Reflections on Some Basic Theories of Corporate Social Responsibility

Reflections on Some Basic Theories of
Corporate Social Responsibility

Zhang Shi Yuan*                   Li Dan Ning**

[Abstract]    Corporate social responsibility (‘CSR’), a constant source of debate in the research of company laws, has attracted wide attention from scholars and increasingly intensive studies have been made in the respect. This paper focuses the research on identification of the definition and characteristics of the concept of ‘CSR’, followed by an analysis on the value orientation on which “CSR” exists and on its theoretical basis. The paper concludes with a tentative summary on the content of CSR and its legislation in China.

[Keywords] Corporate social    Responsibility
Theoretical basis                  Legislation

I、   Identification and characteristics of corporate social responsibility

What does corporate social responsibility (CSR) refer to? There is so far no consensus in the academic circles on the question. However, some US scholars generally take it that CSR refers to the fact that board directors of a company, as the trustees of various interest parties, actively participate in altruist activities in order to perform their due corporate roles in the society. [1]Some other scholars are in favor of the opinion of most US scholars that CSR means that those profit-oriented companies, when their decision making bodies become certain that some undertakings are mostly desired by the majority of the society, should give up their intent of making profits from the undertakings and try to meet the expectations of the majority.  [2]Other scholars believe, that CSR refers to the fact that companies shall not take optimal-profit-making for directors as the sole aim of corporate existence. Instead, all social benefits rather than maximally improving shareholders’ interests should be considered as the sole objective of corporate existence. [3]Still, other scholars think that CSR refers to the social obligation that a company has to be liable to in the maintenance and improvement of social benefits in addition to the pursuit of maximizing shareholders profits. [4]Though the description of CSR varies, the core of it is similar, i.e. a company should undertake certain social responsibilities and liabilities at the same time of making profits for the company.

To sum up the various opinions by different scholars, we may conclude the following as the main characteristics of corporate social responsibility.

ICSR is a kind of responsibility of relations or positive responsibility

Generally speaking, the word “responsibility” contains two folds of meanings: responsibility of relations and method responsibility. The former refers to the fact that the principal of one party takes up certain responsibilities based on certain kinds of relations of the principal of other parties. This kind of responsibility is actually an obligation; the latter refers to the negative consequence, which should be borne by the principal who are liable to responsibility of relations (i.e. obligations) and fails to perform his responsibility of relations. [5]CSR is, in fact, an obligation of a company. It can be said that the “responsibility in “CSR” refers to an “obligation”. In addition, the jurisprudential circle takes an obligation as a positive responsibility and the negative consequence resulted from default of obligations as negative responsibility. If to look at CSR with this kind of division, then, it is obviously a kind of positive responsibility.

II CSR takes those concerned with non-shareholding interests as the concerned party of obligations

According to general understanding, the so-called “concerned parties with non-shareholding interests” are deemed as the consisting part of the concerned parties of interests of the company, i.e. any non-shareholders, who are under actual, potential, direct and indirect influence of corporate decision-making and corporate behaviors. Specifically, they include company employees, consumers of company products, company creditors, beneficiaries of economic and social development planning, resources and environment, social securities and welfare facilities. Since the concerned parties with non-shareholding interests have their respective interests in the company, the company has liabilities to maintain and secure their interests and this liability is what is called CSR. Accordingly, the concerned parties with non-shareholding interests are also considered as the concerned parties of obligation of the company.

IIICSR is an integration of legal and moral obligations of a company

Legal obligation, a statutory liability taking state coercive forces as its performance guarantee, means legal security of minimum requirement of morality necessary to maintain basic social order. Moral obligation is a responsibility non-legalized and voluntarily performed by the obligors and which takes any other means than the state coercive forces as its performing guarantee. It is a higher demand of morality on people above their legal obligations. CSR, as an obligation that a company is liable to the society, is not simply a legal obligation or a moral obligation. Rather, it is the integration of the two.

(IV)          CSR is an amendment and complement to the conventional principle of maximized profits for shareholders.

The conventional companies and company laws take individual principals (shareholders) as the starting point for consideration, believing that the highest or the sole objective of a company is to achieve profits in order to maximize the profits for shareholders. Whereas, CSR takes social principals as its starting point, believing that the objective of a company should be of two dimensions. In addition to realizing the maximum profits for shareholders, companies should also strive to maintain and upgrade social benefits. Of the two corporate objectives of achieving maximum corporate profits and social benefits, any single one of the objectives will have to be put under restriction by the other. Therefore, the objectives of making profits and of bringing social benefits are often found in strong tension. Their respective objectives of maximization are realized under conditions of reciprocal interactions and a balance in corporate objectives has also been maintained. Obviously, CSR is an amendment and complement to the conventional principle of maximized profits for shareholders. And this amendment and complement does not reject the principle of maximizing profits for shareholders.6

IITheoretical Basis of CSR

(I)    Economic basis of CSR

A company is, first of all, an economic setup with making profits as its goal and it has the status of legal entity with independent economic interests. When looking at the social responsibilities that a company should take, those scholars in the economic circle and who are in favor of this opinion believe that corporate objectives lie in creating good conditions of existence and sound development prospect for a company. The managers of a company should become concerned with the optimal long-term capital gains of the company in order to achieve corporate goals; if to achieve the optimal long-term profits, a company will have to take up social responsibilities as well as the social cost thus incurred. When studying on the relationship between social responsibilities and economic performance and efficiency, the focus is given on the research of the relationship between social responsibilities and economic performance and efficiency during the long-term development process of a company so that a positive correlation of the two has been derived.

(II) Sociological basis of CSR

Society is an organic whole. Companies (enterprises) are components making up the organic whole. To look at the relationship of society and companies, companies cannot survive in isolation from a society. Social development relies on the growth of companies. This interdependency decides that society and companies interplay with each other, and at the same time they are restricted by their respective development rules; what is more, companies, as a social setup, have their independent interests; social benefits is of public welfares. The development objectives of companies lie in maximizing their corporate profits, whereas social development objectives are for increment of common benefits of its members in a society. Also, companies, as one tier of a society, require that corporate interests are put under constraint of social benefits and company’s objectives should comply with those of social benefits. Thus, it is made known quite obviously that companies should undertake their respective social responsibilities.

(III)                      Legal Basis of CSR

The chief principle of law to follow in our country when regulating justice and interests, and the contradictions between the relationships of various interests is to take into account the interests of the state, the collective and the individual. Achieving corporate profits and taking up social responsibilities are in fact a matter of the contradictory relationship between the individual corporate business benefits and the collective social benefits. When dealing with the relationship of the two, the first priority should be given to satisfying the integral social benefits while pursuing individual economic benefits, which requires that companies should take up certain social responsibilities while seeking for optimal business benefits. Secondly, the criterion of regulating the various contradictions of relationships of interests is to prioritize efficiency while giving consideration to justice, which means when efficiency contradicts with justice, efficiency overtakes as the dominating factor. Companies should go after as high efficiency as possible in order to acquire the optimal business benefits. However, moral factor will have to be considered at the same time. If companies seek ruthlessly high efficiency and high profitability and therefore damage the justice and fair rules of the society, all the individuals in the society will ultimately have to pay a heavy price.

As far as civil law is concerned, a company, as a legal entity, is the principal of civil law. The principle of public order and good conducts is one of the most basic principles of modern civil law, which requires that the principals of civil cases shall not violate the public orders and good conducts when engaged in civil activities, which also requires companies to undertake non-performance liabilities on any behaviors prohibited by law when engaged in civil activities. Secondly, the idea of civil law has transformed from the individual principal prevalent in the 19th century to the social principal developed in the 20th century. 7As far as companies are concerned, they should also make their shift from the self-centered business profits to the promotion of social benefits as a whole and take up certain social responsibilities while not sacrificing self profit-making opportunities.

As far as the theories of economic laws are concerned, an economic law is the law used to achieve state intervention of the economy. At different historical period, the measures, scope and value orientation of state intervention of the economy vary as different governments in power have different policies. One of the reasons that the state intervenes on the organization and behavior of the market principal is that the contradictions between the social objectives of the behavior of the market principal and its economic objectives need to be intervened by the state for control. One of the market principal – companies, sometimes is not able to take up voluntarily social responsibilities and state intervention in the form of legislation is needed to force or guide companies to take up social responsibilities. 8

IIIValue Theory of CSR
(I)    Theories of value orientation of CSR

1.      Theory of maximized profits for shareholders

The conventional theory of CSR believes that companies, as a business setup, should take optimal profit making for shareholders as their most fundamental objective. The realization of the benefits of any other concerned interest parties who are under the influence of the company’s behaviors should not be deemed as the corporate objective. And the management body of the company shall have the right to resort to any means to achieve the goal when making any decisions or taking any actions on behalf of the company.

2.      Theory of social responsibility for protection on the interests of the corporate stakeholders other than shareholders

This school of theory maintains that maximizing the interests of the shareholders of the company is the most important objective that a business organization should achieve. However, it should not be considered as the sole objective. As a business organization, a company is vitally interrelated with the overall social environment. When in business activities, a company should not only consider on the influence that the activities may have on shareholders, but also on the influence that they will have on the interests of the parties other than the shareholders, including employees, suppliers, customers, creditors and on the benefits of the government. When a company makes any decision, it has to take into account the benefits of these people. Otherwise, it should take liabilities against any harm or damages thus incurred to these people.

3.      Theory of social responsibility on being good citizens

This theory maintains that companies, as business organizations, should take profit making as the corporate objectives. However, companies are also liable to offering help, i.e. companies shall have the obligation to help solve certain social problems. For instance, companies shall have the obligation of making donations to education or charity organizations. 9

4.      Theory of social responsibility on minimum requirement of morality

This CSR theory believes that companies have the obligation to satisfying shareholders’ interests rather than causing damages to other parties. By this theory, as long as companies have avoided causing or corrected the social harm caused due to their behavior during the process of business activities, the companies are deemed to have fulfilled their social responsibilities. The CSR theory of minimum requirement of morality is regarded by some scholars as conservative idealism, or in other words as the voluntary compliance with the law.

(II)Value theory of CSR that China shall follow

The above-mentioned theories of CSR have their respective rational and irrational points. However, one theory, in which the advantages will have to outweigh the disadvantages, has to be selected among them as the guiding theory for the practice in our country. As far as the theory of maximized profits for shareholders is concerned, it has the merits of encouraging investment and promoting business development and prosperity, though there is the suspicion of causing harm to other concerned parties of interests. Therefore, this CSR theory should be insisted on in our country. When looking at the overall situation of our country, we see that the market economy in our country is still not very developed and business activities are not prosperous enough. To take up CSR in our country, the objective of maximized profits for shareholders has to be achieved before having the basis of emphasizing the protection of other concerned principals of interests. The objective maximized profits for shareholders is the ultimate goal of a business organization and the protection of other concerned principal of interests, though also one of the corporate objectives, is in secondary place and is subsidiary to the main objective. When the main objective and secondary ones are in conflict, the board of directors of the company should give up the secondary one and insist on the primary one. Otherwise, the conduct of the board of directors of the company violates the obligation they should take up of working for the best interests of the company and the directors should bear any legal responsibilities to the company.

IVLegislative practice and application of CSR in China

The scope of CSR in different countries and different historical periods of the same country varies greatly. Overall speaking, CSR in people’s mind in the early stages refers only to the moral obligation a company undertakes in participating in charity activities or other social welfare activities. With rising influence of companies on the society, more concerns on such social issues as safety and ecology and gradual improvement on mandatory legislation on the issues, CRS begins to take in more extensive substances.

(I)    Content of CSR

1.      Responsibility to employees              The conventional theory of company law maintains that employees are only the laborers of the company. They are non-members of the company. However, the interests and the fate of the employees are closely connected with the business operation of the company. They are considered as a type of key party of interests. In order to substantially secure and give full consideration to the benefits of employees, all the countries in the modern world list the responsibility to company employees as one of the most important content of social responsibility a company has to undertake.

2.      Responsibility of consumers              Consumers are the acceptors and users of the company’s products. The level of consumers’ living standards depends to a large extent on such factors as products, product types, product quality and prices that the company offers to them. The fact that consumers are scattered with limited ability to claim and the covert nature of product defects due to highly sophisticated modern technology, objectively puts consumers to a disadvantaged position in the society. Because of this fact, the advocators of CSR deem the obligation a company takes up towards consumers as an important content of CSR.

3.      Responsibility of creditors     Creditors of a company are the concerned party of transactions and enjoy the obligatory rights, i.e. the company is liable to its creditors. Whether this obligation is substantially carried out involves such major issues as whether the expected economic benefits by the creditors of the company can be realized. Hence, the creditors of a company are key concerned parties of interests of a company. Whether a company fulfils its obligation to its creditors is considered as both the obligation of civil cases and a social responsibility the company should bear. In addition, the company also has the social responsibility to ensure transaction safety of the creditors group as a whole.

4.      Responsibility of protection and rational utilization of environment and resources This is a social responsibility that a company should bear towards the beneficiary of actual and potential environment and resources. The protection and rational utilization of environment and resources concerns not only the immediate interests of contemporary generations, but also the subsistence and development of future generations. It is the precondition and key for human kind to achieve sustainable development. For companies to take up responsibilities on protection and rational utilization of environment and resources, it is an embodiment of companies to take up responsibilities for the offspring of mankind and this responsibility is a typical CSR.

5.      Responsibility of economic and social development of the local community          
This is the responsibility that a company will take with the community it is located or the residents of the community as the concerned party of interests. The company has inseparable contact with the located community. The prosperity of the company brings economic well-being to the community, which also makes the residents of the community immediate victims to the damages and pollution caused by the company. The authorities of the communities offer necessary securities to the company in such areas as security and infrastructure so that the business activities and operations of the company may be extended normally. All these factors mean that the company should take on some special obligation towards the community.

6.      Responsibility of the cause of social welfare and public interests

This responsibility of the company includes extensive contents, such as making charity donations to hospitals, old people’s homes, diseased people and people in poverty, employing disabled people, people with deficiency of labor skills and other people with difficulties to be employed, and granting scholarships and other funds to educational institutions, participating in prevention of criminal activities or providing funds for such act. The obligations companies undertake towards social welfare and causes of public benefits are deemed as traditional CSR. 10

(II)Embodiment of CSR in Chinese legislation

In our country, legislation has taken a step ahead in theoretical research of CSR, though no mature and systematic structure has been established in the respect. The current legislation has included some of the content of CSR into the statutory articles, which can be seen in several laws.

1.        Enterprise Law

The existing Enterprise Law has been stipulated and fine-tuned with gradually deepened economic system reform starting in 1978, of which, the relevant stipulations on CSR, such as employees taking part in the corporate business management, stipulations on labor protection, on environmental protection, on liabilities of creditors and stipulations on buildup of spiritual civilization and abiding by the professional ethics can be found in the relevant literature on enterprise laws, including the Enterprise Law of State Owned Enterprises, Regulations on Township and Rural Collectively-owned Enterprises, Interim Provisions on Private Enterprises and the Company Law.

2.        Tax Law

In order to provide economic incentive mechanism for CSR activities and taking into consideration of the interests and benefits of the shareholders and the social publics, the current tax law in our country implements the system of reduced income tax for donations to public welfare institutions and for poverty alleviation purposes. This system promotes to a certain extent the execution of CSR.

3.        Donation Law for Public Welfare Cause

The Law of Donation for Public Welfare Causes comes formally into force on Oct 1st, 1999 inour country. The law is applicable to any natural person, legal person and any organizations or institutions that are willing to donate properties without compensation to any social groups of public welfare nature and non-profitable organizations aimed at promoting public welfare and which are established legally as by law. Companies may donate properties to the legally prescribed public welfare causes as by law. This provides legal basis for the typical CSR act by companies who carry out the donation for public welfare purposes. In addition, this law has also reiterated the legislative spirit of granting reduced rate of income tax for donations of welfare nature and poverty alleviation purposes.

4.        Contract Law

According to Articles 186 and 188 of the current  Contract Law in our country, donees may request for delivery of deed of gift which is of a public welfare or moral obligatory nature such as disaster alleviation and poverty alleviation, irrevocable donations, and grant properties, which donors fail to deliver. These articles serve to offer legal support to the implementation of the law of corporate taxes and any other donations of public welfare natures, which are not included in the stipulation of “the Law of Donations for Public Welfare Undertakings”; at the same time, they help establish the principle of estoppel  in donations of public welfare and moral obligatory natures, and work as a forceful pressure to urge companies to cash in their promises made for sponsoring public welfare undertakings so that CSR is substantially carried out.

*Professor of Northern Industrial University, President of Research Institute of Economic Laws
**Lecturer, Institute of Economic Laws, Northern Industrial University
[1]Liu Jun Hai: “Corporate Social Responsibility”, 1999 edition, Press of Law, p2.
[2] Liu Lian Yu: “Corporate Governance and Corporate Social Responsibility”, Press of University of Chinese Political Science and Law, p66.
[3]Liu Jun Hai: “Corporate Social Responsibility”, 1999 edition, Press of Law, p6.
[4] Lu Dai Fu: “Economics and Legal Analysis on CSR”, Press of Law, 2002 edition, p96.
[5] Zhang Wen Xian: “Jurisprudence”, Press of Law, 1997 edition, p143.
[6] Lu Dai Fu: “Economics and Legal Analysis of CSR”, Press of Law, 2002 edition, p101.

7 Liang Hui Xing: “General Introduction to Civil Law”, Press of Law, 1995 edition, p37.
[8]Zhang Shi Yuan, Liu Li: “On CSR”, excerpt from “Classics of Chinese Commercial Law” (Volume 2002), Press of Machine-building Industry, 2002 edition, p119.

9 Edited by Zhang An Min: “Company Law”, Press of Zhongshan University, 2003 edition, p44.
10. Lu Dai Fu: “Economics and Legal Analysis of CSR”, Press of Law, 2002 edition, p101.