Taming the dragon?

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Taming the dragon?

The relationship between corporate social

performance and corporate financial performance

during an economic crisis

Master’s Thesis Business Administration –

Organizational and Management Control

University of Groningen

Jasper Sijsling Soephuisstraatje 5a 9712 BZ Groningen Student number: 1546104 Telephone number: 06-52711912 E-mail: jaspersijsling@hotmail.com

Supervisor: Prof. Dr. D. M. Swagerman Co-assessor: Dr. K. Linke

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Abstract

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Preface

After nine years of studying at the University of Groningen, this master's thesis marks the end of an era. I have enjoyed most of my time in this beautiful city and had many experiences that I will remember the rest of my life. Writing a master's thesis is one of those experiences. I found it a

challenging and often frustrating process to apply the knowledge I built in the previous years, but I am proud to finally present the final piece of my higher education.

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Chapter 1: Introduction

In the last decades, corporate social responsibility (CSR) has become an integral part of business. Corporations engage in a multitude of initiatives that address social responsibility issues ranging from community relations to corporate governance, workplace diversity, employee relations, environmental impacts, human rights, and product quality (Barnett & Salomon, 2012). Illustrative of the growing importance of CSR is the increasing amount of corporations that report their corporate social

performance (CSP) in addition to their annual financial results. A recent survey by KPMG among the 100 largest companies in 41 countries found that over 70 percent reported on CSP; for the 250 largest companies in the world, this amount was 93 percent (KPMG, 2013).

Nevertheless, the assumption of CSR by business remains a debated subject in the business and society literature after more than 60 years of academic research. Considerable disagreement exists to what extent business should take social responsibility, if it should take this responsibility at all. While taking different theoretical perspectives, authors have proposed numerous arguments in favour of and against the assumption of CSR (Davis, 1973; Garriga & Melé, 2008).

Interestingly, both proponents and opponents of the assumption of CSR stressed the possible relationship between CSP and corporate financial performance (CFP) in their argumentation. Proponents argued that higher CSP would lead to higher CFP, whereas opponents claimed that the relationship between CSP and CFP would be negative (Kurucz, Colbert, & Wheeler, 2008; Orlitzky, 2008). Others argued that there would be no relationship between the two variables (McWilliams & Siegel, 2001). Throughout the years, many scholars have therefore focused their attention on researching the CSP-CFP relationship. The results of these studies were as mixed as the initial assumptions: researchers found indications of positive, negative and neutral relationships (Margolis, Elfenbein, & Walsh, 2007). However, measurement strategies differed between these studies. Several authors argued that the various ways in which CSP and CFP were operationalized acted as a moderator and conducted meta-analyses to produce more generalizable results (Allouche & Laroche, 2005; Margolis et al., 2007; Orlitzky, Schmidt, & Rynes, 2003; Wu, 2006). The meta-analyses indicated an overall positive but small relationship between CSP and CFP. Thus, it seems that corporations can ‘do well by doing good’. For corporate managers, investments in CSR are therefore appealing.

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(Ducassy, 2013). On the other hand, in times where consumer spending is under pressure, the market for products and services with CSR premiums might be shrinking (Carrigan & De Pelsmacker, 2009). While taking a similar instrumental perspective on CSR, managers are also interested whether

(additional) investments in CSR are justified in times of economic crisis. In times with fewer resources available, shareholders still expect corporate managers to make those decisions that contribute the most to the (long-term) value of the corporation. Depending on the possible changes in the nature of the relationship between CSP and CFP during an economic crisis, managers might need to adapt existing control systems. For example, if satisfying the interests of certain stakeholders through CSR would lead to a competitive advantage in times of crisis, organizational behaviour needs to be directed towards that strategy.

There is only limited research into the CSP-CFP relationship during times of economic crisis, despite the valuable information that this research could offer. The goal of this thesis is therefore to contribute to the field of CSP-CFP research by statistically testing a set of hypotheses regarding the relationship between CSP and CFP during times of economic stability and economic crisis.

The main research question of this thesis is:

What is the effect of an economic crisis on the relationship between corporate social performance (CSP) and corporate financial performance (CFP)?

To provide an answer to the main research question, the following sub-questions will be addressed: What is corporate social responsibility (CSR)?

What are the main theoretical perspectives on CSR?

What are the main theoretical arguments in favour of and against the assumption of CSR? What are the main theoretical arguments regarding the relationship between CSP and CFP? What is the relationship between CSP and CFP during times of economic stability?

What is the relationship between CSP and CFP during times of economic crisis?

What is the difference between the relationship between CSP and CFP during times of economic stability and times of economic crisis?

This thesis is structured as follows: the second chapter will provide a historical overview of the development of the concept of CSR. In the third chapter, the main theoretical perspectives on CSR will be discussed, as well as the main theoretical arguments in favour of and against the assumption of CSR. Also, we will address the main theoretical arguments regarding the relationship between CSP and CFP and we will discuss previous CSP-CFP research. At the end of chapter 3, a set of hypotheses will be presented, which form the basis of our statistical research. Chapter 4 outlines the methodology used in our statistical research. In the fifth chapter, the statistical results will be presented and

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Chapter 2: Background

2.1 The history of corporate social responsibility

Corporate social responsibility (CSR1_{) is a concept with a history “as old as trade and business itself”} (Asongu, 2007, p. 28). Although corporations have mainly existed since the seventeenth century, examples of social responsibility issues for business can be traced back as far as 5,000 years and include the code of the Babylonian king Hammurabi and business contributions to Roman military funding (Asongu, 2007). Early examples of social responsibility issues in a corporate setting are stockholder activism at the Dutch East India Company (Asongu, 2007) and corporate philanthropy during the industrial revolution (Frederick, 2006; Wren, 2005).

Formal literature on CSR has mainly been produced since the 1950s (Carroll, 2008), but the prominent position that CSR has attained in the academic as well as the business environment is a phenomenon of the last few decades (Crane, McWilliams, Matten, Moon, & Siegel, 2008). In order to understand the concept of CSR and the increasing international attention that it has recently gained, a short review of the early history of CSR will be given, followed by an extensive overview of the development of the concept of CSR since the 1950s. The development of CSR will be illustrated with a great amount of definitions of the concept, which reflect the different theoretical perspectives on CSR. Furthermore, related concepts such as corporate social responsiveness, corporate social performance (CSP) and stakeholder theory will be discussed. The origins of most CSR literature can be found in the United States, although in the last two decades, European as well as Asian CSR literature has expanded significantly (Carroll, 2008). Like Carroll (2008), we will focus on the development of CSR in the United States and Europe.

2.1.1 CSR before the 1950s

Eberstadt (1973) contended that since the beginning of our civilization, society has required responsibility of business in accordance with its power through a social contract. For example, in ancient Greece, the businessman was subject to social pressure to serve the community, while in the Middle Ages, he was expected to be honest and to care for his own community. In the mercantile era (1500-1800), the businessman’s increasing status amounted to more social obligations he had to fulfil, such as to increase national strength and to address local social problems. In return, businesses that contributed most to society were granted a charter of incorporation, with limited liability and legal personality (Eberstadt, 1973).

During the subsequent industrial period, new business attitudes such as the laissez-faire capitalism prevailed, which stressed an unregulated, more individual pursuit of wealth and which rejected the social responsibilities of business. As a result, charters of incorporation became easily available and large corporations began to dominate the economy (Eberstadt, 1973). Consequently, the combination

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of growing corporate power with the rejection of social responsibilities put the balance of the social contract under pressure, if not distorted it. Instead of maximizing social welfare, most industrialists only strived to maximize their profits and in doing so, some acted irresponsibly and illegally. Although Wren (2005) acknowledged that most business people behaved correctly, they did not receive as much attention as the exceptions on the rule. This influenced public opinion on business and led to general claims by authors that “honesty towards customers, respectability and conservatism in business practices were beginning to depart in the 1840s” (Wren, 1979, p. 106). But despite the correct intentions of most business people, it must be noted that in contrast to growing corporate profits, wages and living standards deteriorated (Eberstadt, 1973).

Interestingly, the roots of present CSR can be found in the same period. At the end of the industrial revolution, not only business motives, but also social motives were apparent in the activities and practices of a number of industrialists and their businesses towards their employees and (through philanthropy) towards the community as a whole (Carroll, 2008; Frederick, 2006; Wren, 2005). But whereas individual philanthropy by industrialists was generally accepted at that time, there was considerable legal debate over corporate philanthropy. The main discussion focused on the possible conflicts of interest between managers and stockholders (Wren, 2005). Stockholders argued that they were entitled to all corporate profits and that no amount of their profit was to be spent on corporate philanthropy. In 1883, a British court ruled that the corporation was indeed only responsible for making profits for the stockholders, which indicated that philanthropy was generally beyond the scope granted by the charter of incorporation (Wren, 2005). Philanthropy was only allowed if it would be beneficial to the corporation (Muirhead, 1999); Friedman (1970) would later take the same viewpoint. The industrial period until 1890, characterized as the profit ethic era, was followed by the progressive era (1890-1918) (Hoffman, 2007). The progressives strived for changes due to increasing concerns regarding the role of business and its effects on society. Among the many goals of the progressive movement were a distribution of wealth through economic regulations and an improvement of the standard of living. As a result, the U.S. government introduced regulations to counter the irresponsible behaviour of corporations at the beginning of the twentieth century (Whetten, Rands, & Godfrey, 2002). Simultaneously, the ‘Social Gospel’ movement (Hoffman, 2007) called upon businessmen to use their money in a socially responsible way. But the resulting charitable donations of some very wealthy philanthropists were deemed by a congressional committee as an intrusion on public affairs; it was feared that through individual charity, the business community would gain even more control over society (Hoffman, 2007; Wren, 2005). Hoffman (2007) therefore stated that “the responsibility for social reform began to shift from individuals to institutions” (p. 58).

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institutional factors that played a role in this development. Three external institutes influenced the assumption of a greater social responsibility by business: the government, which took a less active role; the unions, with their decreasing power; and the scientific management movement, that took a scientific approach in management. Within this last group, revisionists shaped the view on the social responsibility of business; they stated that business needed to consider not only production needs, but also human needs (Hoffman, 2007). If business did not take its social responsibility, it risked to be taken over by the community (Davis, 1960; Gantt, 1919). Gantt (1919) argued (in a similar way as Eberstadt would do in the 1970s) that business existed to provide service to the community, but that businessmen had forgotten this larger responsibility. He was supported by other management scholars and businessman Oliver Sheldon, who proposed three management principles which stressed well-being for the community, social justice and ethical standards (Sheldon, 1923)

Several internal institutional factors were influential as well (Hoffman, 2007). First, with the

increasing size of the corporations came greater responsibilities. Second, new production technologies were perceived to provide broader benefits to society through better service. Third, structural changes in business and society enforced the separation of management and ownership, which led to

trusteeship management instead of profit maximization management: managers were not only held responsible for maximizing profits, but also for maintaining a balance between different groups of contributors to the business for which they were considered a trustee (Frederick, 1960; Hay & Gray, 1974). Fourth, the professionalization of management stimulated a growing managerial awareness of the relationship between business and society. Business leaders’ views were supposedly influenced by contacts with social agencies as well (Heald, 1970). As a result, corporate philanthropy was on the rise. However, the main managerial motive behind CSR remained self-interest (Frederick, 2006; Hoffman, 2007).

Whereas Hoffman identified the 1920s as “one of the first eras of modern corporate social responsibility” (Hoffman, 2007, p. 56), Eberstadt (1973) had a different view. He argued that the progressive movement lacked effectiveness and that the economic prosperity of the 1920s masked the true deficiencies of the economic system; the real turning point for social responsibility in business was the Great Depression. As he put it: “business might never have turned back toward responsibility and accountability if the culmination of corporate irresponsibility had not been the collapse of the economic system” (Eberstadt, 1973, p. 81). In his view, the corporation was considered as an institution with social obligations only after the Great Depression; the period that followed was characterized as the corporate period (Eberstadt, 1973).

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of trusteeship was still developing: a survey by Fortune magazine confirmed that business executives considered that they had social responsibilities beyond their profit-and-loss statements (Bowen, 1953). 2.1.2 CSR in the 1950s

CSR acceptance and awareness further increased in the 1950s. In 1953, stockholders sued a manufacturing company, claiming that the donation to a university was outside its charter of

incorporation. However, the New Jersey Supreme Court ruled that the gift was in the best interest of a free-enterprise society, which set a legal precedent for CSR (Wren, 2005).

From an academic perspective, the assumption of social responsibility by business was encouraged through articles in Harvard Business Review, which also called for education on the subject of social responsibility and the relationship between business and society (Frederick, 2006; Whetten et al., 2002). Frederick (2006) identified three core ideas of the CSR doctrine in the 1950s: corporate managers as public trustees and social stewards; the idea of balancing competing claims of those who were affected by business to corporate resources, which was a precursor for the stakeholder era (Carroll, 2008; Hoffman, 2007); and voluntary philanthropic business support of good causes. He characterized this decade and the 1960s as a period of corporate social stewardship (Frederick, 2008). Another important academic event was the publication of Bowen’s Social responsibilities of the

businessman in 1953, which marked the starting point of modern CSR literature (Carroll, 2008) and a

terminology shift from the social responsibility of business to CSR (Garriga & Melé, 2004). Murphy (1978) marked 1953 as the beginning of a new CSR era as well: the awareness era (1953-1967), in which the responsibility of business and its relationship with the community gained attention. In his classification of four CSR eras, he deemed the period before 1953 as the philanthropic era, due to the prevalence of charitable donations. The other two eras that he identified will be mentioned when appropriate.

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overwhelmed by the power of business (Frederick, 2006).

Carroll (2008) characterized the 1950s as a period “of more ‘talk’ than ‘action’” (p. 4) regarding CSR. In a decade where business was mainly becoming aware of social responsibility and where most CSR action related to philanthropy (which is now considered to be of less importance than other categories of social responsibility; Carroll, 1991), Bowen was ahead of his time with his specific action-oriented proposals.

2.1.3 CSR in the 1960s

In the 1960s, literature on CSR was further developing and more CSR definitions emerged. Like Bowen, Davis (1960), another important CSR scholar, argued that businessmen have social power, but that this power should be balanced with responsibility. This principle is known as ‘the social power equation’ and is similar to the social contract that Eberstadt (1973) mentioned. Consequently, if businessmen do not take social responsibility, social power will go to groups that do take the social responsibility (for example, to the U.S. government in the early 1900s). This second principle is known as the ‘Iron Law of Responsibility’. Davis (1960) contended that businessmen have a broad socio-economic obligation regarding public welfare as well as a socio-human obligation. He clearly dismissed the idea of economic responsibility as the only responsibility of business, as opposed to Friedman (1962), whose view will be discussed in Chapter 3. This is reflected in his definition of CSR, which referred to “businessmen’s decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interest” (Davis, 1960, p. 70). Furthermore, Davis was one of the first authors to link CSR with long-run economic gains, which will also be elaborated upon in Chapter 3 (Carroll, 2008).

Other CSR definitions in the decade were based on identical principles. Frederick (1960) also stressed enhancing socio-economic welfare. In his definition of social responsibility, society’s economic and human resources should be used for broad social ends instead of narrow individual interests. McGuire (1963) similarly argued that the corporation has responsibilities to society beyond economic and legal obligations. In explaining his view, core aspects of current concepts of business ethics and corporate citizenship were visible (Carroll, 1999).

In later publications, Davis refined his definition of CSR by stating that business had an obligation “to consider the needs and interests of others who may be affected by business actions” (Davis &

Blomstrom, 1966, p. 12). In 1967, he added the concern for ethical consequences and emphasized the institutional character of CSR and the resulting broad view on the whole social system (Davis, 1967). Walton (1967) focused on the intimate relationships between the corporation and society, which should be considered by managers, and he emphasized voluntarism in CSR.

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business focused on specific CSR issues. Despite the growth of CSR contributions and practices, the 1960s, like the 1950s, were deemed a period of more talk than action (Carroll, 2008).

2.1.4 CSR in the 1970s

Writings about CSR increased during the 1970s and more diverse, specific definitions emerged. In 1971, Johnson introduced four different views on CSR. His first, ‘conventional’ CSR definition acknowledged the aforementioned balancing of multiple interests. In this approach, social norms motivate the way business is conducted. In his other definitions, a second and third motive driving CSR were (long-run) profit maximization and utility maximization in the form of a broader well-being, while in a fourth ‘lexicographic’ view, firms act as if CSR is an important issue once certain basic goals are reached (Johnson, 1971). In the same year, the Committee for Economic Development (CED), like Johnson in his first definition, noted the growing pressure from society towards business to perform a more responsible role. As was already apparent in the 1950s and 1960s, the social contract was changing as society expected business to serve its needs. Eberstadt (1973) indicated that business was merely starting to return to its original philosophy before the industrial era, in a period in which “business … seldom enjoyed so much power with so little responsibility” (p. 81). In the CED definition, this philosophy is apparent through three concentric circles: an inner circle, which indicates a basic economic responsibility; an intermediate circle, which stresses a social awareness while addressing the economic responsibility; and an outer circle, which anticipates future responsibilities to improve the social environment (CED, 1971).

In contrast, like Walton (1967), other authors emphasized the voluntariness of corporations. Manne stated that a CSR action must be purely voluntary, instead of responding to social norms, while in the definition of Wallich, corporations were supposed to be free agents to a certain extent; he therefore did not consider conforming to the law as CSR (Manne & Wallich, 1972). Agreeing, Davis (1973) noticed that “this is what any good citizen would do” (p. 313).

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system should be considered to produce not only traditional economic gains, but also social benefits (Davis, 1973).

At the end of the 1960s and at the beginning of the 1970s, a shift in CSR definitions can be noted. As was apparent in Johnson’s first view and the definition of the CED, society demanded to be served. In what Murphy deemed the issue era (1968-1973), which was followed in 1974 by the responsiveness era (Murphy, 1978), efforts of special interest groups led to formal government regulations (Carroll, 2008), while corporations were expected to go beyond voluntary philanthropy (Frederick, 2008). The early CSR definitions, which more passively raised awareness of the responsibilities of corporations, were complemented with definitions that were more action-oriented. New definitions stressed improving the social environment (Backman, 1975; CED, 1971; Eels, Walton, 1974), accomplishing social benefits (Davis, 1973) or solving social problems (Eilbirt & Parket 1973; Fitch, 1976). From a managerial point of view, the trusteeship management style made way for the quality of life

management style, which was more problem-solving of nature (Hay & Gray, 1974). It was no longer the question whether corporations should take social responsibility, but how (Frederick, 1994). Business had to become more active and responsive to serve the increasing demands of society. But the concept of CSR was criticized for being too narrow and static by focusing too much on the

attribution of obligations and the intentions and motivations behind actions instead of the actual ability to act on social needs (Carroll, 1979). Several authors therefore introduced the concepts of social responsiveness (Ackerman & Bauer, 1976; Sethi, 1975) and corporate social performance (Carroll, 1979, Sethi, 1975). In his legitimacy-based model for evaluating corporate social performance, Sethi made a distinction between social obligation, social responsibility and social responsiveness.

Corporate behaviour in order to gain economic and legal legitimacy was characterized as social obligation; behaviour that was also in accordance with social, norms, values and performance expectations was characterized as social responsibility; and the final state, behaviour that adapted to social needs, was characterized as social responsiveness (Sethi, 1975).

Carroll (1979) introduced a different, more integrated CSP model (Wartick & Cochran, 1985), which identified three aspects of corporate social performance: a definition of CSR, a summary of the social responsibility issues and a philosophy of social responsiveness. First, CSR was defined as

encompassing “the economic, legal, ethical and discretionary expectations that society has of

organizations at a given point in time” (Carroll, 1979, p. 500). The economic responsibility, to produce goods and service at a profit, was at the core of this definition; by explicitly pointing out that

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responsibilities that business would take based on its own judgement and choice. These are implicitly expected from society, strategic of nature and concerned with actively helping society (Carroll, 1979). The second aspect of the model identified the social responsibility issues that needed to be addressed; these issues differed among industries and companies and changed over time. The third and last aspect, corporate social responsiveness, “refers to the capacity of a corporation to respond to social pressures” (Frederick, 1994, p. 154). Based on a schema of Wilson (1974) that described a continuum, four responsiveness strategies were possible: reaction, defense, accommodation and proaction. The CSP model aimed to help scholars in perceiving distinctions between CSR definitions and

understanding the issues important for CSR, while managers would be assisted in assessing which social issues they faced to subsequently come up with suitable responses.

In addition to the development of the concepts of CSR, corporate social responsiveness and CSP, research into CSR (for example, research into the link between CSR and corporate financial performance, CFP) started in the 1970s. Also, the related concepts of business ethics and corporate sustainability have their origins in this period (Kakabadse, Rozuel, & Lee-Davies, 2005). Thus, it becomes clear that in this decade, the academic field of CSR was expanding. But the many different definitions of and views on CSR were also criticized for leading to a lack of definitional clarity: CSR meant something different to everyone, was used inconsistently and was vague and highly generalized (Preston & Post, 1975; Votaw, 1973). Preston and Post (1975) therefore proposed the principle of public responsibility as a more specific managerial alternative. They argued that corporations had a public responsibility, originating from primary involvements, which were the basic economic tasks, and secondary involvements, which were the social issues resulting from the primary involvements (Preston & Post, 1975).This basically meant that business should address responsibility issues that were a consequence of the normal operating activities. Nevertheless, the CSR concept remained dominant in literature (Carroll, 2008). However, in his CSP model, Carroll (1979) included both the macro- and micro level concerns of public responsibility (Wartick & Cochran, 1985).

Although the expanding CSR literature emphasized a managerial approach, Carroll (2008) stated that there still was more academic talk than business action regarding CSR in the 1970s. Nevertheless, increased government legislation as a result of rising social concerns and protests against the economic system forced business to take care of typical CSR issues (Carroll, 2008; Garriga & Melé, 2008). Consequently, Frederick (2008) noticed internal changes in business that led to an active response. CSR behaviour was encouraged through incentives, strategic CSR goals were formulated, and

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2.1.5 CSR in the 1980s

What started in the 1970s continued in the 1980s: the academic focus shifted from developing CSR definitions to research into CSR and the development of related concepts and themes like corporate social responsiveness, CSP, business ethics and corporate sustainability. Also, notions of stakeholder theory and corporate citizenship were popularized in this decade (Carroll, 2008; Garriga & Melé, 2004; Kakabadse et al., 2005). Therefore, most authors used CSR definitions that were similar to the ones of the previous decades, but approached CSR itself from additional theoretical perspectives. For example, in his CSR definition, Jones (1980) emphasized voluntariness as well as a broad obligation to groups in society beyond shareholders. But as a result of taking a social responsiveness approach (Garriga & Melé, 2004) he viewed CSR as a process, instead as a set of static outcomes, due to the dynamic nature of both the social environment and the relationships within this environment (Kakabadse et al., 2005). Drucker (1984) used a similar definition as other CSR scholars by stressing that making profits was the basic social responsibility of business, but he took a more strategic perspective by contending that business should turn its social responsibilities into economic opportunities. Whereas other scholars viewed CSR as a dragon that threatened shareholder value creation, Drucker (1984) argued that business should "tame the dragon" (p. 62) by combining responsibility and profitability. In contrast, Carroll (1983) did not take a different perspective, but adapted his earlier CSR definition by substituting the discretionary responsibilities with voluntary and/or philanthropic responsibilities to support society.

More CSP models were introduced as well. Strand (1983) introduced a systems paradigm for organizational adaptations to the social environment, while using similar concepts as Carroll (1979). Wartick and Cochran (1985) more specifically built on Carroll’s work and placed the three core aspects he identified in a framework of principles, processes and policies. Their CSP model reflected the interaction “among the principles of social responsibility, the process of social responsiveness and the policies developed to address social issues” (Wartick & Cochran, p. 758). Consequently, Carroll (2008) indicated that in the 1980s, CSR became a part of the more comprehensive theory of CSP. Another concept related to CSR that was expanding in this decade was business ethics. Epstein (1987) proposed the concept of the corporate social policy process, which stressed the institutionalization in business of CSR, corporate social responsiveness and business ethics. In this process, CSR was defined as achieving beneficial organizational outcomes on corporate stakeholders; these outcomes were judged on the basis of a certain normative standard. Corporate social responsiveness was defined as the development of organizational processes to anticipate, respond and manage consequences of organizational policies and practices; and business ethics referred to “the systematic, value-based reflection by managers … on the moral significance of personal and organizational business action and its consequences for societal stakeholders” (Epstein, 1987, p. 104). Moral reflection was essential in this last concept.

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scope of this thesis to discuss this concept at length, but it will be addressed shortly in Chapter 3. A more relevant academic event in this decade is the publication of the book Strategic management: a

stakeholder approach by Freeman in 1984, which elaborated on and popularized the stakeholder

concept, using it as a guideline for strategic management. The term stakeholder had already appeared in 1963 at the Stanford Research Institute, and was referred to as the groups “without whose support the organization would cease to exist” (Freeman, 1984, p. 31). As a result, business needed to be responsive to these groups, which included, but were not limited to shareholders. In subsequent CSR literature, emphasis was also put on “adversarial” (p. 38) stakeholder groups, like the public, the community or employees, which could participate in the strategic management process (Dill, 1975). Freeman (1984) therefore defined stakeholders as “any group of individual who can affect or is affected by the achievement of the organization’s objectives” (p. 46). He argued that all stakeholders in the corporation have legitimate interests, even if the corporation deems their demands inappropriate. Though he stated that all stakeholders should be dealt with simultaneously, Freeman (1984) did not address the relative importance of stakeholder groups and their claims on the corporation.

A last CSR related concept worth mentioning is corporate citizenship. Like the stakeholder notion, the term corporate citizenship had been proposed before, but only grew to prominence in the 1980s. Although multiple views of corporate citizenship exist, the basic idea is that the corporation, like a citizen, has certain rights and responsibilities in society as well as the possibility to form partnerships (Garriga & Melé, 2004); several authors noted similarities with the concept of CSR (Carroll, 2008; Frederick, 2008; Waddock, 2004).

Simultaneously with the development of related concepts and themes, research into CSR expanded and increasingly focused on the link with corporate financial performance (Carroll, 1999; Whetten et al., 2002). As noted before, this research will be discussed in detail in Chapter 3.

In contrast to the decades before, Carroll (2008) found that business was more active in dealing with CSR issues in the 1980s. Corporate practices mainly focused on limiting pollution, discrimination and multinational malpractices, while improving the treatment of consumers, employee health and safety, and work life as well as urban life (Carroll, 2008). While activist groups could not influence

government legislation as much as in the 1970s as a result of conservative calls for deregulation, society still expected corporations to address social issues (Whetten et al., 2002). Frederick (2008) marked the decade as the beginning of a new CSR phase of corporate/business ethics, where a responsible corporate culture with an ethical climate and guiding normative principles had a central role.

2.1.6 CSR in the 1990s

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significantly (Carroll, 2008). Nevertheless, Carroll (1991) sharpened his CSR definition by labelling the discretionary component as philanthropic, and describing the philanthropic responsibilities as corporate citizenship: “the CSR firm should strive to make a profit, obey the law, be ethical, and be a good corporate citizen” (p. 43). He hierarchically depicted these responsibilities in a pyramid (Carroll, 1991), but also explicitly noted that all four responsibilities should be addressed simultaneously, rather than sequential (Carroll, 1999). Also, he noticed a fit of CSR with the stakeholder concept, which more specifically pointed out to whom business had a responsibility. Although lacking a specific CSR definition, the organization ‘Business for Social Responsibility’ asserted that CSR encompassed “business ethics, community investment, environment, governance and accountability, human rights, marketplace, and workplace” (Carroll, 2008, p. 38).

Regarding CSP, an important contribution was made by Wood (1991), who further refined the CSP model that Carroll (1979) introduced and Wartick and Cochran (1985) revised. She criticized the model on four points: first, since performance pertained to actions and outcomes, CSP itself could not be defined, because the CSP model was missing an action component; second, she argued that social responsiveness was not a single process, but a set of processes; third, the term ‘policies’ was

considered too narrow to evaluate the social performance; and fourth, the CSP concept was also too simplistic to evaluate the social performance of business. Therefore, she proposed the following definition of CSP: “a business organization’s configuration of principles of social responsibility processes of social responsiveness and policies, programs and observable outcomes as they relate to the firm’s societal relationships” (Wood, 1991, p. 693). She continued by stating that Carroll’s categories defined the domains where the principles of CSR were enacted, but not the principles themselves. Consequently, Wood distinguished three levels of analysis with corresponding principles of corporate social responsibility. The institutional level, with the principle of legitimacy, was based on the work of Davis (1973); the organizational level, with the principle of public responsibility, was based on the work of Preston and Post (1975); and the individual level, with the principle of

managerial discretion, was based on the work of Carroll (1979) and Wood (1990). Regarding corporate social responsiveness, Wood argued that the responsiveness approaches of Carroll (1979) did not correctly represent the processes of social responsiveness, which served as “an action

counterpoint to the principled reflection on social responsibility” (Wood, 1991, p. 703). She identified three processes which were consistent with Ackerman (1975): environmental assessment, stakeholder management, and issues management. The outcomes were divided in three types: the social impacts of corporate behaviour, corporate social programs, and corporate social policies (Wood, 1991). In comparison to the old CSP models, Wood’s CSP model was more extensive and gave more emphasis to corporate social performance through the outcomes (Carroll, 1999).

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perspective; the normative aspects of CSR needed further development. Therefore, Swanson proposed a reoriented CSP model that articulated decision making in terms of ethical and value processes linked across individual, organizational and societal levels (Swanson, 1995). Other comments on the CSP models pertained to the implied hierarchal order of the importance of the economic, legal, ethical and discretionary/philanthropic responsibilities as well as a failure to specify relationships between the key CSP constructs (Whetten et al., 2002).

Stakeholder theory, which became a more complete theory during the 1990s, competed with the CSP framework (Whetten et al., 2002), while the concept of corporate citizenship grew to compete with the concept of CSR (Carroll, 2008). Simultaneously, the complementary theme of corporate sustainability did not remain focused on environmental aspects, but was extended into a broader concept by including the social and stakeholder environment (Carroll, 2008). It is clear that the academic field of CSR-based themes and concepts was still developing in this decade.

Research into CSR and specifically into the relationship between CSP and CFP was flourishing as well, although many studies were considered methodologically weak (Whetten et al., 2002). Among others, Kinder, Lydenberg, Domini & Co. developed a longitudinal index with multiple indicators of social performance; this index was deemed more accurate and reliable than earlier CSP measures used (Whetten et al., 2002).

The academic developments of the 1990s were matched with a growing acceptance of CSR by business. Not only did corporate philanthropy increase, but specific CSR management functions were introduced, CSR initiatives expanded, organizations that intended to stimulate CSR were founded, and businesses with an explicit commitment to CSR gained much attention (Carroll, 2008; Whetten et al., 2002). Combined with the growing globalization, Frederick (2008) therefore identified a fourth stage of CSR development that started in the 1990s: corporate global citizenship, which indicated global social responsibilities.

2.1.7 CSR in the 21stcentury

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Interestingly, Schwartz and Carroll (2003) presented an alternative to Carroll’s pyramid of four responsibilities by subsuming the philanthropic/discretionary responsibilities under the ethical or economical responsibilities, because they found it difficult to distinguish between the (expected) ethical responsibilities and the (desired) philanthropic responsibilities, and because philanthropy could be economically motivated. They further clarified the three remaining responsibilities and depicted them in a Venn-diagram, suggesting that each domain was of equal importance (Schwartz & Carroll, 2003). As can be noted in the previous paragraphs, Frederick (2008) argued that CSR has evolved in four phases; he stressed the deliberate enhancement of social well-being by business “of those whose lives are affected by the firm’s economic operations” (p. 522). Apart from the academic community, business and civil society’s representatives also defined CSR in numerous ways, albeit in more practical terms (Kakabadse et al., 2005). Similar to the formal literature, their definitions stressed aspects like obligations beyond economic and legal responsibilities, responsibilities towards stakeholders or the community, and sustainability.

Regarding CSP, Husted (2000) proposed a contingency approach, while Rowley and Berman (2000) argued that the broad concept of CSP should be replaced with more specific operational terms; Meehan, Meehan and Richards (2010) contended that Wood’s CSP framework did not address practical needs of implementing and measuring CSP and proposed a process model of corporate responsibility. Like CSP, the related CSR concepts of business ethics, corporate sustainability, stakeholder theory and corporate citizenship were further developing (Carroll, 2008).

Empirical research into CSR and CSP focused on many different areas and variables (Carroll, 2008), but research into the link between CSP and financial performance remained popular (Margolis et al., 2007). This is consistent with the observation of Carroll (2008) that there was a “relentless call on the part of the business community for the ‘business case’ for CSR” (p. 40).

Like Frederick (2008), Carroll (2008) noticed that CSR became an increasingly global phenomenon which was especially visible in the EU and, more recently, in Asia. On the basis of a study of best practices by Kotler and Lee (2005), he also stated that at the start of the 21st_{century, CSR was about} cause promotion, cause-related marketing, corporate social marketing, corporate philanthropy, community volunteering and socially responsible business practices (Carroll, 2008).

Despite the “phenomenal rise to prominence” of CSR (Crane et al., 2008, p. 3), the beginning of the 21st_{century was characterized by corporate scandals. Windsor (2006) argued that these scandals were} the result of deregulation, privatization and greed in the 1980s and 1990s. Consequently, like the increase of government regulations in the early 1900s and 1970s, the Sarbanes-Oxley Act of 2002 and other regulatory changes illustrated Davis’ ‘Iron Law of Responsibility’. Whetten et al. (2002) similarly noted a possible deflection point in the trend of decreasing growth of business regulation to counter “business leaders’ myopic focus on short-term earnings” (p. 388). On the other hand, voluntary CSR initiatives were increasing as well (Windsor, 2006).

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financial crisis that started in 2007 (Carrigan & De Pelsmacker, 2009; Crotty, 2009). Again, increased regulations followed: the trend of self-regulation by business halted and governments resumed their active role in the market (Kemper & Martin, 2010). Therefore, though attention for and acceptance of CSR expanded in the past decades, the concept faces theoretical and practical challenges (Kemper & Martin, 2010).

2.1.8 Conclusion

After sixty years of academic research, CSR remains a contested concept. Many different CSR definitions exist, fundamental questions regarding CSR continue to be debated and numerous

competing concepts have been introduced in the business and society literature (Crane et al., 2008). As Votaw already stated in 1973: “[CSR] means something, but not always the same thing, to everybody” (p. 11). Nevertheless, despite disagreement over what exactly constitutes CSR, the concept has gained a prominent position in both the academic and the business environment (Crane et al., 2008).

Though no single definition seems to do justice to the versatility of CSR, we need a basic

understanding of the concept for the remainder of this thesis. Since it was argued that CSR might be subsumed under the more comprehensive theory of CSP (Carroll, 1999), we will adopt the CSP definition of Wood (1991): “a business organization’s configuration of principles of social

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Chapter 3: Literature review

3.1 CSR theories

As became clear in the previous chapter, the concept of CSR has been approached from many different theoretical perspectives. In order to create a better understanding of the fragmented CSR research field, several authors have grouped these perspectives into a number of categories.

Klonoski (1991) identified three main types of CSR theories: fundamentalist theories, which state that corporations do not have a social responsibility or a limited social responsibility at most; moral personhood and moral agency theories, which attribute social responsibilities to the corporation to the extent it can be considered as a moral person or a moral agent; and social institution theories, which contend that the corporation is a social institution (to different extents) and therefore has social responsibilities, depending on the base of the social nature of business.

Garriga and Melé (2004) distinguished four groups of CSR theories, based on their explicit focus on the economic, political, integrative or ethical aspects of social reality. Instrumental theories focus on economics and argue that the corporation is an instrument for wealth creation, the ultimate

responsibility of business towards society; CSR is considered as a strategic tool in this quest. Political theories stress the social power of corporations and its social (and political) responsibilities coherent with this power. A third group, containing integrative theories, argues that corporations are dependent on society and therefore have to integrate social demands; and lastly, ethical theories indicate that there is an ethical obligation to accept social responsibility as a result of the ethical values within the relationship between business and society (Garriga & Melé, 2004).

Another author that classified different CSR theories was Windsor (2006). He identified two theoretical perspectives with opposite moral frameworks and political philosophies. Ethical responsibility theory is focused on corporate duties of self-restraint and altruism, combined with expansive public policy to support stakeholder rights. Economic responsibility theory takes a

utilitarian efficiency perspective, and strives for the protection of investor property rights and minimal public policy. A third theoretical perspective is the corporate citizenship conception, which can be interpreted in an instrumental and an idealized way. Although both corporate citizenship

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Despite the differences in terminology and the number of theoretical categories identified, a number of similarities between these classifications can be noted. We will point out these similarities while following the classification of Garriga and Melé (2004). Furthermore, we will discuss the main CSR theories within the four subcategories of their classification. Note that some of these theories already appeared in the previous chapter. Also, it must be pointed out that although the theories are classified based on their main focus, this does not mean that these theories do not contain strong elements of other aspects of social reality (Garriga & Melé, 2004). An emphasis will be placed on instrumental CSR theories, since the main focus of this thesis is on the possible relationship between CSP and CFP. 3.1.1 Instrumental CSR theories

This group of theories focuses on economics and sees CSR only as a strategic tool in the quest for the ultimate objective of wealth creation (Garriga & Melé, 2004). Instrumental CSR theories bear comparison with the fundamentalist theories of Klonoski (1991), the economical responsibility theory of Windsor (2006) and the utilitarian theories of Secchi (2007).

The origins of the instrumental approach can be traced back to the classical economic works of Adam Smith. In The wealth of nations (1776), he stated that when business could freely strive for profits and efficiency, its self-interest would usually (and unintentionally) be in the interest of the whole society by resulting in a general welfare improvement. In a reaction to the growing demand from society towards business to assume social responsibilities, the neoclassical economist Friedman (1962) therefore argued that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (p. 133); the ‘rules of the game’ were later extended to include ethical custom as well (Friedman, 1970). Thus, in his view, corporations have no social responsibility or only to a limited extent, while profits should be maximized. Though his view on CSR seems narrow, Carroll (1991) correctly noted that Friedman only fully rejected the (purely altruistic) philanthropic component of his CSR pyramid.

Drawing on agency theory, Friedman (1970) further argued that the corporate executive (the agent) has the single fiduciary duty to maximize value for the shareholder (the principal). Engaging in CSR at the expense of the shareholders would be a violation of this duty. In essence, it would mean that the executive imposed taxes on the shareholders as well as deciding how to spend these taxes. This would undermine the market mechanism: shareholders would have spent their money elsewhere if they had wanted to engage in social activities (Friedman, 1970). Therefore, Friedman (1962) claimed that the doctrine of social responsibility was “fundamentally subversive” (p. 133) in a free society. Business should remain focused on making profits, while other social institutions (for example, governments and charitable organizations) should solve social problems and incur the associated costs (Friedman, 1970; Levitt, 1958; Waddock & Graves, 1997).

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corporate profits (Orlitzky, 2008). Friedman clearly supported such a result from his shareholder-oriented viewpoint, but he considered specifying these actions as CSR as hypocritical window-dressing since the assumption of CSR would have been out of self-interest (Friedman, 1970). As Whetten et al. (2002) put this view: “[it] is simply good economics” (p. 391). Regarding Johnson (1971), both the long-run profit maximization view and the ‘lexicographic’ view on CSR can be recognized.

Although the underlying arguments behind a possible positive impact of CSP on CFP will be discussed in more detail in the remainder of this chapter, it is interesting to note here that several arguments were built on the stakeholder theory introduced by Freeman (1984), that was argued to have a natural fit with CSR (Carroll, 1999). Instrumental stakeholder theory proposed that stakeholder management would be beneficial for corporate performance: by adhering to stakeholder principles and practices corporations could match or outperform other business approaches (Donaldson & Preston, 1995; Jones, 1995). The fiduciary duties towards multiple groups within Freeman’s stakeholder theory are in this respect not necessarily incompatible with the single fiduciary duty towards shareholders of Friedman’s shareholder theory.

Garriga and Melé (2004) identified three major groups of instrumental theories, differing in their economic objectives. The first group of theories takes the aforementioned neoclassical approach of Friedman and has the objective of maximizing shareholder value, which is reflected in the share price. Engaging in CSR can therefore be considered as an investment decision: it is accepted when it contributes to shareholder value and rejected when it reduces shareholder value (Friedman, 1970; McWilliams & Siegel, 2001). As Levitt (1958) argued: “Corporate welfare makes good sense if it makes good economic sense – and not infrequently it does. But if something does not make economic sense, sentiment or idealism ought not to let it in the door” (p. 42).

Though Friedman (1970) aimed for satisfying long-term interests of the corporation, shareholder value maximization often led to a focus on short-term profit (Garriga & Melé, 2004). Jensen (2000), a neo-classicist, therefore proposed a combination of shareholder theory and stakeholder theory and introduced two identical concepts: enlightened value maximization and enlightened stakeholder theory. Enlightened value maximization used stakeholder theory to counter the short-term profit focus by acknowledging that corporations could not maximize value if important stakeholders were ignored or mistreated. But the trade-offs between stakeholder interests remained based on the objective of long-term value maximization. Similarly, enlightened stakeholder theory used shareholder theory to overcome traditional difficulties in decision-making resulting from the many different objectives of multiple stakeholder groups through the single objective of long-term value maximization (Jensen, 2000). This would also lead to decisions benefiting multiple stakeholders. Nevertheless, core

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the separation of ethics and economics and arguing that values are a fundamental part of business (Branco & Rodrigues, 2007); critics considered Friedman’s economic responsibility viewpoint unrealistic (Wartick & Cochran, 1985). Interestingly, Freeman (1994) did not aim for such a divide between shareholder and stakeholder theory: he considered shareholder theory as a form of stakeholder theory, since it contained its own normative core.

A second set of instrumental CSR theories aims for competitive advantage through spending resources on achieving long-term social objectives (Garriga & Melé, 2004). This set includes three approaches. Social investments to improve areas of competitive context would lead to competitive advantage for corporations or clusters of corporations. In this approach, it is also argued that business can solve social problems more effectively than governments due to its specific knowledge and resources, which contrasts with the arguments of Levitt (1958) and Friedman (1970). A second approach builds on social and ethical resources and dynamic capabilities to gain a competitive advantage, while in the last approach, business specifically targets the bottom of the economic pyramid (Garriga & Melé, 2004). The third set of instrumental CSR theories pertains to cause-related marketing, where a certain amount of revenues is donated to a good cause (Garriga & Melé, 2004). In essence, by stressing the CSR dimension, products are differentiated based on their reputation.

3.1.2 Political CSR theories

Political CSR theories not only consider the interactions and connections between business and society, but they also consider the power and position of business and the associated responsibility (Garriga & Melé, 2004). Corresponding theories can be found in the second and third group Klonoski (1991) identified, while the two corporate citizenship conceptions Windsor (2006) introduced also contain political aspects. Furthermore, several political theories are consistent with some theories in Secchi’s (2007) managerial and relational categories. Garriga and Melé (2004) found three major political theories: corporate constitutionalism, integrative social contract theory and corporate citizenship.

Corporate constitutionalism was pioneered by Davis (1960). As mentioned before, he focused on the responsibility of business inherent with its power and proposed his well-known ‘social power

equation’ and ‘iron law of responsibility’. Although he agreed with Friedman (1962) that in the case of perfect competition, market forces leave business without social power and thus, without social

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Integrative social contract theory builds on a similar assumption, by arguing that there exists an implicit social contract between business and society, which comes with certain social obligations for business to gain legitimacy (Eberstadt, 1973; Garriga & Melé, 2004, Wartick & Cochran, 1985). The original assumption was extended to include a theoretical macrosocial contract with basic hypernorms as well as a microsocial contract, which contains certain community specifications that have to adhere to the hypernorms (Garriga & Melé, 2004).

Corporate citizenship has gained attention in recent decades due to the increasing power of

multinationals vis-à-vis governments. In corporate citizenship, rights, responsibilities and partnerships of business in society analogous to that of a citizen are central. Responsibilities towards and

partnerships with local communities have a prominent role, as well as environmental considerations. Different notions of corporate citizenship exist, ranging from limited to extended views and being based on social contract theory or taking other approaches (Garriga & Melé, 2004).

3.1.3 Integrative CSR theories

At the heart of integrative CSR theories is the perceived dependence of business on society. In order to gain legitimacy from society, business has to integrate social demands by incorporating prevailing social values into their operations (Garriga & Melé, 2004). Because the proper actions that need to be taken differ between industries and through time, this group of theories is concerned with identifying and reacting to the relevant social demands. This group of theories relates somewhat to both the second and third group of Klonoski (1991) as well as the ethical group of Windsor (2006). It also has similarities with several managerial and relational theories that Secchi (2007) described. The main integrative theories that Garriga and Melé (2004) distinguished are issues management, the principle of public responsibility, stakeholder management and corporate social performance.

Issues management has its origins in the corporate social responsiveness approach, which focused on bridging the gap between expectations of relevant groups regarding corporate performance and the actual corporate performance through responding to social issues (Ackerman & Bauer, 1976). As stated before, Jones (1980) argued that the processes, instead of the outcomes, were the most

important aspect in evaluating CSR. The more generic social responsiveness was therefore extended to the more specific issues management, which stressed the CSR processes behind identifying and responding to social (and political) issues that could influence corporations (Wartick & Rude, 1986). These processes were aimed to minimize surprises and to provide coordination to strategically respond to social issues in order to gain legitimacy (Garriga & Melé, 2004).

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expectations. Public policy went beyond explicit legal requirements: it included the broad pattern of social direction. Furthermore, business could legitimately participate in the public policy process (Preston & Post, 1981).

Stakeholder management was formally introduced in the 1980s, but stakeholder notions were apparent in practice as well as in earlier CSR literature (CED, 1971; Frederick, 2006; Hoffman, 2007; Johnson, 1971). At the core of stakeholder management is the aim for cooperation between the corporation and its stakeholders, which affect or are affected by corporate actions, through integrating them in the decision-making process. Actions dealing with multiple stakeholders at once are considered to be strategically efficient. The great amount of differing stakeholders can help in responding more accurately to social demands (Garriga & Melé, 2004).

Corporate social performance theories try to merge the other integrative theories. As discussed in the previous chapter, CSP models were proposed by numerous authors (Carroll, 1979; Swanson, 1995; Wartick & Cochran, 1985; Wood, 1991) to provide guidance in satisfying social needs; elements of responsiveness, issue and stakeholder management are clearly visible. Furthermore, several CSP models explicitly focused on multiple aspects of social reality: the model of Wood (1991) contained both integrative and political aspects, while the reorientation of Swanson (1995) added ethical elements (Garriga & Melé, 2004).

3.1.4 Ethical CSR theories

Ethical CSR theories focus on the ethical values within the business-society relationship and stress the duty of business to do the right thing as well as improving society (Garriga & Melé, 2004). Theories of this group can also be found in the third group of Klonoski (1991) and are similar to the ethical responsibility approach that Windsor (2006) identified. Some ethical theories bear resemblance to theories in Secchi’s (2007) managerial and relational category. Garriga and Melé (2004) included four approaches in this category: normative stakeholder theory, universal rights, sustainable development, and the common goods approach.

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A second group of ethical theories put universal human rights at the centre of (global) CSR. Several institutions came up with sets of human rights principles, which were based on international declarations of human rights (Garriga & Melé, 2004).

Theories of sustainable development have their roots in environmentalism, but also include social and economic aspects; they are focused on meeting the needs of the present generation as well as future generations (Garriga & Melé, 2004).

A fourth theory, the common good approach, contends that business has to contribute to the common good, since it is part of society as a social actor (Garriga & Melé, 2004).

3.1.5 Conclusion

In addition to the many different definitions of CSR, a multitude of views on the concept of CSR have been presented in business and society literature. We adopted the classification of Garriga and Melé (2004), who identified four main perspectives on CSR: an instrumental, a political, an integrative and an ethical perspective. While focusing on the instrumental perspective, we outlined the main theories within these perspectives. Though the most vociferous critics of the assumption of CSR have seemed to be caught up by the current reality, with CSR as an integral part of business, the discussion still remains how and to what extent CSR should be assumed (Frederick, 1994).

3.2 The assumption of CSR and the relationship with CFP

Throughout the years, scholars have proposed a variety of arguments in favour of and against the assumption of CSR. These arguments reflected the different theoretical perspectives identified in the previous paragraph. Since the focus of this thesis is on the relationship between CSP and CFP, we will approach the discussion of the assumption of CSR from an instrumental viewpoint. Therefore, we will elaborate upon the arguments identified in literature that predict a positive, negative or neutral

relationship between CSP and CFP. Nevertheless, we will shortly address the other main arguments in favour of and against CSR at first to get a more comprehensive picture of the discussion regarding CSR; several of these arguments are also hypothesized to (indirectly) influence the relationship between CSP and CFP.

3.2.1 Main arguments in favour of the assumption of CSR

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Both political and integrative aspects can be recognized in the first argument, which stressed that the assumption of CSR could contribute to the long-term viability of business as an institution. Regarding the political perspective on CSR, Davis referred to his proposed ‘iron law of responsibility’ by stating that business should use its power responsibly if it wanted to retain its social role and power (Davis, 1960). He also took an integrative viewpoint by pointing out that business was dependent on society for its existence and that it should therefore meet society’s expectations (Davis, 1973; Porter & Kramer, 2006). In essence, CSR would provide legitimacy and thus silence critics on business (Wren, 1979).

A second argument, related to the 'iron law of responsibility', contended that through the assumption of CSR, business could avoid increased government regulation. Social obligations could either be discharged voluntarily through pre-emptive actions or they could be imposed coercively by the government (Frederick, 1994). The former option was preferred, since increased government regulations would restrict freedom in decision making and shift power from business to the

government (for example, as was the case at the beginning of the 20th_{and the 21}st_{century); this would} be damaging for political pluralism (Jones, 1980). Also, regulation would lead to more costs for business, which would have a negative impact on CFP (Davis, 1973). The assumption of CSR to avoid government regulation is similar to what Windsor (2006) deemed prudent altruism.

The third argument, which is more ethical of nature, emphasized the sociocultural norms that

encourage business to be socially responsible. Basically, business should assume CSR because it is the moral right thing to do (Davis, 1973; Porter & Kramer, 2006; Whetten et al., 2002).

Another argument was that business had the proper resources to address social problems. Business' management skills, functional expertise, capital resources, innovative capacity and the ability to make effective use of limited resources were considered valuable traits. Other institutions, like the

government, could not match these capabilities. It was also argued that business could at least try to solve social problems (Davis, 1973).

Lastly, it was stated that CSR could prevent social problems from occurring in the future. It would be more efficient to deal with these problems instantly and avoid unwanted side-effects of business through self-regulation than to solve them later (Davis, 1973). Similarly, because the rise of corporations caused most current social problems, corporations should be at the forefront of dealing with these problems (Anderson, 1989).

3.2.2 Main arguments against the assumption of CSR

If we ignore his arguments regarding wealth creation, Davis (1973) identified several main arguments against the assumption of CSR in addition to Friedman's argument of violating the market mechanism we discussed earlier: excessive business power, lack of broad support, morally undesirable, lack of social skills, and the lack of accountability.

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excessive amount of power and the possibility to impose its will on society. Thus, the concentration of power within business would be endangering for the viability of a pluralistic, free society (Davis, 1973; Friedman, 1962; Jones, 1980; Levitt, 1958).

A second, integrative oriented argument pointed out that CSR would lack broad support from society. Considerable disagreement between and within social groups existed with regard to the assumption of CSR. If business would get involved in social issues, it could lose support of several social groups, which would lead to its social as well as its other goals to fail (Davis, 1973).

Though Davis did not explicitly propose an ethically based argument against CSR, he mentioned Friedman’s profit maximization argument against CSR. Despite the perceived separation of ethics and economics, Friedman’s viewpoint on CSR did have a moral core, which among others stressed respect for property rights (Branco & Rodrigues, 2007). If corporations engaged in CSR at the cost of

shareholders, this would be morally undesirable; it would equal theft (Jones, 1980).

A fourth argument was that business did not have the knowledge and skills to solve social problems, because it was specialized in economic and technical issues. Furthermore, by addressing social problems in addition to its economic function, business would perform poorly in both areas. Hence, social issues could best be handled by governments or other institutions and economic issues by business (Davis, 1973; Jones, 1980). On the other hand, proponents of CSR argued that this

specialization was not realistic since corporations played a political role, while governments played an economic role. Corporate actions were also argued to have social and political impacts: it was

therefore “too late to claim incompetence” (Jones, 1980, p. 61).

The final argument against CSR was the lack of accountability of business to society (in contrast with political representatives, for example). Without mechanisms of accountability, the public could not effectively control business involvement. Consequently, business should not assume social responsibility (Davis, 1973).

3.2.3 Arguments predicting a positive relationship between CSP and CFP

From an instrumental viewpoint, CSR was accepted if it would contribute to the ultimate objective of wealth creation (Garriga & Melé, 2004). As partly became clear from the different groups of

instrumental CSR theories that Garriga and Melé (2004) identified, scholars hypothesized multiple ways through which increased CSP would lead to increased CFP and, ultimately, wealth creation. We will discuss the main arguments predicting a positive influence of CSP on CFP while grouping them on the basis of their nature to increase benefits or to decrease costs. As noted before, several (indirect) arguments overlap with non-instrumental CSR theories, including stakeholder management.

Furthermore, we will consider reverse causation, which would also lead to a positive relationship between CSP and CFP, and the possibility of a virtuous circle (Kurucz et al., 2008).

Taming the dragon?