b u s i n e s s
Corporate Social Responsibility
Can Be Profitable
orporate social responsibility (CSR) is a doctrine that promotes expanded social stewardship by businesses and organizations. CSR suggests that corporations embrace responsibilities toward a broader group of stakeholders (customers, employees and the community at large) in addition to their customary financial obligations to stockholders. A few examples of CSR include charitable giving to community programs, commitment to environmental sustainability projects, and efforts to nurture a diverse and safe workplace.1 As more attention is being paid by outsiders to the social impact of businesses, corporations have acknowledged the need for transparency regarding their social efforts. In a recent survey, 74 percent of the top 100 U.S. companies by revenue published CSR reports last year, up from 37 percent in 2005. Globally, 80 percent of the world’s 250 largest companies issued CSR reports last year.2 Is CSR Socially Desirable?
By Rubén Hernández-Murillo and Christopher J. Martinek
Despite the apparent acceptance of CSR by businesses, many economists have taken a skeptical view of CSR and its viability in a competitive environment. Milton Friedman, in particular, doubted that CSR was socially desirable at all. He maintained that the only social responsibility of a business is to maximize profits (conducting business in open and free competition without fraud or deception).3 He argued that the corporate executive is the agent of the owners of the firm and said that any action by the executive toward a general social purpose amounts to spending someone else’s money, be it reducing returns to the stockholders, increasing the price to consumers or lowering the wages of some employees. Friedman 4 The Regional Economist | April 2009
pointed out that the stockholders, the customers or the employees could separately spend their own money on social activities if they wished to do so. Friedman, however, also noted that there are many circumstances in which a firm’s manager may engage in actions that serve the long-run interest of the firms’ owners and that also have indirectly a positive social impact. Examples are: investments in the community that can improve the quality of potential employees, or contributions to charitable organizations to take advantage of tax deductions. Such actions are justified in terms of the firm’s self-interest, but they happen to generate corporate goodwill as a byproduct. Furthermore, this goodwill can serve to differentiate a company from its competitors, providing an opportunity to generate additional economic profits. Friedman’s argument provoked economists to explore the conditions under which CSR can be economically justified. Economists Bryan Husted and José de Jesus Salazar, for example, recently examined an environment where it is possible for investment in CSR to be integrated into the operations of a profit-maximizing firm. The authors considered three types of motivation that firms consider before investing in social activities: • altruistic, where the firm’s objective is to produce a desired level of CSR with no regard for maximizing its social profits, i.e., the net private benefits captured by the firm as a consequence of its involvement in social activities; • egoistic, where the firm is coerced into CSR by outside entities scrutinizing its social impact; and • strategic, where the firm identifies social activities that consumers, employees or
investors value and integrates those activities into its profit-maximizing objectives. In agreement with Friedman, Husted and Salazar conclude that the potential benefits to both the firm and society are greater in the strategic case: when the firm’s “socially responsible activities” are aligned with the firm’s self-interest. Strategic CSR
Similarly, economists Donald Siegel and Donald Vitaliano examined the theory that firms strategically engage in...
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