assessing the compatibility of business ethics and...

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Assessing the Compatibility of Business Ethics and Sustainable Development

Matthias Witt

Uppsala University

Uppsala Center for Sustainable Development (CSD)

Assessing the Compatibility of

Business Ethics and Sustainable Development

Matthias David Witt, BA UZH in Economics and Business Administration

Date of Seminar: 2012/02/13

Date of Submission: 2012/02/20

Date of Resubmission: 2012/02/20

MSc in Sustainable Development 2010 - 2012

Degree Project E in Sustainable Development (1GV038), 30 ECTS

Supervisor: Gloria Gallardo

Contact details: Matthias David Witt

Langholzstrasse 32

CH-6333 Hünenberg See

Switzerland

Phone: +41 41 780 65 64

E-mail: [email protected]

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ABSTRACT

Since 1987, the United Nations has promoted sustainable development as a form of

development that takes into account and balances economic, ecological, and social

considerations. To achieve sustainability, the United Nations has repeatedly required private

businesses—among other actors—to assume a broader set of social responsibilities. This is

though highly contested in the corporate world and among economists. To throw light on this

debate, the aim of this paper is to assess whether contemporary theories of business ethics are

compatible with the Brundtland notion of sustainable development. For that reason, the

responsibilities for sustainable development that corporations should assume are deduced

from the Brundtland Report; followed by an introduction to the field of business ethics and a

detailed discussion of major contemporary theories reflecting instrumental, integrative,

political, and ethical approaches to corporate social responsibility. By comparing the different

responsibilities the compatibility of sustainability with each discussed theory on business

ethics is assessed. This paper finds that the compatibility is low for instrumental theories,

moderate for integrative and political theories, and high for ethical theories on business ethics.

Nevertheless, ethical theories assume a normative perspective on sustainable development,

idealizing how corporations ought to act in a sustainable world. In reality, the world is far

from sustainability. This is not least a result of national economic and legal policies

maintaining conditions and structures that continue to promote globalization and free markets.

It is argued that the combination of fierce competition and corporations’ opportunities to take

advantage of weak legal systems in emerging and developing countries leads firms to further

subscribe to an instrumental approach to business ethics. It is suggested that international

politics develop a global legal framework based on sustainable development that provides

competitive conditions at arm’s length.

At the same time, recent management research is presented that suggests that corporations can

promote sustainability if they contribute solutions to the social and environmental problems of

our time. The pursuit of sustainability, therefore, results more from business opportunities

than from any ethical convictions.

Keywords: Sustainable development, business ethics, corporate social responsibility (CSR),

shareholder value, stakeholder management, corporate citizenship.

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TABLE OF CONTENTS

ABSTRACT..........................................................................................................................iii

TABLE OF CONTENTS ...................................................................................................... iv

LIST OF TABLES ................................................................................................................vi

LIST OF FIGURES..............................................................................................................vii

LIST OF ABBREVIATION................................................................................................viii

1 INTRODUCTION............................................................................................................1

1.1 Background......................................................................................................1

1.2 Aim of the study ..............................................................................................5

1.3 Scope and limitations.......................................................................................5

1.4 Methods...........................................................................................................6

1.5 Outline.............................................................................................................8

2 CONCEPTUAL FRAMEWORK .....................................................................................9

2.1 What is a corporation? .....................................................................................9

2.2 Economic growth and profit and shareholder value maximization principles.. 10

2.3 Brief history of environmental issues on the international political agenda..... 11

2.4 Brundtland definition of sustainable development .......................................... 13

2.5 Expectations on business from a sustainability perspective............................. 15

2.6 Classification of the corporate responsibilities for sustainability..................... 16

2.6.1 Economic function of corporations..................................................... 16

2.6.2 Social function of corporations .......................................................... 18

2.6.3 Political function of corporations....................................................... 19

2.6.4 Ethical function of corporations......................................................... 22

2.7 Framing business ethics ................................................................................. 24

2.7.1 What is business ethics?..................................................................... 24

2.7.2 Defining morality, ethics and ethical theory ....................................... 24

2.7.3 Why is business ethics important? ...................................................... 25

2.8 Corporate Social Responsibility ..................................................................... 27

2.8.1 Instrumental approach to CSR — Shareholder Perspective ................ 28

2.8.2 Integrative approach to CSR —Philanthropy and Stakeholder

management....................................................................................... 30

2.8.3 Political approach to CSR — Corporate citizenship........................... 34

2.8.4 Ethical approach to CSR — Universal rights ..................................... 36

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3 COMPARISON.............................................................................................................. 40

3.1 Overview ....................................................................................................... 40

3.2 Instrumental approach to CSR — Shareholder Perspective............................. 41

3.3 Integrative approach to CSR —Philanthropy and Stakeholder management ... 41

3.4 Political approach to CSR — Corporate citizenship ....................................... 42

3.5 Ethical approach to CSR — Universal rights.................................................. 43

4 DISCUSSION AND CONCLUSIONS........................................................................... 45

4.1 Instrumental approach to CSR — Shareholder Perspective............................. 45

4.2 Integrative approach to CSR — Philanthropy and Stakeholder management .. 47

4.3 Political approach to CSR — Corporate citizenship ....................................... 49

4.4 Ethical approach to CSR — Universal rights.................................................. 51

4.5 A new approach: The concept of shared value................................................ 52

4.6 Summary of findings...................................................................................... 53

4.7 Conclusions ................................................................................................... 54

REFERENCES ..................................................................................................................... ix

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LIST OF TABLES

Table 1: Overview of milestones in the economic development, political and

environmental awareness, UN conferences on environment, development

and sustainable development, and theories and related approaches on CSR

between 1950 and 2020........................................................................................4

Table 2: Responsibilities of corporations for sustainable development .............................23

Table 3: Theories on Corporate Social Responsibility ......................................................28

Table 4: The UN Global Compact....................................................................................38

Table 5: The benefits of participating in the UN Global Compact ....................................39

Table 6: Compatibility of business ethics theories with responsibilities for

sustainable development (no or low compatibility = 0, moderate

compatibility = 1, strong compatibility = 2)........................................................40

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LIST OF FIGURES

Figure 1: Parsons’ AGIL paradigm......................................................................................7

Figure 2: The relationship between ethics and the law.......................................................10

Figure 3: The three dimensions of sustainable development ..............................................15

Figure 4: The Pyramid of CSR ..........................................................................................31

Figure 5: The stakeholders of the corporation....................................................................33

Figure 6: Compatibility of instrumental theories with proposed responsibilities for

sustainable development.....................................................................................41

Figure 7: Compatibility of integrative theories with proposed responsibilities for


Figure 8: Compatibility of political theories with proposed responsibilities for


Figure 9: Compatibility of ethical theories with proposed responsibilities for


Figure 10: Sustainable development requires an expansion and standardization of

national legal systems at the international level ..................................................55

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LIST OF ABBREVIATIONS

CC Corporate Citizenship

CSR Corporate Social Responsibility

FDI Foreign Direct Investment

MNC Multinational Corporation

NGO Non-Governmental Organization

TNC Transnational Corporation

UN United Nations

UNCED United Nations Conference on the Environment and Development

UNCHE United Nations Conference on the Human Environment

UNGA United Nations General Assembly

UNGC United Nations Global Compact

WCED World Commission on Environment and Development

WSSD World Summit on Sustainable Development

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1 INTRODUCTION

Man has the fundamental right to freedom, equality and adequate conditions of life, in an

environment of a quality that permits a life of dignity and well-being.

(Stockholm Declaration, Principle 1, 1972)1

1.1 Background

During the World Summit on Sustainable Development (WSSD) in Johannesburg in 2002,

held on the tenth anniversary of the UN Conference on the Environment and Development

(UNCED) in Rio de Janeiro, the then UN Secretary-General Kofi Annan (2002) stated that:

And more and more we are realizing that it is only by mobilizing the

corporate sector that we can make significant progress. The corporate

sector has the finances, the technology and the management to make

this happen (Annan, 2002, para. 5-6).

By ‘this’ Annan meant sustainable development. Speaking in front of executives, he urged

them to consider their businesses as important and leading actors for making sustainable

development happen. Although Annan’s call to action was easy to understand, he gave the

auditions no answer about how corporations could play an active role and successfully

promote sustainable development in practice. If corporations are to be concerned with

sustainable development, they should have access to some form of reliable academic guidance

for adequate corporate behavior for sustainability (Moon, 2007). The scientific foundation for

the role of business and its contribution to sustainable development remains vague, even

though the number of academic articles on this subject has increased lately (Moon, 2007;

Payne & Raiborn, 2001; Porter & Kramer, 2011; Rushton, 2002; Steurer, Langer, Konrad &

Martinuzzi, 2005).

According to some scholars, the research on corporate behavior for sustainable development

has thus to be seen as a part of the broader concept of business and society relations (Garriga

& Melé, 2004; Hansen, 2010). The research field of ‘business and society’ (Schwartz &

Carroll, 2008) focuses on exploring the “relationships that exist between business and

society” and “the contributions each can make to a better quality of life for all people”

(Wood, 1991, p. 385). While the relationship between business and society has been

1 UN, Report of the United Nations Conference on the Human Environment, Document

A/CONF.48/14/Rev.1, Chapter 1 (New York: 1972).

2

extensively researched, both the purpose and extent of this relationship have been subject to a

highly controversial discourse among scholars in the past (for an overview see Whetten,

Rands & Godfrey, 2002). Originally, there are two opposite perspectives on the social role of

business. One the one hand, businesses, based on their influential position and the “far-

reaching scope and consequences of their decisions” (Lee, 2008, p. 58), are obligated to

consider the social consequences and recognize the responsibilities resulting from their

corporate activities. Corporations are acting socially responsible if, and only if, corporate

outcome is “desirable in terms of the objectives and values of our society” (Bowen, 1953, p.

6). Hence, corporations are assumed to follow the primacy of social well-being. On the other

side, Friedman (1970, p. 34), a fierce proponent of neoliberalism and awarded with the Nobel

Prize in economics in 1976, notes that the only responsibility of business is “to make as much

money as possible while conforming to the basic rules of the society, both those embodied in

law and those embodied in ethical custom.” Primacy is given to profit maximization, and

social concerns are only taken into account if their consideration maximizes shareholder value

(Garriga & Melé, 2004).

Considering this substantial difference between the diametrically opposed perceptions of

Bowen (1953) and Friedman (1970), Wallich and McGowan (1970) point out that the social

role of corporations respectively their social responsibilities would always remain

controversial if they could not be aligned with shareholder interests. Consequently, they

introduced a ‘new rationale’ that promotes the social responsibilities of corporations without

compromising the interests of their shareholders. Assuming that corporate organizations are

embedded in and interacting with society, and if this surrounding society deteriorates for

some reasons, corporations are likely to lose the basis for their commercial operations

(Wallich & McGowan, 1970). As a result, corporations have a long-term interest to support

and sustain the well-being of the society in which they operate (Lee, 2008).

Following the Post-Second World War economic recovery, which was facilitated by the

relaxation of the East-West tension in the late 1980s (Ikenberry, 2010), the ongoing process of

global integration of geographically divided economies into a single global economy (Beck,

2000; Kearney, 2010), proved to pose new challenges for the social role of corporations

(Crane & Matten, 2010). Whereas globalization has made regional differences less important,

it has also revealed economic, political, and cultural differences, some of them hardly

reconcilable with each other (Robertson & Crittenden, 2003). Yet, globalization is highly

contested (Jackson, 2009), not least because of diametric effects on the preservation of natural

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resources (Rockström et al., 2009)2 and an uneven distribution of accumulated wealth among

regions, nations and individuals (World Bank, 2009). Inequality both within and between

countries has proven to be one of the main obstacles to human development (UN, 2009).

Multinational corporations (MNCs, also referred to as transnational corporations, TNCs) are

generally understood to play an active role in both promoting and taking advantage of

globalization through the expansion to and diversification of production into new regions and

markets (Deresky, 2008). On the other side, non-governmental organizations (NGOs) are

assumed to have evolved as counteracting force in the face of the steadily increasing power of

MNCs (Palazzo & Scherer, 2006). Spar and La Mure (2003) assess the impact of NGOs on

global business and note a tendency of NGOs to blame MNCs for growing social inequality

and environmental degradation.

Scherer, Palazzo and Matten (2009) adduce two reasons for reconsidering the social

responsibility of MNCs. First, globalization reduces the capacity of national governments and

institutions to regulate and enforce socially desirable corporate behavior. Second, MNCs are

increasingly exposed to heterogeneous social, cultural and political values due to their global

activities. Consequently, MNCs are assumed to often operate in ‘legal limbo’ as they are no

longer subject to a given legal system, but can rather choose between many alternative

frameworks considering economic factors. This means that people affected by economic and

political decisions are less and less involved in the decision-making process (Palazzo &

Scherer, 2006).

Table 1 provides an overview of important events for the economic development, the increase

in political awareness for environmental issues, the corresponding UN conferences on the

environment and sustainable development, and the historical development of theoretical

approaches to corporate social responsibilities (CSR) between 1950 and 2020. As can be seen

from Table 1, all four dimensions are interlinked, yet economic development and its

consequences having preceded the political awareness for environmental issues and actions

by the United Nations (UN). Indeed, it took the international community almost four decades

to address the need for sustainable development. Interestingly, the academic debate about

CSR has evolved in parallel with the economic development.

2 Rockström et al. (2009, p. 472) point out the consequences if there is no change in current economic practices:

“Since the Industrial Revolution ... human actions have become the main driver of global environmental change.

This could see human activities push the Earth system outside the stable environmental state ... with

consequences that are detrimental or even catastrophic for large parts of the world.”

4

Table 1: Overview of milestones in the economic development, political and environmental

awareness, UN conferences on environment, development and sustainable development, and

theories and related approaches on CSR between 1950 and 2020.

Source: Author based on Baylis, Smith & Owens (2008); Crane & Matten (2010); McNeill

(2001).

If the implications of globalization call for greater corporate responsibilities, Walsh (2005)

notes that established management theories hitherto do not sufficiently answer questions

regarding type and scope of such responsibilities in a global context. For example, can MNCs

regulate themselves, and if so, why? Should MNCs provide global public goods such as

education, health, and environmental protection? What are limits to corporate responsibility?

Providing answers to these questions has traditionally been the objective of studies on

business ethics. Although attached with little importance in the past (Crane & Matten, 2010),

theories on business ethics have gained attention and become more important in the

management discourse lately (Scherer et al., 2009).

Considering Annan’s quote at the beginning of this chapter, it can be said that corporations,

and especially MNCs, are not only assumed to play a major role in globalization but also in

5

adopting and promoting sustainable development. This raises the question of whether theories

of business ethics can also serve as academic basis for corporate sustainable behavior.

1.2 Aim of the study

The aim of this paper is to assess whether contemporary theories of business ethics are

compatible with the notion of sustainable development. Therefore, this paper seeks to explore

and outline the role of business for sustainable development and to compare this role to the

social roles of business suggested by selected theories of business ethics. The purpose of this

thesis paper is to answer the following research questions:

(1) What type of responsibilities for sustainable development does the Brundtland Report

suggest corporations should assume?

(2) Which contemporary theories of business ethics, if any, are possible to combine with

the notion of sustainable development and the responsibilities for sustainable

development of corporations?

(3) If the theories discussed in (2) are deficient, are there any present contributions to the

business management literature that take into account the responsibilities for sustainable


1.3 Scope and limitations

Although the idea of sustainable development is a relatively new one, a large number of

varying definitions of sustainable development exist in the academic literature. For the aim of

this paper, the notion of sustainable development is limited to the classic definition provided

by the Brundtland Commission in 1987, which was later adapted during the World Summit on

Sustainable Development in Johannesburg in 2002.

Similarly, the role of business in society has been subject to controversial discussions in

academic writing since the early 1950s. While many different theories on business ethics

exist, this paper focuses to present and discuss major contemporary theories reflecting

instrumental, integrative, political, and ethical approaches to CSR. This study does not

attempt to provide a thorough review or comparison of all theories associated with sustainable

development and business ethics. This paper focuses on theories specifically related to CSR.

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1.4 Methods

This study is exclusively based on a literature review of the academic discourse on corporate

responsibilities, which is the main subject of business ethics theories; an analysis of the

Brundtland notion of sustainable development regarding the expected corporate sustainable

behavior; a compilation of selected business ethics theories; and a comparison of these

selected theories with the expected corporate sustainable behavior according to the

Brundtland notion.

In the 1950s, the American sociologist Parsons developed his theory on the basic functions

that every system is required to maintain if it is to persist (Holton, 2001). According to

Parsons (1951, 1961), any system is faced with four interconnected problems:

(1) The extraction and distribution of resources among the system.

(2) The definition of system goals, including the provision of resources to achieve these

goals, which requires a system to prioritize its goals.

(3) The coordination and maintenance of viable relationships among different parts of the

system.

(4) The adherence all parts of the system to appropriate values, which motivate interaction

within the system and resolve conflicts between different parts of the system.

According to Parsons (ibid.), the existence of these problems requires any system to develop

the following abilities:

(a) Adaptation, or the ability of a system to interact with the environment and adapt to

changing external conditions.

(b) Goal attainment, or the ability of a system to define and pursue goals.

(c) Integration, or the ability of a system to establish and secure cohesion and inclusion

based on broad and converging values and norms.

(d) Latency, or latent pattern maintenance, or the ability of a system to maintain the basic

structures and value patterns, and thus enabling the integration throughout time.

When a system has these abilities, the roles and norms are established and guide interactions

between individuals and groups. The system is thus said to be stable. Where the system lacks

one or more abilities, for example to adapt to environmental changes, the system falls apart

and either forms a new system with new structures, or the system dissolves.

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To fulfill these four functions, a system forms specific subsystems that deal with the

respective tasks (Parsons, 1977). In a broad and abstract action system, these subsystems

consist of:

(a) A behavior system based on needs that organizes individual actions.

(b) A personal system based on motives that aligns individual actions with set goals.

(c) A social system based on social roles that enables interaction between and integration of

different actors.

(d) A cultural system based on values that organizes the values, norms, and symbols of a

system on which different actors interact in the system.

Each action, whether of individuals or groups (including organizations), is always a result

from these four subsystems. Moreover, each subsystem can be subdivided further, using the

four required functions for the system. For example, the social system consists of an

economic system (adaptation), a political system (goal attainment), a commonwealth

(integration), and a cultural system (latency). Figure 1 depicts these connections in detail.

Adaptation Goal attainment

A G

Behavior system

Latency Integration L I

AEconomic system Political system

Cultural systemL I

Personal system

L I

G

Commonwealth

A G

Socialsystem

Cultural system

Figure 1: Parsons’ AGIL paradigm. Source: Author based on Parsons (1951; 1961; 1977).

Since sustainable development is about creating and maintaining “the conditions under which

humans and nature can exist in ... harmony, that permit fulfilling the social, economic and

other requirements of present and future generations” (EPA, 2011, para. 1), the Brundtland

Report (UNGA Report of the World Commission on Environment and Development

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(hereinafter WCED), 1987) envisions a lasting system for humanity on earth. It is assumed

that the Brundtland Report (ibid.) describes the world as social system, which requires

Parsons’ four abilities to persist in the future. For the purpose of this paper, a firm’s

responsibilities for sustainable development can then be classified into economic

responsibilities (related to resources and economics), political responsibilities (related to goal

definition and achievement), social responsibilities (related to integration and securing

cohesion), and ethical responsibilities (related to culture and values).

1.5 Outline

First, the concept of the corporation and principles of profit and shareholder value

maximization are introduced (2.1 and 2.2). Then, the notion of sustainable development is

outlined based on official documents from the Brundtland Commission and the conferences

on environment and development in Rio de Janeiro (1992) and Johannesburg (2002), as well

as from academic literature on sustainable development (2.3 and 2.4). Using these sources,

the role of business for sustainable development is derived and outlined to get a summary of

the demands from the international political level (2.5 and 2.6). Then, using primarily

management literature, the notion of business ethics and the idea of CSR are introduced (2.7).

Following, the selected theories of business ethics are outlined (2.8). Fifth, it is analyzed if

and to what extent the selected theories are compatible with the Brundtland notion of

sustainable development (3.1 – 3.4). In case the theories outlined in 2.8 fall short on

explaining the responsibilities outlined in 2.6, it is discussed whether there are other present

contributions to the business management literature that could help corporations to understand

sustainable development (4.1 - 4.5). This paper ends with a summary of the findings and the

presentation of some conclusions (4.6 and 4.7).

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2 CONCEPTUAL FRAMEWORK

2.1 What is a corporation?

The corporation is the prevalent type of business entity in most market economies (Crane &

Matten, 2010). Gutenberg (1951) states three constitutive features of the company, including

the principle of profit maximization, the principle of private property, and the principle of

autonomy. These principles are usually stated in a nation’s economic order and allow

companies to freely engage and invest in economic activities within the boundaries of the

national law. From a legal perspective, corporations are normally regarded “as independent

from those who work in them, manage them, invest in them, or receive products or services

from them” (Crane & Matten, 2007, p. 42). Corporations are thus separate entities in their

own right, which has significant implications for the understanding of the responsibilities of

corporations:

(a) Legally, corporations are broadly considered as artificially created entities. As ‘artificial

persons’ corporations are entitled to certain rights in society, but are also obliged to

legal responsibilities similarly to individual citizens.

(b) Although the shareholders own corporations through their shares, corporations exist

independently of them. Shareholders’ responsibilities for a corporation’s misconduct,

including debts and damages to people and the environment, is legally limited to their

equity stake in the company.

(c) Where the shareholders do not manage corporations themselves, appointed managers

and directors have a fiduciary responsibility to represent the shareholders’ interests for

the benefit of the shareholders. Narrowly defined, corporate executives are generally

expected to protect shareholders’ equity against external claimants, while putting their

personal interests aside.

Consequently, the basis legal framework for a corporation’s legal responsibilities is well

established. Yet in practice, scope and enforcement on national level may differ greatly

between various nations (Tricker, 2009). Crane and Matten (2010) argue that the problem

with legal frameworks is that they hardly assign any moral responsibility to corporations.

Therefore, legal frameworks are of little or no use when it comes to the moral aspects of

‘doing the right or wrong thing’ thus putting companies in a grey area between binding

legislation and voluntarily applied ethics as shown in Figure 2.

10

Figure 2: The relationship between ethics and the law. Source: Adapted from Crane and

Matten (2007).

On the other side, why, can be argued, should corporations assume a broader set of

responsibilities that go beyond legally binding obligations? These reasons are outlined in

subsequent parts.

2.2 Economic growth and profit and shareholder value maximization principles

In economics, two basic assumptions are that personal needs are unlimited while the resources

to meet these needs are limited. This means that all needs cannot be satisfied in an economy at

a given point in time. However, an economy can gradually improve and meet increasingly

more needs. In neoclassical economic thinking, economic growth (also economic progress) is

mainly the result of profit-maximizing activities and initiatives on part of corporations

(Henderson, 2005). In their own interests, firms maximize their profits by maximizing the

difference between its total revenues and its total costs. According to Brickley, Smith,

Zimmerman & Willett (2003, p. 25), a firm creates value “whenever it sells something whose

benefit to the customer is greater than the costs incurred by both the company in producing

the product and the customer in owning it.” Based on the price, the created value is shared

between the customers and the corporation. The more customers are willing to pay above the

settled price, the more value they capture. By contrast, a firm that can perfectly differentiate

its customers according to their willingness to pay captures the entire value (Hirshleifer,

Glazer & Hirshleifer, 2005). (For a generic discussion of value creation and capture, see

Lepak, Smith & Taylor, 2007).

While originally an Anglo-Saxon tradition (Tricker, 2009), Brickley et al. (2003) note that

corporations in all parts of the world are increasingly committed to maximize shareholder

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value. Shareholders, through their investment, are by definition the residual claimants of the

firm (Fama & Jensen, 1983) and, therefore, entitled to the residual value created by the firm.

Lately, shareholders are increasingly interested in the return on their investments, that is the

cash that they receive from the firm (Brickley et al., 2003). Managers on part of the firm can

increase shareholder value when they find ways to increase present and future cash payouts to

shareholders, primarily by either increasing revenues or reducing costs. Importantly, Brickley

et al. (2003, p. 33) emphasize, “creating value is not sufficient for maximizing shareholder

value. It is also important for firms to capture that value.” In a competitive environment, firms

may have difficulties in capturing value for a considerable time. Even if the firm finds a way

to generate profits (for example, through a process innovation that decreases the production

costs), competing firms will eventually imitate the successful firm to profit for themselves

(Hirshleifer et al., 2005; Lepak et al., 2007). Competition, therefore, leads to lower prices and

reduces the value that the innovating firm can capture. Most notably, competition benefits

customers, who can buy highly valued products and services at competitively low prices

(Brickley et al., 2003).

From an economic point of view, the maximization of profits and shareholder value seem to

be desirable principles. On the other side, this one-sided orientation of firms is said to be the

cause of some of the largest environmental and social problems of our time. Therefore, the

shareholder value principle is challenged against the notion of sustainable development in

subsequent parts.

2.3 Brief history of environmental issues on the international political agenda

Environmental concerns have not always been at the center of attention in the international

political discourse. Until the Second World War, the conservation of natural resources and the

handling of damage caused by pollution from industrializing economies used to be the major

environmental concerns (McNeill, 2001). Where pollution happened to be border-crossing,

solutions were usually found by bilateral negotiations between the neighboring states. Then,

after World War II, economic recovery was heavily pushed by political interventions towards

a higher degree of integration of geographically separated economies (Beck, 2000). Though

economic activity and prosperity grew rapidly in many parts of the world, it became clear that

economic growth had adverse effects on the natural environment, including the increasing

12

pollution of the atmosphere, watercourses, and oceans.3 Nevertheless, such issues were

“hardly the stuff of great power politics” nor of the UN General Assembly (UNGA) (Baylis,

Smith & Owens, 2008, p. 353).

Then, in the late 1960s when environmental problems became more apparent, the involved

Swedish government proposed to hold an international conference on environmental issues.

Only a few years later, the first UN Conference on the Human Environment (UNCHE) was

held in Stockholm in 1972. The defined goal was:

[To] provide a framework for comprehensive consideration within the

U.N. of the problems of the human environment in order to focus

Governments’ attention and public opinion on the importance of this

question and also to identify those aspects of it that can only or best be

solved through international co-operation and agreement (UNGA,

1968, quoted as in Galizzi, 2005, p. 961).

The main achievement of this conference was the creation of the UN Environment

Programme (UNEP) and that many governments formed special environment departments to

prevent further environmental degradation (Chasek, Downie & Welsh Brown, 2010).

Nevertheless, it became shortly afterwards clear that the countries of the South would not be

willing to refrain from their legitimate demands for development and financial aid (Sachs,

1999). Referring to the proclamation of the Second Development Decade by the UNGA in

1970, 4 the countries of the South claimed that environmental and development questions had

to be dealt with integratively rather then separately. According to Baylis et al. (2008), the

political interest for a conference on both the environment and development was present

shortly after the UNCHE in Stockholm. Yet, the global economic downturns of the 1970s and

the intensification of the Cold War pushed environmental concerns down on the international

political agenda (Mitchell, 2010).

3 These effects are often border-crossing and require both attention and action by more than one state. Such

circumstances were subsequently considered by the Brundtland Report (WCED, 1987, p. 49): “National

boundaries have become so porous that traditional distinctions between matters of local, national, and

international significance have become blurred. Ecosystems do not respect national boundaries. Water pollution

moves through shared river, lakes, and seas. The atmosphere carries air pollution over vast distances. Major

accidents—particularly those of nuclear reactors or at plants or warehouses containing toxic materials—can have

widespread regional effects.” 4 UNGA Resolution 2626/XXV, 24 October 1970

13

Despite economic and foreign-policy related matters, the deterioration of the natural

environment continued nevertheless. In the early 1980s, the recognition of new environmental

challenges such as acid rain, a thinning ozone layer and the possibility of climate change, in

combination with supporting scientific facts and figures, raised the political and public

interest for environmental issues again (McNeill, 2001; WCED, 1987). Yet, at this time both

environmental and development concerns had to be considered as a single issue. These

considerations, then, formed the basis for the Brundtland Commission and its much-noticed

report on sustainable development (Rist, 2002).

2.4 Brundtland definition of sustainable development

The classic notion of sustainable development was developed by the WCED, convened by the

UNGA in 1983 and chaired by the former Norwegian Prime Minister Gro Harlem Brundtland,

and first introduced by its Commission Report (commonly referred to as “Brundtland Report”

respectively “Our Common Future”) in 1987. The report, which was the first one of its kind,

was intended to build on the insights from the earlier Stockholm conference in 1972 and to

include the development demands of the countries of the South. Sustainable development was

thus defined as:

Sustainable development is development that meets the needs of the

present without compromising the ability of future generations to meet

their own needs. ... in particular the essential needs of the world’s

poor, to which overriding priority should be given (WCED, 1987, p.

54).

Although Meadows (1972) had pointed to the limitations of growth almost two decades

before the Brundtland Report was published, the Commission explicitly recognized social,

technological, and environmental limitations to future growth (WCED, 1987). Whereas the

political aim was to accommodate the concerns for the environment in industrialized states

and the demands for development of developing countries, the report made also clear that

further economic growth was essential to overcome the inhumane situation of the world’s

poorest (WCED, 1987).5 So with the Brundtland notion of sustainable development, demands

5 Indeed, the Brundtland Commission (WCED, 1987, p. 51) noted that: “Far form requiring the cessation of

economic growth, [sustainable development] recognizes that the problems of poverty and underdevelopment

cannot be solved unless we have a new era of growth in which developing countries play a large role and reap

large benefits. ... But policy makers ... will necessarily work to assure that growing economies remain firmly

14

for environmental protection and development were transformed into the idea of

environment-friendly economic growth (Baylis et al., 2008), which has been heavily

criticized by some scholars (Rist, 2002; Sachs, 1999).

Twenty years after the UNCHE in Stockholm in 1972 and five years after the publication of

the Brundtland Report, the UNCED was held in Rio de Janeiro in 1992. The primary

objective of the conference was to carry forward the discussion about how environmental and

development issues could be interlinked (UN, 1993). Yet, as Baylis et al. (2008, p. 480) note,

the outcome of the conference was “the legitimation of market based development policies to

further sustainable development, with self-regulation for transnational corporations.” The

main accomplishment of the conference were the adoption of Agenda 21, a plan of action

addressing sustainability issues at supranational, national and especially sub-state level, and a

convention on the preservation of biodiversity (UN, 1993).

One decade later, the WSSD was held in Johannesburg in 2002 with a focus on globalization,

poverty eradication and improvement of living conditions, not least on the African continent

(UN, 2002). From then on, all actions for sustainable development were dedicated “to ensure

a balance between economic development, social development and environmental protection

as interdependent and mutually reinforcing pillars of sustainable development” (UNGA, 57th

Session, p. 2).

Figure 3 depicts the concept of sustainable development based on the initial Brundtland

Report and the extended definition from the WSSD in Johannesburg in 2002. As shown,

sustainable development requires the balance of environmental, economic, and social needs.

Sustainable development is the progress towards an economically and environmentally viable,

socially and environmentally bearable, and socially and economically equitable end state, that

is, sustainability.

attached to their ecological roots and that these roots are protected and nurtured so that they may support growth

over the long term.”

15

Figure 3: The three dimensions of sustainable development. Source: Adapted from Elkington

(1998).

It is thanks to the UN conferences that environmental concerns were first added to the

international political agenda, and successfully reflected the underlying changes in the scope

and perception of environmental problems (Chasek et al., 2010; McNeill, 2001). However, as

Annan (2002) notes the goal of sustainable development can only be achieved if corporations

play a major, leading role and accept a broad set of economic, social, political, and ethical

responsibilities. In the following, the details of these responsibilities are derived from the

Brundtland Report in 1987 (WCED, 1987).

2.5 Expectations on business from a sustainability perspective

As early as in Gro Brundtland’s foreword, the report suggests a crucial role for corporations

for making sustainable development happen:

The Commission is also addressing private enterprise, from the one-

person business to the great multinational company with a total

economic turnover greater than that of many nations, and with

16

possibilities for bringing about far-reaching changes and

improvements (WCED, 1987, p. 16).

In the following paragraphs, the Brundtland notion of sustainable development (see 2.4) is

studied and analyzed regarding statements indicating the role of corporations for sustainable

development. These statements are deduced from the comprehensive, over three hundred

pages counting Commission Report (WCED, 1987) and classified to make a subsequent

comparison with selected business theories on CSR possible. For this classification, Parsons’

theory on systems (1951, 1961, 1977) is applied.

2.6 Classification of the corporate responsibilities for sustainability

Applied on the Brundtland Report (WCED, 1987), Parsons (1951, 1961, 1970) theory of

social systems implies that corporate responsibilities can be classified into economic

responsibilities (related to resources and economics), political responsibilities (related to goal

definition and achievement), social responsibilities (related to integration and securing

cohesion), and ethical responsibilities (related to culture and values). This classification will

simplify the subsequent comparison with CSR expressed in the business literature.

2.6.1 Economic function of corporations

Considering the economic role of business, which constitutes the core function of business,

the Commission (WCED, 1987) expects corporations to take on greater responsibilities in

three areas: (1) foreign direct investment (FDI), (2) transfer of technology, knowledge and

managerial skills, and (3) innovation of new technologies.

First, foreign trade has proven to be an important driver of economic growth and increasing

prosperity. Many developing countries have traditionally relied on the extraction and export

of non-renewable resources (such as fossil fuels and minerals) to earn foreign exchange for

their own development process. Since the need for increasing export volumes, resulting from

the absence of feasible alternatives, has revealed the risk of unsustainable overexploitation

and impoverishment of the natural resource base in the long-term, developing countries must

develop alternative goods and services for export. The Commission (WCED, 1987)

recognizes that:

If developing countries are to reconcile a need for rapid export growth

with a need to conserve the resource base, it is imperative that they

17

enjoy access to industrial country markets for non traditional exports

where they enjoy a comparative advantage (WCED, 1987, p. 90).

In this respect, MNCs have become to play an important role in developing a diversified

export structure, usually with the consent of developing countries. With the use of foreign

direct investments, MNCs can set up own manufacturing sites, enter into joint ventures as

partners, or grant license agreements to local manufactures (Deresky, 2008). Consequently,

MNCs are involved in the mining and manufacturing sectors as well as in the production of

primary commodities in many developing countries (WCED, 1987). Yet, if MNCs are to have

a positive influence on long-term sustainable development, they are required to strictly

observe the principle of sovereignty of the host countries, respect their environmental

concerns, and to fairly share managerial skills and technological knowledge with domestic

corporations (ibid.).

Second, “[m]any developing countries ... need assistance and information from industrialized

nations to make the best use of technology. Transnational corporations have a special

responsibility to smooth the path of industrialization in the nations in which they operate”

(WCED, 1987, p. 31). Technological progress will continue to change social, cultural, and

economic patterns and can thus positively affect sustainable development. If used and

managed wisely “new and emerging technologies offer enormous opportunities for raising

productivity and living standards, for improving health, and for conserving the natural

resource base” (ibid., p. 217). Yet, “[t]he real challenge is to ensure that the new technologies

reach all those who need them, overcoming such problems as the lack of information and in

some cases an inability to pay for commercially developed technologies” (ibid., p. 94).

Third, a successful promotion of sustainable development will in a large part depend on

broad-based efforts to develop and spread new environmentally sound technologies all over

the world (WCED, 1987). Challenges requiring improvement include among others

agricultural production, clean and renewable energy systems, and environmental protection.

Corporations are thus expected to integrate environmental considerations into their planning

and decision-making processes and come up with technological innovations and solutions

increasing the efficiency of resource use (ibid.).

18

2.6.2 Social function of corporations

The Commission notes that “[r]ising poverty and unemployment have increased pressure on

environmental resources” (WCED, 1987, p. 23). Since the majority of people affected by

environmental pollution and degradation tend to be poor and lack the capabilities to complain

effectively, corporations get away with externalizing the negative impacts of their activities

on these underprivileged people. Moreover, these people living in affected regions often have

no other alternatives but rather depend heavily on the natural resources, which in itself

deteriorate the livelihood of these people. From a sustainability perspective, the social

function of corporations is consequently understood as promoting social development. This

includes (1) the opportunity of employment, (2) the provision of public goods such as

education and health, which not least (3) improve the position of women in society.

First, the Commission notes that “[t]he principal development challenge is to meet the needs

and aspirations of an expanding developing world population. The most basic of all needs is

for a livelihood: that is, employment” (WCED, 1987, p. 64).6 Employment is especially

needed for a large number of young people in developing countries, who comprise most of

their population. Since agriculture can only absorb a limited number thereof, corporations

have the responsibility of providing sustainable employment opportunities for a growing

population (ibid.). As much as employment is important, corporations are also responsible to

pay sufficient wages, which will “enable poor households to meet minimum consumption

standards” (ibid., p. 64).

Second, employment is just one of many elementary needs. A ‘life of dignity and well-being’

(UNGA, 1972) presupposes also access to food, education and health care. Yet, present

population growth rates already compromise many governments’ abilities to provide adequate

levels of the very same goods and services (WCED, 1987). Many governments, furthermore,

lack funding for maintaining present provision levels, let alone for increasing them.

Consequently, the quality of education and health care services deteriorate (ibid.). This does

not only open new possibilities for corporations, it also places a responsibility on them. After

all, the Commission (ibid.) holds that:

6 Based on data from the UN (2011a), between 2010 and 2050 the labor force (population at age 15 to 64) in

developing countries will increase by more than 1.4 billion people, and new livelihood opportunities will have to

be generated for roughly 60 million people each year until 2050.

19

Economic and social development can and should be mutually

reinforcing. Money spent on education and health can raise human

productivity. Economic developments can accelerate social

development by providing opportunities for underprivileged groups

spreading education more rapidly (WCED, 1987, p. 64).

Third, the Commission (WCED, 1987) argues that rapid population growth is a main driver of

both environmental and economic challenges. The human population on earth has increased

2.7-fold from 2.5 billion in 1950 to 6.9 billion in 2010 (UN, 2011a). By 2050, the UN expects

the world population to grow additionally to 8.1 billion (low scenario), 9.3 billion (medium

scenario), or 10.6 billion (high scenario) (ibid.). While the population in the developed world

is expected to grow only slightly, developing countries will face a large increase in their

population levels.7 Since these rapid increases are substantially driven by the status of women

in society, socio-cultural values and disparities in economic and political power, sustainable

development must enhance social development, and be designed to “improve the position of

women in society, to protect vulnerable groups, and to promote local participation in decision

making” (WCED, 1987, p. 49). Corporations are expected to contribute to this development

by offering employment and education to people in developing countries, yet with a special

focus on women. If these women can be included into the formal economy and earn their own

income, female empowerment is enhanced and fertility rates are expected to decline. A higher

status of women in society in the developing world can thus help to lower fertility rates and

decelerate population growth in these parts of the world.

2.6.3 Political function of corporations

The Commission recognizes that, “[m]aking the difficult choices involved in achieving

sustainable development will depend on the widespread support and involvement of an

informed public and NGOs, the scientific community, and industry. Their rights, role and

participation in development planning, decision making, and project implementation should

be expanded” (WCED, 1987, p. 36). Companies are thus required to take into account effects

of their operations, actions, and investments. For example, setting up a hydropower project

should not only be understood as a mean of producing electricity, but also take into account

the positive and negative effects upon the local environment and living conditions of local

7 For example, the population of Africa surpassed 1 billion in 2009 and is expected to double in three and a half

decades by 2044 (UN, 2011a).

20

societies. Consequently, the expected political function of corporations includes beyond

compliance with national law and regulations especially (1) cooperation with political

institutions, particularly in developing countries, (2) increased basis of legitimacy of

corporate decisions through stakeholder discourse, and improved and all-encompassing

accounting of corporate actions and transparency, and (3) establishment of international code

of conducts for sustainable development.

First, the Commission (WCED, 1987) recognizes that corporations constitute a critical link

between people and the environment, since they have a significant impact on the way natural

resources are used for development and economic growth. Hence, “[l]arge industrial

enterprises, and transnational corporations in particular, have a special responsibility” for

sustainable development (ibid., p. 229). These companies are equipped with scarce technical

skills and know about the highest safety and health protection standards available, and hence

are expected to accept the responsibility for constructing safe facilities, developing safe

operational processes design, and training its staff adequately (ibid.). Consequently,

corporations, together with its technologies and processes, play a crucial role for the success

of sustainable development. Governments, both in industrialized and developing countries,

should aspire after a closer cooperation with corporations for mutual benefits (ibid.).

Nevertheless, small, poor, developing countries continue to mistrust large corporations.

Comparable with the colonial era, these countries experience negotiations with the latter

repeatedly to be one sided, with large corporations taking advantage of “a developing

country’s lack of information, technical unpreparedness, and political and institutional

weakness” (ibid., p. 93). Developing countries find it thus difficult to defend their position

against financially independent MNCs when it comes to concerns regarding the introduction

of new technologies, the development and exploitation of national resources, and the

sustainable use of the environment. The Commission then argues that MNCs must take steps

to reduce the information asymmetry, and engage with governments in developing countries

to build mutual trust and counteract conflicts (ibid.).

Second, this can be achieved if MNCs share their knowledge and assist governments in

developing countries in strengthening policies in this sphere, but also seek for the views of

NGOs and the local community where new industrial facilities are being planned (WCED,

1987). Corporations should disclose relevant information on corporate policies and standards

applied for investment and operations in their own home country. For example, MNCs are

21

expected to carry out environmental assessments based on the same criteria as required in

industrialized countries prior to major investment in developing countries. Moreover,

corporations have the responsibility to fully inform relevant national and local authorities

regarding “the properties, potentially harmful effects, and any potential risks to the

community of the technology, process, or product being introduced” (ibid., p. 230). This is

particularly important for the implementation of new technologies, which often bring new

hazards, and thus requires MNCs of enhancing and adopting their risk assessment and risk

management policies. The relevant information about a specific investment should then be

communicated to nearby residents in an easy to understand way. By sharing the resulting

information, risk assessment, and recommendation with the host country’s government, the

latter is empowered and capable of making well-founded decisions regarding a specific

investment and the resulting benefits for its country (ibid.). Where sustainability

considerations are significant, investments should be rejected, even though the might be

financially attractive in the short run. Where manageable risks allow companies to implement

projects, they must institute environmental and safety audits, and subsequently disclose the

results to local government and other interested parties (ibid.). Moreover, corporations are

required to work collaboratively with “the local government and community in contingency

planning and in devising clearly defined mechanisms for relief and compensation to pollution

or accident victims” (ibid., 230). From the corporate perspective, enhanced transparency will

thus increase the basis of legitimacy of corporate decisions and operations in developing

countries.

Third, from a broader perspective, corporations could gain legitimacy if they engaged in joint

advisory councils for sustainable development with governments. Such joint advisory

councils could be designed “for mutual advice, assistance, and cooperation in helping to

shape and implement policy, laws, and regulations for more sustainable forms of

development” (WCED, 1987, p. 321). On the international level, actors from governments,

corporations and NGOs should convene and work towards basic codes of conduct for

sustainable development, where they could draw and extend relevant existing voluntary codes

of conduct (ibid.). These codes could control guide corporate behavior for sustainable

development at supranational level.

22

2.6.4 Ethical function of corporations

The concept of sustainable development presupposes that economic exchange is only

beneficial for all involved if “[t]he sustainability of ecosystems on which the global economy

depends” is guaranteed and “the economic partners must be satisfied that the basis of

exchange is equitable” (WCED, 1987, p. 76). None of these conditions were met in 1987,

when the Brundtland Report was published. While the responsibilities outlined in the

economic, social, and political function of corporations are designed to eventually bring about

economic equity and sustainability, international efforts concerning the regulation of MNCs

have proved extremely difficult to negotiate and unsatisfactory in purpose and scope (ibid.).

Corporations should thus (1) voluntarily commit to a broader sense of social and

environmental responsibility that go beyond simple compliance with regulations, and accept

certain special responsibilities where required. Further, (2) corporations should encourage

sustainable consumption standards, and (3) aim towards a global ethic and social justice.

First, to this end, all industrial enterprises together with trade associations and labor unions

should “establish [and adopt] company or industry-wide policies concerning resource and

environmental management, including compliance with the laws and requirements of the

country in which they operate” (ibid., p. 222). Moreover, sustainable behavior requires

corporations to change their values and attitudes towards the use of environmental resources,

people inside and outside their operations both at home and overseas, and their role in society

in general. Corporations are thus expected to establish corporate code of conducts, which

reflect these values and control corporate behavior at firm level.

Second, since “[l]iving standards that go beyond the basic minimum are sustainable only if

consumption standards everywhere have regard for long-term sustainability. Yet many of us

live beyond the world’s ecological means” (WCED, 1987, p. 54-55). This includes mainly the

patterns of energy use, but also over fishing, deforestation, and natural resource depletion.

Since perceived needs result from socially and culturally constructed moral values,

corporations should actively engage to promote values “that encourage consumption

standards that are within the bounds of the ecological possible and to which all can reasonably

aspire” (ibid., p. 55).

23

Third, throughout the Brundtland Report, the Commission tries to elevate sustainable

development to ‘a global ethic’ (WCED, 1987, p. 303), which could be the decisive factor for

future human survival and well-being. The quality of life on earth depends on all actors’

efforts, including the willingness and cooperation to alleviate international poverty, to

reinforce peace and enhance security around the world, and to manage the global commons in

a sustainable way (ibid.). These efforts require a common set of broadly shared values and

attitudes, and a global ethic could be the reference point for sustainable development and

social justice.

The previous sections named and described the economic, social, political, and ethical

responsibilities of corporations for sustainable development as outlined in the Brundtland

Report (WCED, 1987) and seen by all official institutions belonging to the UN. In Table 2,

these responsibilities are briefly summarized.

Table 2: Responsibilities of corporations for sustainable development

Economic Social Political Ethical

(1) Use of foreign direct investment (FDI) as driver of economic growth and increasing prosperity

(1) The opportunity of employment and fair salaries, enabling poor households to meet minimum consumption standards

(1) Close cooperation with political institutions, particularly in developing countries, reducing the information asymmetry, building mutual trust and counteracting conflicts

(1) Voluntarily commitment to a broader sense of social and environmental responsibilities beyond regulatory compliance, and accept certain special responsibilities where required, controlling and guiding corporate behavior at firm level

(2) Transfer of technology, knowledge and managerial skills to make the best use of technology

(2) The provision of public goods such as education and health to accelerate and raise human productivity

(2) Broader stakeholder discourse and disclosure of relevant information, enhancing transparency and increasing legitimacy of corporate decisions and operations

(2) Promotion of values and attitudes encouraging sustainable consumption standards world-wide

(3) Innovation and diffusion of new, environmentally sound technologies

(3) Improving the position of women in society through employment and education, lowering fertility rates and decelerating population growth

(3) Establishment of international codes of conduct for sustainable development, controlling and guiding corporate behaviour for sustainable development at supranational level

(3) Promotion of a global ethic, a common set of broadly shared values and attitudes, enabling sustainable development and social justice

Res

pons

ibili

ties

Role of corporations

Source: Based on WCED (1987).

24

In 2.7, the concept of business ethics is briefly introduced for a better understanding of the

following discussion of theories on CSR in 2.8. These theories provide an instrumental, an

integrative, a political, and an ethical approach to corporate responsibility. In 3, these theories

are compared to the corporate responsibilities for sustainable development derived in 2.6.

2.7 Framing business ethics

2.7.1 What is business ethics?

Crane and Matten (2010, p. 5) define business ethics as “the study of business situations,

activities, and decisions where issues of right and wrong are addressed.” As such, business

ethics aim to answer the fundamental question of whether corporations have responsibilities

to make moral decisions beyond their economic core function of supplying goods and

offering services on a profitable basis. Since the early 1950s, when Bowen (1953) launched

the discussion about the social role of corporations, a number of theories defining and

justifying these potentially wider responsibilities have been presented (Whetten et al., 2002).

Though some of these theories are complementary, scholars have differed greatly in their

conception of what such responsibilities should be. To answer the question of whether

corporations can have a moral responsibility in the same way as individual people do, it is

important to have a basic understanding of morality, ethics and ethical theory.

2.7.2 Defining morality, ethics and ethical theory

According to Crane and Matten (2004, p. 11) “morality is concerned with the norms, values,

and beliefs embedded in social processes which define right and wrong for an individual

community.” Other, although similar definitions of morality, suggest “morality is generally

used to describe a sociological phenomenon, namely the existence in a society of rules and

standards of conduct” (Boatright, 2007, p. 22) and morality serves as “a practical guide for

interpersonal behavior” (Remmé, 2008, p. 176). Matten and Crane (2007) note that a basic

sense of morality is inherent to all individuals and communities. Ethics is then the systematic

and rational study of morality. By applying reason, philosophers seek for normative rules and

principles, which define right and wrong for a given situation of moral uncertainty (Boatright,

2000). These rules and principles can be universally valid or context-dependent and

subjective. Finally, ethical theories comprise these rules and principles in a codified form

(Matten & Crane, 2007).

25

Ethical theories can be divided into consequentialist and non-consequentialist theories.

Reasoning in non-consequentialist theories is based on generally applicable rules and

principles. Actions are judged based on their underlying motivations and principles without

regard to the desirability of their outcomes. By contrast, consequentialist theories understand

these rules and principles to be context-dependent and subjective. The morality of actions is

judged based “on the intended outcomes, the aims, or the goals of a certain action” (Crane &

Matten, 2007, p. 91). For example, corporations act morally right if their activities lead to a

desirable outcome such as the provision of goods and services. This differentiation, and the

actual difficulties in combining these perspectives, will become clearer in the subsequent

outline and discussion of theories on business ethics.

To sum up this short introduction to ethics, one can say that business ethics theories typically

aim to contribute to “the enhancement of ethical decision-making” in the business context

(Crane & Matten, 2007, p. 9). As is shown in the following, the number of situations with

moral uncertainty has increased lately, and more ‘ethical decision-making’ is, therefore,

required.

2.7.3 Why is business ethics important?

The Great Depression in the 1930s had disastrous consequences on individuals, societies, and

entire nations (Tricker, 2009). These circumstances raised the question of the power relations

between the state and corporations. Berle and Means (1932) describe this relation as follows:

The rise of the modern corporation has brought a concentration of

economic power which can compete on equal terms with the modern

state—economic power versus political power, each strong in its field.

The state seeks in some aspects to regulate the corporation, while the

corporation, steadily becoming more powerful, makes every effort to

avoid such regulation. Where its own interests are concerned, it even

attempts to dominate the state (Berle & Means, 1932, p. 357).

Though the raise of corporations is largely based on political institutions, corporations

continuously seek for loopholes to take advantage of institutional ambiguities. To some

extent, it looks like corporations are playing cat and mouse with national states. In 1932,

Berle and Means (1932) were rather pessimistic about the future power relations between

corporations and states:

26

The future may see the economic organism, now typified by the

corporation, not only on an equal plane with the state, but possibly

even superseding it as the dominant form of social organization (Berle

& Means, 1932, p. 357).

Although White (2008) argues that the corporation as an economic organization will never

replace the state since “the part cannot supersede the whole” (2008, p. 402), it seems likely

that Berle and Means’ prediction has come true nowadays. As Kegley (2009, p. 208) notes

“MNCs have grown dramatically in scope and potential influence with the globalization of

the world political economy since World War II.” These MNCs obtain their power through

large-scale, worldwide economies, strategic flexibility, and the control over technology use

and production location (Deresky, 2008). The paradox is that a majority of the people

themselves have gained from the increasing power of MNCs by an increased supply and

lower prices as a result of competition (for a discussion on the mechanism of competition, see

2.2), but blame the very same MNCs for financial scandals, human rights violations,

environmental side-effects, collaboration with repressive regimes and other problematic

issues (Palazzo & Scherer, 2006). At the same time, it has become increasingly difficult to

influence the actions of MNCs in a positive way, even if people are interested (Spar & La

Mure, 2003). Tricker (2009) notes that the complexity of the financial system has made it

almost impossible for an individual shareholder to have an influence on the behavior of the

company:

[Since] an individual might invest in a pension fund, which invests in

a highly geared hedge fund, which invests in an index tracking fund,

which invests in the shares on a given stock market index ... it can be

difficult for the [individual] to exercise any influence over ... the

company in which his funds have been invested, which was the

original intention of the corporate concept (Tricker, 2009, p. 18).

While individuals seem to be powerless, and political institutions are tied up closing

loopholes, and thus always lag behind corporations, society increasingly distrusts large

corporations. Indeed, Porter and Kramer (2011, p. 64) hold that the legitimacy of business has

dropped to the lowest levels in recent history, not least since “companies are widely perceived

to be prospering at the expense of the broader community.” Moreover, some scholars deny

corporations any form of legitimacy if they are unable of creating value and wealth for many

different stakeholders. Post, Preston and Sachs (2002) argue that “the corporation ... cannot—

27

and should not—survive if it does not take responsibility for the welfare of all of its

constituents and for the well-being of the larger society within which it operates” (2002, p.

16-17). Corporate legitimacy is at stake, and moral responsibilities of corporations have

become a very critical issue for corporations, especially for MNCs with global operations

(Palazzo & Scherer, 2006).

Potential solutions to these issues are the topic of theories on CSR, which offer a wide range

of approaches to corporate moral responsibility and enhanced legitimacy. A selection of these

theories is outlined and discussed in the following section.

2.8 Corporate Social Responsibility

The role of business in society has been subject to controversial discussions in academic

writing since the early 1950s. Garriga and Melé (2004) suggest to categorize the different

theories on CSR based on the applied approach into instrumental, integrative, political, and

ethical theories. These four groups are explained and one or two contemporary and widely

accepted approaches are discussed for each specific group. Table 3 summarizes the outlined

approaches and provides a short description and key readings for each approach.

28

Table 3: Theories on Corporate Social Responsibility

Type of theory Approaches Short descirption Authors and references

Instrumental theories(focusing on achieving economic objectives through social activities)

Maximization of shareholder value

Long-term value maximization

Friedman (1970), Jensen (2002)

Stakeholder management Balances the interests of the stakeholders of the firm

Freeman (1984)

Corporate philanthropy Searches for social legitimacy and processes to give appropriate responses to social issues

Carroll (1979)

Political theories(focusing on a responsible use of business power in the political arena)

Corporate citizenship The firm is understood as being like a citizen with certain involvement in the community

Matten and Crane (2005)

Ethical theories(focusing on the right thing to achieve a good society)

Universal rights Frameworks based on human rights, labor rights and respect for the environment

UN Global Compact (2000)

Integrative theories(focusing on the integration of social demands)

Source: Adapted from Garriga and Melé (2004).

2.8.1 Instrumental approach to CSR — Shareholder Perspective

From an instrumental perspective, the corporation is perceived as an instrument for the

creation of wealth. Social wealth is maximized if each corporation in the economy maximizes

its total market value (Jensen, 2002). The only social responsibility of corporations is thus to

maximize its profits, and decisions are solely made upon economic considerations.

Consequently, social activities are accepted if, and only if, they create value for the

corporation. Garriga and Melé (2004) suggest calling this group of theories instrumental

theories as they conceive CSR as a mere, strategic tool for the profit maximization. Theories

included in the instrumental group discuss primarily shareholder value maximization.

The most prominent proponent of an instrumental approach to CSR is Nobel Prize laureate

Milton Friedman. According to Friedman (1970), corporations cannot have moral

responsibilities. As a corporation is an artificial person from a legal perspective, its

responsibilities can only be of artificial kind. Yet, Friedman notes that individuals do have

29

moral responsibilities. Typically, management is employed on behalf of the shareholders, and

their primary responsibility is thus to the owners of the firm (ibid.). This responsibility is of

fiduciary kind, and requires corporate executives to:

[C]onduct the business in accordance with their [the owners of the

business] desires, which generally will be to make as much money as

possible while conforming to the basic rules of the society, both those

embodied in law and those embodied in ethical custom (Friedman,

1970, p. 33).

This concludes that corporate behavior is driven by the primacy of profit maximization, and

the only legitimate stakeholders are the company’s shareholders. Social activities by the

corporation are only desirable if their outcomes are compatible with shareholders’ interest. In

these cases, and although corporations are tempted to rationalize these efforts as an exercise

of its social responsibilities, these expenditures are entirely justified in the self-interest of the

corporation (Friedman, 1970). Consequently, a corporation’s engagement in CSR is first an

attempt to increase its reputation under ‘the cloak of social responsibility’ (ibid.). Moreover,

any corporate engagement in CSR for other reasons than the above is counterproductive due

to the following reasons (Friedman, 1970):

(a) Problem of competing claims: The main objective of firms should be economical, not

social. CSR distracts firms from further development and impairs their economic

efficiency.

(b) Competitive disadvantage: Investing in CSR will cause competitive disadvantages for

the firm. For example, environment-friendly products will increase production costs.

(c) Lack of competence: Firms would not gain any competence through dealing with social

issues. Friedman (1962) argues that investing in CSR is an inefficient use of money

since firms have no core competence in CSR and therefore lowers shareholder value by

investing in it.

(d) Fairness-domination by business: If firms obtain excessive concentration of power, it

may threaten the power of other institutions.

(e) The role of government: Friedman (1962) argues that companies should leave social

issues to be managed by the government and support it through their payment of taxes.

As Friedman (1970) concludes, the notion of social responsibilities of a corporation is “a

fundamentally subversive doctrine ... [that] harm[s] the foundations of a free society ... [by]

30

help[ing] to strengthen the already too prevalent view that the pursuit of profits is wicked and

immoral and must be curbed and controlled by external forces [other than the market].”

Clearly, the shareholder perspective on CSR has a neo-liberal bias towards the free market

ideology. Globalization and free trade increase the opportunities for profits, and thus

increased social welfare. Moreover, free trade is seen as a major driver of development. As

Krauss (1997, p. 51) notes “the way to help poor people abroad is to open our markets to them

not to force them to adopt ... human rights standards.” Indeed, even some economists from

developing countries argue that “a lousy job is better than no job at all” (Martinez-Mont,

1996). If corporations trade with and invest in developing countries, corporations contribute

to economic development and enhanced productivity, and wages and labor standards will

increase (Irwin, 2002). Consequently, “efforts to limit international trade or to shut down the

sweatshops are counterproductive” (Irwin, 2002, p. 214). From an economic point of view,

economic development is a necessity for democratization and social and environmental

standards in developing countries (Barro, 1997).

2.8.2 Integrative approach to CSR — Philanthropy and Stakeholder management

Rather than existing independently from its environment, the corporation is understood as a

part of its environment from an integrative perspective. The corporation is embedded in a

network of economic, social, and political relations. The corporation interacts with society on

social aspects, and social legitimacy is critical for its existence, continuity, and growth

(Palazzo & Scherer, 2006). Consequently, corporate management should consider social

expectations, and integrate them into its business so that corporate behavior reflects social

values. Preston and Post (1975) note that the content of business responsibility is contextually

determined, with space and time altering the values of society over time. Therefore, the role

of corporations and its responsibilities may change throughout time and different locations.

As Garriga and Melé (2004, p. 59) note integrative theories “are focused on the detection and

scanning of, and response to, the social demands that achieve social legitimacy, greater social

acceptance and prestige.”

Carroll (1979) has been an early proponent of this integrative approach to CSR. In an attempt

to reconcile the economic orientation with the social role of corporations, Carroll proposes

that CSR consists of economic, legal, ethical, and discretionary responsibilities. These four

dimensions reflect the evolutionary path of corporations, namely an early emphasis on

31

economic aspects, first followed by legal concerns and later by ethical and philanthropic

aspects. Subsequently, Carroll (1991) visualizes his perception of CSR in form of a pyramid,

convinced that it would help managers to “see that the different types of obligations are in a

constant tension with one another” (1991, p. 42). Figure 4 depicts this pyramid.

Figure 4: The Pyramid of CSR. Source: Adapted from Carroll (1991) and Hansen (2010).

Carroll (1991) accepts that the raison d’être of the firm is to create value for its shareholders

through satisfying society’s needs. Corporations have thus first an economic responsibility,

which constitutes the bottom of the pyramid. All other responsibilities can be assigned to

corporations if, and only if, the corporation is economically sound. On the next level, the

corporation has legal responsibilities, which include adherence to the law, regulations and

rules that ensure responsible business practices with contractual stakeholders (Claydon,

2011). On the third level of the pyramid, the ethical responsibilities oblige corporations to act

in a right, just and fair manner with their broad set of stakeholders. Corporate behavior should

especially avoid doing these stakeholders any harm. On the uppermost level, Carroll (1991)

argues that corporations have philanthropic responsibilities to the communities in which they

operate. Corporations must consider themselves as citizen with rights and responsibilities, and

thus fairly contribute to society like any other individual is required to do (Dahl, 1972).

32

Although Carroll’s (1991) approach to CSR proposes a broader set of corporate

responsibilities, it is important to understand that “a company will only ever be socially

responsible if this fits in with its economic goal of maximizing profit” (Crowther & Claydon,

2009, p. 262). As a result, efforts towards increased CSR are inevitably economically

motivated.

A second integrative approach to CSR is Freeman’s theory on the stakeholders of the firm

(1984). Though the notion of stakeholder in business dates from the 1960s (Crane & Matten,

2007), it was Freeman who developed a theoretical framework. According to Stark (1993),

the stakeholder theory of the firm is one of the most popular and influential approaches to the

social responsibilities of corporations. Freeman (1984, p. 52) argues that corporations are not

simply responsible to its shareholders alone, but to a broader set of stakeholders that “can or

[are] affected by the achievement of the organization’s objectives.” It has been suggested that

stakeholders are those individuals and groups with a ‘critical eye’ on the corporation

(Bowmann-Larsen & Wiggen, 2004). Since the scope of Freeman’s initial definition of

stakeholders is too broad to be applicable in specific situations, other scholars have refined

the definition. Hill and Jones (1992) suggest that only stakeholders with a legitimate claim on

the corporation should be considered. Crane and Matten (2010, p. 62) suggest that “[a]

stakeholder of a corporation is an individual or a group which either: is harmed by, or benefits

from, the corporation; or whose rights can be violated, or have to be respected, by the

corporation.” Even though the set of stakeholders may vary among different companies an

overview of the most common stakeholders in the stakeholder view of the corporation is

presented in Figure 5.

33

Figure 5: The stakeholders of the corporation. Source: Adapted from Ulrich (2008, 2010).

As depicted, the corporation has obligations to a wide range of groups that are affected by its

activities. This view reflects the opinion that the purpose of the organization is to create value

for many different stakeholders, including earnings for shareholders, salaries for employees,

benefits for customers, taxes for government, and employment for local communities (Post et

al., 2002). Since various stakeholders, by definition, “have different views as to what is

valuable because of unique knowledge, goals, and context conditions” (Lepak et al., 2007, p.

185), corporations must identify to whom and for whom they are responsible, and what these

responsibilities entail. Lately, the impact of governments and local communities, NGOs and

media on corporations has increased (Spar & La Mure, 2003). Although each of these groups

has its own perception of responsible corporate practices (Garriga & Melé, 2004), Rushton

(2002) notes:

It is now clear that stakeholders demand high standards of ethical and

social responsibility from companies. ... Companies need to

understand the mindset of their stakeholders that governs their

34

perception as to what constitutes responsible corporate behaviour, and

then develop a strategy to satisfy these expectations so far as possible

[since] successful companies are those that can operate in harmony

with the needs and aspirations of their stakeholders (Rushton, 2002,

pp. 137-138).

A stakeholder approach to CSR requires corporations to integrate its identified stakeholders

into their managerial decision-making process, and thus helps the company to grasp both

strong and weak signals received from its environment. A stakeholder approach does

therefore “not only enhance a company’s sensitivity to its environment but also increases the

... understanding of the dilemmas facing the organization” (Kaptein & Van Tulder, 2003, p.

208).

2.8.3 Political approach to CSR — Corporate citizenship

There are theories of CSR that study the political power of corporations in the relationship

with society. It is assumed that corporations with economic power do have political

responsibilities. The corporation must accept social duties and rights and a certain

involvement in the community. Garriga and Melé (2004) suggest calling this group political

theories. Matten and Crane’s (2005) theoretical conceptualization of Corporate Citizenship

(CC) is widely recognized (Baumann & Scherer, 2010), and focuses on how corporations can

use their power in a responsible manner in the political sphere.

The notion of CC emerged in the late 1990s and has mainly been used among corporations to

combine their social responsibilities. Yet, corporations have used CC in many different ways,

and consequently, its usage has neither been consistent nor particularly clear (Matten &

Crane, 2005). Carroll (1999) suggests that CC is an extension of already existing work on

CSR, and thus builds on his earlier CSR pyramid (1991). Matten and Crane (2005) classify

the traditional understanding of CC into two categories:

(1) A limited view on CC, which consists of a corporation’s engagement in strategic

philanthropy focusing on its immediate business environment and local communities.

Rather than traditional philanthropy in Carroll’s sense (1979), CC is a rational, long-

term investment motivated by the self-interest of the corporation (Porter & Kramer,

2006). Firms do so because a profitable business depends on a stable social,

environmental, and political environment (Matten & Crane, 2005)

35

(2) An equivalent view on CC, where the notion of CC is used as an equivalent to CSR

intended to rebrand, relaunch, and disseminate existing ideas about the relations of

business and society among corporations and managers (for example Carroll, 1998).

In addition, Matten and Crane (2005) suggest an extended view of CC, which takes into

account the consequences of globalization for the social role of corporations. They argue that

the prevailing understanding of citizenship in most industrialized societies reflects a liberal

perspective, where citizenship includes a set of individual rights. According to Marshall

(1965), a liberal citizenship is characterized by three types of entitlements, including:

(1) Social rights, or positive rights that provide the individual with the freedom to

participate in society, including the rights to education, healthcare, and welfare. Social

rights entitle an individual towards third parties.

(2) Civil rights, or negative rights that provide the individual with the freedom from abuses

and impairment by stronger powers (mostly the government), including the rights to

own property, to engage in the market economy, and to exercise freedom of speech.

Civil rights protect the individual against the infringement of stronger third parties.

(3) Political rights that provide the individual with active and passive voting rights, the

freedom of association and the right to assemble. Political rights enable the individual to

participate in the political process and influence political outcome.

Traditionally, national governments used to govern these rights for their citizen. Yet, the

space of action and control for national governments has narrowed as globalization

increasingly promotes unconditional free trade and fierce global competition (Beck, 2000).

Hence in the globalized world, the power of rule-making and rule-implementation moves

away from single national states towards a supranational level on a global scale (Zürn, 2002),

and a substate level below traditional governmental politics (Beck, 2000). As Scherer,

Palazzo and Baumann (2006) note MNCs and civil society groups increasingly contribute to

the formulation and implementation of rules in public policy areas, which were traditionally

the responsibility of the state. Consequently, Matten and Crane (2005, p. 69) observe that “at

the same time, as we have witnessed a weakened state, we have also witnessed a parallel

development, which has seen a massive rise in corporate power and influence.” Hence,

corporations, which are one of the mains drivers of globalization (Deresky, 2008) and directly

contribute to the weakening of traditional national states, are increasingly faced with a new,

political responsibility to compensate for the loss of control of national governments,

especially concerning citizens’ rights. Indeed, “corporations have increasingly taken on a role

36

in society which is similar to that of traditional political actors” (Crane & Matten, 2010, p.

77). According to Matten and Crane (2005, p. 173), CC is then “the role of the corporation in

administering citizenship rights for individuals” in the following situations:

(1) Governments can no longer secure the citizens’ rights; or

(2) Governments do not yet provide the citizens’ rights; or

(3) Governments are in principle incapable of ensuring the citizens’ rights.

In these situations, corporations can replace the traditional national state and provide social

rights, enable civil rights and channel political rights (Matten & Crane, 2005). Firms can thus

have a significant impact on these societies. For example, in situation (3) when governments

generally fail to ensure the citizens’ rights, corporations can offer education to local people (a

social right), protect property such as pension funds (a civil right), and encourage a broader

political participation such as the formation of worker unions (a political right). As the

motives for a corporation’s engagement in CC remain unclear, Crane and Matten (2010)

observe that:

It is evident that corporate citizenship may be the result either of

voluntary, self-interest driven corporate initiative, or of a compulsory,

public pressure-driven corporate reaction—either way it places

corporations squarely in a political role rather than just an economic

one. Most firms actually claim to not want to take on such a political

role in society, yet it seems that increasingly they do, either because of

pressure from activists, or sometimes simply out of necessity (Crane

& Matten, 2010, p. 79).

Matten and Crane (2005) emphasize repeatedly that their extended view of CC is a descriptive

conceptualization of what corporations do, rather than what they should do. Their framework

therefore primarily improves the understanding of the political power of corporations in

relation to common citizens’ rights across nations, as well as the challenges posed by

globalized world. Moreover, improved citizens’ rights are closely linked to a new global

ethics of sustainability.

2.8.4 Ethical approach to CSR — Universal rights

A number of theories argue that the relationship between business and society is defined and

controlled by ethical values. Corporations ought to base their actions on ethical principles,

37

that is, doing the right thing at any time, and thus contribute to a good society. Moreover,

corporations voluntarily accept social responsibilities as an ethical obligation, irrespectively

of the outcome. Such theories are thus non-consequentialist. Garriga and Melé (2004) propose

to name this group ethical theories.

Ruston (2002, p. 139) argues that corporations willing “to survive and prosper in a world of

change will need to have strong ethical values and standards ... Successful global business

will be those that integrate sustainable development, including social responsibility, into their

business strategies.” Bondy, Matten and Moon (2004) note that codes of conduct stating

corporate values and principles are commonly thought to serve as a behavioral guidance

system towards CSR for a company’s employees. However, as Deresky (2008) points out

MNCs have repeatedly struggled in defining a corporate-wide ethical code of conduct, since

ethical standards vary greatly around the world. Indeed, many practices that are accepted

ways of doing business in one part of the world can be considered unethical in others (ibid.).

The UN Global Compact (UNGC), based on the widely accepted notion of human rights,

strives to overcome these difficulties. Officially launched in 2000, the UNGC asks companies

to “integrate universal principles into their strategies, operations and culture ... [since] global

markets must contribute to a world where all people can live in societies that are prosperous

and peaceful” (UN, 2010, p. 9). The UNGC focuses on ten principles regarding human rights

protection, fair labor conditions, environmental responsibility, and anti-corruption, which are

summarized in Table 4.

38

Table 4: The UN Global Compact

The Ten Principles

Principle 1

Principle 2

Principle 3

Principle 4Principle 5Principle 6

Principle 7Principle 8Principle 9

Principle 10

undertake initiatives to promote greater environmental responsibility; and

Businesses should support and respect the protection of internationally proclaimed human rights; andmake sure that they are not complicit in human rights abuses.

Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;the elimination of all forms of forced and compulsory labour;

encourage the development and diffusion of environmentally friendly technologies.

Businesses should work against corruption in all its forms, including extortion and bribery.

The UN Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment and anti-corruption:

Environment

Labor

Human Rights

Anti-Corruption

the effective abolition of child labour; andthe elimination of discrimination in respect of employment and occupation.

Businesses should support a precautionary approach to environmental challenges;

Source: Adapted from UN (2010, p.8).

The UNGC was initiated when representatives within the UN had come to realize at the end

of the twentieth century that globalization divided the world in winning and loosing parties.

While foreign-direct investment and global trade could raise living standards in selected parts

of the world, a large number of people and nations had been excluded from similar economic

development so far. Matters were complicated further by the fact that economic advances

increasingly occurred at the costs of neglecting human rights, social and environmental

responsibilities. The UN, therefore, addressed the need for a global governance system for the

private sector, which called on responsible CC and companies’ commitment “to act in a

principled way wherever and whenever they operated” (UN, 2010, p. 9). Notably, companies

were explicitly understood as part of the solution to the global challenges that humankind

would face in the new millennium.

Since the former UN Secretary-General Kofi Annan invited companies to commit to a global

compact of shared values and principles at the World Economic Forum (WEF) in Davos in

1999, over 8,700 companies and other stakeholders in more than 135 countries around the

world have signed the UNGC (as of December 2011; UN, 2010). As of today, the UNGC

represents the world’s largest, network-based, and purely voluntary initiative for corporate

39

responsibility and sustainability. Consequently, the UNGC benefits from the power of

collective action, and companies can contribute towards a more sustainable and inclusive

global economy in a collaborative effort with governments, labor and civil society

organizations, and the UN (UN, 2011b). The main objectives include mainstreaming the ten

principles in business activities around the world, and catalyzing actions in support of the UN

Goals (for example, the UN Millennium Development Goals), where the UNGC seeks to

facilitate the achievement of these objectives through mechanisms such as policy dialogues,

learning, country and regional networks, and projects (UN, 2011b). Importantly, the UNGC is

purely voluntary, and has thus no regulatory power to enforce favorable corporate behavior

and actions (UN, 2011b). If anything, the UNGC “relies on public accountability,

transparency and the enlightened self-interest of companies, labour and civil society to initiate

and share substantive action in pursuing the principles upon which the Global Compact is

based” (UN, 2007, p. 3). Form a corporate perspective, participating in the UNGC is said to

be advantageous for a number of reasons, which are summarized in Table 5.

Table 5: The benefits of participating in the UN Global Compact

1

2

3

4

5

6

Accessing the United Nations' extensive knowledge of and experience with sustainability and development issues.

Utilizing UN Global Compact management tools and resources, and the opportunity to engage in specialized workstreams in the environmental, social and governance realms.

Adopting an established and globally recognized policy framework for the development, implementation, and disclosure of environmental, social, and governance policies and practices.

Sharing best and emerging practices to advance practical solutions and strategies to contemporary challenges [related to globalisation, sustainable development and corporate responsibility in a multi-stakeholder context].

Advancing sustainability solutions in partnership with a range of stakeholders, including UN agencies, governments, civil society, labour, and other non-business interests.

Linking business units and subsidiaries across the value chain with the Global Compact's Local Networks around the world — many of these in developing and emerging markets.

Source: Adapted from UN (2011b, para. 7).

Consequently, a company committed to the UNGC shows interest in a leading role to

contribute to a global dispersion of responsible CC. Internally, the company can manage its

risks more proactively through a broad stakeholder approach on critical issues. Finally,

companies help the UN leverage its global reach through the cooperation between

governments, businesses, civil society and other stakeholders.

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3 COMPARISON

3.1 Overview

Based on the previously outlined responsibilities for sustainable development of companies

and the four described theories on CSR, each theory can be individually compared to the

responsibilities for sustainable development according to the Brundtland Report (see Table 2).

Table 6 summarizes the suggested compatibility of each theory with the proposed

responsibilities, where no or low compatibility = 0, moderate compatibility = 1, and high

compatibility = 2.

Table 6: Compatibility of business ethics theories with responsibilities for sustainable

development (no or low compatibility = 0, moderate compatibility = 1, strong compatibility =

2)

# Responsibilities Label Instrumental theories

Integrative theories

Political theories Ethical theories

Economic 1 Use of foreign direct investment (FDI) as driver of economic growth and increasing prosperity

Econ1 2 2 2 0

2 Transfer of technology, knowledge and managerial skills to make the best use of technology

Econ2 2 2 2 2

3 Innovation and diffusion of new, environmentally sound technologies

Econ3 2 2 2 2

Social 1 The opportunity of employment and fair salaries, enabling poor households to meet minimum consumption standards

Soc1 2 2 2 2

2 The provision of public goods such as education and health to accelerate and raise human productivity

Soc2 1 1 2 0

3 Improving the position of women in society through employment and education, lowering fertility rates and decelerating population growth

Soc3 0 0 2 2

Ethical 1 Voluntarily commitment to a broader sense of social and environmental responsibilities beyond regulatory compliance, and accept certain special responsibilities where required, controlling and guiding corporate behavior at firm level

Eth1 0 1 2 2

2 Promotion of values and attitudes encouraging sustainable consumption standards world-wide

Eth2 0 0 0 2

3 Promotion of a global ethic, a common set of broadly shared values and attitudes, enabling sustainable development and social justice

Eth3 0 0 1 2

Political 1 Close cooperation with political institutions, particularly in developing countries, reducing the information asymmetry, building mutual trust and counteracting conflicts

Pol1 0 1 2 2

2 Broader stakeholder discourse and disclosure of relevant information, enhancing transparency and increasing legitimacy of corporate decisions and operations

Pol2 0 2 2 2

3 Establishment of international codes of conduct for sustainable development, controlling and guiding corporate behaviour for sustainable development at supranational level

Pol3 0 1 1 2

Source: Author’s suggestion.

41

3.2 Instrumental approach to CSR — Shareholder Perspective

Figure 6 depicts the suggested compatibility of the instrumental theories with the proposed

responsibilities for sustainable development. It becomes clear that instrumental theories are

strongly consistent with the economic responsibilities (Econ1, Econ2 and Econ3), the

provision of employment opportunities (Soc1) and partly consistent with the provision of

public goods (Soc2) in cases where this maximizes shareholder value in the long-term. By

contrast, instrumental theories do not assume any responsibility for improving the role of

women in society (Soc3), or any ethical (Eth1, Eth2 and Eth3) or political responsibilities

(Pol1, Pol2 and Pol3).

Figure 6: Compatibility of instrumental theories with proposed responsibilities for

sustainable development.

3.3 Integrative approach to CSR — Philanthropy and Stakeholder management

Figure 7 depicts the suggested compatibility of the integrative theories with the proposed

responsibilities for sustainable development. It becomes clear that integrative theories are

strongly consistent with the economic responsibilities (Econ1, Econ2 and Econ3), the

provision of employment opportunities (Soc1) as well as the integration of a broader

stakeholder discourse (Pol2). They are partly consistent with the provision of public goods

(Soc2), the voluntary commitment to a broader sense of social and environmental

42

responsibilities (Eth1), a closer cooperation with political institutions (Pol1) and the

establishment of international codes of conduct (Pol3). By contrast, integrative theories do not

assume any responsibility for improving the role of women in society (Soc3) nor for the

promotion of values and attitudes encouraging sustainable consumption standards world-wide

(Eth2) or a global ethic (Eth3).

Figure 7: Compatibility of integrative theories with proposed responsibilities for sustainable

development.

3.4 Political approach to CSR — Corporate citizenship

Figure 8 depicts the suggested compatibility of the political theories with the proposed

responsibilities for sustainable development. It becomes clear that political theories are

strongly consistent with the economic responsibilities (Econ1, Econ2 and Econ3) and social

responsibilities (Soc1, Soc2 and Soc3), a voluntary commitment to a broader sense of social

and environmental responsibilities (Eth1), a closer cooperation with political institutions

(Pol1) and the integration of a broader stakeholder discourse (Pol2). They are partly

consistent with a global ethic (Eth3) and the establishment of international codes of conduct

(Pol3). By contrast, political theories do not assume any responsibility for the promotion of

values and attitudes encouraging sustainable consumption standards world-wide (Eth2).

43

Figure 8: Compatibility of political theories with proposed responsibilities for sustainable

development.

3.5 Ethical approach to CSR — Universal rights

Figure 9 depicts the suggested compatibility of the ethical theories with the proposed

responsibilities for sustainable development. It becomes clear that ethical theories are strongly

consistent with the ethical responsibilities (Eth1, Eth2 and Eth3), the political responsibilities

(Pol1, Pol2 and Pol3), the transfer of technology, knowledge and managerial skills to make

the best use of technology (Econ2) and the innovation and diffusion of new, environmentally

sound technologies (Econ3), the provision of employment opportunities (Soc1) and the

responsibility for improving the role of women in society (Soc3). By contrast, ethical theories

do not assume any responsibility for the use of FDI as driver of economic growth and

increasing prosperity (Econ1) and for the provision of public goods (Soc2).

44

Figure 9: Compatibility of ethical theories with proposed responsibilities for sustainable

development.

These findings suggest that each theoretical approach to business ethics has its deficiencies

with regard to the responsibilities for sustainable development with no theory assuming all

responsibilities. Indeed, these weaknesses have been subject to widespread criticism, which

are discussed in the following.

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4 DISCUSSION AND CONCLUSIONS

Based on the analysis of the responsibilities of business for sustainable development and the

subsequent comparison with instrumental, integrative, political and ethical theories on

business ethics, the presented results suggest that none of the outlined theories is completely

consistent with the assumed responsibilities in the Brundtland Report (WCED, 1987). These

shortcomings have been the basis for widespread criticism and intense academic discourse. In

the following, some criticism and counter-arguments are discussed for each of the outlined

theories, beginning with the most heavily criticized theory of shareholder value maximization.

4.1 Instrumental approach to CSR — Shareholder Perspective

Although the shareholder perspective is widely spread among corporate executives, especially

in the US (Deresky, 2008), a growing number of scholars challenge the one-sided orientation

on profit and shareholder value maximization. For example, Lepak et al. (2007, p. 191) raise

the question whether “value creation activities [can] survive in the long term if only one target

is satisfied, or do [corporations] have to meet some minimum level of [shared] value for all

parties to maximize [social welfare]?” Indeed, the sole focus on profit maximization is most

likely to have adverse effects on society and the environment, with some of them stated in the

Brundtland Report (WCED, 1987). Porter and Kramer (2011, p. 64) note that nowadays

“companies are widely perceived to be prospering at the expense of the broader community.”

Corporations do increasingly maximize and claim the profits if things go well, but expect

society to subsidize the losses if things go poorly (French et al., 2010). Recent examples of

privatized gains and socialized losses include the government bailouts of financial service

providers despite excessive executive compensation in years previous to the crisis, or the

sinking of the oil platform Deepwater Horizon and the consequent marine pollution in the

Gulf of Mexico and loss of income for fishers. The latter example illustrates the difficulties

arising from neoclassical thinking, which is inherent in instrumental theories. According to

neoclassical theory, firms maximize their profits. Then, any requirements for improvement,

such as for example increased safety arrangements related to the risky deep-sea drilling for oil

reserves, impose a constraint on the firm, which will inevitably result in increased costs, a

competitive disadvantage and reduced profits (Hirshleifer et al., 2005; see also Friedman,

1970). If firms disregard such improvements, this can lead to negative externalities. In

economics, negative externalities are a market failure and refer to situations when firms create

social costs without having to bear them. Firms have thus traditionally excluded social and

46

environmental concerns from their economic considerations (Porter & Kramer, 2011).

Excessive pollution of the environment is a classic example of a negative externality. In

theory, governments play an important role in solving the problems and mitigating the

consequences arising from negative externalities. By designing and implementing policies

that rely on taxes, regulations and penalties, the internalization of negative externalities can be

partially enforced. These government interventions are consistent with Friedman’s

perspective on CSR if they are embodied in the law and thus defining the rules of the game

(1970). Consequently, stakeholders other than shareholders “have protection (or can seek

remedies) through contracts and the legal system” (Sundaram & Inkpen, 2004, p. 353).

However, as the discussion about the corporation outlines (see 2.1), the scope of legal systems

is generally considered too narrowly from an ethical point of view (Crane & Matten, 2010)

and existing legislations vary greatly in scope and enforcement between various nations.

Corporate governance structures are particularly weak and thus hardly protecting stakeholders

in emerging and developing countries (Tricker, 2009), thus allowing MNCs to unrestrictedly

exploit national resources and cheap labor in these countries and maximizing their profits at

the costs of society. At the same time, neoclassical economists persist on their viewpoint that

the primacy of profit maximization in free markets remains the world’s indispensable engine

for economic progress in both rich and poor countries. Moreover, globalization has not

brought with it any negative consequences as Henderson (2005) notes:

Globalisation … has chiefly resulted from deliberate decisions taken

by governments, with good reason, to make international trade and

investment flows freer. It has not brought with it ‘social exclusion’. It

has not ‘marginalised’ poor countries. It has not conferred on

businesses undue benefits or new powers to determine events. The

idea that corporations now have to take on new and wider national and

international responsibilities, because they have become more

powerful while governments have lost control, has no basis

(Henderson, 2005, p. 31).

In contrast, Porter and Kramer (2006, p. 83) argue that “any business that pursues its ends at

the expense of the society in which it operates will find its success to be illusory and

ultimately temporary.” Because of growing opposition among broad social classes, the pursuit

of a shareholder value approach, if not Western capitalism, must prove that it can solve the

world’s most pressing problems and really contribute to sustainability.

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4.2 Integrative approach to CSR — Philanthropy and Stakeholder management

It has been shown that Carroll (1979, 1991) understands CSR mainly as the need for

companies to engage in corporate philanthropy on top of their economic, legal, and ethical

responsibilities. Claydon (2011) notes that this philanthropic approach to CSR is widely used

in practice. On the other side, Carroll’s framework has also been criticized since it explicitly

acknowledges the profit maximization principle at the bottom of the CSR pyramid (see

Figure 4). Since a firm’s responsibility is primarily to its shareholders comparable with

instrumental theories, the firm may not be acting socially responsibly in all cases. For

example, economically weak companies do not have excess resources and are thus less likely

to invest time, effort and money into discretionary responsibilities (Campbell, 2007).

Therefore, companies that fail to accumulate excess resources are unlikely to meet the

expected ethical and desired philanthropic responsibilities. Further, if a firm suffers from

financial losses in the short-term, the fulfillment of these responsibilities is further

complicated.

On the other side, neoclassical economists argue that profit-maximizing firms may in

principle not accumulate excess resources. In theory, if the firm were to maximize its profits,

and if it had the opportunity to create profits from deploying existing excess resources, it

would already have exploited this opportunity (Zinn & Flood, 2009). Consequently, the

existence of excess resources indicates that the firm is using its resources inefficiently, and is

therefore not maximizing its profits. This inevitably harms the shareholder value proposition

underlying the instrumental theories on business ethics. Besides the inefficiency aspect,

excess resources pose another problem for organizations from an agency perspective. In a

classical principal-agent relationship, the owners of the firm (the principals) and the

management (the agents) run inevitable into conflicts of interest (Tricker, 2009). Agency

theory studies the problem of motivating the management to act on behalf of the owners’

interests (Ross, 1973). Jensen (1986) argues that managers can no longer be assumed to

automatically act to maximize profits and firm value, but are likely to pursue their own

interests in the presence of excess resources, and in particular cash reserves. For example,

management might support their children’s local soccer club. While this would be a desirable

act of philanthropy according to Carroll (1979), management would be illegitimately

spending their owners’ money from a shareholder perspective (Friedman, 1970). Porter and

Kramer (2011, p. 64) argue, therefore, “the most powerful force for addressing the pressing

issues we face [are] businesses acting as business, not as charitable donors.”

48

Other arguments against Carroll’s framework include the fact that corporate philanthropy is

not a desirable activity per se, since it does not challenge the sources of the funds for the

charitable donations (Ulrich, 2008). Indeed, if a firm earned its profits in a morally

questionable way, such as the maintenance of poor working conditions or the use of child

labor, and gave parts thereof to charity, it would assume its ethical and discretionary

responsibilities. However, critics argue that there is no point in corporate philanthropy if it

obscures morally wrong behavior in the first place (Crane & Matten, 2010).

Claydon (2011) concludes, therefore, “the traditional ‘Pyramid of CSR’ model is not

sufficient as a comprehensive understanding of the ways in which CSR and sustainability

should be achieved.”

Stakeholder theory is the other integrative theory outlined. According to Freeman (1984),

stakeholder theory does help a firm to analyze its environment, identify interest groups and

facilitate a broader stakeholder discourse than the neoclassical shareholder approach. Lepak et

al. (2007) support such an important long-term perspective on the relationships of the firm,

since it makes clear that firms are likely to face different and perhaps competing opinions

among stakeholders on what are desirable outcomes of corporate activities. It is, therefore,

essential that companies “direct time and effort toward recognizing and, to some degree,

reconciling these differences” (ibid., p. 185).

Yet, stakeholder theory has also been criticized since it focuses solely on the identification of

stakeholders in the firm and potential conflicts of interest among them. While a stakeholder

analysis ends here, it does not specify how a firm should make the inevitable tradeoffs among

these conflicts of interest. Jensen (2002, p. 241) suggests that a useful theory tells decision-

makers “how to choose among multiple competing and inconsistent constituent interests.” If a

stakeholder management approach were a useful alternative to the shareholder perspective, it

would have to set the order of priority for a set of conflicting viewpoints. For example,

financial investors may favor short-term profits at the cost of budget and job cutbacks, while

employees may favor secured long-term employment and high salaries, and environmentalists

may prefer only activities that do not harm the environment (Lepak et al., 2007). Yet, Jensen

(2002, p. 242) argues that a stakeholder management perspective “leaves boards of directors

and executives in firms with no principled criterion for problem solving.” But if theories on

business ethics are to contribute to “the enhancement of ethical decision-making” in situations

of moral uncertainty (Crane & Matten, 2007, p. 9), Freeman’s stakeholder management is not

49

a sufficient framework for corporations to comprehensively understand CSR and achieve

sustainability.

Further, Porter and Kramer (2006) question the premise that stakeholders have better

knowledge on the firm’s environment. Although they accept that stakeholders’ viewpoints are

important, they argue:

Stakeholders ... can never fully understand a corporation’s

capabilities, competitive positioning, or the trade-offs it must make.

Nor does the vehemence of a stakeholder group necessarily signify the

importance of an issue—either to the company or to the world. A firm

that views CSR as a way to placate pressure groups often finds that its

approach devolves into a series of short-term defensive reactions—a

never-ending public relations palliative with minimal value to society

and no strategic benefit for the business (Porter & Kramer, 2006, p.

82).

Companies, therefore, are better off if they refrain from adopting a stakeholder approach to

CSR. Instead, firms should focus on creating value, which is shared among many stakeholders

in the firm (Porter & Kramer, 2011).

4.3 Political approach to CSR — Corporate citizenship

Although a number of important reasons support a political role of corporations (Baumann &

Scherer, 2010), such a role is also criticized. Dubbink (2005) mentions the legitimacy deficit

of MNCs, Deresky (2008) claims culture imperialism of MNCs, and Scherer et al. (2006)

point out the need for adequate instruments to administer citizens’ rights in practice.

Moreover, Baumann and Scherer (2010) hold that the legitimacy of a corporation is its license

to operate. Indeed, corporations will have to “operate in a way that is perceived as legitimate

in an increasingly heterogeneous environment” if they are to survive in the long-term (ibid., p.

17). The legitimacy of corporations, therefore, depends increasingly on moral legitimacy as

Palazzo and Scherer (2006) argue:

In the current transition from stable industrial society to a globalized

post-industrial society, cognitive legitimacy is eroding (e.g.,

shareholder-value ideology, free and open market narratives,

normative homogeneity) while pragmatic legitimacy (e.g., lobbying,

branding, strategic public relations) provokes growing resistance (e.g.,

50

anti-globalization movement, no logo movement). Therefore, moral

legitimacy has become the core source of societal acceptance (Palazzo

& Scherer, 2006, p. 78).

According to Palazzo and Scherer (2006), moral legitimacy is a social construct resulting

from conscious moral judgments on a company’s products and services, processes,

organizational structures and leaders. It is in the interest of the corporation to participate in an

“explicit public discussion’’ (Suchman, 1995, p. 585), where it can bring forward arguments

that justify and explain its decision and actions. As a result, a company can only gain moral

legitimacy if it actively engages in these public discussions (Suchman, 1995). Important,

corporations must know how to convince rather than manipulate and persuade opponents

(Palazzo & Scherer, 2006). Moreover, companies are increasingly urged to alter their

“economic, utility-driven, and output-oriented” view of corporate legitimacy in favor of “a

political, communication-driven and input-oriented” approach (Baumann & Scherer, 2010, p.

16), as described by Habermas’ concept of deliberative democracy (for an overview, see

Habermas, 1996). Ultimately, this approach will “lead to better and broader accepted political

decisions and a deeper mutual understanding of the stakeholders involved and thus

contributes to sustaining moral legitimacy” (Palazzo & Scherer, 2006, p. 81).

In neoclassical economics, the government must resolve issues of public interest, such as the

enforcement of human rights, social and environmental standards. According to Friedman

(1962), companies should normally leave social issues to be managed by governments while

supporting their activities with tax payments. This perspective presupposes a sovereign

national state that is capable of fulfilling these tasks. In the globalized world, however,

national states are increasingly losing influence over their territories in industrialized

countries (Beck, 2000), respectively have never or barely been able to build functioning social

and political structures (Matten & Crane, 2005). The framework of CC draws on these

insights and argues in favor of a broader set of social responsibilities for companies. As

opposed to the shareholder value approach, a CC perspective emphasizes the positive

reinforcing effect of a healthy relationship between corporations and society. Porter and

Kramer (2006) suggest that:

Successful corporations need a healthy society. Education, health care,

and equal opportunity are essential to a productive workforce. Safe

products and working conditions not only attract customers but lower

51

the internal costs of accidents. Efficient utilization of land, water,

energy, and other natural resources makes business more productive

(Porter & Kramer, 2006, p. 83).

These are a number of reasons why corporations indeed should assist failing states in the

provision of basic infrastructural facilities and securing citizens’ rights. Moreover, local

societies can benefit from good government, working legal systems and strong regulatory

standards, since these factors promote efficiency, innovation and protect employees from

exploitation (Porter & Kramer, 2006). Ultimately, a healthy society triggers a virtuous circle

of economic progress, as corporations can meet more human needs.

Yet, Matten and Crane’s (2005) framework on CC is currently purely descriptive. Therefore,

they point out the need for further research about an extended view of CC based on citizens’

rights. For example: Which citizens should corporations consider? How can their expectations

be collected? And how can corporations integrate, prioritize and balance their presumed

rights? Eventually, time will tell whether the outlined framework of an extended view on CC

can be further developed towards a more sophisticated, prescriptive theory on corporations

can contribute to sustainable development.

4.4 Ethical approach to CSR — Universal rights

Even though it is not easy to adapt a universal code of morality and ethics for a set of

individual countries (Deresky, 2008), the UNGC has been established as a set of basic

guidelines that should direct corporate behavior in an increasingly global world. Already at

the time of the publication of the Brundtland Report (WCED, 1987), Bowie (1987) argued in

favor of a desperately needed moral universalism reflecting moral standards accepted by all

cultures. According to Bowie (ibid.), a global ethic is preferable to the more frequently

applied ethnocentric or ethical relativistic approaches. Ethnocentrism implies that a firm

applies its own moral norms no matter what norms the host country might have. By contrast,

ethical relativism implies that the firm simply acts according to the local moral norms in each

respective host country where it operates (Deresky, 2008). From a sustainability perspective,

a firm’s subscription to either one of these approaches is likely to have negative

consequences. If a firm with strong moral norms and ethical values adopts an ethnocentric

approach in a host country with a weak ethical system, the firm might suffer from higher costs

and competitive disadvantages compared to competitors subscribing to ethical relativism.

This additional cost argument is particularly brought forward by neo-liberal economists

52

(Friedman, 1970; Irwin, 2002; Krauss, 1997), and is closely linked to weak legal systems in

emerging and developing countries (Crane & Matten, 2007). Yet, many MNCs in

industrialized countries are increasingly pressured by NGOs to subscribe to an ethnocentric

approach and act in accordance with the very same values used in its home markets (Deresky,

2008; Spar & La Mure, 2003). On the other side, if a firm adopts an ethical relativistic

approach, it knowingly exploits the poor ethical and legal conditions in emerging and

developing countries, gains a competitive advantage over its ethnocentric competitors and

outperforms them finally in a free market economy. Put differently, an ethnocentric approach

pays off in the absence of strong, widespread and enforceable ethical and legal systems, while

acting socially responsibly is not sustainable from an economic point of view.

The aim of the UNGC is to break this cycle and to establish a globally accepted code of basic

ethical values and principles. Although this code is helpful to raise firms awareness for a

global ethic, and can serve as a behavioral guidance system towards CSR and sustainability

for a company’s employees (Bondy et al., 2004), it seems unlikely that universally applicable

moral norms will ever be reality (Bowie, 1987; Wicks, 1990). Arguments against global ethic

include the accusation of cultural imperialism, in particular if mainly Western standards are

imposed on all other cultures (Cavanagh, 2004). Palazzo and Scherer (2006) note that a global

ethic, understood as a set of subconsciously shared values, norms and beliefs among all

societies, neglects the fact that modern societies are increasingly pluralistic. Pluralization

describes “the threefold process of individualization, the devaluation of tradition and the

globalization of society … [that] results in a loss of traditional certainties” (ibid., p. 80). In

light of the pluralization, a global ethic, such as the UNGC proposes, can no longer assume

that values and expectations in a global society will eventually converge. If indeed, these

values and expectations have become heterogeneous (Palazzo & Scherer, 2006) and

diametrically opposed to the aim of the UNGC. Therefore, future will tell whether the UNGC

really can make a difference towards fulfillments of its broadly set goals and the achievement

of sustainability.

4.5 A new approach: The concept of shared value

According to Porter and Kramer (2011), a majority of companies continues to maintain a

reactive approach to business ethics and CSR. In reality, the solution lies in a proactive,

strategic approach. Shared value involves the creation of economic value at the same time as

societal needs and challenges are addressed. Porter and Kramer (2011) suggest:

53

The concept of shared value … recognizes that social harms or

weaknesses frequently create internal costs for firms—such as wasted

energy or raw materials, costly accidents, and the need for remedial

training to compensate for inadequacies in education. And addressing

societal harms and constraints does not necessarily raise costs for

firms, because they can innovate through using new technologies,

operating methods, and management approaches—and as a result,

increase their productivity and expand their markets (Porter &

Kramer, 2011, 64).

From a shared value perspective, corporations assume a broader set of responsibilities. Yet,

companies do not do this because they feel they have to for some ethical reason. Quite the

opposite, companies adopting a shared value approach act for selfish reasons, simply because

there are huge business opportunities to solve all or part of the societal and environmental

problems of our time. Therefore, “shared value is not social responsibility, philanthropy, or

even sustainability … it is about expanding the total pool of economic and social value”

(Porter & Kramer, 2011, p. 64).

Obviously, the concept of shared value draws on the same assumptions as instrumental

theories. Compared to the shareholder value approach, a shared value perspective suggests

that corporations do not deny any social responsibilities, but focus their corporate activities on

providing solutions for present and future societal and environmental problems based on their

capabilities. At the same time, shareholder value maximization becomes legitimate again,

since corporations are no longer seen as the cause of the problems. However, time will

eventually tell whether Porter and Kramer’s (2011) concept can really bring the required

changes for sustainable development.

4.6 Summary of findings

(1) What type of responsibilities for sustainable development does the Brundtland Report

suggest corporations should assume?

The results answering research question 1 are based on the review of the Brundtland Report

(WCED, 1987). It is shown that the Brundtland Report (ibid.) indeed requires corporations to

assume a broad set of economic, social, political, and ethical responsibilities. For a summary

of these responsibilities refer to Table 2.

54

(2) Which contemporary theories of business ethics, if any, are possible to combine with

the notion of sustainable development and the responsibilities for sustainable


A total of four theories on business ethics and CSR have been studied for the purpose of this

paper. These include an instrumental perspective (shareholder value maximization), an

integrative perspective (corporate philanthropy and stakeholder management), a political

perspective (CC), and an ethical perspective (UNGC). By comparison with the required

responsibilities in Table 2, the findings suggest that instrumental theories have the lowest and

ethical theories the highest compatibility, with integrative and political perspectives lying in

between.

However, as the discussion shows, all four presented approaches are criticized. Yet, while

instrumental theories maintain an economic position, integrative and political theories aim to

assume a broader set of responsibilities. At the top, universal theories aim to provide an all-

embracing solution to sustainable development.

(3) If the theories discussed in (2) are deficient, are there any present contributions to the

business management literature that take into account the responsibilities for sustainable


The results and conclusions from the discussion show that none of the presented approaches

fully assumes all required responsibilities from the Brundtland Report (WCED, 1987). Porter

and Kramer (2006, 2011) have recently presented a new strategic approach to business and

sustainable development. A shared value perspective takes into account aspects from

instrumental, integrative, and political theories.

4.7 Conclusions

According to Garriga and Melé (2004, p. 51), the field of CSR “presents not only a landscape

of theories but also a proliferation of approaches, which are controversial, complex and

unclear.” On the other side, an all-embracing definition of the CSR would be “too vague to be

useful in academic debate or in corporate implementation” (van Marrewijk, 2003, p. 96). The

variety of theories and approaches to business ethics and CSR poses an immense challenge

for managers to filter out a set of appropriate theories, which take into account a company’s

present situation and can create future value for both the firm and society (Christensen &

Raynor, 2003).

55

But how can sustainable development benefit from business ethics and CSR then? One can

argue that the initial purpose of altering corporate behavior towards ethically and

environmentally responsible behavior at the disposal of the profit maximization principle has

turned out to be illusionary. Yet, the intensifying academic discourse might have helped to

increase public and private awareness for social and environmental and, therefore, increased

the awareness for sustainable development.

However, one crucial factor of a competitive economic system is that any privately owned

company can only survive if customers buy its products or services. Therefore, not only

corporations bear responsibilities but also individual customers. If sustainable development is

to come true, customers must change their consumption patterns towards more responsible,

sustainable products, and companies have to innovate sustainable business models and

contribute to the solutions of problems they have caused by irresponsible activities in the past.

The concept of shared value (Porter & Kramer, 2011) can be leading the way for the future.

At the same time, international politics are required to establish globally accepted rules and

principles that promote competitive conditions that reward socially and environmentally

friendly business practices. In particular, legal systems and enforcing mechanisms in

emerging and developing countries should be enhanced to promote the achievement of

sustainable development as depicted in Figure 10.

Figure 10: Sustainable development requires an expansion and standardization of national

legal systems at the international level.

Finally, sustainable development can only come true if all actors, free of ideology, cooperate

towards a more equitable, more peaceful and greener world.

ix

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