Corporate Social Responsibility: A Theory of the Firm Perspective

Summary of: McWilliams, A. & Siegel, D. (2001). Corporate Social Responsibility: A Theory of the Firm Perspective, Academy of Management Review, 26(1), 117-127

CSR: A THEORY OF THE FIRM PERSPECTIVE

In this article CSR is defined as: actions that appear to further some social good, beyond the interests of the firm and that which is required by law.

Friedman (1970): Engaging in CSR is symptomatic of an agency problem or a conflict between the interests of managers and shareholders. Managers use CSR as a means to further their own social, political, or career agendas, at the expense of shareholders.

Freeman (1984): firms have relationships with many constituent groups and that these stakeholders both affect and are affected by the actions of the firm.

It is assumed that the management of publicly held firms attempts to maximize profits. Therefore, CSR can be viewed as a form of investment.

Demand for CSR

Two major sources of demand for CSR:

1. Consumer demand

2. Demand from other stakeholders

CSR can be used as a differentiation strategy. CSR may be a popular means of achieving differentiation, because it allows managers to simultaneously satisfy personal interests and to achieve product innovation.

Differentiating through the use of CSR resources, such as recycled products or organic pest control, may also include investment in research and development (R&D). R&D investment may result in both CSR-related process and product innovations, which are each valued by some consumers.

CSR and advertising. For CSR differentiation to be successful, potential customers must be fully aware of CSR characteristics, otherwise they will purchase a similar product without such characteristics.

Two types of goods:

1. Search goods: products whose attributes and quality can be determined before purchase.

2. Experience goods: products that must be consumed before their true value can be known.

Consumers typically assume that the products of a reliable and honest firm will be of high quality. Advertising that provides information about CSR attributes can be used to build or sustain a reputation for quality, reliability, or honesty – all attributes that are important but difficult to determine by search alone.

Income is another determinant of consumer demand for CSR. Whereas low-income shoppers generally are quite price sensitive, affluent consumers can more easily pay a higher price for additional CSR attributes.

Supply of CSR

The RBV leads us to a supply-side perspective, which begins with the realization that firms must devote resources to satisfy the demand for CSR.

The supply and demand framework implies that there is some optimal level of CSR attributes for firms to provide, depending on the demand for these characteristics and the costs of generating them.

Those consumers who value CSR are willing to pay a higher price for a product with an additional social characteristic than for an identical product without this characteristic. This result is contingent on consumers being aware of the existence of the CSR attribute. If consumers are not aware of this additional social future, they will choose the lower-priced product. Thus, advertising plays an important role in determining the optimal level of CSR attributes or outputs provided.

One is likely to find CSR attributes in industries with highly differentiated products, such as food and cosmetics.

Demographic and technological changes also can stimulate demand for CSR attributes. The rapid rise in the number of working women has resulted in an increase in the demand for corporate-supplied day care.

On the supply side, the rise of the internet has made it much easier for firms to target consumers who have social goals. On the demand side, the internet makes it easier for groups who share common social goals to exchange information.

The ideal level of CSR can be determined by cost-benefit analysis. There is a level of CSR investment that maximizes profit, while also satisfying stakeholder demand for CSR.

The provision of CSR will depend on R&D spending, advertising intensity, the extent of product differentiation, the percentage of government sales, consumer income, tightness of labor market, and the stage of the industry life cycle. Additionally, the likelihood of economies of scale and scope in the provision of CSR implies that large, diversified companies will be more active in this arena. The model indicates that although firms providing CSR will have higher costs than firms not providing CSR, they will each have the same rate of profit.

CSR attributes are like any other attributes a firm offers. The firm chooses the level of the attribute that maximizes firm performance, given the demand for the attribute and the cost of providing the attribute, subject to the caveat that this holds true to the extent that managers are attempting to maximize shareholder wealth.