Models of Corporate Responsibility Part I: The Classical Model

In his book, Corporate Responsibility and Legitimacy, James Brummer describes the four theories of CSR. By understanding these theories, we can analyze the CSR work of specific corporations more carefully—see what they contribute to society and assess the strengths and weaknesses of their particular approach. Over the coming weeks, I’m going to provide a brief summary of each of these models in four parts.

First, let’s look at the Classical Model. The Classical Model argues that society is best served by a variety of institutions, each of which serve a particular function. The primary function of corporations should be economic rather than social. The primary goal of the corporation should be to maximize profit and the primary obligation of managers are to act in the interest of their shareholders while not breaking the law.

The assumption at the root of this theory is “methodological individualism,” the belief that the individual is the center of a value system. Individuals seek their own satisfaction and act rationally to increase personal satisfaction. If I’ve got ten dollars and I’m hungry, I will exchange five dollars for a sandwich. But there’s no reason for me to buy two sandwiches when one will fill me up, so I hang on to the other five dollars. The delicatessen makes me a sandwich, pockets the profit, and we’re both happy.

According to classical theorists, this “invisible hand”—individuals operating together in mutually satisfying (or profitable) exchanges—leads to the most efficient economic system. In order to fulfill their institutional responsibility to society, corporations should limit any social activities that add costs and reduce their profits. The only ethical obligation is negative: don’t break the law. In this model, the government should function to promote activities and laws that protect/benefit the public.

It’s important to point out here that the classical theorists believe that their model is the most socially responsible because it’s the most efficient.

  • Shareholders benefit because they make a greater return on their investment. If a company spends money for social causes, it reduces the wealth of the shareholders. As dissatisfied shareholders sell of their shares, the value of the stock drops, and the company has less capital for future growth.
  • Consumers benefit because prices stay low. For example, the deli doesn’t charge an extra $.50 per sandwich, which he can then donate to his local food bank.
  • Workers are happy because higher profits help the company to expand, creating more jobs, better wages, and other benefits.
  • Society as a whole benefits because these successful businesses and their workers all pay taxes to the government, which then fulfills its social functions: education, roads, social services, etc. The government also acts in the interest of society to determine the laws by which these companies must abide.

So what are the weaknesses of this model? I’ll only list two of the important ones.

  • Some of the basic assumptions may be a bit problematic. For instance, while I’d agree that individuals basically operate in their own self-interest to increase personal satisfaction (whether that is to buy a sandwich for myself or to feel fulfilled by giving my money to a foodbank), I don’t agree that they are necessarily making rational decisions. Humans are influenced to do irrational things (like smoking or agreeing to a mortgage whose payments will one day exceed projected income) through marketing, peer pressure, or addictions. Can the government really be asked to foresee irrational behaviors and protect consumers at all times? Does any government legislative body move as quickly as the market? Shouldn’t corporations be held to some level of ethical and social accountability in addition to the specific laws that govern them?
  • There have been a number of empirical studies that have compared the efficiency and profitability of those companies who do not engage in social activities with those who do. While the outcomes of these studies are mixed, the basic finding is that efficiency and profitability is not tied to social enterprise (or lack thereof). After a detailed analysis of these studies, Brummer concludes that “when managers respond directly to the needs and interests of individuals other than shareholders, they do not necessarily injure the financial interests of the corporation” (132). Social activity does not necessarily decrease profitability; some social activities (such as REI’s efforts to promote healthy outdoor activity) may actually increase profits.

In conclusion, I do agree with the basic thrust of the Classical Model: Self-interest drives most of our decisions and results in mutually beneficial, efficient exchanges. In addition, profitable corporations benefit society through job and wealth creation. However, it does not follow that corporations will fail to strengthen the economy if they also engage in social activities and promote ethical values like human rights.

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2 Responses to Models of Corporate Responsibility Part I: The Classical Model

  1. Pingback: Models of Corporate Social Responsibility Part 2: The Stakeholder Model | Project CSR

  2. Pingback: Microsoft’s Corporate Citizenship | Project CSR

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