CSR and Stakeholder Theory: A Tale of Adam Smith

1 CSR and Stakeholder theory : a tale of Adam SmithJill A. Brown William R. ForsterReceived: 26 May 2011 / Accepted: 15 February 2012 Springer Science+Business Media 2012 AbstractThis article leverages insights from the body ofAdam Smith s work, including two lesser-known manu-scripts theTheory of Moral SentimentsandLectures inJurisprudence to help answer the question as to howcompanies should morally prioritize corporate socialresponsibility (CSR) initiatives and Stakeholder makes philosophical distinctions between justice andbeneficence and perfect and imperfect rights, and weleverage those distinctions to speak to contemporary CSRand Stakeholder management theories. We address theoften-neglected question as to how far a company shouldbe expected to go in pursuit of CSR initiatives and we offera fresh perspective as to the role of business in relation tostakeholders and to society as a whole. Smith s moralinsights help us to propose a practical framework oflegitimacy in Stakeholder claims that can help managersselect appropriate and responsible CSR Smith Beneficence Corporate socialresponsibility Justice Perfect rights StakeholdersIntroductionFor decades, scholars have discussed the relationshipbetween business and society in the context of corporatesocial responsibility (CSR) (Carroll1979) and stakeholdertheory (Freeman1984).

2 Many different philosophicalapproaches have been cited in this discussion, especiallyregarding the challenge of integrating the ethical perspec-tive of CSR with the practical, managerial orientation ofstakeholder theory (Mele2008; Parmar et ;Windsor2006). On the CSR side, these approaches haverun the gambit from positivist/instrumental approaches(Jones1995; Wartick and Cochran1985) to normativeapproaches that are derived from a variety of deontologicaland teleological philosophies (Scherer and Palazzo2007).On the Stakeholder theory side, ethical components can bedrawn from several sources including the Principles ofCorporate Rights and Corporate Effects (Evan and Free-man1988), pragmatism (Freeman et ), the nor-mative viewpoint of businesses as moral agents (Donaldsonand Preston1995), and Stakeholder applications like thePrinciple of Fairness (Phillips1997). This article offers adifferent perspective through the lens of Adam Smith (circa1759).

3 Although Adam Smith s articles have primarilybeen used in economic theory , they also contain importantethical aspects that have broad implications for both CSRand Stakeholder theorists. This article leverages insightsfrom the body of Smith s works including two lesser-known manuscripts theTheory of Moral Sentiments(Smith1759) andLectures in Jurisprudence(Smith1762) to shed light on how companies might use theconcepts of justice and perfect rights to prioritize stake-holder claims from economic and moral standpoints tosatisfy both business and is an important issue as CSR and Stakeholder the-orists sometimes do not agree as to both the nature andlimits of business responsibilities owed to society. CSRscholars have long argued that companies have ethical andmoral obligations to society that, while not required, areexpected (Carroll2004). Stakeholder theorists have arguedJ. A.

4 Brown (&) W. R. ForsterCollege of Business and Economics, Lehigh University,Bethlehem, PA 18015, USAe-mail: R. Forstere-mail: Bus EthicsDOI while there are normative, ethical elements to stake-holder theory beyond its managerial, social science appli-cations, these are separate and distinct (Freeman1984,1994,2002; Jones and Wicks1999). In this regard,researchers on both topics are quick to point out that CSRand Stakeholder theory are not the same thing. They aredelineated by differences in the CSR obligations of busi-nesses to society and the Stakeholder responsibilities ofbusinesses to their firm-specific stakeholders to createvalue (Berman et ; Freeman and Liedtka1991;Freeman and Velamuri2006; Mele2008). The theoreticaldebates regarding the similarities and differences betweenCSR and Stakeholder theory have arguably muddied thewaters for practical applications of such theories to firm/ Stakeholder relationships.

5 Consequently, researchers havecalled for additional empirical evidence of the effects ofcorporate social performance (Margolis and Walsh2003;Orlitzky2008; Schreck2011) as well as a names andfaces approach to Stakeholder applications (McVea andFreeman2005). Few studies actually address the limits ofCSR and how far a company should be expected to go inpursuit of CSR propose a post-positivist approach to CSR andstakeholder relationships (Scherer and Palazzo2007;Wicks and Freeman1998) through the philosophical lensof Adam Smith (1759). A post-positivist approach is onethat emphasizes a normative, moral grounding for CSRbased on the epistemology of the humanities and variousphilosophies. This approach differs from positivistapproaches to CSR that are grounded in value-free scien-tific approaches to the study of organizations (Astley1985;Wicks and Freeman1998), but which have been criticizedfor focusing on power struggles between the firm and itsstakeholders (Scherer and Palazzo2007).

6 While manyreaders of Adam Smith sWealth of Nationsreference hispragmatic, market-approach to understanding division oflabor and economic factors, his lesser-known works of theTheory of Moral SentimentsandLecture on Jurisprudenceoffer moral messages that may be applied to stakeholdermanagement. Much of Adam Smith s philosophy relies ontenets of morality, justice, and beneficence. Under thisapproach, commutative justice, or fairness in exchange,and the concept of perfect rights provide insight into thepotential limits of a company s CSR activities and the firm-specific relationships necessary for a practical applicationof Stakeholder theory . Additionally, in crossing ethical andlegal boundaries, the tenets of Smith s theory on perfectrights can assist companies as they grapple with competingand divergent Stakeholder claims under the broader CSRdefinition of a business s obligation to article makes two important contributions to theliterature.

7 First, we begin with a discussion of CSR prior-ities and the trade-offs that often must be made bybusinesses in social performance decisions not to high-light the broader tensions that are self-evident in CSRdecisions along multiple dimensions but rather to castthese tensions in specific Stakeholder conceptions of howbusinesses should prioritize and limit CSR activities. Whilewe concentrate on the tradeoffs between discretionary,philanthropic CSR and other CSR decisions, we show howSmith s logic can apply to broader Stakeholder claims. Wefocus on the concepts of commutative justice versusbeneficence from Smith sTheory of Moral Sentimentsaswell as from theLectures in Jurisprudenceto show that, inparticular, the perfect rights element of commutativejustice can facilitate prioritizing Stakeholder claims. Sec-ond, we show how Smith s concept of commutative justiceembodies economic and moral components, complement-ing CSR and Stakeholder theories while answering the callfor business ethicists and CSR/ Stakeholder theorists toembrace the managerial challenges faced by practitioners(Parmar et ).

8 CSR and StakeholdersCorporate social responsibility has been described as aparadigm that is in a state of emergence (Crane et , p. 7). While broadly defined as the responsibilities ofa business to society, researchers have been challengedboth theoretically and empirically to provide clarity to thisconstruct. Schwartz and Carroll (2003) presented a three-domain conceptualization of CSR that helped to define itselements, including economic, legal, and ethical obliga-tions, collapsing the fourth dimension of philanthropy intothe ethical component. Windsor (2006) denoted three dif-ferent philosophical approaches along similar dimensionsof ethical, economic, and corporate citizenship. Garrigaand Mele (2004) mapped instrumental, political, integra-tive, and ethical theories to four dimensions of CSR thatinclude a business s obligations to pursue profits, acceptsocial obligations, grow its business, and embed ethicalvalues.

9 Yet, while practitioners embrace different dimen-sions of these responsibilities, they still face the challengesof explaining to their stockholders why and how theychoose to pursue social initiatives at a significant cost tothose who invest in their companies ( , the self-evidentnature of CSR tensions).The business case for CSR argues that there are legiti-mate reasons for a corporation to invest in CSR an economic standpoint, there is theoretical logic andsome (albeit inconclusive) empirical evidence that engag-ing in socially responsible activities can reduce costs andrisks to the firm, build firm competitive advantage, enhancereputation and legitimacy, and create synergies (Salazarand Husted2008). Scherer and Palazzo (2007) note,J. A. Brown, W. R. Forster123however, that these approaches are decidedly positivist innature looking for cause effect relationships that oftenserve to fit into an economic theory of the firm (Margolisand Walsh2003).

10 This business case reconciles to thestakeholder perspective that legitimate reasons to invest inCSR activities must encompass a defensible normativecore while also supporting and generating economic value(Parmar et , p. 410).Beyond the business case for strategic CSR, however,there are altruistic and coercive motivations for pursuingCSR (Baron2001; Husted and Salazar2006). AltruisticCSR projects are pursued without regard to economicbenefits. Coercively motivated projects are those that areundertaken to provide social benefit, but with the goal ofminimizing costs and with the hope of reputational , the downside to these CSR motivations are theagency costs that take place when managers make thedecision to invest in these activities without any observableconsequences, so that moral hazard and other agency costscan emerge, even in seemingly charitable projects (Hustedand Salazar2006; Laffont and Martimort2002).