors in increasing productivity.

Furthermore, a series of scandals during the 1990s pushed major international groups (including Nike, Coca Cola and Danone) to give serious attention to stakeholders such as the media, non-profits and other pressure groups with the capacity to influence public opinion, damage brand and group image, and affect sales and performance. These events clearly show the appearance of a dual requirement to maintain a good reputation, thus creating value [MAI 03], while establishing a relationship of trust with certain stakeholders.

In this context, SHT provides a particularly interesting conceptual framework, allowing the modeling of strategic relationships between a company and its stakeholders, using formalized language drawn from organizational theory, a branch of economic theory focused on the strategy and management of firms. Compared to other CSR approaches, SHT provides working hypotheses that can be tested empirically and permits a hypothetico-deductive form of validation; this is a significant reason for its success in management circles (both in theory and practice).

Jones [JON 95], in an attempt to rationalize stakeholder actions, proposed a defense of SHT within the theoretical framework of agency theory and the transaction cost theory¹². He showed that the application of ethical principles by firms in their relations with stakeholders bestows a competitive advantage on the company. By investing resources in the creation of trust, loyalty and cooperation-based relationships with stakeholders (employees, suppliers or interest groups with the capacity to damage its image), companies are able to avoid significant costs. These include costs stemming from opportunistic behavior by an agent, pursuing their own interests to the detriment of that of the company (shirking employees, suppliers failing to control the quality of provided goods) and the resulting costs of prevention (quality control activities in relation to work carried out, purchased products, etc.). Citing empirical work, for example based on the Prisoner’s Dilemma – in which a lack of cooperation causes individuals to select an option that is not in their own best interests¹³ – Jones aims to show that agents who behave in a moral manner (free from duplicity, lying or cheating) make better partners in principal/agent relationships, thus reducing the transaction costs payable by the principal. Jones [JON 95, p. 420] extended this reasoning to companies: directors who carry out their economic activities in an ethical manner, respecting principles of trust, loyalty and cooperation with stakeholders, limit costs associated with damage to their reputation (which can entail colossal expenses in PR terms) and attract employees with similar principles, reducing problems of adverse selection and the associated monitoring costs.

Similarly, relationships between a company and its suppliers benefit from the existence of mutual trust, which may reduce the need for costly vertical integration, as seen, for example, in cases where automobile constructors buy out their electronic component suppliers. Creating and maintaining trusting relationships reduces the potential cost of legal action in cases of breach of contract, and those resulting from the various forms of monitoring required in order to guarantee the quality of a product provided by a supplier. From this perspective, investment in strong relationships with primary (employees, suppliers and clients) and secondary stakeholders (the media, non-profits) makes companies more competitive, reducing unnecessary expenditure. This type of argument is clearly represented in the slogan “Good Ethics is Good Business”.

Taking a related approach, Michael Jensen aimed to combine the rationality of neo-classical analysis with concern for stakeholders, using the attractive notion of “enlightened” value maximization [JEN 02]. Jensen’s starting point is the idea that SHT can only be defended in terms of the primary objective of businesses, i.e. long-term maximization of commercial value. Thus, where SHT is perceived as being incomplete and dysfunctional, this is due to the fact that it requires businesses to take account of a variety of potentially conflicting interests. The author presents a list of demands to which companies need to respond, not without a degree of irony:

“Customers want low prices, high quality, expensive service, etc. Employees want high wages, high quality working conditions, and fringe benefits including vacations, medical benefits, pensions, and the rest. Suppliers of capital want low risk and high returns. Communities want high charitable contributions, social expenditures by firms to benefit the community at large, stable employment, increased investment, and so on” [JEN 02, p. 241].

How, then, are companies to choose which of these interests to focus on? In Jensen’s opinion, SHT fails to respond to this question, and only an “objective” function, such as long-term maximization of company value (defined as “the sum of the values of all financial claims on the firm including equity, debt, preferred stock, and warrants” [JEN 02, p. 236]) may be used to weight and select from these different claims.

However, there is a crucial difference between this approach and classical micro-economic hypotheses, in that the maximization of the company’s objective function is a long-term, and not solely a short-term, goal. This focal shift, echoing the suggestions made by Carroll and Shabana ([CAR 10, see Chapter 1), enables the inclusion of “constituencies” in information for consideration by the company; it would not be rational to ignore their demands. Jensen thus recommends the maximization of a single function, the long-term value of the company, but this may depend on multiple variables, including stakeholder claims. More precisely, this “enlightened” version of SHT states that it is only rational to spend an extra dollar to further stakeholder interests if the long-term value of this expenditure for the company is equal to at least an extra dollar [JEN 02, p. 242]. In other terms, stakeholder interests only need to be taken into account in cases where doing so increases the value of the company in the long term.

This criterion makes it possible to differentiate between interests that should be satisfied (those which reduce future costs or create value) and those which should not. Without a rational weighting mechanism of this type, directors will be inclined to pursue their own best interests, i.e. to focus company efforts on attaining the best possible short-term financial performance, measured in terms of profit, or, “even more silly”, as Jensen puts it, in terms of earnings per share. In the absence of decision criteria, there is also a high risk of directors ceding to pressure from the most influential stakeholders at the expense of company sustainability. Enlightened SHT thus enables choices to be made on the basis of rational criteria, and engages the responsibility of directors, who become accountable in terms of the way in which they evaluate and weight the interests of stakeholders to maximize the firm’s long-term market performance [JEN 02, p. 246].

While the specific arguments used are different, Arrow’s analyses of the need for ethical norms in cases of market imperfections, Jones’ views on reducing transaction costs through investment in stakeholder relationships and Jensen’s notion of enlightened SHT stem from the same consequentialist logic. The normative value of company engagement in promoting stakeholder interests is measured via the consequences of this engagement in terms of economic efficiency and financial profitability. Social responsibility is thus rationally and morally desirable if, and only if, it generates significant profits. This instrumental strategy is often contrasted with so-called “normative” justifications for responsibility, which justify the suggestion that directors should follow moral principles of action on the basis of neo-Kantian, Rawlsian, Libertarian, feminist or Aristotelian ideas (see section 2.3). This is the case, for example, of Donaldson and Preston’s [DON 95] proposed distinction between descriptive SHT (concerned with the best means of organizing strategic relationships with stakeholders: [BEN 98, AGL 99, MIT 97, OGD 99], for example); instrumental theories, for which taking account of stakeholders increases the efficiency and economic performance of a company; and the normative theories mentioned above. As we saw in Chapter 1, Garriga and Melè [GAR 04] also identify several types of CSR theory: political, integrative, instrumental and ethical.

From a philosophical standpoint, it would be wrong to see instrumental justifications as non-normative, as suggested by the distinction between instrumental and specifically “normative” or “ethical” justifications. The idea that ethical management of stakeholders creates improved prospects in terms of profit is built on a theoretical foundation that is, itself, open to empirical investigation (for example [OGD 99]), something which is not always true of so-called normative theory. However, it still includes a normative dimension, if and when economic efficiency is taken to be the only truly desirable end. The view that economic efficiency is connected to the quality and nature of dialog and interactions between a company and its stakeholders is not, in and of itself, prescriptive; this type of argument states that if we want x, then we need to y [JON 95, p. 406]) However in most cases, the only stated objective is an increase in productivity, and hence in profits. The theory thus begins a slow and implicit descent into the normative domain. The moral nature of these consequentialist arguments, however pragmatic and instrumental they may be, needs to be fully recognized; otherwise, there is a risk that instrumental arguments may be seen to be more “rational” than those with their origins in “normative” theories, which take their reasoning from deontological approaches to morality or to the ethics of care. In terms of the structure of moral reasoning, all three types of argument are equally rational. Any distinction between them must be based on the use of different normative theories, which need to be disclosed in order for enlightened choices to be possible.

This being said, a final argument from the instrumental family of justifications for CSR concerns the potential for empirical correlation between economic efficiency and corporate responsibility, i.e. the existence of a causality connection between the two events, which might be demonstrated through quantitative or qualitative data analysis.

2.2.4. The search for empirical correlation

Running parallel to the theoretical debate, a significant portion of CSR literature has aimed to demonstrate and measure a positive correlation between the pursuit of social “performance” (such as the fulfilment of environmental goals or a social mission) and economic performance. Works that have attempted to demonstrate the existence of positive, neutral or negative correlation between these elements include: [FRO 97, GRI 97, KEY 98, ROM 99, WAD 97, MAR 01, MAR 03, MAR 07, ORL 03, ALL 05, LEE 08, LYO 08, REI 08].

The meta-analysis carried out by Margolis et al. [MAR 07] made use of data from 251 studies on the connection between CSR and economic performance. The authors identified several dimensions of social performance presented in these studies (among others, the general company policy, their propensity to publish annual reports containing information about their environmental actions, donations, the existence and public awareness of bad practice, or the use of external auditors). The authors consider that, in the cases demonstrating a positive connection between “social” and financial performance, this connection is only weak.

Vogel [VOG 05a, VOG 05b] and Forget [FOR 10, CRI 15] also found the results of existing studies to be inconclusive. Following extensive literature reviews – carried out independently – the two authors concluded that no significant correlation can be demonstrated between the two variables. It is impossible to prove empirically that corporate engagement in responsible practices improves financial profitability. The mixed history of success and failure seen in the case of companies such as Starbucks, often presented as an example of a responsible business (for example due to their use of fair-trade coffee and their self-imposed environmental policies)¹⁴ clearly demonstrates the relative disconnection of economic performance and responsible engagement [VOG 08]. Far from leading to automatic wealth increases, the adoption of more responsible practices should, like any other function of a business (such as marketing or advertising), be implemented in a strategic and appropriate manner [VOG 05a, VOG 05b]. In order to enable an increase in profits, a company must notably take account of risks in terms of potential return on investment:

“The risks associated with CSR are no different from those associated with any other business strategy; sometimes investments in CSR make business sense and sometimes they do not. Why should we expect investments in CSR to consistently create shareholder value when virtually no other business investments or strategies do so?” [VOG 05a, p. 33].

While engaging in CSR has improved the profitability and financial performance of certain companies, this is not the result of a permanent causal law, but rather because the underpinning strategic options were implemented in an efficient and coherent way.

Goodpaster [GOO 83] expressed a similar view, writing:

“The morally responsible individual is inevitably, and perhaps not lamentably, caught up in managing the creative tension between internal and external perspectives on his or her conduct… An organization, like an individual, can be and often is caught up between an ‘interested’ and a ‘disinterested’ perspective on its own decisions…The point is that corporate moral responsibility, like its analogue in the individual, requires management: management of people and resources, but most importantly what we might call self-management” [GOO 83, p. 19].

Finally, systematic opposition of profit and morality is pointless; the two objectives need to be balanced. Management is the key to success. The challenge for companies is not to make a binary choice between profit and responsibility, but rather to combine these interests, in spite of their potential for opposition.

While empirical approaches are helpful in shedding light on real practices in terms of responsibility, from a theoretical perspective, the question of motivation for responsibility remains to be answered: consequentialist arguments cannot provide an unassailable defense for the idea that increased attention to stakeholder interests within a company leads to guaranteed benefits, either for society or the company. Ethical and responsible businesses are not always highly profitable; no mechanism or law can guarantee that by accepting responsibility toward stakeholders, social actors will further the interests of a company in the form of improved economic performance.