Business Horizons (2007) 50, 449–454

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EXECUTIVE DIGEST

The evolution of corporate social responsibility

Kelley School of Business, Indiana University, 801 West Michigan Street, BS 4049, Indianapolis, IN 46202-5151, USA

1. CSR: My, how you’ve grown (and assertion that firms have a corporate social responsi-
changed!) bility. Although many other proponents of “sharehold-
er primacy” still disagree, by 1954, Professor Berle
Over the past several decades, corporate social famously declared that “the argument has been
responsibility (CSR) has grown from a narrow and settled (at least for the time being) squarely in favor
often marginalized notion into a complex and multi- of Professor Dodd’s contention” (Berle, 1954, p. 169).
faceted concept, one which is increasingly central to During the 1950s and 1960s, the United States
much of today’s corporate decision making. To the witnessed the birth of the modern activist movements.
extent that corporate social responsibility was even The modern civil rights movement gained momentum
discussed several decades ago, these discussions were with the 1954 decision of Brown v. Board of Education.
confined to a small group of academics. The environmental movement was at least in part
Among the first academics to debate the topic were sparked by the publication of Rachael Carson’s (1962)
Columbia professor Adolf A. Berle and Harvard pro- Silent Spring. Some trace the beginnings of the
fessor E. Merrick Dodd, in a series of articles featured modern consumer movement back to the publication
in the Harvard Law Review. Whereas Berle contended of Ralph Nader’s (1965) first book, Unsafe at Any
that managers were responsible only to a firm’s share- Speed. The Vietnam War of the 1960s and early 1970s
holders, Dodd argued that managers had a wider range swept these and other social movements together,
of responsibilities. In a classic exchange, Professor permanently changing the business environment in
Dodd (1932) asked: “For whom are corporate managers America and the world by ushering in an era of activist
trustees?” (p. 1145). Answering his own query, he groups and NGOs that are concerned about businesses
posited that corporate managers were responsible to and business practices, and which today often attempt
the public as a whole, and not just to shareholders. to focus media attention on business practices they
The crux of Dodd’s argument was his contention consider to be unethical or irresponsible.
Unwanted media attention can seriously tarnish
that, in addition to the economic responsibilities they
owed shareholders, managers had social responsibili- corporate reputation, which in turn can lead to
decreases in sales or employee dissatisfaction. If
ties to society because the modern large firm is “per-
firms do not react appropriately, this media attention
mitted and encouraged by the law primarily because it
can also lead to unwanted legislation and regulation.
is of service to the community rather than because it is
In today’s business environment, executives must
a source of profit to its owners” (Dodd, 1932, p. 1149).
either embrace corporate social responsibility or risk
This reasoning became the intellectual basis for the
serious consequences.
As a result, the focus of the debate changed in the
E-mail address: [email protected] 1970s from corporate social responsibility to

0007-6813/$ - see front matter © 2007 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2007.06.004
450 EXECUTIVE DIGEST

corporate social responsiveness. Late in the decade, new type of corporate philanthropy. In this piece,
William Frederick (1978) wrote a much cited working the authors noted that “[i]n the long run…social and
paper entitled From CSR1 to CSR2: The Maturing of economic goals are not inherently conflicting but
Business-and-Society Thought, in which he noted integrally connected” (p. 5). Further, they pointed
that firms were no longer simply involved in an out that many economic investments have social
academic debate about the ethics of different returns, and many social investments have economic
degrees of social responsibility. Instead, they were returns. Instead of trying to keep these two types of
pragmatically responding to various social pressures. returns totally separate, businesses should empha-
Thus, as various activist groups began applying media size projects that have both significant financial and
and other pressures to firms, the firms were reacting social returns. Although Porter and Kramer applied
by changing products, policies, etc. this principle to philanthropy, it could easily be
The term corporate social performance was first extended to virtually any form of CSR.
coined by Sethi (1975), expanded by Carroll (1979), The authors cited the Cisco Networking Academy
and then refined by Wartick and Cochran (1985). as an example. Initially, Cisco contributed networking
Basically, the idea behind corporate social perfor- equipment to schools in its region, basically as a
mance is the recognition that firms do have ethical goodwill gesture. It soon became clear, however, that
obligations and that they must also respond prag- these schools did not have the expertise to manage
matically to social pressures. The range of appro- the donated hardware. As such, some Cisco engineers
priate responses has, however, grown dramatically decided to help train involved teachers to maintain
over the past several decades. the equipment, and soon students were taking these
classes, as well. At that point, Cisco realized there
was a significant demand for such training, with over
2. From philanthropy to strategic 1 million unfilled IT jobs worldwide.
philanthropy In response, the company ramped up the program
and began systematically offering it in more and more
One of the pioneering aspects of corporate social schools. Then, at the urging of the US Department of
responsibility was corporate philanthropy. Although Education, they began to focus their academies in
early capitalists such as Andrew Carnegie were economically challenged communities. When the
renowned philanthropists, their charitable activities United Nations became interested, Cisco began
were pursued as individuals and not on behalf of opening academies in developing countries. Within
corporations. The era of modern corporate philan- five years, the firm had established nearly 10,000
thropy, when corporations began giving for purposes academies and graduated over 115,000 students,
not directly related to immediate corporate benefit, more than half of whom found employment in the IT
began in 1953 as a result of Smith v. Barlow. In this industry. Through the relatively minor investment of
decision, “the New Jersey Supreme Court cleared the $150 million, Cisco dramatically increased the pool of
way for A. P. Smith Manufacturing Company to donate trained network administrators. This benefited not
$1500 to Princeton University without violating share- only the students who were trained in network
holder interest” (Burlingame, 2004, p. 104). Barlow administration but also Cisco, by increasing the
opened the floodgates of corporate philanthropy. number and quality of network administrators.
In the decades that followed, the “gold standard” Porter and Kramer argue that firms should not
for corporate philanthropy was for firms to make simply throw money at good causes. If a firm has no
philanthropic contributions that would improve the competitive advantage in a given philanthropic area,
overall health of the larger society. This could include it is likely that any investment it makes in that area will
donations to universities, local operas, or any other have little to no long-run impact. This concept is
worthy social service cause. One major tenet of this similar to the business strategy of “sticking to your
phase of corporate philanthropy was that it be “from knitting,” which Peters and Waterman (1982) de-
the heart,” rather than focused on any clear business scribed when they contended that firms should
or “bottom line” gain. In fact, there was a stigma concentrate on their core competencies and not be
attached to activities that also produced benefits for distracted by other apparently interesting opportuni-
the firm. Many argued that activities that also enhance ties in which they have little to no expertise.
the firm’s bottom line should not be seen as “philan- Instead, Porter and Kramer suggest that firms use
thropic,” but viewed strictly as business decisions. the basic fundamentals of corporate strategy to find
An important intellectual tipping point occurred those philanthropic areas that not only benefit
with the publication of an article in the Harvard society, but also benefit the firm. From this view-
Business Review by Michael Porter and Mark Kramer point, organizations should find social needs that align
(2002), which built a powerful argument in favor of a with their particular expertise. For example, it would
EXECUTIVE DIGEST 451

seem to make little sense for a computer manufac- might screen out firms that operate in countries with
turer to spend funds on building homeless shelters. human rights abuses or repressive regimes, or those
This is not to suggest that the computer manufacturer that are categorized as terrorist states.
should not engage in philanthropy, but rather that Funds with positive screens invest in firms that
when it does so, it should engage in an activity or issue are viewed as socially responsible. Examples of such
closer to its area of expertise. In this case, a computer organizations include Herman Miller, IBM, Timber-
manufacturer might have a goal of providing free or land, and Starbucks, all of which tend to rank near
low cost computing solutions for the poor, and would the top of the most recent lists of ethical and
be wise to leave to a construction company the socially responsible firms. They have policies and
charitable provision of sheltering homeless citizens. practices lauded by the firm’s employees, custo-
Companies that focus on causes in their area of mers, and other stakeholder groups.
expertise will almost certainly be more efficient at
addressing social needs. In fact, Porter and Kramer
3.2. Social advocacy
suggest that firms should exploit this synergy A second focus of socially responsible investing is
between the social and the economic, rather than social advocacy. One example of social advocacy is
try to minimize it. the Investor Network on Climate Risk (INCR). The
INCR is a network of over 60 institutional investors
that is concerned with climate change. It consists of
3. From investing to socially responsible
representatives from major institutional investors, a
investing number of states, and over 15 countries. What unites
The modern history of socially responsible investing this disparate group is the recognition that either
(SRI) can be traced back to the activist movements of their investment portfolios or their beneficiaries are
the 1960s and 1970s. The real boost to social investing vulnerable to the risks posed by climate change. The
occurred in the 1960s, with the growing number of INCR holds conferences, funds research, and advo-
boycotts of firms that were doing business in South cates in the area of climate change. On occasion, it
Africa. Although but one factor in the eventual collapse will also lobby for climate change legislation.
of the white minority regime, this successful social 3.3. Community investment
movement provided the model for similar movements.
The central idea behind social investing is that it is The final strategy of SRI is community investing.
possible for groups of individuals to have an impact on Here, funds focus their investments in areas such as
the practices and policies of firms through market non-profits, cooperatives, small businesses, com-
mechanisms. By not purchasing or by selling the shares munity facilities, and affordable housing. The
of certain firms that are engaged in practices that the principle behind community investment is to make
stockholder finds objectionable, he or she can make a investments that will strengthen local communities.
small difference. Acting in unison, many stockholders
can make a major difference. This is similar to voting in
national elections: while it is very unlikely that any
4. From entrepreneurship to social
single individual can make a difference, the sum of all entrepreneurship
individuals can make a substantial difference. Social entrepreneurship is the process of applying the
Today, SRI is a large and sophisticated movement. principles of business and entrepreneurship to social
According to the Social Investment Forum (2006), problems. Social enterprises are enterprises devoted
$2.29 trillion in assets was socially managed in 2005. to solving social problems. The reason for their
This represents nearly 10% of all managed assets. existence is not to maximize return to shareholders,
Socially responsible investing entails following one but to make a positive social impact. One way to
of three broad strategies: screening, social advoca- envision social entrepreneurship is to picture how an
cy, or community investment. MBA might tackle a social problem. Presumably, an
3.1. Screening MBA facing a social problem would be concerned with
how to finance the operations, market the product,
Screened funds have either negative screens or and organize the enterprise. She would be very
positive screens. Those with negative screens weed concerned about measuring outcomes. She would
out firms that produce objectionable goods and recognize that it will be necessary to generate funds
services, or operate in distasteful industries or in order to pay for the ongoing social investments.
countries. Such funds run the gamut and often One of the best known social entrepreneurs is
exclude firms that deal in tobacco, alcohol, gam- Professor Mohammed Yunus, who founded the field
bling, defense, and nuclear power. In addition, they of micro lending. Professor Yunus’ first experiment
452 EXECUTIVE DIGEST

in micro lending occurred in 1972, when he lent $27 grant”), Drayton was in 2005 named one of America’s
to 42 families in rural Bangladesh so that each could top 25 leaders by US News & World Report. In 1980,
purchase a small inventory of items to sell for a Drayton founded Ashoka with an initial investment of
profit (Knowledge@Wharton, 2007). These loans $50,000. Today, Ashoka’s annual budget is in excess of
were subsequently repaid in full. $30 million. Since 1981, the organization has named
Following that and similar experiences whereby he over 1800 Ashoka Fellows from over 60 countries,
funded loans using his own money, Professor Yunus providing them with training, living stipends, and
founded Grameen Bank in 1976 as a trial to determine networking opportunities (www.ashoka.org).
whether it was feasible to systematically provide
credit and banking services without collateral to the
very poor (in his words, “the poorest of the poor”) in 6. From an MBA to an MBA in CSR
developing countries. After several years of testing, A number of MBA programs have begun to focus on the
Grameen Bank was able to achieve an astounding area of social responsibility and social entrepreneur-
repayment rate of over 98% (Yunus, 2002). As of ship. For example, Indiana University now offers a
March 2007, the institution had lent over $6.13 billion certificate program in Social Entrepreneurship for
(Grameen Bank, 2007), and earned a profit in all but graduate students. A joint venture of the Kelley School
three years of its existence. Of critical significance is of Business, the School of Public and Environmental
that once loans are repaid to Grameen Bank, these Affairs, and the Center on Philanthropy, the program
funds are recycled into the community by extending requires that MBA students (and others) take 18 credit
more loans. For pioneering work in micro credit, hours to prepare them to help solve social problems,
Mohammed Yunus and Grameen Bank were named using courses from all three of these highly rated
recipients of the 2006 Nobel Peace Prize. entities.
Green Mountain Coffee represents another type In 1993, the Harvard Business School created an
of social venture: it makes a profit, but at the same “Initiative on Social Enterprise.” This plan supports
time entertains a significant social mission. The “the creation, strategy, and management of social
firm, which produces a variety of fine coffees, also enterprises; the governance of social nonprofit
supports a wide range of social causes. The exclusive organizations; corporate involvement in the social
roaster, seller, and distributor of Newman’s Own Fair sector; and social capital markets” (Aisner &
Trade Certified coffees, Green Mountain gives at Kavanagh, 1999). The Initiative on Social Enterprise
least 5% of its pre-tax profits to a range of social now consists of one required MBA course and seven
initiatives. In addition, Green Mountain Coffee has elective courses, involving over 40 faculty and more
been recognized by Forbes magazine as one of the than 300 students in this innovative program.
“200 Best Small Companies in America.” The CSR movement has now reached the point that
at least one MBA program, Nottingham University (in
conjunction with Nottingham’s International Centre
5. From venture capital fund to social for Corporate Social Responsibility (ICCSR)), grants a
venture capital fund degree in the field. This MBA in CSR examines the full
range of socially responsible organizations, from for-
Supporting the growth in social ventures is a new type
profit through public. Students apply principles of CSR
of venture capitalist. Social venture capitalists not
and business ethics through the spectrum of functional
only supply seed money to social ventures, but also
courses. Ultimately, the program prepares individuals
engage in a rigorous process of training future social
for careers that will, at least in part, focus on CSR
entrepreneurs. For example, Echoing Green has
issues.
supported over 400 social entrepreneurs, as Echoing
Green Fellows, in the fundamentals of social enter-
prise. Covering individuals for two year terms, the 7. Corporate social responsibility and
company has invested $25 million in the program and profitability
has seen its Fellows subsequently raise an additional
$938 million, representing a nearly 40-fold leverage Several hundred academic studies have attempted
on the initial investment (Echoing Green, 2007). to analyze the relationship between corporate social
Beyond providing seed money and training, Echoing responsibility and profitability. A recent meta-
Green provides technical assistance, consulting help, analysis suggests “the cost of having a high level of
and networking opportunities. corporate social responsibility is minimal and that
Another social venture capital firm, Ashoka, was firms may actually benefit from socially responsible
founded by Bill Drayton. An early recipient of a actions” (Wu, 2006, p. 168). This finding is similar to
MacArthur Prize (sometimes referred to as the “genius results of earlier studies, such as Abbott and Monsen
EXECUTIVE DIGEST 453

(1979), and should not be surprising. Examining the are likely to be repeat customers. As a result,
marketing or the research-and-development litera- Starbucks can charge five to ten times as much for a
ture, like conclusions can be found. Although higher cup of coffee than does the local convenience store, in
levels of both marketing and R&D are often part due to the quality of the customer experience.
associated with higher profits, the actual relation-
ship is very difficult to parse out in empirical studies. 7.3. Governments
In fact, it is undoubtedly a function of the specific Strong government relations can also help companies
industry and the environmental conditions faced by in a number of dimensions. For example, such firms
any specific firm at any given point in time. are less likely to see seriously onerous regulations
Nonetheless, it is possible to find mechanisms by imposed on their industries, and are more likely to be
which CSR might enhance profitability by examining able to anticipate and react to new regulations.
the impact of social responsibility on various Importantly, they are expected to be able to help
stakeholders. It is important to understand this mold new regulations in ways that are less likely to
does not mean that firms which engage in socially damage their basic business practices. In a study of
responsible activities will always be more success- how firms can acquire strategic advantage through
ful. It is rare when a single factor can explain why political means, Schuler, Rehbein, and Cramer (2002)
any specific organization is successful or unsuccess- found that “firms with access to those who make
ful. In fact, the overall success of any organization is public policy enjoy competitive advantage” (p. 659).
a result of its entire portfolio of management
practices and policies, combined with industry and 7.4. Media
economic conditions, plus a certain degree of luck.
Positive media relations can be absolutely critical to
7.1. Employees organizations in today’s media rich environment.
Firms that are seen as socially responsible will have
Firms that have good employee relations are likely to
an edge over other firms, particularly those with
have significantly lower turnover rates and a substan-
socially irresponsible reputations. Companies of
tially more enthusiastic workforce. Consider the fact
good repute are much more likely to be believed,
that, in 2007, Google was named by Fortune magazine
and reporting on their activities will generally be
as the best company for which to work. In addition,
significantly more positive. Organizations that do a
many would claim the firm is one of the most “fun” for
poor job with media relations risk damaging their
employees: it offers free meals, a spa, and free med-
reputation (Motion & Weaver, 2005).
ical care on site (Fortune, 2007). Moreover, engineers
at Google are allowed to spend up to 20% of their time
working on projects of their own choosing. As a result 8. The bottom line
of all these perks, Google can choose from the best of
the best when hiring staff members; the company of Perhaps the most important intellectual break-
6000 employees receives over 1300 résumés a day. through regarding modern conceptions of CSR is
With an exceptionally low turnover rate and very high that socially responsible activities can, and should,
employee morale, factors such as these are likely to be used to enhance the bottom line. The corollary is
enhance Google’s bottom line over time. that most, if not all, economic decisions should also
In an important empirical study of this phenome- be screened for their social impact. Economic
non, Turban and Greening (1997) demonstrated that returns and social returns should not remain
“a firm’s CSP may provide a competitive advantage in quarantined in isolated units. Firms that success-
attracting applicants” (p. 658). The authors went on fully pursue a strategy of seeking profits while
to argue that firms develop a competitive advantage solving social needs may well earn better reputa-
by being perceived as great places to work. Clearly, tions with their employees, customers, govern-
Google falls into that category. ments, media, et cetera. This can, in turn, lead to
higher profits for the firms’ shareholders.
7.2. Customers
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