Corporate Social Responsibility: Stakeholders

This particular paper is based on the stakeholders perspective towards a CSR. The arguments in this paper include the stakeholder theory, stakeholders and CSR relations and finally the stakeholder’s perspective on CSR. Corporate social responsibility has evolved as a global phenomenon that encompasses businesses, consumers, governments, and civil society, and many organizations.

There are various definitions proposed by various researchers for Corporate Social Responsibility (CSR), but still it remains an uncertain and is poorly defined with few explanations. First, the issues that a CSR must address should be easily interpreted so that it includes virtually everyone and everything. Second, with its unique, often particular characteristics, different stakeholder groups tend to focus only on specific issues that they believe are the most appropriate and relevant in organizations’ corporate social responsibility programs. Thus, the beliefs about what constitutes a socially responsible and sustainable organization depend on the perspective of the stakeholder. This will be further elaborated in the later parts of the paper.

Defining Corporate Social Responsibility and Stakeholders

Although the most basic of definition CSR describes it as a social obligation for an organization (Bowen, 1953), which is conceptually and operationally diverse. The World Business Council for Sustainable Development in its publication Making Good Business Sense by Lord Holme and Richard Watts, used the following definition (Mallen’s CSR blog).

Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.

Stakeholders are described broadly by Freeman and Reed (1983) as any identifiable group or individual who can affect the achievement of an organization’s objectives or who is affected by the achievement of an organization’s objectives.

In other words, a person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization’s actions, objectives, and policies. Key stakeholders in a business organisation include creditors, customers, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources.

Although stake-holding is usually self-legitimizing (those who judge themselves to be stakeholders are stakeholder), all stakeholders are not equal and different stakeholders are entitled to different considerations. For example, a company’s customers are entitled to fair trading practices but they are not entitled to the same consideration as the company’s employees.

Stakeholder Theory

As noted previously, the term stakeholder stands for concerned constituencies who are affected by or able to affect a corporation (Freeman & Reed, 1983). Stakeholder as an umbrella term for groups with a vested interest in an organization includes customers, employees, business partners, communities, investors and the environment.

The theoretical framework of this paper reflecting stakeholder’s perspective is thus based primarily on stakeholder theory. Stakeholder theory of the firm proposes that the nature of an organization’s stakeholders, their values, their relative influence on decisions and the nature of the situation are all relevant information for predicting organizational behaviour and outcomes (Brenner and Cochran, 1991). The objectives of a corporation can only be achieved by protecting and balancing the interests of these different groups of stakeholders. The pluralistic nature of stakeholder theory is based on the notion that there are many groups in society besides owners and employees to whom the corporation is responsible (Freeman, 1999). As a descriptive theory, stakeholder theory has been used to describe the nature of the firm (Brenner and Cochran, 1991), management of corporations, and how board directors think about the interests of corporate constituencies. From an instrumental perspective, the theory is used to identify the connection between stakeholder management and the achievement of corporate social responsibility (Kotter and Heskett, 1992). In this respect, the theory can be regarded as a perspective of the firm that focuses on the question of which stakeholders deserve or require management attention.

Concern for Stakeholders

The concern for stakeholders by corporate leaders is expected to have a significant influence on the formulation and implementation of a firm’s strategy (Frooman, 1991). Such a concern will also have significant impact on how the strategies an organization uses to deal with multiple stakeholders will change as the organization evolves through the stages of formation, growth, maturity, and decline or revival. This will provide a relevant framework for assessing the roles, rights, responsibilities, and legitimacies of different actors in the interaction between organizations and their environment (Freeman, 1999). The concern for stakeholders by corporate directors has some important implications for corporate governance. Corporations can be more responsive to the interests of society as a whole by incorporating the participation of stakeholders in their boards of directors. The stakeholder approach to the role of the governing board expects the organization leaders, such as corporate directors, to negotiate and compromise with stakeholders in the interest of the corporation.

Stakeholder Approach to Corporate Social Responsibility

The prevalence of stakeholder theory is grounded in the belief that CSR-stakeholder relationships are the essential assets that corporates must manage. While CSR aims to define what responsibilities business ought to fulfil, the stakeholder concept addresses the issue of whom business is or should be accountable to. Both concepts are closely inter-related. However, while the CSR concept still suffers from a level of abstraction, the stakeholder approach offers a practical alternative for assessing the performance of firms as well as the key stakeholder groups.

Stakeholder theory has accordingly witnessed a new revival and dominance in the context of CSR. Brenner and Chochran suggested as early as 1991 that stakeholder theory holds the promise of becoming the theoretical centre-piece in a field that is searching for workable paradigms. Doh and Guay (2006) similarly find the adoption of a stakeholder model as a potentially appropriate and insightful theoretical lens, given its ability to systematically identify social stakeholder issues, and establish specific measures of performance. An organization’s stakeholder management data can thus be gathered and compared to other firms within and across industries, making social auditing for internal and external use both practical and possible. Along these lines, this paper has tried to make the case for a stakeholder approach to CSR, by arguing that:

(1) Stakeholder theory in all its three veins or branches can bring to the fore a set of new insights for CSR academics and practitioners;

(2) The language of stakeholder theory is easy to grasp by corporates as most firms understand and define obligations and responsibilities as well as their traditional stakeholders; and

(3) Stakeholder theory seems easier to plan in collecting and analysing CSR data as evidenced by the proliferation of empirical studies that have essentially integrated a stakeholder approach to CSR.

It thus increasingly represents a concrete alternative to traditional models. It is also noticed that the stakeholder management is affected by the relational attributes of stakeholders and the pressures they can exert on corporations, while also noting the increased proficiency of corporates in balancing a broader range of stakeholder interests.

CSR in the Stakeholder’s Perspective

Corporate now has spent decades to promote not only a firm’s economic but also a social responsibility. This challenged a discussion in corporations what corporate responsibility should be. In the past, the CSR approach was useful to foster these important discussions and thus it is important to analyse it from different perspectives, for what CSRs should be responsible. It seems that the CSR responsibilities are not very promising to understand real-world situations for three main reasons. First, the concept of CSR itself is not distinguishable as most decisions of businesses are not purely economic, legal, ethical, or philanthropic. Consequently and by agreeing with Freeman (1994), the separation of economic and social responsibilities to which the CSR approach contributes is rejected. Second, another argument raised by Freeman (2004) against the CSR concept comes in the form of a risk that business could treat their CSR activities as moral substitutes to compensate for other irresponsible activities. And third, we argue that the general responsibilities implied by the CSR approach can’t neither account for the specificity of an individual firm nor for the specific stakeholder network where it is embedded in.

Summing up, it can be claimed, similar to Freeman (2004) that corporate responsibility should refer to a firm’s strategically relevant stakeholders. Thus, mainly the instrumental framework of the stakeholder’s view, that sees strategic stakeholders as the core of corporate wealth creation. Within the stakeholder view, stakeholders can be defined as ”all individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and are therefore its potential beneficiaries and/or risk bearers”.

Based on this definition the stakeholders can be distinguished in four categories: benefit-providers/receivers and/or risk-providers/bearers. This comprehensive stakeholder perspective not only considers resource-based (e.g. employees, investors) and market-based stakeholders (e.g. customers, business partners, competitors) but also social and political stakeholders (e.g. government, non-governmental organizations (NGOs) media).

The stakeholder view framework is used here because its normative core i.e., a comprehensive understanding of property rights is one of the most important principles of our society (Friedman, 1970). The stakeholder view enhances the idea of property right to not only those parties who provide financial resources but also to all those that contribute other firm-specific investments such as knowledge, networks etc. We argue that such a consideration of stakeholders as those individuals and groups that contribute to the firm’s wealth creation process can serve as a useful foundation for thinking about corporate responsibilities. It is thereby important that this wealth creation process is not viewed in a one-sided fashion from the corporation’s perspective, but also from the stakeholders’ perspective. The corporation is only legitimized in its existence if it creates wealth for and with its strategic stakeholders.

Therefore in the stakeholder view, the origin for the responsibility concerning firm’s stakeholders is based on their existence and position within the corporate wealth creation process. In the stakeholder view, the stakeholders ought to participate because corporate wealth distribution is organized according to the stakeholders’ contributions and their risk adoption in the wealth creation process. Similar to the shareholders who are compensated for the use of their capital and the risk involved, all other relevant stakeholders ought to be included in the wealth distribution.

After the expenditures have been compensated according to the complete contracts, a residual profit emerges from which not only the shareholders, but also all other strategically relevant stakeholders should benefit. In reality, the assessment of all these values is not necessarily predetermined. Rather, scopes of discretion exist, as can be experienced in determining the compensation of shareholders. Thus, the dissemination of residual profits to the stakeholders is subject to scope of discretion.

Summing up, the stakeholder view claims for a corporate responsibility that takes into account stakeholders’ contributions to the corporate wealth creation process. Therefore, the firm is responsible to reduce risk and increase benefits for stakeholders at one side but also for a fair distribution of benefits at the other side.