Origins of CSR and Stakeholder Theory

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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