THE EVOLUTION OF CORPORATE SOCIAL RESPONSIBILITY

Philip L. Cochran

1. CSR: My, how you’ve grown (and changed!)

Over the past several decades, corporate social responsibility (CSR) has grown from a narrow
and often marginalized notion into a complex and multifaceted concept, one which is
increasingly central to much of today’s corporate decision making. To the extent that corporate
social responsibility was even discussed several decades ago, these discussions were confined to
a small group of academics.
Among the first academics to debate the topic were Columbia professor Adolf A. Berle
and Harvard professor E. Merrick Dodd, in a series of articles featured in the Harvard Law
Review. Whereas Berle contended that managers were responsible only to a firm’s shareholders,
Dodd argued that managers had a wider range of responsibilities. In a classic exchange,
Professor Dodd (1932) asked: “For whom are corporate managers trustees?” (p. 1145).
Answering his own query, he posited that corporate managers were responsible to the public as a
whole, and not just to shareholders.
The crux of Dodd’s argument was his contention that, in addition to the economic
responsibilities they owed shareholders, managers had social responsibilities to society because
the modern large firm is “permitted and encouraged by the law primarily because it is of service
to the community rather than because it is a source of profit to its owners” (Dodd, 1932, p.
1149). This reasoning became the intellectual basis for the assertion that firms have a corporate
social responsibility. Although many other proponents of “shareholder primacy” still disagree,
by 1954, Professor Berle famously declared that “the argument has been settled (at least for the
time being) squarely in favor of Professor Dodd’s contention” (Berle, 1954, p. 169).
During the 1950s and 1960s, the United States witnessed the birth of the modern activist
movements. The modern civil rights movement gained momentum with the 1954 decision of
Brown v. Board of Education. The environmental movement was at least in part sparked by the
publication of Rachael Carson’s (1962) Silent Spring. Some trace the beginnings of the modern
consumer movement back to the publication of Ralph Nader’s (1965) first book, Unsafe at Any
Speed. The Vietnam War of the 1960s and early 1970s swept these and other social movements
together, permanently changing the business environment in America and the world by ushering
in an era of activist groups and NGOs that are concerned about businesses and business
practices, and which today often attempt to focus media attention on business practices they
consider to be unethical or irresponsible.
Unwanted media attention can seriously tarnish corporate reputation, which in turn can
lead to decreases in sales or employee dissatisfaction. If firms do not react appropriately, this
media attention can also lead to unwanted legislation and regulation. In today’s business
environment, executives must either embrace corporate social responsibility or risk serious
consequences.
As a result, the focus of the debate changed in the 1970s from corporate social
responsibility to corporate social responsiveness. Late in the decade, William Frederick (1978)
wrote a much cited working paper entitled From CSR1 to CSR2: The Maturing of Business-and-
Society Thought, in which he noted that firms were no longer simply involved in an academic
debate about the ethics of different degrees of social responsibility. Instead, they were
pragmatically responding to various social pressures. Thus, as various activist groups began
applying media and other pressures to firms, the firms were reacting by changing products,
policies, etc.
The term corporate social performance was first coined by Sethi (1975), expanded by
Carroll (1979), and then refined by Wartick and Cochran (1985). Basically, the idea behind
corporate social performance is the recognition that firms do have ethical obligations and that
they must also respond pragmatically to social pressures. The range of appropriate responses has,
however, grown dramatically over the past several decades.

2. From philanthropy to strategic philanthropy

One of the pioneering aspects of corporate social responsibility was corporate philanthropy.
Although early capitalists such as Andrew Carnegie were renowned philanthropists, their
charitable activities were pursued as individuals and not on behalf of corporations. The era of
modern corporate philanthropy, when corporations began giving for purposes not directly related
to immediate corporate benefit, began in 1953 as a result of Smith v. Barlow. In this decision,
“the New Jersey Supreme Court cleared the way for A. P. Smith Manufacturing Company to
donate $1500 to Princeton University without violating shareholder interest” (Burlingame, 2004,
p. 104). Barlow opened the floodgates of corporate philanthropy.
 In the decades that followed, the “gold standard” for corporate philanthropy was for firms
to make philanthropic contributions that would improve the overall health of the larger society.
This could include donations to universities, local operas, or any other worthy social service
cause. One major tenet of this phase of corporate philanthropy was that it be “from the heart,”
rather than focused on any clear business or “bottom line” gain. In fact, there was a stigma
attached to activities that also produced benefits for the firm. Many argued that activities that
also enhance the firm’s bottom line should not be seen as “philanthropic,” but viewed strictly as
business decisions.
An important intellectual tipping point occurred with the publication of an article in the
Harvard Business Review by Michael Porter and Mark Kramer (2002), which built a powerful
argument in favor of a new type of corporate philanthropy. In this piece, the authors noted that
“[i]n the long run…social and economic goals are not inherently conflicting but integrally
connected” (p. 5). Further, they pointed out that many economic investments have social returns,
and many social investments have economic returns. Instead of trying to keep these two types of
returns totally separate, businesses should emphasize projects that have both significant financial
and social returns. Although Porter and Kramer applied this principle to philanthropy, it could
easily be extended to virtually any form of CSR.
The authors cited the Cisco Networking Academy as an example. Initially, Cisco
contributed networking equipment to schools in its region, basically as a goodwill gesture. It
soon became clear, however, that these schools did not have the expertise to manage the donated
hardware. As such, some Cisco engineers decided to help train involved teachers to maintain the
equipment, and soon students were taking these classes, as well. At that point, Cisco realized
there was a significant demand for such training, with over 1 million unfilled IT jobs worldwide.
In response, the company ramped up the program and began systematically offering it in
more and more schools. Then, at the urging of the US Department of Education, they began to
focus their academies in economically challenged communities. When the United Nations
became interested, Cisco began opening academies in developing countries. Within five years,
the firm had established nearly 10,000 academies and graduated over 115,000 students, more
than half of whom found employment in the IT industry. Through the relatively minor
investment of $150 million, Cisco dramatically increased the pool of trained network
administrators. This benefited not only the students who were trained in network administration
but also Cisco, by increasing the number and quality of network administrators.
Porter and Kramer argue that firms should not simply throw money at good causes. If a
firm has no competitive advantage in a given philanthropic area, it is likely that any investment it
makes in that area will have little to no long-run impact. This concept is similar to the business
strategy of “sticking to your knitting,” which Peters and Waterman (1982) described when they
contended that firms should concentrate on their core competencies and not be distracted by
other apparently interesting opportunities in which they have little to no expertise.
Instead, Porter and Kramer suggest that firms use the basic fundamentals of corporate
strategy to find those philanthropic areas that not only benefit society, but also benefit the firm.
From this viewpoint, organizations should find social needs that align with their particular
expertise. For example, it would seem to make little sense for a computer manufacturer to spend
funds on building homeless shelters. This is not to suggest that the computer manufacturer
should not engage in philanthropy, but rather that when it does so, it should engage in an activity
or issue closer to its area of expertise. In this case, a computer manufacturer might have a goal of
providing free or low cost computing solutions for the poor, and would be wise to leave to a
construction company the charitable provision of sheltering homeless citizens.
Companies that focus on causes in their area of expertise will almost certainly be more
efficient at addressing social needs. In fact, Porter and Kramer suggest that firms should exploit
this synergy between the social and the economic, rather than try to minimize it.

3. From investing to socially responsible investing

The modern history of socially responsible investing (SRI) can be traced back to the activist
movements of the 1960s and 1970s. The real boost to social investing occurred in the 1960s,
with the growing number of boycotts of firms that were doing business in South Africa.
Although but one factor in the eventual collapse of the white minority regime, this successful
social movement provided the model for similar movements.
The central idea behind social investing is that it is possible for groups of individuals to
have an impact on the practices and policies of firms through market mechanisms. By not
purchasing or by selling the shares of certain firms that are engaged in practices that the
stockholder finds objectionable, he or she can make a small difference. Acting in unison, many
stockholders can make a major difference. This is similar to voting in national elections: while it
is very unlikely that any single individual can make a difference, the sum of all individuals can
make a substantial difference.
Today, SRI is a large and sophisticated movement. According to the Social Investment
Forum (2006), $2.29 trillion in assets was socially managed in 2005. This represents nearly 10%
of all managed assets. Socially responsible investing entails following one of three broad
strategies: screening, social advocacy, or community investment.

3.1. Screening
Screened funds have either negative screens or positive screens. Those with negative screens
weed out firms that produce objectionable goods and services, or operate in distasteful industries
or countries. Such funds run the gamut and often exclude firms that deal in tobacco, alcohol,
gambling, defense, and nuclear power. In addition, they might screen out firms that operate in
countries with human rights abuses or repressive regimes, or those that are categorized as
terrorist states.
Funds with positive screens invest in firms that are viewed as socially responsible.
Examples of such organizations include Herman Miller, IBM, Timberland, and Starbucks, all of
which tend to rank near the top of the most recent lists of ethical and socially responsible firms.
They have policies and practices lauded by the firm’s employees, customers, and other
stakeholder groups.

3.2. Social advocacy

A second focus of socially responsible investing is social advocacy. One example of social
advocacy is the Investor Network on Climate Risk (INCR). The INCR is a network of over 60
institutional investors that is concerned with climate change. It consists of representatives from
major institutional investors, a number of states, and over 15 countries. What unites this
disparate group is the recognition that either their investment portfolios or their beneficiaries are
vulnerable to the risks posed by climate change. The INCR holds conferences, funds research,
and advocates in the area of climate change. On occasion, it will also lobby for climate change
legislation.
3.3. Community investment
The final strategy of SRI is community investing. Here, funds focus their investments in areas
such as non-profits, cooperatives, small businesses, community facilities, and affordable
housing. The principle behind community investment is to make investments that will strengthen
local communities.

4. From entrepreneurship to social entrepreneurship

Social entrepreneurship is the process of applying the principles of business and entrepreneurship
to social problems. Social enterprises are enterprises devoted to solving social problems. The
reason for their existence is not to maximize return to shareholders, but to make a positive social
impact. One way to envision social entrepreneurship is to picture how an MBA might tackle a
social problem. Presumably, an MBA facing a social problem would be concerned with how to
finance the operations, market the product, and organize the enterprise. She would be very
concerned about measuring outcomes. She would recognize that it will be necessary to generate
funds in order to pay for the ongoing social investments.
One of the best known social entrepreneurs is Professor Mohammed Yunus, who founded
the field of micro lending. Professor Yunus’ first experiment in micro lending occurred in 1972,
when he lent $27 to 42 families in rural Bangladesh so that each could purchase a small
inventory of items to sell for a profit (Knowledge@Wharton, 2007). These loans were
subsequently repaid in full.
Following that and similar experiences whereby he funded loans using his own money,
Professor Yunus founded Grameen Bank in 1976 as a trial to determine whether it was feasible
to systematically provide credit and banking services without collateral to the very poor (in his
words, “the poorest of the poor”) in developing countries. After several years of testing,
Grameen Bank was able to achieve an astounding repayment rate of over 98% (Yunus, 2002). As
of March 2007, the institution had lent over $6.13 billion (Grameen Bank, 2007), and earned a
profit in all but three years of its existence. Of critical significance is that once loans are repaid to
Grameen Bank, these funds are recycled into the community by extending more loans. For
pioneering work in micro credit, Mohammed Yunus and Grameen Bank were named recipients
of the 2006 Nobel Peace Prize.
 Green Mountain Coffee represents another type of social venture: it makes a profit, but at
the same time entertains a significant social mission. The firm, which produces a variety of fine
coffees, also supports a wide range of social causes. The exclusive roaster, seller, and distributor
of Newman’s Own Fair Trade Certified coffees, Green Mountain gives at least 5% of its pre-tax
profits to a range of social initiatives. In addition, Green Mountain Coffee has been recognized
by Forbes magazine as one of the “200 Best Small Companies in America.”

5. From venture capital fund to social venture capital fund

Supporting the growth in social ventures is a new type of venture capitalist. Social venture
capitalists not only supply seed money to social ventures, but also engage in a rigorous process
of training future social entrepreneurs. For example, Echoing Green has supported over 400
social entrepreneurs, as Echoing Green Fellows, in the fundamentals of social enterprise.
Covering individuals for two year terms, the company has invested $25 million in the program
and has seen its Fellows subsequently raise an additional $938 million, representing a nearly 40-
fold leverage on the initial investment (Echoing Green, 2007). Beyond providing seed money
and training, Echoing Green provides technical assistance, consulting help, and networking
opportunities.
Another social venture capital firm, Ashoka, was founded by Bill Drayton. An early
recipient of a MacArthur Prize (sometimes referred to as the “genius grant”), Drayton was in
2005 named one of America’s top 25 leaders by US News & World Report. In 1980, Drayton
founded Ashoka with an initial investment of $50,000. Today, Ashoka’s annual budget is in
excess of $30 million. Since 1981, the organization has named over 1800 Ashoka Fellows from
over 60 countries, providing them with training, living stipends, and networking opportunities
(www.ashoka.org).

6. From an MBA to an MBA in CSR

A number of MBA programs have begun to focus on the area of social responsibility and social
entrepreneurship. For example, Indiana University now offers a certificate program in Social
Entrepreneurship for graduate students. A joint venture of the Kelley School of Business, the
School of Public and Environmental Affairs, and the Center on Philanthropy, the program
requires that MBA students (and others) take 18 credit hours to prepare them to help solve social
problems, using courses from all three of these highly rated entities.
In 1993, the Harvard Business School created an “Initiative on Social Enterprise.” This
plan supports “the creation, strategy, and management of social enterprises; the governance of
social nonprofit organizations; corporate involvement in the social sector; and social capital
markets” (Aisner & Kavanagh, 1999). The Initiative on Social Enterprise now consists of one
required MBA course and seven elective courses, involving over 40 faculty and more than 300
students in this innovative program.
The CSR movement has now reached the point that at least one MBA program,
Nottingham University (in conjunction with Nottingham’s International Centre for Corporate
Social Responsibility (ICCSR)), grants a degree in the field. This MBA in CSR examines the full
range of socially responsible organizations, from forprofit through public. Students apply
principles of CSR and business ethics through the spectrum of functional courses. Ultimately, the
program prepares individuals for careers that will, at least in part, focus on CSR issues.

7. Corporate social responsibility and profitability

Several hundred academic studies have attempted to analyze the relationship between corporate
social responsibility and profitability. A recent metaanalysis suggests “the cost of having a high
level of corporate social responsibility is minimal and that firms may actually benefit from
socially responsible actions” (Wu, 2006, p. 168). This finding is similar to results of earlier
studies, such as Abbott and Monsen (1979), and should not be surprising. Examining the
marketing or the research-and-development literature, like conclusions can be found. Although
higher levels of both marketing and R&D are often associated with higher profits, the actual
relationship is very difficult to parse out in empirical studies. In fact, it is undoubtedly a function
of the specific industry and the environmental conditions faced by any specific firm at any given
point in time.
Nonetheless, it is possible to find mechanisms by which CSR might enhance profitability
by examining the impact of social responsibility on various stakeholders. It is important to
understand this does not mean that firms which engage in socially responsible activities will
always be more successful. It is rare when a single factor can explain why any specific
organization is successful or unsuccessful. In fact, the overall success of any organization is a
result of its entire portfolio of management practices and policies, combined with industry and
economic conditions, plus a certain degree of luck.

7.1. Employees
Firms that have good employee relations are likely to have significantly lower turnover rates and
a substantially more enthusiastic workforce. Consider the fact that, in 2007, Google was named
by Fortune magazine as the best company for which to work. In addition, many would claim the
firm is one of the most “fun” for employees: it offers free meals, a spa, and free medical care on
site (Fortune, 2007). Moreover, engineers at Google are allowed to spend up to 20% of their time
working on projects of their own choosing. As a result of all these perks, Google can choose
from the best of the best when hiring staff members; the company of 6000 employees receives
over 1300 résumés a day. With an exceptionally low turnover rate and very high employee
morale, factors such as these are likely to enhance Google’s bottom line over time.
In an important empirical study of this phenomenon, Turban and Greening (1997)
demonstrated that “a firm’s CSP may provide a competitive advantage in attracting applicants”
(p. 658). The authors went on to argue that firms develop a competitive advantage by being
perceived as great places to work. Clearly, Google falls into that category.

7.2. Customers
An excellent customer experience is a core element for most successful firms. Howard Schultz,
chairman of Starbucks, argues that “[w]ith more than 40 million customers per week worldwide,
Starbucks must continually find ways to surprise and delight customers by offering the highest
quality products and services” (Business Wire, 2006). Customers who are delighted are likely to
be repeat customers. As a result, Starbucks can charge five to ten times as much for a cup of
coffee than does the local convenience store, in part due to the quality of the customer
experience.

7.3. Governments
Strong government relations can also help companies in a number of dimensions. For example,
such firms are less likely to see seriously onerous regulations imposed on their industries, and are
more likely to be able to anticipate and react to new regulations. Importantly, they are expected
to be able to help mold new regulations in ways that are less likely to damage their basic
business practices. In a study of how firms can acquire strategic advantage through political
means, Schuler, Rehbein, and Cramer (2002) found that “firms with access to those who make
public policy enjoy competitive advantage” (p. 659).

7.4. Media
Positive media relations can be absolutely critical to organizations in today’s media rich
environment. Firms that are seen as socially responsible will have an edge over other firms,
particularly those with socially irresponsible reputations. Companies of good repute are much
more likely to be believed, and reporting on their activities will generally be significantly more
positive. Organizations that do a poor job with media relations risk damaging their reputation
(Motion & Weaver, 2005).

8. The bottom line

Perhaps the most important intellectual breakthrough regarding modern conceptions of CSR is
that socially responsible activities can, and should, be used to enhance the bottom line. The
corollary is that most, if not all, economic decisions should also be screened for their social
impact. Economic returns and social returns should not remain quarantined in isolated units.
Firms that successfully pursue a strategy of seeking profits while solving social needs may well
earn better reputations with their employees, customers, governments, media, et cetera. This can,
in turn, lead to higher profits for the firms’ shareholders.