The Business Case for Corporate Social Responsibility

Abstract

Do firms benefit from their voluntary efforts to alleviate the many problems confronting society? A vast literature establishing a “business case” for corporate social responsibility (CSR) appears to find that usually they do. However, as argued herein, the business case literature has established only that firms usually benefit from responding to the demands of their primary stakeholders. The nature of the relationship between the interests of business and those of broader society, beyond a subset of powerful primary stakeholders, remains an open question despite this vast literature. This article develops a set of propositions that highlight constraints on firms’ ability to profit from CSR and outlines a set of managerial challenges on which researchers must focus their attention to truly determine whether and when firms can profit by responding to the needs of society.

Keywords

business case corporate social responsibility (CSR)social welfare stakeholder theory

You know, we’re living in a society!

—George Costanza, Seinfeld (Episode 16; May 23, 1991)

The world cries out for repair. While some people in the world are well off, many more live in misery . . . In the face of these broad and deep problems, calls go out for companies to help.

—Margolis and Walsh (2003, pp. 268-69)

We now have the opportunity to eradicate poverty and deal with the issue of climate change. What bigger opportunity do you want to see? . . . Companies make up 60 percent of the global economy. If they don’t play an active part, how can we solve [these crises]?

—Paul Polman, CEO of Unilever, quoted in Burn-Callander (2015)

Why don’t more firms take a more active role in resolving more of society’s problems? After all, firms gain myriad benefits from being socially responsible (Fombrun, Gardberg, & Barnett, 2000). In this article, I argue that the voluminous literature supporting firms’ ability to profit from corporate social responsibility (CSR)—the “business case” for CSR—has had the perverse effect of limiting firms’ efforts to resolve critical issues facing society. These studies have enacted CSR to entail strategically responding to primary stakeholder demands rather than as a matter of resolving society’s problems (Walsh, 2005). The resulting literature has shown that “it pays to be good” but only to firms’ most powerful stakeholders (cf. Mitchell, Agle, & Wood, 1997). As firms have taken an increasingly strategic view of CSR (McWilliams, Siegel, & Wright, 2006), those without the power to directly affect firms—that is, most of those suffering the worst of society’s ills—have become less likely to find a place on corporate agendas. Thus, despite hundreds of studies linking corporate social and financial performance, the gap between the interests of business and society may be widening, not shrinking.

Herein, I seek to redirect scholarship on the business case for CSR toward investigating the conditions under which firms may profit from engaging in practices that go beyond “managing for stakeholders” (Freeman, Harrison, & Wicks, 2007), to entail truly managing for society. I first review the literature underlying the established business case. Extant literature has pushed management scholarship and practice beyond exclusive concern for shareholder interests. However, it has settled into a focus on firms triaging the issues brought to bear on them by powerful stakeholders rather than, and often to the exclusion of, alleviating society’s problems. As a result, hundreds of studies have largely validated a business case for critical stakeholder responsiveness while largely leaving untested a business case for engagement in broader societal problems. Thereafter, I clarify the nature of CSR and explain how, by benefitting society rather than by selectively responding to the demands of their most powerful stakeholders, firms can improve relationships with their primary stakeholders. Furthermore, I develop a set of propositions that explain how the increasingly strategic use of CSR hampers a firm’s ability to build stakeholder relationships. I conclude with a revised agenda for research on the business case for society.

The Weak Link Between CSR and Society

Our society faces many serious problems: poverty, disease, and environmental destruction, to name a few. We often look to corporations to help alleviate these problems (Margolis & Walsh, 2003). They are not legally bound to address social problems, but the resources at their disposal place corporations in a position of unique strength to do so (Walsh, 2005). For problems that cross borders and so are difficult or intractable for sovereign governments to address, corporations may be the only viable means of ameliorating causes of great human misery (Scherer, Palazzo, & Matten, 2014).

When will corporations address society’s problems? With limited resources and operating in competitive environments, corporations are more likely to take on social problems and more able to sustain their efforts if they profit from doing so (Aguilera, Rupp, Williams, & Ganapathi, 2007). Fortunately, studies have demonstrated that firms can “do well by doing good.” Under a variety of conditions, firms gain financial (Barnett & Salomon, 2012), reputational (Fombrun et al., 2000), and insurance-like benefits (Godfrey, 2005) from their acts of CSR. At minimum, socially responsible firms rarely suffer financial harm (Margolis & Walsh, 2003). Overall, there is a well-established “business case” showing how firms benefit from engaging in acts of CSR (Fombrun et al., 2000).

The business case for CSR is well established not just in the academic literature but also in practice. It is now commonplace for firms to file annual social responsibility reports alongside their financial reports and, therein, to declare a positive relationship between the firm’s success and its contributions to society. For example, the 2014 CSR Report from Cisco states,

We are committed to being a responsible company and making a positive contribution to society and the environment. This helps us inspire trust in our brand, develop strong relationships with our stakeholders, and create long-term value for society and our business. (p. A5)

Within this report, Cisco’s Chairman and CEO, John T. Chambers, states,

Our focus is not only on our customers and partners, but also on society and the environment. . . CSR has always been one of the pillars of our culture, and I’m extremely proud of the global impact of our programs. (p. A3)

Yet, despite so many major firms espousing the centrality of society to their missions and declaring the many benefits their firms gain by focusing on society, social problems still abound and many are worsening. For example, economic inequality is rising, as is the planet’s temperature, and with it, the oceans. Ecological disasters are commonplace. Women and children continue to be sold into slavery. Diseases still kill thousands for want of a vaccine or clean water. How can this be?

The literature and along with it, firms, have confused CSR with critical stakeholder responsiveness. The two, though, are far from synonymous. As firms have honed their stakeholder management strategies, they have largely ignored many of society’s problems. Rather, powerful stakeholders have benefitted over social problems from the extensive and, perhaps, sincere corporate interest in social responsibility.

Aided by the clarity of purpose it provides managers (cf. Jensen, 2000), the notion that a firm should be operated solely for the benefit of its shareholders has held sway with many for many decades. This position is famously represented by Friedman (1970), who decreed that the business of business is business and not to meddle in society’s problems. Freeman (1984) later noted, though, in now nearly as famous a fashion that the firm’s strategic imperative is to attend to the concerns of “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (p. 46). This stakeholder approach, or what is now generally deemed stakeholder theory, has “infiltrated the academic dialogue in management” (Harrison & Wicks, 2013, p. 97) and helped to spur legions of scholars as well as titans of industry to broadly discredit the shareholder model as “wrong,” “a tragically flawed premise,” “dreary and demeaning,” “totally idiotic,” and even “the dumbest idea in the world” (Denning, 2015).

Although they are commonly depicted as diametrically opposed, the shareholder and stakeholder perspectives both seek to maximize the profitability of the firm and differ only in the path prescribed to do so. Whereas Friedman (1970) was quick to dismiss spending on non-compulsory benefits to employees, suppliers, customers, and the like as tantamount to theft from the firm’s owners, Freeman (1984) shines a favorable light on the benefits that can accrue to the firm from investing in its relationships with its various stakeholder groups. In any situation where it is demonstrated that attending to stakeholder concerns helps the firm to improve its financial performance, the “Friedman-Freeman debate” (Freeman, 2008) comes to an amicable close. Under such conditions, the only difference between the two is that Friedman would portray any stakeholder who favors a firm due to its CSR as misguided, whereas Freeman is pleased by the prospect of stakeholders making social demands of firms. Yet, even Friedman would encourage rather than begrudge managers for seeking to capture any profit that CSR can bring the firm through gaining the favor of its stakeholders, misguided or not.

Note that neither perspective is concerned with alleviating the broader ills of society. Friedman was quite clear about his exclusive focus on firm profitability. But Freeman and his colleagues have not hidden the fact that the primary concern of stakeholder theory is also the welfare of the firm, not of society. For example, Freeman and Phillips (2002) declared, “first and foremost, stakeholder theory is about business and capitalism” (p. 340). Walsh (2005) thoroughly reviewed Freeman (1984) and two other books core to stakeholder theory (Phillips, 2003; Post, Preston, & Sachs, 2002) and honed in on their lack of concern for social or even stakeholder welfare:

. . . make no mistake, he [Freeman] is not interested in serving stakeholders to satisfy their needs in any altruistic sense. (p. 428)

. . . stakeholder management ideas complement the neoclassical theory of the firm; they do not challenge it . . . If we want to browbeat infidels and supplant the stockholder theory of the firm, then we must look elsewhere for relief. (p. 437)

Nevertheless, stakeholder theory underpins the management literature on the social responsibilities of corporations. In fact, stakeholder theory is so consonant with the CSR literature that, as Laplume, Sonpar, and Litz’s (2008) systematic review noted, many have argued that stakeholder theory obviates and even supersedes the CSR construct (p. 1168). Wood (1991) framed stakeholder theory as a means of helping firms to think more concretely about their responsibilities to society, whereas Waddock and Graves (1997) described CSR as being composed of the firm’s interactions with its various stakeholders. Argandoña (1998) combined the two perspectives into a single term, “the stakeholder theory of the social responsibility of business” (p. 1093). Freeman (2005) characterized CSR as superfluous, given stakeholder theory and its associated focus on the firm’s responsibilities to a broad set of stakeholders, and Rowley and Berman (2000), a fortiori, suggested replacing the CSR construct with stakeholder theory.

Conflating or replacing the concept of CSR with that of stakeholder management has led to a rather narrow interpretation of the firm’s obligations to society, one that rarely reaches beyond the interests of those stakeholders who have direct power over the firm. Some corporations have more resources than some countries, but even the largest cannot attend to all the demands of all its stakeholders, let alone all of society’s problems. Stakeholder management, thus, entails sorting out which stakeholder demands to address. This sorting process tends to exclude many social issues from the firm’s agenda.

Scholars have written extensively about how managers should decide which stakeholder demands to fulfill and which to ignore. Freeman’s (1984) guidance was blunt, advising firms to focus on stakeholders who could jeopardize the firm’s survival and to not “give in” (p. 149) to those who lack such power (see Walsh, 2005, p. 428). Phillips (2003) argued for a graduated approach: A firm ought to concern itself with a stakeholder issue only to the degree that the stakeholder affects the firm, and those stakeholders without amply strong influence over the firm “should look elsewhere for relief” (p. 142). The most dominant perspective specified three factors that underpin the triage process that managers use to determine whether or not a stakeholder “really counts”: power, legitimacy, and urgency (Mitchell et al., 1997).

But what about those problems that lack the urgent push of a powerful and legitimate stakeholder? Such problems fall to the wayside under the stakeholder model. Walsh (2005) concluded that when managers are guided by stakeholder theory, the call of the Secretary-General of the United Nations for corporations to help in the fight against AIDS goes unheeded. Disasters in the natural environment are ignored (Starik, 1995). The suffering of the impoverished, diseased, starving . . . if lacking power over firms, they “should look elsewhere for relief” (Phillips, 2003, p. 142). Granted, acting at the behest of those without power, stakeholders with power can push the firm to address animal welfare, global warming, rainforest destruction, or any other social problems (Frooman, 1999). But even for social problems that powerful stakeholders push firms to address, the same problematic logic holds: Only the concerns of the powerful, whether self-serving or in selective support of those without power, will gain managerial attention and perhaps firm resources. As prescribed by stakeholder theory, there is no direct access to the firm for those in society without power; the interface is via amply powerful stakeholders.

Given the nature of stakeholder management, is there a way to bring more of society’s problems to the attention of more firms? The key to broadening a firm’s concerns is to show that addressing these additional issues benefits the firm (Aguilera et al., 2007). For example, firms moved beyond managing for shareholders in response to a business case that demonstrated the returns to serving stakeholder interests. I next explain how addressing society’s problems can improve a firm’s relationships with its primary stakeholders and thereby benefit the firm.

Resocializing CSR

Motivated by a desire to bring business interests into alignment with those of society (Preston, 1975) and augmented by a zeal to legitimize the field of study (Rowley & Berman, 2000), business and society scholars have actually established what is tantamount to a business case for serving powerful stakeholders. After decades of research, it is evident and perhaps obvious that firms’ interests are well aligned with those of their most powerful stakeholders and so firms do better by ensuring that the concerns of these stakeholders are addressed. However, we still have few insights about the alignment between broader societal interests and those of the firm (Margolis & Walsh, 2003).

Do firms do better by ensuring that society does well? Extant literature answers part of this question in the affirmative but suggests that, overall, the relationship may be negative. Powerful stakeholders are members of society, just as shareholders are a subset of a firm’s stakeholders. Therefore, advancing powerful stakeholder interests advances society, in part.¹ However, society is composed of much more than just powerful stakeholders. The amorphous nature of the stakeholder concept (cf. Orts & Strudler, 2002) has blurred the distinction between responding to stakeholder demands and acting responsibly toward broader society. Whenever the literature has unpacked the stakeholder concept, though, the resulting contingent view (Rowley & Berman, 2000) suggests that the business case may not hold for much of society.

The Primacy of the Primary Stakeholder

Since its inception, the stakeholder concept has been bemoaned as vague. Freeman’s (1984) initial definition of a stakeholder as “any group or individual who can affect or is affected by the achievement of the firm’s objectives” ruled little out (p. 46), as mostly anyone or anything has the potential to affect or be affected by any firm by at least some stretch of the imagination (Orts & Strudler, 2002). Others have since parsed stakeholders many ways, particularly along the dimension of whether they can affect the firm or are affected by the firm. For example, Goodpaster (1991) categorized those who can affect the firm as strategic stakeholders, whereas those who are affected by the firm, he deemed to be moral stakeholders. Given interest in establishing a business case, though, most scholars have focused on strategic stakeholders and parsed them according to the degree to which they could affect the firm (Mitchell et al., 1997). Those with direct influence on the firm are often characterized as primary stakeholders, whereas those with only indirect influence are typically relegated to secondary stakeholder status (Carroll, 1979; Clarkson, 1995). Those who lack power, legitimacy, and urgency entirely are considered “nonstakeholders” (Mitchell et al., 1997, p. 873).

Empirical studies isolating the financial returns from serving different stakeholder groups have found the business case to hold for primary stakeholders—those without whose support the firm would cease to exist—but the more secondary are stakeholders, the less likely is the firm to profit from serving them. Berman, Wicks, Kotha, and Jones (1999) found a positive relationship between return on assets and the level of support the firm provides its employees, as well as its level of concern for customers through the production of safer and higher quality goods. In contrast, the firm’s support of diversity, safeguarding of the natural environment, and contributions to the broader community had no significant relationship with its return on assets. Hillman and Keim (2001) contrasted firm support for primary stakeholders with support of social issues and found the former to be positively related to financial performance but the latter negatively related. Although hypothesizing the opposite, Van der Laan, Van Ees, and Van Witteloostuijn (2008) also found empirical support for a positive relationship with financial performance for primary stakeholders and a negative relationship for secondary stakeholders. Thus, there is empirical validation that serving those who can directly affect the firm pays, but extending the firm’s actions beyond this powerful core group does not.

These findings seem to refute the validity of a business case for tackling social issues, as they appear to show that the interests of firms and the welfare of broader society, beyond primary stakeholders, do not coincide and often may conflict. However, such a conclusion is premature. Should there be a valid business case for society at large, the same empirical results would prevail. By definition, secondary stakeholders and nonstakeholders lack an exchange relationship with the firm (Clarkson, 1995). Therefore, they are unable to directly reciprocate for the firm’s good deeds. Prior studies isolated firms’ efforts to advance social issues from their efforts to satisfy primary stakeholder interests and found that the pursuit of social issues was not positively associated with firm profitability and often reduced it. But when studies isolate the firm’s efforts to aid non-primary stakeholders, all else equal, they will necessarily find that as firms do more, they lose more because non-primary stakeholders are unable to provide compensating revenues for the firm. Only primary stakeholders transact with the firm, so any returns to the firm must occur via these relationships. Simply, a business case can only be made by focusing on those with whom the firm does business—its primary stakeholders.²

The relationships between the firm and its non-primary stakeholders are akin to cost centers. Firms benefit from cost centers to the degree that they improve the firm’s primary functions. Viewed independent of the performance of these primary functions, though, investing more in a cost center generates only more losses. For example, as a firm spends more on R&D or advertising, it may benefit from new product development and sales. But if R&D and advertising are assessed alone, then greater spending on each will appear to lead to greater losses for the firm. To understand their true value, their effects on the firm’s primary functions must be assessed. Does investing more in R&D and advertising help to build and sell more innovative and marketable products? If so, then a business case may be established. Likewise, one cannot conclude that firms do not benefit from their efforts to alleviate social problems unless the effects of these initiatives on primary stakeholder relationships are accounted for.

Despite frequent operationalization otherwise, prior conceptual studies have framed the business case in this indirect way, arguing that a firm’s contributions to society can increase the degree to which its primary stakeholders view the firm as a trustworthy, and so favored, party with which to transact. Although primary stakeholders do not receive the direct benefit of these acts of CSR, they still may respond in ways that benefit the firm:

The business case for CSR implies that as stakeholders observe a firm’s socially responsible behaviors, they will deem the firm a more favorable party with which to conduct their own transactions . . . Trust arises and relationships improve as stakeholders observe a firm’s CSR activities, not as a consequence of a firm’s use of direct influence tactics to capture their favor. (Barnett, 2007, p. 800)

Barnett (2007) argued that when firms respond to demands from their stakeholders, they are engaging in “direct influence tactics,” not acts of social responsibility. Direct influence tactics are reciprocal, intended to maintain and improve relationships with powerful stakeholders through direct exchange. Such acts “are not necessarily focused on improving social welfare” and can even “be instrumental in reducing a firm’s contributions to social welfare” (p. 799). In contrast, CSR aims to improve social welfare rather than directly satisfy a stakeholder demand.

Empirical studies evince that CSR, as distinguished from direct influence tactics, can help firms gain better access to key resources held by their primary stakeholders. Being a good corporate citizen has been shown to increase the desirability of firms to potential employees (Turban & Greening, 1997) and decrease constraints on firms’ ability to acquire capital (Cheng, Ioannou, & Serafeim, 2014), for example. Thus, there exist both theoretical rationale and empirical support for the possibility of a business case for managing societal problems that is distinct from the extant business case that focuses on responding to primary stakeholder demands. But under what conditions will it hold?

Giving, Not Giving In: Distinguishing CSR From Critical Stakeholder Responsiveness

When a firm seeks to benefit society, its stakeholders may infer that the firm is trustworthy and so favor the firm. For example, a firm’s donation of goods and services to local food pantries might help the firm to improve its employee relations. Because of this donation, the firm’s employees may view it as more trustworthy and so a more desirable place to work, and then reward the firm with greater loyalty (Fombrun et al., 2000). If the gains to the firm from employee loyalty exceed the costs of the donations, then the firm profits from its efforts to improve its local community; that is, there is a business case. However, a firm might also improve its employee relations by acquiescing to labor union demands to increase wages. If gains to the firm from improved employee relations exceed the costs of the wage increase, then the firm profits by increasing wages; thus, there is also a business case for this.

Both the wage raise and the donation to local food pantries seek the same means of benefitting the firm—via improved relations with a primary stakeholder group—but the way each pursues this outcome differs. A firm’s acts of CSR build trust by signaling to its primary stakeholders that the firm is “other-considering,” not purely self-interested (Godfrey, Merrill, & Hansen, 2009). Actions taken at the behest of stakeholders, by contrast, rely on power rather than trust and so “precisely because these actions can be viewed through a power-exchange lens they may be seen as wholly consistent with the firm’s profit-making interest and viewed as merely self-serving, rather than other-regarding, behaviors” (Godfrey et al., 2009, p. 429).

A significant body of literature has explored the varying conditions under which it pays to respond to the demands of powerful stakeholders. But under what conditions will it pay to address social problems? We cannot expect every “other-serving” CSR act to produce a positive return for every firm, else we would see firms earning infinite returns by investing in infinite amounts of CSR (Barnett, 2007). Rather, there are a variety of contingencies that influence whether or not it pays to be good (Rowley & Berman, 2000).

Barnett (2007) identified the importance of firm characteristics to stakeholder inferences about CSR (p. 803). A firm with a weak record of social performance lacks the “stakeholder influence capacity” that is needed to transform an act of social responsibility into an increase in stakeholder favor. That firm will gain no benefit from an isolated act of kindness because this act alone is not ample to convince stakeholders that the firm is truly “other-considering.” In contrast, a firm with a strong record of social involvement may profit from engaging in the same act of CSR because stakeholders may interpret the act as sincere and, therefore, favor the firm. Thus, under differing conditions, stakeholders may respond very differently, even negatively, to a particular effort to tackle a social problem. In the remainder of this section, I develop a set of propositions that detail how the characteristics of an act of CSR, not just the characteristics of the firm engaging in the CSR act, affect a firm’s relationships with its primary stakeholders.

Giving or taking?

The core premise of a business case for society is that stakeholders have greater trust in firms that engage in altruistic actions and so favor them as exchange partners. Stakeholders still expect firms to pursue profit but firms do not accrue goodwill from such self-serving pursuits (Godfrey et al., 2009). In fact, firms’ actions that are perceived as self-serving can destroy trust (Varadarajan & Menon, 1988). However, it may not be feasible for a stakeholder to categorize any particular action of a firm as entirely self- or other-serving. Even the most altruistic actions may have self-serving aspects to them (Glazer & Konrad, 1996). Because they have opposing influences, with other-serving actions building trust but self-serving actions destroying it, these mixed motives thus need to be accounted for when trying to understand how a particular CSR act affects stakeholder relationships.

CSR can take many forms, and these varying forms affect stakeholder perceptions of the degree of altruism present in a given act of CSR. Some acts of CSR are perceived as more altruistic than others, not as merely altruistic or not (Ellen, Webb, & Mohr, 2006). For example, firms often engage in cause-related marketing, through which they may tie their contributions to a social cause to product sales, such as donating to a charity a certain percentage or flat amount for each item purchased (Varadarajan & Menon, 1988). This approach to CSR benefits both a social cause and the firm. However, firms may also directly donate to a charity independent of firm sales. This latter approach is less transparently self-serving. Accordingly, the following general relationship is expected:

Proposition 1: The more that a firm’s initiative to help society also directly benefits the firm, the less likely will that initiative improve the firm’s relationships with its primary stakeholders.

Giving ’til it hurts?

In his 2014 Lenten message, Pope Francis declared, “I distrust a charity that costs nothing and does not hurt” (Vatican, 2014). His comments suggest that there must be sacrifice involved in an action for it to convey altruism and so earn trust. Symbolic adoption of a social cause does not signal a firm’s concern for others as effectively as does substantively participating in an effort to resolve that same social problem. For example, a firm that issues a press release in support of marriage equality is likely to be perceived as less supportive of that social cause than is a firm that provides full benefits to same-sex couples and lobbies legislators for new laws supporting equality. The more difficult and costly is the firm’s effort to support the social cause, the more altruistic the firm is likely to be perceived to be, and so the more stakeholder trust it may generate. Du, Bhattacharya, and Sen (2011) demonstrated the effects of having more “skin in the game” from a different perspective, showing that when consumers went beyond mere awareness of a firm’s CSR effort and physically participated in it, they developed a more positive attitude toward the firm. More generally, the following is proposed:

Proposition 2: The less burdensome to a firm is its initiative to help society, the less likely will that initiative improve the firm’s relationships with its primary stakeholders.

Giving early?

When a firm increases employee pay or benefits, it is generally considered to be behaving in a socially responsible way.However, the context in which the action occurs can alter stakeholder perceptions about the degree to which the act may instead be self-serving. For example, in February 2015, Walmart announced that it would raise its minimum wage to US$1.75 above the federal minimum wage and then by another US$1 the following year. Whereas some saw this as an act of good corporate citizenship, others pointed out that Walmart did so under pressure. As a result, this socially responsible action engendered more skepticism than it likely would have had Walmart acted earlier:

. . . you cannot deny the role of the United Food and Commercial Workers’ campaign to organize Wal-Mart workers. “This is not an act of corporate benevolence,” said Marc Perrone, president of UFCW, in a statement on the Wal-Mart announcement. “Walmart is responding directly to calls from workers and their allies to pay a living wage.” In fact, the last time Wal-Mart faced significant labor unrest in 2006, it raised wages as a direct result, according to Federal Reserve minutes. It, like most businesses, makes changes that benefit workers only when its reputation is threatened and poor publicity ensues. That means that worker voices play a powerful role in wage growth. (Dayen, 2015)

More generally, the more time that a firm takes to respond to a social problem, particularly in the face of mounting pressure to act, the less likely is a stakeholder to perceive the eventual response to be indicative that the firm is altruistic. Thus, the following is proposed:

Proposition 3: The less proactive is a firm’s initiative to help society, the less likely will that initiative improve the firm’s relationships with its primary stakeholders.

Giving consistently?

Barnett (2007) theorized that firms that suddenly engage in CSR are not believable. Stakeholders treat an unexpected act of CSR with suspicion. A good act by a bad firm can even backfire, harming trust between the firm and its stakeholders (Varadarajan & Menon, 1988). Barnett and Salomon (2012) empirically validated the importance of firm history, demonstrating that firms need an extensive record of social responsibility before they are able to profit from it.

The need to establish a consistent record of social involvement before being able to profit from it may apply not just at the firm level but also to specific social initiatives. Although two firms may allocate the same overall level of funding and other resource commitments to addressing social issues, these firms may assemble very different CSR portfolios. One firm might support a large number of ad hoc social projects, whereas the other might focus deeply on one or a few specific issues. For example, Google doles out a variety of grants to address various social issues each year, whereas McDonald’s is closely associated with one particular charity, that of the Ronald McDonald House. A firm’s consistency in addressing a particular social issue in depth over time should provide its stakeholders a greater indication that the firm is other-considering than would another firm’s new or intermittent support of that same issue. Thus, the following is proposed:

Proposition 4: The less sustained is a firm’s involvement in an initiative to help society, the less likely will that initiative improve the firm’s relationships with its primary stakeholders.

Giving and gabbing?

Firms face a conundrum in publicizing their good deeds. A firm needs its primary stakeholders to be aware of its socially responsible actions if it is to gain increased trust as a result. Thus, it needs to publicize these acts. Yet, when a firm publicizes its good deeds, stakeholders may perceive the firm to be behaving in a self-serving way, and this may cause stakeholders to limit or even decrease their trust in the firm. As Du, Bhattacharya, and Sen (2010) noted, “While stakeholders claim they want to know about . . . good deeds . . . they also quickly become leery of the CSR motives when companies aggressively promote their CSR efforts” (p. 9). The following relationship is thus expected to hold:

Proposition 5: The more that a firm promotes its initiative to help society, the less likely will that initiative improve the firm’s relationships with its primary stakeholders.

These propositions highlight the difficulty that firms face when attempting to simultaneously serve themselves and society. An act of CSR is more likely to improve primary stakeholder relationships and so benefit the firm if it entails self-sacrifice (Proposition 1), is costly to the firm (Proposition 2), occurs in advance of calls for such action (Proposition 3), is a sustained effort (Proposition 4), and is not self-promoted (Proposition 5). Perversely, it thus seems that the better aligned is an act of CSR with a firm’s self-interest, be that because it is cheaper, easier, or less risky to undertake, then the less that act may be capable of advancing the firm’s self-interest. That is, for CSR initiatives, the pursuit of self-interest can be self-defeating. How effectively can firms balance these competing pressures so that they gain private benefits from serving the public good? The next section outlines a research agenda for determining this.

Business and/or Society? Uncovering (Mis)Alignment

Figure 1 illustrates how the pathways to profit differ across firms when they are managed for shareholders, or for stakeholders, or for society. The dotted line in the lower part of the figure that links a firm’s actions directly to its financial returns represents the traditional view that firms are managed solely for the benefit of their shareholders and so are obligated to take actions that maximize the firm’s financial returns, unfettered by concern for others (cf. Friedman, 1970). The bold arrows through the center of the figure complicate this direct path to financial returns by introducing stakeholders as mediator. The positive signs reflect the findings of the literature on stakeholder theory that a firm’s financial returns are enhanced through actions that improve its relationships with its primary stakeholders (cf. Freeman, 1984).

Figure 1.

Mapping the business cases.

The dashed arrows at the top of Figure 1 illustrate the yet-more-complicated link between a firm’s actions and its financial returns that is the focus of this article. Many studies have shown that a firm’s efforts to benefit anyone other than its primary stakeholders tend to be to the financial detriment of the firm (e.g., Hillman & Keim, 2001). Therefore, the figure portrays firm actions to better society as leading to a decrease in firm’s financial returns. However, as previously argued, a firm’s actions to better society can improve its financial returns indirectly, via its effects on primary stakeholder relations. The established business case literature has provided few insights into the validity of this indirect path to financial returns, so Figure 1 labels this pathway with a question mark. This is the open question that we seek to answer in refocusing business case research. As suggested in the propositions developed in the prior section, this complex third path to profit may often be difficult for firms to traverse. To determine the conditions under which firms can, in fact, serve their own interests by serving the interests of society, researchers will need to move past their ongoing efforts to correlate “various mishmashes” (Rowley & Berman, 2000, p. 405) of variables with financial performance and instead focus on developing an understanding of how well firms can manage conflicting pressures, as next discussed.

When Do Stakeholders Begin to View Selfless Acts as Selfish?

Figure 1 depicts alternative pathways to profitability, but any given act of CSR can traverse all three. For example, if a firm decreases its waste production, it may directly improve its financial returns through savings on material costs and waste disposal; thus, there is a shareholder business case to support it. Moreover, the firm may have acted to reduce its pollution at the behest of a powerful stakeholder group and so the firm may improve stakeholder relations by taking this action. And, of course, society may benefit from the resulting decrease in pollution.

Proposition 1 suggests that perceptions that a firm is profiting via the first (shareholder) and second (stakeholder) paths may crowd out its ability to profit via the third, focal (society) path. Firms build trust with their primary stakeholders by demonstrating that they are concerned with the plight of others (Godfrey et al., 2009). The resulting improved relationships with these key resource holders benefit the firm. Such “win–win” outcomes are the defining characteristic of the business case (cf. Porter & Van der Linde, 1995). Yet, a firm’s wins have the potential to be self-defeating. The more that a stakeholder perceives that a firm’s actions are self-serving, the less likely will the firm be able to gain the trust of the stakeholder (Varadarajan & Menon, 1988). Therefore, as firms publicize the ways that they have benefited from their CSR initiatives, they may harm their ability to continue to gain such benefits.

This co-mingling of social and corporate benefit is common in CSR reporting. Consider the 2014 CSR Report from Cisco mentioned at the start of this article. Cisco’s CEO states that the firm is proud of its contributions to improving society and the environment, but the report also notes that these contributions benefit the firm by improving its stakeholder relationships and generating long-term value. CEO Howard Schultz similarly introduces Starbucks’ (2014) Global Responsibility Report by writing, “I am proud that Starbucks not only achieved another year of record financial performance, but we did so while doing more for our people and the communities we serve than at any time in our history” (p. 1).

Firms’ returns from CSR initiatives are likely to be affected by the way they publicize these efforts. Because other-serving and self-serving actions have offsetting effects on stakeholder trust, firms may be able to improve their returns by downplaying the private benefits and focusing their messaging instead on the gains these initiatives create for society. For example, describing CSR as an investment rather than as an act of goodwill may harm a firm’s ability to build stakeholder trust. However, the degree to which mention of gains to the firm harms the ability of the firm to realize these gains is likely to vary by stakeholder group. In particular, investors may view a firm’s declaration that it profits from its social investments as further assurance that the firm is fulfilling its fiduciary responsibility and, therefore, increase trust in the firm.

Proposition 5 suggests that not only the way in which firms publicize their CSR initiatives but also the degree to which they do so can limit their ability to profit from them. Firms must publicize their CSR acts to create awareness, yet “tooting one’s own horn” can appear self-serving to the stakeholders that it is intended to impress. Thus, even advertising that focuses on the benefits that a CSR initiative brings to society, not just to the firm, can become problematic.

Scholars need to conduct additional research on the way in which messaging about CSR affects various stakeholders. How does variation in the wording of a press release or an annual report on CSR affect stakeholder perceptions of a firm’s trustworthiness? Are there guerilla marketing techniques that allow firms to bring their good deeds to the attention of their primary stakeholders without risking the backlash that a traditional marketing campaign might trigger? We need to determine how and when firms may gain the most benefit from their acts of CSR, given their potential to build stakeholder trust, without tipping over into the downside by instead causing stakeholders to question the firm’s sincerity. Rather than seek linear correlations, scholars ought to test for U-shaped relationships between key variables (cf. Barnett & Salomon, 2012) to uncover when seemingly beneficial things, such as publicity, turn negative.

When Are the Powerful Better Served by Not Serving Them?

Figure 1 also illustrates that both the established business case, which has focused on how firms may profit by managing in the interests of stakeholders, and the revised business case, which as outlined herein is focused on how firms may profit by managing in the interests of society, are premised on gaining favor with primary stakeholders. Where they differ is in how the firm gains this favor. The established business case argues that firms maintain the most stakeholder favor by prioritizing the needs of their most powerful, legitimate, and urgent stakeholders (Mitchell et al., 1997). But in a business case for society, the reverse may hold true. Proposition 3 suggests that by responding to social issues for which the firm is not under immediate pressure, the firm is better able to demonstrate to its primary stakeholders that it is other-serving and so gain their favor. If the firm faces urgent pressure from its powerful stakeholders to deal with a social issue, then the response, though still to the benefit of society, may be perceived as self-serving and so produce no gain and, perhaps, a loss of favor with primary stakeholders.

Power and trust thus interact in determining the degree to which a firm’s social initiatives affect stakeholder favor, but exactly how remains unclear. A firm’s relationships with its primary stakeholders is a function of how it deals with the demands these stakeholders make of the firm to take on specific issues, as well as how these stakeholders react to its decisions to take on or ignore other social issues absent such pressure. Given limited time, attention, and resources, firms must be selective in their pursuits of social causes. The calculus involved in rationing the firm’s resources must include more than just power, legitimacy, and urgency if it is to determine the most optimal way to manage primary stakeholder relations. Perhaps the firm best advances its own interests by dealing with any particular social problem before rather than after it becomes a stakeholder demand. However, any given firm is likely to face a mix of social issues vying for its limited resources, to include many that are championed by powerful stakeholders. How do primary stakeholders weigh a firm’s decision to acquiesce to their demands relative to a firm’s proactive effort to take on a social issue? How do stakeholders process conflicting firm actions, such as denying one direct demand but pursuing another social issue? Our lack of understanding of how these issues are weighed in the minds of stakeholders and how they affect their trust in and favor toward a given firm highlights the need for more work on stakeholder cognition, as it is the core determinant of whether or not it pays to be good (Barnett, 2014).

When Do the Costs of Being Good Start to Outweigh the Benefits?

A firm can increase its financial returns not only by increasing its revenues but also by decreasing its costs. The literature has typically focused on the ability of CSR to bring about increased revenues but it has also recognized that CSR helps to buffer firms from losses (Fombrun et al., 2000). The actual costs of CSR—the resources a firm expends in pursuing a given social initiative—typically have not been considered.

Proposition 2 suggests that costs both benefit and harm firms’ ability to profit from CSR and so must be carefully studied when assessing the viability of a business case. Perceptions that a firm has willingly taken on a significant burden in its efforts to better society are helpful in convincing stakeholders of the firm’s trustworthiness. Thus, firms may gain valuable stakeholder favor as a result of committing more resources to CSR initiatives. However, greater spending, all else equal, simply means greater difficulty in turning a profit. Therefore, to profit, firms must manage CSR spending in a way that allows them to gain the most benefit at the lowest cost.

Barnett and Salomon (2012) acknowledged the countervailing force of costs on returns to CSR and called for research on the efficiency by which firms are able to produce stakeholder favor through CSR. Some firms may have to spend considerably more than others, and perhaps more than they can recover through improved stakeholder favor, to convince their primary stakeholders that their firm is other-considering. More generally, the efficiency of firms in running social initiatives has not been well accounted for. Some firms may be able to mount a campaign to, say, end homelessness in their local community or increase high school graduation rates, at lower cost than others. Overall, business case research must better measure the costs of engaging in CSR if it is to understand when firms can and cannot profit from these actions.

Conclusion

By helping others, do firms help themselves? An extensive literature has found that typically they do (Orlitzky, Schmidt, & Rynes, 2003), at least when we define helping others to mean meeting the demands of firms’ primary stakeholders (cf. Walsh, 2005). However, finding that it pays to maintain favorable relationships with those whose support is essential for firm survival—primary stakeholders—is a validation of resource dependence theory (Pfeffer & Salancik, 1978), not a test of the returns to social responsibility. Such findings are effectively tautological, establishing only a business case for taking actions that are necessary to remain in business. When helping others is instead defined as voluntarily tackling the many problems of society at large, as firms are often called upon to do, the business case remains largely untested.

Given the challenges facing society and the important role that firms could play in resolving them, it is important that we seek to fill this research gap. Management theories can become self-fulfilling prophecies (Ghoshal, 2005), and so getting the theories right can help in getting practice right. If firms expect that addressing social problems comes at a cost, firms rationally are unlikely to do so, especially repeatedly or in significant numbers, and so societal problems are unlikely to be resolved through this means. However, if firms expect that they can profit from alleviating social ills, then knowledge of such win–win scenarios ought to spur widespread and ongoing corporate action to better society.

Because of its indirect, complex nature and in light of its costs, many of the conditions necessary for firms to profit from social responsibility may prove invalid when scholars refocus their efforts on validating a business case for society. This is not particularly surprising, as a business case for society requires firms to find a way to simultaneously be other-serving and self-serving, and these aims are fundamentally at odds. As a field, we may have successfully fooled ourselves into believing that these opposing states can be brought consistently into alignment through market mechanisms. But as argued above, we have brought them into alignment by artifice, having minimized the requirement that firms serve society and instead measured how effectively they serve themselves by satisfying the demands of their primary resource holders. After we reorient, will it still work? Rather than finding win–win outcomes as the rule, we may instead find that there are many trade-offs (Hahn, Figge, Pinkse, & Preuss, 2010). Where the business case falls short, we will need to consider the appropriateness and desirability of formal regulation as a means of managing any misalignments.

This call to reorient business case research is not a call to supplant or replace stakeholder theory. Rather, such a reorientation would advance and enrich stakeholder theory by further clarifying what stakeholder theory is and is not, and more clearly distinguishing it from, rather than muddling it with or substituting it for, CSR. Although it seems rather obvious now, it was indeed a contribution to establish that building and maintaining trusting relations with one’s stakeholders can be a better way to manage long-run firm performance. But it is now time to recognize that stakeholder theory may not be effective at managing many of society’s pressing problems and, in fact, could be driving firms away from deeper involvement with society. Perhaps stakeholder theory could be enriched so as deal with social welfare directly. But as it has become more instrumental and we have further clarified the contingencies of the business case, the non-instrumental, social welfare aspects of stakeholder theory have only fallen away. By highlighting the ways in which it may be profitable to manage for society, not just for stakeholders, we can begin to assess when and if business and society can align via market mechanisms and, where they cannot, we may spur much-needed conversation about the role of formal government intervention in bringing about the desired level of alignment.

Footnotes

Acknowledgements

The author sincerely thanks the editors and Rob Phillips for their constructive feedback.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

Notes

Author Biography

Michael L. Barnett (PhD, New York University) is a professor of management and global business at Rutgers Business School–Newark & New Brunswick. His research focuses on how firms individually and collectively manage their relationships with stakeholders, and how their efforts at stakeholder management, through acts of corporate social responsibility and via communal institutions such as industry trade associations, influence their reputations and financial performance, as well as affect society. His articles have appeared in such journals as Academy of Management Journal, Academy of Management Review, Business & Politics, Business & Society, Journal of Management, Journal of Management Studies, Long Range Planning, and Strategic Management Journal.

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