Tracing The Historical Origin And Development Of Corporate Social Responsibility and

Critically Analysing The Role Of The Concept Of Corporate Social Responsibility In

Corporate Governance.
By Edwin N Kimani*
TABLE OF CONTENTS
Tracing The Historical Origin And Development Of Corporate Social Responsibility and
Critically Analysing The Role Of The Concept Of Corporate Social Responsibility In Corporate
Governance. .................................................................................................................................... 1
1. Introduction .......................................................................................................................... 3
1.1. A History of Corporate Social Responsibility ................................................................. 4
1.2 Cycles of Corporate Social Responsibility ....................................................................... 6
1.3 Contemporary Applications And Historical Perspectives .............................................. 11
2. Theoretical Framework On CSR .............................................................................................. 14
2.1 Stakeholder theory and CSR ........................................................................................... 14
2.2 Institutional theory and CSR ........................................................................................... 14
2.3 Other Theories ................................................................................................................ 17
3. Legal Aspects and Regulation Of CSR ..................................................................................... 19
3.1 Arguments in support of CSR Regulation ...................................................................... 19
3.2 Arguments against CSR Regulation ............................................................................... 20
3.3 Approaches to Corporate Philanthropy........................................................................... 21
3.4 Legal Framework of CSR in Kenya................................................................................ 24
4. Role of Corporate Social Responsibility................................................................................... 27
4.1 Dimensions of CSR......................................................................................................... 28
5. Significance Of CSR ................................................................................................................. 32
a) Social Responsibility and Customer Relationships .......................................................... 32
b) Motivated Employees ....................................................................................................... 32
c) Profitability and Value ...................................................................................................... 32
d) Showing a True Commitment........................................................................................... 33
e) Social Media Visibility ..................................................................................................... 33
f) Public Relations Benefits .................................................................................................. 33
g) Government Relations ...................................................................................................... 33
h) Building a Positive Workplace Environment ................................................................... 34
6. Emerging Trends in Corporate Social Responsibility .............................................................. 34
6.1 Emerging trends .............................................................................................................. 34
7. Challenges to Corporate Social Responsibility......................................................................... 36
8. REFERENCES ..................................................................................................................... 39

2
 1. Introduction
Overtime, corporate social responsibility, herein CSR, has morphed from being an irrelevant
concept outside corporate governance, to being recognized as a core organizational objective. In
the contemporary business world, managers employ the concept as a strategic tool for compliance
with regulations and the maintenance of standards. The concept of corporate social responsibility
is also linked to company reputation and has helped command consumer loyalty. However, there
are still debates on the place of corporate social responsibility and whether it is a subset of
corporate governance. In order to determine this, it is imperative to first get a more nuanced
understanding of the concept.

One of the earliest attempts towards defining the concept was made by Howard Bowen, as “the
obligations of business men to pursue those policies, to make those decisions, or to follow those
lines of action which are desirable in terms of the objectives as values of our society”12. Definitions
of the concept during that era were more inclined towards the need for managers to take up
responsibilities for the good of society by contributing to its stability, strength and harmony3.On
the other hand, Brown and Dacin (1997) define the concept as “A corporate status and activities
with respect to its perceived societal or, at least, stakeholder obligations “4.A more recent definition
given defines it as a “cluster concept which overlaps with such concepts as business ethics,
corporate philanthropy, corporate citizenship, sustainability and environmental responsibility. It is
a dynamic and contestable concept that is embedded in each social, political economic and
institutional context.”5 Despite the various definitions, it is clear that the concept is centered upon
two aspects; sustainability and social obligations. Analyses of the various definitions have
concluded that authorities on Corporate Social Responsibility have based their definitions on five
dimensions; environmental, social, economic, stakeholder and charity.6

*The author is an Advocate of the High Court in Kenya and an LLM holder in Capital Markets from the University
of Nairobi
1
Bowen, Howard R. Social responsibilities of the businessman. University of Iowa Press, 2013.
2
Howard Bowen was called the father of corporate social responsibility due to his immense contributions to the
field.
3
Drucker, Peter. The practice of management. Routledge, 2012.
4
Brown, Tom J., and Peter A. Dacin. "The company and the product: Corporate associations and consumer product
responses." The Journal of Marketing (1997): 68-84.
5
Matten, Dirk, and Jeremy Moon. "Corporate social responsibility." Journal of business Ethics 54, no. 4 (2004):
323-337.
6
Dahlsrud, Alexander. "How corporate social responsibility is defined: an analysis of 37 definitions." Corporate
social responsibility and environmental management 15, no. 1 (2008): 1-13.

3
Throughout history, Corporate Social Responsibility has manifested itself in many different
dimensions. For instance, during the post-Vietnam war period, it took the form of humane
philosophies, poverty alleviation, philanthropy and community development. During the late 20th
century, the concept symbolized of corporate citizenship through adoption of legal and ethical
responsibilities and management of relationships with stakeholders. In the 21st Century, the
concept runs to the core of corporate governance. It is employed as a competitive strategy, as
companies use it to ensure suitability, accountability and transparency. The 21st century saw the
internationalization of Corporate Social Responsibility standards making the practice more similar
in different nations.7

1.1. A History of Corporate Social Responsibility

One of the first debates around Corporate Social Responsibility occurred in 1932 with a series of
articles by Adolf A Berle and Harvard professor E. M. Dodd8. In answering the question, “For
whom are corporate managers trustees?” their response was that corporate managers are
responsible to the public as a whole, not only shareholders. Their argument was that the law
permits firms to operate primarily because they are of service to the community, and not because
they are a source of profit for their owners9. The 1953 publication of Howard R. Bowen’s seminal
book, Social Responsibilities of the Businessman, marked the beginning of the modern era of
Corporate Social Responsibility, as we know it today10. In this book, Bowen famously posed the
question, “What responsibilities to society may businessmen reasonably be expected to assume?”
The answer was that businessmen were responsible for the consequences of their actions in a
sphere somewhat wider than that covered by their profit-and-loss statements and, interestingly,
93.5% of businessmen responding to a Fortune magazine survey conducted during the same
period, agreed with the statement11.

7
Hamidu, Ahmad, Md Haron, and Azlan Amran. "Corporate social responsibility: A review on definitions, core
characteristics and theoretical perspectives." (2015).
8
Cochran, P.L. (2007). The evolution of corporate social responsibility. Business Horizons. Vol. 50, No. 6,
2007:pp449-454
9
Supra note 1
10
Carroll, A.B. (1999). Corporate Social Responsibility: Evolution of a Definitional Construct.
Business & Society. Vol. 38, No 3, September 1998:pp268-295
11
ibid
4
The 1950s also saw the emergence of civil rights movements in the United States, which gained
momentum in the case of Brown vs. Board of Education verdict12 where the United States Supreme
Court decision dismantled the legal basis for racial segregation in schools and other public
facilities. Civil activists were to become some of the most vocal and hard line proponents of social
and environmental awareness, exerting pressure on government to regulate corporations’ self-
serving approach to business. The environmental movement having been sparked by Rachel
Carson’s book, Silent Spring, published in 196213 exposed the harmful effects of pesticides on the
environment and accused the chemical industry of spreading misinformation. More energy was
subsequently provided by Ralph Nader’s 1965 book, Unsafe at Any Speed, wherein he accused
automobile manufactures of refusing to spend money on improving the safety of cars 14. It then
became commonplace for society to hold corporations to account for socially and environmentally
irresponsible behavior. The Vietnam War of the 1960s and early 1970s brought about the
unification of the various social movements and ushered in an era of activist groups and NGOs
concerned about businesses and business practices15.

The 1970s was a decade in which environmental issues rose. Greenpeace and Friends of the Earth
were founded (MacKay & Watson, 2003: 625). These two organisations have been instrumental
in the reform of regulation over the past 40 years. In 1972 the first major international conference
addressing environmental issues was held. This was the United Nations Conference on the
Environment held in Stockholm (MacKay & Watson, 2003: 625). In 1978 William Frederick wrote
a working paper titled From CSR1 to CSR2, in which he noted that businesses had risen beyond
the level of academic debate but were pragmatically responding to social pressures16.

The 1980s witnessed the emergence of environmental legislation in the UK and USA. Interest in
this period was mostly focused on conservation and on ‘sustainable development’.
In the late 1990s the concept of sustainability started to include Corporate Social Responsibility
(as well as governance). This shift came as a result of the increase in corporate scandals. It soon
became clear that unethical behaviour was just as detrimental to society as inappropriate

12
Supra note 1
13
ibid
14
ibid
15
ibid
16
ibid
5
environmental practices. Kielstra reports that Corporate Social Responsibility has moved along a
continuum to a point where “today leading companies are looking at aligning business strategy
with societal needs”17.Other drivers of the Corporate Social Responsibility revolution have been
concerns over climate change and energy security. These fears were driven largely by the rapid
urbanisation of the world and the growth of megacities. So currently CSR includes environmental
responsibility, risk management and corporate governance, whilst maintaining the drive towards
improved financial performance.

1.2 Cycles of Corporate Social Responsibility18

What do corporations owe society is a question that has been asked as a result of scandals. Legal
debates over Corporate Social Responsibility revolve around whether directors have a legal duty
to take into account needs of stakeholders affected by a corporation’s actions. Works on Corporate
Social Responsibility focus on what the company owes shareholders, workers and the larger
community. The only shortcoming with the debates is that they rarely go anywhere. Each new
round of debate resembles the previous one but in a slightly altered form.

There are four theoretical models that explain the historical evolution of the concept of Corporate
Social Responsibility. Four models (CSR1 to CSR4) constitute the milestones of the debate.
CSR1 remained prominent from 1960 until the late 1970s, it views companies as an element of
society with corresponding obligations and responsibilities and contends that since they make use
of non-monetary social benefits, they should also show themselves to be responsible agents in
society and heed the consequences of their actions on society for ethical reasons. This construct
effectively established the idea and is the foundation on which subsequent concepts are based. The
next significant step came with the recognition of the fact that companies that accept and embrace
these responsibilities are able actively to shape their relationship with society. This exerting of
influence by companies on their social environment came to be known as corporate social
responsiveness.

17
Kielstra, P. (2008). Doing good: Business and the Sustainability Challenge. A Report for the
Economist Intelligence Unit. 2008.
18
The Cycles of Corporate Social Responsibility: An Historical Retrospective for the Twenty-first Century C.A.
Harwell Wells
6
CSR2 which was first discussed in the mid-1970s presupposed internal analyses, targets and
planning processes, which shifted the focus in subsequent development activities onto the actual,
demonstrable achievements of the company and the issue of how to measure them.
The CSR3 and CSR4 concepts did not appear until the 1980s and 1990s. CSR3, corporate social
rectitude, addresses the integration of ethical issues into central corporate decision making, while
CSR4, Cosmos, Science and Religion, attempts to put the significance of individual companies
into perspective and stresses the importance of natural science and meaning for the development
of society’s institutions. Thus far, however, the ideas and concerns raised by CSR3 and CSR4 have
failed to gain any significant foothold in either the debate or general corporate practice19.

1.2.1 1st Debate; 1931-1932

Adolf A. Berle and E. M. Dodd could not agree on the responsibility directors owed shareholders
as well as other groups. The debates in the 1960s, mid 1970s and years around 1990 were products
of specific legal and social development. The debates nevertheless shared foundations and were
premised on the idea that the U.S economy was dominated by a relatively small number of
enormous and powerful and corporations that were different from smaller competitors.
The immediate solution was not elimination of the corporation but rather implementation of legal
mechanisms that would require directors to take into account needs of both shareholders and
stakeholders.
There were 4 claims about the discourse of social responsibilities;
1) CSR is about big business. When CSR is discussed, the discussion is centred on social
responsibility being that of a giant corporation.
2) Advocates for CSR aim to reform corporate powers not eliminate it.
3) Diverse legal debates over CSR share the underlying structure. One accepted doctrine is that
managers and directors have a duty to make decisions that will increase company profits.
CSR advocates challenge the shareholder primacy which only imposes corporate decisions but
fails to account for interests of other constituents.
4) Structure of the CSR debate remains constant with each decade supplying its own reason why
the organization should assume more responsibility. CSR is therefore an unchanging solution
to a new problem.

19
Significance of the CSR debate for sustainability and the requirements for companies T loew, K Ankele, S Braun,
J Clausen
7
1.2.1.1 Berle, Dodd and Origins of The Debate
The debate dates back to the 1930s between A. A. Berle and E. M. Dodd over whom do directors
ought to serve. The debate emerged from changes in the American business in the 1920s. For
Berle, his background in corporate law exposed him to some of the worst corporate legal abuses
in the 1920s where the corporates were often run by their owners but later it passed from owners
to managers. There was erosion of legal abuses in the 1920s that once put strict limits on managers
and managements increased willingness to transfer corporate wealth and power from shareholders
to themselves. Berle received a grant from the Rockerfeller foundation to study the modern
corporation. Berle together with Gardiner Means and his sponsor William Z. Ripley saw their
study as an examination of management abuse of shareholders, but they would later on realize the
broader issue was that of corporate power over the American society.

In the Berle – Dodd debate, Berle sought to protect shareholders from managers while Dodd sought
to protect the nation from corporations. The idea behind general social responsibility of
corporation was not in Berles article but the same was found in Dodds article ‘For whom are
corporate manager’s trustees’. Berle saw the gap between ownership and control and perceived it
as the problem with the immediate solution being imposing new duties on managers. Dodd on the
other hand saw the gap as an opportunity in that if directors could have new duties to shareholders
imposed on them, could they not equally assume duties to stakeholders. As at 1932, there was no
clear cut legal doctrine outlining how the corporate manager could favour community interest over
shareholder wealth.

What then are the unresolved tensions in this cycle?

Dodd wanted to give directors leeway to help the constituents beyond shareholders therefore
proposing that they be treated as agents of the corporation and not shareholders. Berle on the other
hand skeptical about the potential of abuse advocated for strict fiduciary duties towards
shareholders and hoped to include the courts as protector of shareholder interests.

1.2.2The Debate Recurs; From The 1950s To The 1990s

After the Berle –Dodd exchange the CSR debate lay dormant for nearly 20 years. Several factors
contributed to its quiescence, one of them being the deepening of the depression by 1933 that had

8
thrown into doubt the survival of large corporations. The abuses that Berle and Dodd attacked
were resolved through enactment of legislation like the Securities Act and the Exchange Act.
1950’s legal debate over CSR was part of a bigger discussion over the corporation’s role in
American society and politics. The 1950s witnessed an outpouring of critical writings on the large
corporations.

David Rockerfeller summed up corporate success as ‘the old concept that the owner of a business
had a right to the use of his property as he pleased to maximize profits, has evolved into the belief
that ownership carries certain building social expectations/obligations. Berles approach post world
war differed from his approach in the 1930s. He over the years had advocated that the corporation
should use its powers for the benefit of the entire community.

Berle was still very optimistic about the corporation and many other writers but lay emphasis on
the unique status and power of the large corporation did fit well with the critiques of the 1950s.
For instance his political economy differed from that of John Kenneth Galbraith who argued that
large corporations possessed oligopolistic economic power. He would however agree with C.
Wright Mills and Vance Packard that corporations had great political power in America though
they would have differed on whether this was good or bad.

Berle could relate better with Peter Drucker who is known as a pioneering management consultant
in the 1950s, who was viewed as an analyst of corporate power having written the concept of the
corporation and the new society where in each he put a corporatist vision by declaring the
corporation to be the representative institution of modern society and further argued that its powers
over workers and consumers gave it a social, political and economic dimension. His particular
interest was on corporate management, seeing senior managers as wise men capable of balancing
needs of all the corporations’ diverse divisions and employees. For him the ideal corporation would
be run by an enlightened manager for the benefit of its shareholders, workers and the wider
community.

9
In 1953, the New Jersey Supreme Court held in A. P Smith Manufacturing Company versus
Barlow20 that New Jersey allowed corporations to make charitable donations. Smith is today often
read as allowing corporate donations as an aspect of enlightened self-interest, so reconciling it with
doctrines of shareholder primacy, but the decision included a ringing defense of a corporation’s
social duties. In the course of its holding, the Smith court cited Berle and Means’s The Modern
Corporation and Private Property, as well as Dodd’s For Whom Are Corporate Managers
Trustees. While the court’s final decision relied on a construction of New Jersey’s corporation’s
statutes, it also rested on the proposition that, “just as the conditions prevailing when corporations
were originally created required that they serve public as well as private interests, modern
conditions require that corporations acknowledge and discharge social as well as private
responsibilities.” Even if, in the long run, Smith had only a limited impact, its immediate effect
was to give heart to Berle and other proponents of still greater corporate social responsibility.
Berle and Drucker were on the far end of the spectrum in 1950s’ discussions of corporate
responsibility, but more clearly than other critics they articulated a legal foundation for a socially
responsible corporation.
The corporation, they believed, was not merely an economic assemblage but a social institution
serving employees, shareholders, customers, and communities. Each group could be said to have
a claim on the corporation. Berle and Drucker’s legal innovation would complete the separation
of ownership and control, by having the corporation treat shareholders as merely one constituency
among many, and trust the managers to act for the “public good.” In broad strokes their proposals
differed little from Dodd’s of twenty years before. Berle and Drucker’s chief failing was their
inability to clearly address the problems raised by their proposals. How management would
reconcile constituents’ conflicting demands, or why it would not simply line its own pockets, was
left largely unaddressed.

Even harsher criticism was to come in an essay by Yale Law School Dean Eugene V. Rostow.
Rostow correctly identified much of the new push for corporate social responsibility as an
outgrowth of the proposals Dodd made in 1932. He mocked this “emerging ethos” which claimed
that “corporate property “was” really that of the directors and management, to dispose of . . . in
accordance with their own standards of business foresight, social statesmanship, and generalized

20
13 N.J. 145, 98 A.2d 581 (N.J. 1953)
10
good citizenship.” Most people, Rostow noted, felt little need to radically revamp corporate law in
the way Berle, Drucker, and many of the contributors to The Corporation in Modern Society
suggested. Outside academia and intellectual circles, he claimed, most people did not feel there
was a problem of corporate power. Rostow’s greatest contribution to the emerging debate was to
offer an economic defense of modern corporate law. The new proposals, Rostow saw, would turn
managers from agents for shareholders into autonomous agents free to direct corporate funds in
the public interest.

The problem was not just that such proposals placed huge faith in ordinary men, the problem was
that they ignored the economic justification for business in the first place. Allowing corporate
managers to deviate from profit maximization would distort market mechanisms for distributing
goods and services, and might, if pursued with enough force, produce long-run market failure. Not
until the 1970s would economic analysis become an important element in debates over corporate
social responsibility, and not until the late 1980s would it win the field.
By the early 1960s, a few clear lines had been drawn in the ongoing debate over corporate social
responsibility. On the one side stood Berle, Drucker, and allies both inside and outside legal
academia. They agreed on at least two broad propositions. First, large corporations had over the
previous half-century amassed not only economic but social and political power, power that
decisively set them apart from smaller firms. Second, with this new power came new
responsibilities to groups beyond shareholders. Against this view stood a few scholars who voiced
scepticism about both the threat of “corporate power” and the promise of business statesmanship,
and who contended that shareholder primacy should not be abandoned without far better reasons
than had so far been offered. It was, to put it mildly, an unfocused debate. But its very lack of focus
tells us something. In both generalities and particulars, the debate recapitulated the 1930s debate
over corporate social responsibility.

1.3 Contemporary Applications And Historical Perspectives

What can critics take from the history of corporate social responsibility? By giving perspective on
the development of legal proposals for making corporations more responsible, this history should
better enable us to distinguish genuinely innovative proposals from conceptual dead ends, and spot
weaknesses and unanswered questions in new proposals. As examples, we can examine a recent

11
scholarly proposal touching on corporate social responsibility: Cynthia Williams’ proposals for
greater corporate transparency through securities disclosures21.

Social Transparency
Cynthia Williams seeks social responsibility through greater corporate disclosure. In The
Securities and Exchange Commission and Corporate Social Transparency22, she argues that the
Securities and Exchange Commission should change its disclosure rules to require publicly held
corporations to make “social disclosures,” which she defines as information about “management’s
policies and practices with respect to social and environmental issues.” Her article is an exegesis
of the history of the Securities Act and the Exchange Act, demonstrating that the acts (especially
Section 14(a) of the Exchange Act) can be fairly read to allow the Securities and Exchange
Commission to require disclosure of socially relevant, but non-material, information. She appends
a shorter discussion of why such disclosure might be desirable, pointing to the use that investors,
concerned with social issues, might make of such information, and the light such disclosure might
also shed on corporate management’s competency.
While she focuses on the use shareholders and potential investors would make of this information,
it is clear she hopes the information will change the companies’ policies as well. Williams’ article
fits within the broad ambit of corporate social responsibility, her proposal focuses on large
corporations, is reformist rather, and aims to make corporate managers responsible to
nonshareholder constituencies. She does not call for imposing new fiduciary duties on managers
or directors but her paper also suffers from unanswered questions, questions that would have been
apparent against a backdrop of earlier proposals. Two examples will suffice.

Williams assumes that corporations have concentrated power and that taming that power is the
proper task of corporate law. In making this assumption, she ignores criticisms of this view offered
by, among others, Milton Friedman and the nexus-of contracts theorists of the corporation, who
have contended that the corporation when properly viewed has little power other than what its
constituents have ceded to it. She presupposes corporations have disproportionate power and need
to be tamed, but does not support this with the careful analysis that marked Berle’s work.

21
“The Securities and Exchange Commission and Corporate Social Transparency” By Cynthia A. Williams.
Published on the Harvard Law Review, Vol. 112, P. 1197, 1999
22
Ibid No. 21
12
Second, Williams’ neutral proposals smuggle in a specific social agenda. Social reporting, she
hopes, will lead companies to do “more expensive things for their communities, their employees,
and the long-term welfare of the company,” including offer childcare. But as David Engel pointed
out twenty years before, such proposals ask corporations to implement programs that government
has not yet seen fit to provide, in effect asking corporate managers to use corporate funds to
implement their own view of societal needs. Knowledge of the long debate over corporate social
responsibility would have allowed Williams to frame answers for these objections to her proposals,
and so strengthened her overall scheme for Securities and Exchange Commission -imposed
corporate social transparency. As it is, not taking into account the past, she leaves unanswered the
same questions that faced her predecessors.

Cycles of legal debates over corporate social responsibility have, since the 1930s, shared deep
similarities despite superficial differences. All the separate debates have:
i. Presupposed that the problems created by business are really problems created by this
nation’s large publicly held corporations,
ii. Aimed to reform those corporations, rather than to eliminate them, and
iii. Seen the imposition of new duties towards nonshareholder constituents on directors and
officers as the best way to make corporations answerable not just to shareholders, but to
the wider society.
To be sure, each debate has also differed from its predecessors and successors, but chiefly in the
problems they profess to tackle. As stated earlier, the problems change; the solutions remain the
same. The result has been an often stale scholarly critique of corporations as each new cycle of
debate recapitulates debates in the past, and as ideas are recycled with little awareness of their
predecessors, much why they were rejected thirty (or even seventy years) before.

13
2. Theoretical Framework On CSR
2.1 Stakeholder theory and CSR
Stakeholder theory23 emerged as the dominant theoretical response to the economists‟ challenge
about firm’s role as a wealth-creating agent or a social institution24. Freeman provided a framework
to examine how firms relate to “any group or individual who can affect or is affected by the
achievement of the organization’s objective”25. This is because firms consist of a variety of
different constituencies such as customers, suppliers, employees, shareholder and even society at
large in which firms have to balance these various stakeholders‟ needs”.

Most of the stakeholder literature focuses on four issues26. First, it focuses on describing who the
stakeholders are and what corporation is. Second, it claims that stakeholders have legitimate
interests over corporate activities. Third, it advocates structures, attitudes, and practices that
constitute stakeholder management. Last, it discovers the relationship between achievement of
numerous corporate performance goals such as profitability and growth as well as stakeholder
management. Although stakeholder theory is closely related to CSR to the extent that the theory
defines inappropriate and appropriate firm behaviors in relation to their stakeholders, stakeholder
theory alone is not well-suited on the grounds that it neglects the question of how stakeholders are
impinged upon specific politics, culture, and the like that form institutional environment which
establishes proper set of incentives for firms to act in socially responsible manner.
Proponents of stakeholder theory maintain that increasing shareholder wealth is too myopic.
According to stakeholder theory, increased CSR makes firms more attractive to consumers.
Therefore, CSR should be undertaken by all firms.

2.2 Institutional theory and CSR

New institutionalism or neo-institutionalism broadens the conception of earlier organizations
environment, which emphasized the importance of technical environment, to include the
importance of social and cultural environment27. The theory recognizes that social, economic,

23
Freeman, R.E. (1984). Strategic management: A stakeholder approach. Pitman/Ballinger, Boston.
24
Margolis, J.D., Elfenbein, H.A. and Walsh, J.P. (2007). Does it pay to be good? A meta-analysis and redirection
of research on the relationship between corporate social and financial performance. Presented at Annual Convention
Academy of Management, Philadelphia.
25
Supra note 1 page 46
26
Donaldson, T. and Preston, L.E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and
implications. Academy of Management Review 20(1), 65-91.
27
Scott, W.R. (1995). Institutions and organizations. Sage, Thousand Oaks, CA.
14
political and other factors constitute an institutional structure of an environment, or rationalized
myths, widely held beliefs and impersonal rules specifying procedures necessary to accomplish a
given end. Owing to the fact that firms need to establish legitimacy and obtain resources, existing
external and internal institutional pressures in the environment where firms operate such as
politics, public, or cultural pressures force organizations to adopt a particular structural form and
therefore behave in certain ways in order to survive28. The net effect of institutional pressures is
then the increase in homogeneity of organizational structures in an intuitional environment.

With responsiveness towards stakeholders as a vital part of CSR, firms embedding in broad
political and economic institutions affecting their behaviors29 , and an institutional framework
where CSR is considered as a part of a new legitimacy30, we focus on institutional determinants of
CSR31. Institutional theory is associated with CSR through:
i. bringing in interactions and inter-dependencies among stakeholders into account; and
ii. creation of rationalized myths that regulate and standardize firm practices to execute CSR
to some extent, leading to homogenization of institutional environment adhering to socially
responsible behavior32.
Consider an example of firms‟ CSR involvement through coercive isomorphism – formal or
informal pressure (i.e., laws imposed by states, standards enforced by voluntary organizations)
exerted on firms as a condition for legitimacy.
Industrial associations force product quality, workplace safety, and the like of socially responsible
behaviors by setting standards to which members should adhere. Failure to conform can be seen
as irrational and negligent and might even result in sanctions33. Another example is ISO14000.
Ever since its establishment, there has been a rush of firms‟ initiatives to comply with this
environmental standard34. In addition, scholars have agreed that certainly there are increasing
internal and external pressures exerted on firms to fulfill broader social goals and consequently

28
Meyer, J.W. and Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. The
American Journal of Sociology 83(2), 340-363.
29
Fligstein, N. (2001). The architecture of markets. Princeton University Press, Princeton, NJ.
30
Matten, D. and Moon, J. (2008). “Implicit” and “explicit” CSR: A conceptual framework for a comparative
understanding of corporate social responsibility. Academy of Management Review 33(2), 404-424.
31
Wood, D.J. (1991). Corporate social performance revisited. Academy of Management Review 16(4), 691-718.
32
Supranote 8
33
Campbell, J.L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of
corporate social responsibility. Academy of Management Review 32(3), 946-967.
34
Supra note 8
15
engage in CSR initiatives.35 From the arguments above, we conclude that there exist institutional
pressures for firms to embrace CSR. These include external institutional pressures – i.e., forces
operating outside firms at the macro- and inter-organizational level within which firms maneuver36
such as government, consumers, and the public; and internal institutional pressures – i.e., forces
operating inside firms such as employees, management, organizational culture, structure, and
leadership37. There are other factors triggering firms to respond differently to CSR as well, for
instance, the features of the social problems.

There is no penalty or destructive impact from allocating resources to CSR. In fact, it seems that
such investments are advantageous especially if they are aimed towards bettering relationships
with key stakeholders38. This provokes many firms to adopt a triple bottom line philosophy, which
commends that organizational success is conditioned on:
i. economic profitability,
ii. environmental sustainability, and
iii. social performance (Hart and Milstein, 2003). Such triple bottom line thinking requires
integrative actions that are born organically from internal players, such as from
management and owners/shareholders.
This breed of CSR is driven by regards to relationships among distinct stakeholder groups in order
to gain legitimacy with a long-term purpose in order to achieve cohesion with societies.
It was therefore proposed that; Internal institutional pressures are in association with mutually-
benefiting CSR and external institutional pressures are not in association with mutually-benefiting
CSR.

35
Aguilera, R.V., Rupp, D.E., Williams, C.A. and Ganapathi, J. (2007). Putting the S back in corporate social
responsibility: A multilevel theory of social change in organizations. Academy of Management Review 32(3), 836-
863.
36
DiMaggio, P.J. and Powell, W.W. (1983). The iron cage revisited: Institutional isomorphism and collective
rationality in organizational fields. American Sociological Review 48(2), 147-160.
37
Supra note 11
38
ibid
16
2.3 Other Theories
2.3.1 Corporate Accountability Theory
The company should be responsible for all the consequences arising either intentionally or
unintentionally to stakeholders. The theory stated CSR activities not only generosity (charity) or
the activity of mutual love (stewardship) which are voluntary action which are understood by
businessmen so far, but it involved an inherent and fundamental obligation and has become a
"spirit of life" in systems and business practices. The underlying reason implies that CSR is a
logical consequence of the existence of human rights issued by the state to the company to live
and thrive in certain environment. If there is no harmony between human rights and obligations of
the company in that environment, there will live two parties, the company as gainers and society
as the losers39.
2.3.2 Legitimacy Theory
The original definition of legitimacy theory is a generalized perception or assumption that the
actions of an entity are desirable, proper, or appropriate within some socially constructed system
of norms, values, beliefs, and definitions40. Legitimacy theory perceives that the company and the
surrounding community have close social relations as both are bound by a social contract.
Therefore, CSR is a fundamental obligation of a company that is not voluntary and the disclosure
practices of corporate responsibility should be implemented in such a way that the activities and
performance of the company can be accepted by society.
2.3.3 Corporate Sustainability Theory
The theory underlines that in grow sustainably, corporations must integrate business goals with
social and ecological objectives as a whole. Business development should be based on three main
pillars, i.e. economists, social, and environment in an integrated manner, and does not sacrifice the
wellbeing of future generations to live and meet their needs. Corporate sustainability theory
perceives society and the environment is the main pillar and foundation that determines the success
of a business enterprise, therefore it must always be protected and empowered. The theory
identifies that the corporate growth and profitability are essential. However, it also involves the

39
Dellaportas, S., K. Gibson, R. Alagiah, M. Hutchinson, P. Leung and D.V. Homing, 2005. Ethics Governance and
Accountability. First Edition, pp: 206-212.
40
Suchman, M.C., 1995. Managing Legitimacy: Strategic and Institutional Approaches. Academy of Management
Journal, 20(3): 571-610.
17
corporation to pursue societal goals, specifically those relating to sustainable development which
include environmental protection, social justice and equity, and economic development41.
2.3.4 Political Theory
The economic domain cannot be isolated from the environment in which economic transactions
are carried out. A financial statement of company is a document of social and political as well as
economic documents. Since they cannot be isolated from the community and the environment,
companies must consider and implement CSR. Political theory focuses on a responsible use of
business power in political arena. The theory implies that social responsibilities of businesses
occur from the amount of social power that they have42.
2.3.5 Signalling Theory
The theory discusses how the company signals the external parties in providing information. The
impetus was due to the information asymmetry between management and external parties. To
reduce the asymmetry, the company must disclose information, both financial and non-financial.
Manager generally is motivated to deliver good information about the condition of the company
to the public because it can convince people to invest in the company. On the other hand, the
external parties would only have minimal information about the reliability of the information
delivered.
If the manager can provide a convincing signal to the public which must be supported by the
underlying data, then the public will respond positively. One of the mandatory information to be
disclosed by the company is information about corporate social responsibility. This information
can be integrated in a company's annual report or a separate corporate social report. The company
discloses Corporate Social Responsibility in conjunction to improving the reputation and value of
the company43.

41
Wilson, M., 2003. Corporate Sustainability: What is it and where does it come from? Ivey Business Journal
March/April.
42
Garriga, E. and D. Mele´, 2004. Corporate Social Responsibility Theories: Mapping the Territory. Journal of
Business Ethics, 53: 51–71.
43
Johnston, J.S. and G. Robert Fuller, Jr., 2005. Signaling Social Responsibility. Working Paper No. 14. Harvard
University.
18
3. Legal Aspects and Regulation Of CSR
Doreen McBarnet views CSR as having shifted from profit maximization for shareholders within
legal obligations to a responsibility towards communal concerns, environmental protection, legal
and ethical accountability.44 This expanded view has caused many companies in the United States
and United Kingdom to adopt new CSR structures, policies, codes and reporting standards. In
Kenya, the Kenya Bureau of Standards introduced ISO 26000:2010 on social responsibility which
is also voluntary, and urged companies to determine who they are responsible to for social
performance, identify socially relevant behaviour to carry out and report on those activities45 in
an accountable and transparent manner. 46 Carroll’s depiction of CSR includes corporate legal and
philanthropic responsibilities47 which have sparked a debate as to whether CSR should remain
voluntary or be legislated and regulated.

3.1 Arguments in support of CSR Regulation

Dr Sheikh Saleem in support of regulation alongside the civil society and governments, believes
that there is a responsibility owed to the environment, employees, suppliers, customers, the local
community and other such similar groups.48
Regulation would require companies with a lot of resources to not only benefit through profit
maximization, but to balance the needs of shareholders and stakeholders and aid the government
and civil society in solving social problems such as pollution control, infrastructure and education
among others. Furthermore, it would increase awareness on social responsibility for the benefit of
employees and protect them against corporate violations while increasing their participation in
CSR activities.
In addition to this, regulation would prevent or control environmental degradation and pollution
thereby reduce corporate litigation costs. When regulation requires participation in CSR,
corporations benefit from brand enhancement, profit maximization and increased acceptance into
the community. Compliance with legal and regulatory obligations is a form of good corporate

44
Doreen McBarnet, The new Corporate accountability: Corporate Social Responsibility Beyond la, Through Law,
For Law, University of Oxford; Chapter 1 of D McBarnet, A Voiculescu, T Campbell (editors) The New Corporate
Accountability: Corporate Social Responsibility and the Law. (Cambridge University Press, 2007) 1.
45
The Benchmark, Kenya Bureau of Standards (KEBS) News, Standards guarantee sustainable business practices,
Issue 6 (2009) 34. < https://www.kebs.org/images/newsletters/issue_61.pdf> last accessed on 8/10/2018.
46
Standard Digital, < https://www.standardmedia.co.ke/business/article/2000159017/kebs-tips-private-public-
sector-on-csr-standards>- last accessed on 13/8/2018.
47
Dr Archie. B. Carroll, ‘The Pyramid of Corporate Social Responsibility: Toward the Moral Management of
Organizational Stakeholders’, 1991 Business Horizons 34, No. 4, 39-48.
48
Dr Saleem Sheikh, Corporate Social Responsibilities: Law & Practice, Cavendish Publishing Limited, (1996) 52.
19
governance and citizenship. Regulation ensures a continuous corporate commitment to CSR is
maintained, development of codes, enforcement of mandatory CSR reporting, and prescribes legal
consequences for non- compliance. It is also argued that through regulation, the impact of CSR
will be measurable through a monitoring and evaluation tool at the board level. Regulation will
create a CSR legal framework to provide a structure, minimum requirements, and policy
guidelines, key areas of focus and an enforcement agency for regulatory purposes. If CSR remains
unregulated, companies will use the opportunity as a marketing gimmick with a self-centred focus
instead of a communal concern.

3.2 Arguments against CSR Regulation

Arguments against regulation state that the key role of a company is the maximization of profit for
its shareholders, strict adherence to the memorandum and articles of association and further that
any good act by the company is on a voluntary basis. The review of company law reporting in UK
adopted the voluntary aspect of CSR as opposed to a legal requirement.49 Subsequently, the
European Commission in its Green Paper on CSR and the Department of Trade and Industry in
UK upheld a similar view.50Opponents of CSR regulation argue that CSR ought to be voluntary
because creating an obligatory nature demeans and limits the goodwill of a company.
Further to this, it turns the practice into a checkbox system where companies carry out the
minimum required activities in order to be allowed to continue with their operations and avoid
legal implications. There is also a danger of companies finding clever ways of contravening laws
and regulations and escaping their obligation to carry out CSR initiatives.

If CSR becomes mandatory, an efficient enforcement agency must be established with the
appropriate corporate governance structures. With limitations such as lack of funds due to heavy
government debt, lack of political support and corruption, such efforts will be curtailed. It is also
argued that when CSR becomes a legal obligation, it will become another form of taxation to
companies which will be negatively received by profitable companies that are a source of income
generation and employment. 51 Regulation can be seen to be potentially expensive for companies
because in addition to philanthropy, they will need to consider recruiting staff with CSR expertise,

49
Department of Trade and Industry, Company Law Review Report 2001.
50
<www.UKcsr.gov.whatiscsr.> last accessed on 13/8/2018.
51
Mandatory CSR in India: help or hindrance? <http://www.eco-business.com/news/mandatory-csr-india-help-
hindrance/> last accessed on 8/10/2018.
20
capacity build their staff, creation of CSR board committees like in India and hiring of consultants
to produce codes. 52 For parastatals it is argued that since their mandates of public service delivery
are already a form of social responsibility, key focus should be on strengthening the achievement
of those mandates to reduce the need for CSR in key areas.

3.3 Approaches to Corporate Philanthropy

Corporate philanthropy refers to the ways in which companies support beneficial causes and
promote the welfare of others through strategic and generous use of finances, employee time,
facilities, products and services.53 Dr Saleem Sheikh opines that legal issues may arise in company
law regarding legal regulation of corporate philanthropy and gratuitous distributions.54 Before
1989, the ultra vires doctrine was applied strictly such that any transaction not defined in the
objects clause of the memorandum would be void and could not be ratified by members.55

In January 1973, UK joined the European community and implemented the first directive on
company law being Article 9, which was aimed at protection of third parties dealing with the
company. It stated that acts done by the organs of the company are binding even if they fall outside
the objects of the company unless the acts exceed the legally conferred powers on those organs.56

Where members could not comply with this directive there was an alternative provision which
stated that the company shall not be bound where acts are outside the company objects if it proves
that the third party knew that the transaction was outside the objects or could not have been
unaware of it.57 UK implemented the alternative provision which became Section 35 of the
Companies Act. It stated that in favour of a person dealing with a company in good faith, any
transaction decided upon by the directors is within the capacity of the company and the power of
directors to bind a company is free of limitation under the memorandum or articles. Furthermore,
a party to a transaction is not bound to inquire about the capacity of the company to enter into the
transaction or the limitation of the powers of the directors and will be presumed to have acted in

52
In 2004, 91% of the UK’s FTSE 100 companies had codes of conduct or statements of business. Ninety of the top
100 European countries, fifty nine of the US top 100 and eighty three of the FTSE 100 companies reported on CSR
in 2005-2006.
53
<https://www.frontstream.com/what-is-corporate-philanthropy/> last accessed on 13/8/2018.
54
Sheikh 105.
55
Sheikh 108.
56
Sheikh 111.
57
Sheikh 112.
21
good faith unless the contrary is proved. Good faith was defined in the case of Barclays Bank vs
TOSG Trust Fund Ltd to mean acting genuinely and honestly in the circumstances of the case.58

The Prentice approach to corporate philanthropy is that its problems do not exist if the company
is described as a general commercial company authorising it to carry on any legal trade or business
whatsoever including corporate donations as such donations enhance a company’s business
prospects. These donations are a part of a company’s general commercial acts. 59 On the contrary,
the Sealy approach contends that corporate philanthropy is an act ultra vires the company. The
argument is that why should the directors or even majority shareholders decide on benevolence
when there are likely to be other shareholders who would choose something different with their
share of money if it was paid out to them.60 However, Sealy acknowledges that public and judicial
perceptions on corporate philanthropy have changed to the belief that corporations should not
neglect wider interests outside shareholders such as employees, clients, customers, community and
the environment.
The judicial approaches taken by English courts to corporate philanthropy are as follows:
a. The Business judgment approach
This approach allows corporate gifting where decisions are taken by directors in good faith in
what they may consider and not what the court might consider is in the best interest of the
company. In the case of Taunton vs Royal Insurance Company61 the Vice Chancellor stated
that a compensation payment to insured parties was made because the directors though it was
judicious to do so and the action against it failed. There was concern for the company’s welfare
and its reputation in the community if the payment was not made.

b. The Liberal approach

This has been applied in English courts in allowing companies to engage in corporate
philanthropy. In the absence of an express power in the constitution of a company to make
gratuitous payments the courts implied a power to make these donations provided they are
reasonably incidental or conducive to the company’s business.62In the case of Evans vs

58
(1984) BCLC 1, 18.
59
Sheikh 116.
60
Ibid.
61
(1864) T24.
62
Sheikh, 119.
22
 Brunner Mond63 it was held that a donation of 100,000 pounds to universities and scientific
institutions for furtherance of education and research was permitted under the objects.

c. The Restrictive Approach

If a company is no longer a going concern due to its insolvency or near insolvency and is not
in a position to engage in corporate philanthropy or discharging any social obligation the courts
apply a restrictive approach. Any expenditure in corporate philanthropy is ultravires to protect
creditors and shareholders. In the case of Hutton vs WestCork Railway Co.64 the Court of
Appeal held that a power to make payments to former employees for loss of employment could
not be implied after the company had ceased to be a going concern. The powers are only
implied as incidental to the company’s business.

d. The Three Pertinent Questions Approach

A payment by a company could be made under an express or implied power dependent on the
answers to the three pertinent questions as follows65
 Is the transaction reasonably incidental to the carrying on of the company’s business?
 Is it a bona fide transaction?
 Is it done for the benefit and to promote the prosperity of the company?

In the case of Re Lee Behrens & Co. Ltd66 Eve J in using this approach held that a pension
payment to a widow was not for the benefit of the company or reasonably incidental to the
company’s business. The three questions approach was laid to rest in Rolled Steel Products
(Holdings) Ltd vs British Steel Corp67 where the court of appeal stated that the focus should
be whether a particular gratuitous transaction was within a company’s corporate capacity. An
act is ultra vires if it is in excess of the company’s capacity but if it could be ratified by
members in the general meeting then it is not ultra vires.

63
(1921) 1 Ch. 359.
64
(1883) 23 Ch. D 654.
65
Sheikh 125.
66
(1932) 2 Ch. D 46.
67
(1986) Ch. 246.
23
3.4 Legal Framework of CSR in Kenya
There are a number of laws and policies with provisions of CSR in Kenya.

Constitution of Kenya
Article 10 lists sustainable development, integrity, transparency and accountability under
principles of good governance and national values. Being key aspects of CSR, when a corporation
upholds them, funds set aside for it will be utilized accordingly for sustainable development. Under
Article 20, it is evident that the bill of rights is binding to all state organs and all persons including
a company.68 Corporations are therefore expected to uphold, respect, promote and observe the bill
of rights in their operational activities for the benefit of general citizens, communities, employees
and the environment. Companies ought to provide information to the general public and employees
that will enable them to exercise or protect their rights and fundamental freedoms.69
In employee dealings, companies should protect their labour rights,70 and allow them to participate
in the activities and programmes of the organization71 With regard to the environment,
corporations in the course of their operations must be aware of the following;-
a. Every person has the right to a clean and healthy environment.72
b. Where this right is interfered with, a suit can be instituted by a person acting in public interest73
to seek available legal remedies74and the demonstration of loss or suffered injury is not
necessary. 75 The court can order the prevention and stoppage of the act or compel a public
officer to intervene and lastly provide compensation for any victims of the violation. 76
c. They have a duty to ensure the protection and conservation of the environment and ensure
ecologically sustainable development and use of natural resources as they carry out their
activities.77
d. The national and county governments have a duty to ensure protection of the environment and
natural resources for a sustainable system of development.78

68
The Constitution of Kenya 2010, Article 260.
69
Constitution, Article 35.
70
Constitution, Article 41 (2) (a) & (b).
71
Constitution, Article 41 (3).
72
Constitution, Article 42.
73
Constitution, Article 258 (2) (c).
74
Constitution, Article 70(1).
75
Constitution, Article 70 (3).
76
Constitution, Article 70 (2) (a) (b) & (c).
77
Constitution, Article 69(2).
78
Constitution, Fourth Schedule, Article 185 (2) 186(1) 187(2).
24
e. Companies that own Kenyan land must ensure that the said land is used and managed in a
manner that is equitable, efficient, productive and sustainable and in accordance with the
principle of sustainable and productive management of land resources.79

Public companies that produce goods and services for the benefit of consumers, should ensure
protection of their health and safety, the goods and services are of reasonable quality and have the
right information necessary for the full benefit of the good or service. Where this right is
contravened, compensation for loss or injury arising from the defective good or service will
follow.80 Protection of consumer rights is paramount.

The Companies Act Kenya

The Companies Act has provisions that are related to CSR. A director of a company is required to
act in a way that they consider is in good faith that would promote the success of the company for
the benefit of its members as a whole. This aspect of what they consider is good faith is vague and
can potentially be abused because directors have different value systems. The success of a
company is dependent on the director having regard to the interests of the employees of the
company, the impact of the operations of the company on the community and the environment,
the desirability of the company to maintain a reputation for high standards of business conduct. 81

For quoted companies, directors are obligated to include in their report, information about
environmental matters including the impact of the company business on the environment, the
employees, social, community issues, company policies on the same and their effectiveness.82
Where the above information is not included in the business review, companies have been allowed
to specify which information is not available.83 Further to this, for an understanding of the
development, performance or position of the company’s business directors ought to include in the
business review, an analysis of information relating to the environment and employees where

79
Constitution, Article 60.
80
Constitution, Article 46.
81
Companies Act Section 143(1) (b) (d) & (e).
82
Companies Act, Section 655 (1).
83
Companies Act, Section 655 (4) & (5).
25
appropriate.84 Companies have been allowed to omit the information on CSR and simply state that
the information is not available without giving reasons.

Even the analysis is based on grounds of appropriateness which is vague for purposes of
interpretation. Despite this, a director’s default of section 655 is regarded as an offence with a fine
not exceeding five hundred thousand shillings upon conviction.85 There are exceptions regarding
the rule on disclosure where information is about impending developments and is related to matters
in the course of negotiation where the disclosure would in the opinion of the directors detrimentally
affect the interests of the company.86

Mwongozo
The Mwongozo is the guiding code of corporate governance for state owned enterprises.
According to it, an organization’s operations are to be guided by ethical practices that promote
good corporate citizenship, CSR and investments. The board is supposed to spearhead the creation
of an organizational policy on CSR and investment.87 This policy should be implemented, a
sustainable and appropriate budget allocated towards it and the employee awareness of CSR should
be increased to ensure that they respect and promote a sustainable environment.88 To ensure that
CSR activities are carried out, the board should subject the organization to an annual governance
audit which should contain a CSR report.89 Where a company lacks the budget for carrying out
CSR it is allowed to fundraise for that cause.90

Environmental Management and Coordination Act

The Environmental Management and Coordination Act91 requires that where an intended project
may or is likely to have a significant impact on the environment, before it is financed and executed,

84
Companies Act, Section 655 (6) (b).
85
Companies Act, Section 655 (9).
86
Companies Act, Section 656 (1).
87
Mwongozo Code of Governance for State Corporations, Section 2.9.
88
Mwongozo, Section 4.5.
89
Mwongozo, Section 1.13.
90
Mwongozo, Annexure-Code of Conduct and Ethics, Section 3.4.
91
Environmental Management and Co-ordination Act CAP 387, S 58 & 59, Revised Edition 2012 [1999],
<www.kenyalaw.org> last accessed on 8/10/2018.
26
the proponent shall undertake an environmental impact assessment study, prepare a report and
submit it to the National Environment Management Authority.92 For the protection of the right to
public participation and access of information, this report is to be published for two successive
weeks in the Gazette and in a newspaper circulating in the area or proposed areas of the project.
The main role of the impact assessment is to ensure that company operations do not degrade the
environment.93

4. Role of Corporate Social Responsibility

Corporate social responsibility may be referred to as corporate sustainability, sustainable

business, corporate conscience, corporate citizenship or responsible business)94 is a type of
international private business self-regulation.95

While once it was possible to describe CSR as an internal organizational policy or a business
strategy, that time has passed as various international laws have been developed and various
organizations have used their authority to push it beyond individual or even industry-wide
initiatives. While it has been considered a form of corporate self-regulation96for some time, over
the last decade or so it has moved considerably from voluntary decisions at the level of individual
organizations, to mandatory schemes at regional, national and even transnational levels.

Considered at the organizational level, CSR is an organizational policy. As such, it must align with
and be integrated into a business model to be successful. With some models, a firm's
implementation of CSR goes beyond compliance with regulatory requirements, and engages in
"actions that appear to further some social good, beyond the interests of the firm and that which is
required by law97.

92
EMCA, Section 58.
93
EMCA, Section 59.
94
Wood, Donna J. (1991). "Corporate Social Performance Revisited". The Academy of Management Review. 16
(4): 691–718
95
Sheehy, Benedict (2015-10-01). "Defining CSR: Problems and Solutions". Journal of Business Ethics. 131 (3):
625–648.
96
Sheehy, Benedict (2012). "Understanding CSR: An Empirical Study of Private Regulation". Monash University
Law Review. 38: 103–127.
97
McWilliams, Abagail; Siegel, Donald (2001). "Corporate social responsibility: A theory of the firm perspective".
Academy of Management Review. 26 (1): 117–127
27
4.1 Dimensions of CSR

The three dimensional aspect of corporate social responsibility includes:-

 Economic aspects.
 Social aspects.
 Environmental aspects.

4.1.1 Economic Aspects of CSR

The economic aspects of CSR consist of understanding the economic impacts of the company’s
operations. The economic aspects of CSR is often mistakenly considered to be synonymous with
financial issues, which is why it has been assumed easier to implement than the other two pillars.
However, the economic responsibility is not simply a matter of companies being financially
accountable, recording employment figures and debts in their latest corporate responsibility report.
The economic dimension of the sustainability agenda should rather consider the direct and indirect
economic impacts that the organizations’ operations have on the surrounding community and on
the company’s stakeholders. That is what makes up corporate economic responsibility.

a) Effect on Stakeholders

The economic performance of a company has direct and indirect impacts on all of its stakeholders
– including its employees, local governments, non-profit organizations, customers, suppliers, and
the communities in which the companies operates. A good economic performance makes it
possible to develop operations for the long term and to invest in development and the well-being
of employees. The employees of the company get good salaries, from which they purchase goods
and services as well as pay taxes. These activities fuel the local service industry, government
programs and the community activities. This multiplier effect becomes all the more important if
the company is one of the largest employers in the communities.

b) Through taxes

Companies are major contributors to the well-being of the area surrounding their operations, for
example through the local tax base. Therefore, the question arises: is it responsible for a business
to see corporate taxes purely as to cost be avoided, rather than part of their social contract with

28
society? Taxes have a significant impact on the creation and distribution of wealth: tax avoidance,
though perfectly legal, deprives the community in the area of the company’s operation of well-
being.

c) Maintaining Trust

A company’s license to operate depends upon the trust and support of the local communities where
it operates. The shift in power from the public the private sector emphasizes the importance of this
trust – and the obligations and responsibilities that come with it. Some company activities are
potentially very destructive to the trust earned from the community or otherwise cannot be
regarded as economically responsible. These should be avoided or at least carefully considered.
Example of such harmful company behavior include: bribery and corruption, tax avoidance: and
concentration of rewards and incentives of the company’s performance to few individuals only
instead of fairer distribution among the personnel. The company should also stop to consider the
economic effects of changes in locations and/or operations to the community.

4.1.2 Social Aspects of CSR

Social responsibility is the newest of the three dimensions of corporate social responsibility and it
is getting more attention than it has previously had. Many organizations are becoming increasingly
active in addressing social concerns social responsibility means being accountable for the social
effects the company has on people -even indirectly. This includes the people within the company,
in the supply chain of the company, in the community the company is in and as customers of the
company which means the whole lot of stakeholder. It refers to the management’s obligation to
make choices and take actions that will contribute to the well fare and interests of society as well
as those of the organization. The following aspects have been found to be key the social aspects
of CSR for an organization.

a) Responsibility of CSR towards Customers

The idea of treating customers with respect and attention is not new to business: often being
responsible to customers has a direct positive effect on the company’s profits. There are, however,
broader social responsibilities including providing good value for money. These responsibilities
may include such issues as the safety and durability of products or services; standard or after sales

29
service; prompt and courteous attention to queries and complaints; adequate supply of products or
services; fair standards of advertising and trading; and full and unambiguous information to
potential customers.

b) Responsibility of CSR towards Employees

Businesses are major contributors to the employment generation of the community. However,
social responsibility to employees extends beyond terms and conditions of the formal contract of
employment. Companies need to come up with wider expectations that today’s employees have
for the quality of their working life. Such expectations include taking care of the personnel’s
welfare and safety at work and upholding their skills and motivation for the work. Beyond these
expectations, a socially responsible company secures a just treatment and equal opportunities for
all its employees, regardless of gender, age, race, or religion.

c) Responsibility of CSR towards the Community

Companies depend on the health, stability, and prosperity of the communities in which they
operate. Often majority of the company’s employees and customers come from the surroundings
area – especially so for SME’s. The reputation of a company at its location, its image as an
employer and producer, but also as an actor in the local scene, certainly influences its
competitiveness. Many companies become involved in community causes, for example by
providing additional vocational training places, recruiting socially excluded people, sponsoring
local sports and cultural events, and through partnerships with communities or donations to
charitable activities.

4.1.3 Environmental Aspects of CSR

Environmental concern and sustainable development is a key pillar of the corporate social
responsibility. Environmental and ecological issues have been an important topic of discussion for
the past thirty years in the business world – the longest time of the three dimensions corporate
social responsibility. The knowledge and issues within the dimensions have progressed across a
landscape of changing business realities. Environmental aspects put in place in the 1970s with the
first real understanding of the environmental impacts of business.

30
a) Environmental Impact

Corporate activity may have many types of effect s on the environment. Usually environmental
impact refers to the negative effects occurring in the surrounding natural environmental due to
business operations. Such impacts may include: overuse of natural, on-renewable resources of
energy, pollution wastage, degeneration of biodiversity, climate change, deforestation etc. Since
many business – related environmental problem transcend national boundaries, most companies
are thus actors in global environment.

b) Measuring Environmental Impact

Environmental impacts can be measured in several ways through environmentally extended input-
output tables, material input per service unit (MIPS) calculations, ecological footprint and life
cycle assessment, to name a few. Ecological footprint measures the amount of nature’s resources
consumed in a given year, and compares it to the resources available in the world. Life cycle
assessment (LCA or eco-balance) is used to assess the environmental performance of a product
from raw materials in the beginning of the production process all the way to disposal at the end of
use. The MIPS value is calculated by dividing the amount of material the product or service causes
to move e.g. the amount of earth moved in mining, not just the metal used – during its entire life–
span by the amount of benefits and value its brings.

c) Environmental Management

To truly commit to its environmental responsibilities a company should change its traditional
modes operation towards a more environmentally oriented one. The environmentally more
responsible perspective could include such issues as an emphasis on increased resource
productivity, cleaner production and active dialogue with the company’s stakeholders. Many
businesses have found that establishing an environmental management system is the best basis for
good environmental performance. Quality, health and safety issues can also be integrated into the
same management system.

d) Environmental Responsibility

Several individual companies have found that improving environmental performance may also
have beneficial effects on the company itself. Using less material and streamlining processes to

31
create less waste may lower the costs of operation significantly. Moreover, the close review of
operations, which is needed to improve the environmental performance, may reveal other
improvement points, such as risk and material loss. A responsible public image may also attract
more customers. State governments can fulfill their role in helping business to identify market
opportunities and undertake win-win investments, the action program also set out a number of
other measures aimed at business: establishment of a compliance assistance program to help
business understand the environmental requirements of the European Community; development
of national, but harmonized, company environmental performance reward schemes that identify
and reward good performers and encourage voluntary commitments and agreements.

5. Significance Of CSR

CSR plays very significant role in smooth functioning of organizations. It includes:-

a) Social Responsibility and Customer Relationships

One of the foundational elements of CSR is that it causes companies to reason beyond basic ethics
to consider the benefits of active involvement in communities. Companies must prove themselves
to customers to build long-term, trusting relationships98. They must also get involved in the
community to give back. This community connection endears your company to the local markets
in which you operate.

b) Motivated Employees

Employees are a company's most valued asset. This is the premise of a company's obligation to
this key stakeholder group with regard to CSR compliance. This means treating employees with
respect and offering fair working conditions. It also means establishing fair hiring practices and
promoting a non-discriminatory workplace. This improves morale within the workplace and
encourages teamwork.

c) Profitability and Value

A CSR policy improves company profitability and value. The introduction of energy efficiencies
and waste recycling cuts operational costs and benefits the environment. CSR also increases

98
" Robert Moment – “The 7 Principles of Business Integrity"
32
company accountability and its transparency with investment analysts and the media, shareholders
and local communities. This in turn enhances its reputation among investors such as mutual funds
that integrate CSR into their stock selection. The result is a virtuous circle where the company's
stock value increases and its access to investment capital is eased.

d) Showing a True Commitment

The most successful corporate social responsibility programs integrate these two types of CSR
together to show a true commitment to a cause. For example, a company that uses sustainable
materials in their products, donates financial resources to environmental causes, and allows
employees to take paid time off for volunteering at environmental charities would be showing a
true commitment to the environment that goes beyond any single CSR initiative.

e) Social Media Visibility

One of the reasons that corporations should have visible CSR campaigns is due to the importance
and prevalence of social media. Corporations that want to protect their brand understand that social
media is an integral part of public perception. When a corporation exercises social responsibility
in the form of fundraising or setting up employee giving programs, using social media to promote
these actions helps to create a positive branding environment and it is a great way to engage with
your audience on a deeper level that goes beyond your products or services.

f) Public Relations Benefits

Public relations are a potent tool for shaping consumer perception and building a company’s
image. Corporations that actively promote their social responsibility activities often take steps to
publicize these efforts through the media. Getting the word out about corporate donations,
employee volunteer programs, or other CSR initiatives is a powerful branding tool that can build
publicity for you in both online and print media.

g) Government Relations

Corporations that place an emphasis on corporate social responsibility typically have an easier
experience when dealing with politicians and government regulators. In contrast, businesses that
present a reckless disregard for social responsibility tend to find themselves fending off various

33
inquiries and probes, often brought on at the insistence of public service organizations. The more
positive the public perception is that a corporation takes social responsibility seriously; the less
likely it is that activist groups will launch public campaigns and demand government inquiries
against it.

h) Building a Positive Workplace Environment

Finally, one of the greatest benefits of promoting social responsibility in the workplace is the
positive environment you build for your employees. When employees and management feel they
are working for a company that has a true conscience, they will likely be more enthusiastic and
engaged in their jobs. This can build a sense of community and teamwork which brings everyone
together and leads to happier, more productive employees.

6. Emerging Trends in Corporate Social Responsibility

6.1 Emerging trends

There are various emerging trends on CSR and they include:-

a. Corporate social reporting

It stands for the disclosure of non-financial information on the various activities undertaken by the
companies in order to discharge their social responsibilities.99English Company Law requires that
companies shall disclose specified information primarily with a view to protecting the interests of
both investors and creditors from an unlawful depletion of company funds.100 Government
regulation increasingly mandates social responsibility reporting by publicly listed companies in
order to disclose ethical, social and environmental risks in its annual reports. This is due to the
need and demand by external stakeholders are seeking to hold companies accountable for social
issues and highlight the potentially large financial risks for any firm whose conduct is deemed
unacceptable.101

99
Saleem Sheikh, “Corporate Social Responsibility: Law and Practice,” Cavendish Publishing Limited (1996) 176
100
Ibid
101
Michael E. Porter & Mark Kramer, “Strategy and Society: the Link Between Competitive Advantage and
Corporate Social Responsibility,” Harvard Business Review, December 2006 2
34
b. Proposal for company code of conduct on CSR

There a proposal for a company code of conduct on corporate social responsibilities for firms in
England. It has been argued that, the proposed code should be self regulated by the companies
initially, and if the desired results are not achieved in the near future, it should be implemented by
law. A survey conducted in England revealed that most companies (66%) supported the
implementation of a code for various reasons, the most popular was to clarify and formalise
corporate policy as a result of company growth and to provide guidelines and social objectives
102
for managers . Companies also felt a moral obligation to state expressly their particular
philosophy on social responsibilities.103

c. Proposal for Regulation of CSR

Scholars have argued for the regulation of CSR in order to have standards of what is expected by
the government on the conduct of business by firms. The companies Act of England has provided
for some provisions on the conduct of CSR.

d. Essential test

The essential test that should guide CSR is not whether a cause is worthy but whether it presents
an opportunity to create shared value that is meaningful and beneficial to the society and also
valuable to the business.

e. Moving towards creating corporate social agenda

Businesses are moving towards creating corporate social agenda. This entails categorizing and
ranking social issues in order to create an explicit and affirmative corporate social agenda that
looks beyond community expectations to opportunities to achieve social and economic benefits
simultaneously.

f. Linkage between CSR and Total Quality Management (TQM):

The linkage between CSR and Total Quality Management (TQM): the position adopted by the
American Quality Society (ASQ) code of ethics which states that quality is knowledge and skill

102
Saleem Sheikh, “Corporate Social Responsibility: Law and Practice,” Cavendish Publishing Limited (1996) 187
103
Ibid
35
for the advancement of human welfare and in promoting the safety and reliability of products for
public use. Thus TQM has a foundational similarity to CSR, that is, it has an “ethical anchor”
considered essential for CSR development104. Thus companies are using existing TQM conduits
of organisational change to develop CSR in organisations without compromising on the underlying
principles of CSR or TQM.

When making purchase decisions, consumers particularly those in developed countries, are placing
more importance on the social responsibility of firms.105 Social responsibility perceptions affect
the image of brands and firms , hence the propensity of consumers to buy brands and services from
firms that they perceive to be performing CSR.

7. Challenges to Corporate Social Responsibility

Some of the challenges faced by firms in implementation of their CSR activities and strategies
are:-

1. Taking of stakeholder views may lead to a company ceding primary control of its CSR
agenda to outsiders. Stakeholders’ views are important, however, these groups can never
understand a corporation’s capabilities, competitive positioning or the trade-offs it must
take. The insistence of stakeholders’ may not necessarily signify the importance of the
issue- either to the company or to the world.
2. Fragmentation of a company’s CSR strategy may lead to tremendous lost opportunity. The
power of a company to create social benefit is dissipated and so is the potential of
companions to take actions that would support both their communities and their business
goals.
3. The mutual dependence of corporations and society implies that both business decisions
and social policies must follow the principle of shared value, that is, choices must benefit
both sides.
4. Societies are complex and dynamic organisms, thus without a clear understanding of
societies to which a corporation is meant to be responsible, the efficacy of any discussion

104
Rodney Mac Adam and Denis Leonard, “Corporate Social Responsibility in a total quality management context:
opportunities for sustainable growth,” Corporate Governance Vol.3 No.4 2003 38
105
Wagner Tillmann, Richard J. Lutz and Barton A Weitz, “Corporate Hypocrisy: Overcoming the Threat of
Inconsistent Corporate Social Responsibility Perceptions,” Journal of Marketing Vol. 73 (November 2009) 77
36
 on CSR is limited by a fundamental incommensurability.106 No such comprehensive
definition of CSR will ever be possible as all interested parties will never be at the
negotiating table and hence will not be able to contribute their definitions of “social” and
“responsibility” to the debate.107
5. Corporations exist to generate economic returns, not to solve societal problems.108 There
is only one social responsibility of the business- to use its resources and engage in activities
designed to increase profits so long as it engages in open and free competition without
deception or fraud.109 Thus CSR is not a corporation’s core activity unless made mandatory
by statutory provisions.
6. Corporations skew societal standards to their own needs for example in the use of
regulatory capture and direct and indirect political influence.110
7. Most corporations are naturally socially conservative and hence will not experiment unless
they can see a clear profit from the endeavour. Although corporations have an incentive to
engage in product and market experimentation, they are unlikely to engage in socially
confronting experimentation.111 For example it is difficult to find firms in Italy and Africa
that would actively donate to or allow their names to be associated with gay , lesbian and
pro abortion organisations.
8. CSR allows governments to abdicate some of their social responsibilities, thus making the
delivery of those social services provided by companies less accountable and transparent
and more subject to the whims of unelected decision makers.112
9. As the in depth academic study of CSR movement is relatively nascent, it is difficult to
disassemble the underlying corporate competencies and to determine which CSR
competencies can be linked to specific performance outcomes.113 This is related to the
problem of defining what CSR is and whose benefit is most relevant.

106
Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The Good, the Bad, and the Ugly of
Corporate Social Responsibility,” Academy of Management Perspectives, Vol. 23 No. 2 (May 2009) 47-8
107
Ibid
108
Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The Good, the Bad, and the Ugly of
Corporate Social Responsibility,” Academy of Management Perspectives, Vol. 23 No. 2 (May 2009) 49
109
Ibid
110
Ibid
111
Ibid
112
Ibid
113
Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The Good, the Bad, and the Ugly of
Corporate Social Responsibility,” Academy of Management Perspectives, Vol. 23 No. 2 (May 2009) 51
37
 10. There is no indication that doing well by doing good has a clear and obvious relationship
to the generation of firm value.114
11. CSR seems to be perceived by many as the social strand of sustainable development,
including the World Business Council for sustainable development and the European
Parliament. However, there is far less agreement regarding the measurement of CSR.115

114
Ibid
115
Risako Morimoto, John Ash and Chris Hope, “Corporate Social Responsibility Audit: From Theory to Practice,”
journal of Business Ethics Vol. 62 No. 4 (Dec 2005) 318
38
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