What is the social purpose of the firm? Is the sole or predominant purpose to make profits for the shareholders, as Milton Friedman famously noted, or should firms adopt policies that enhance social welfare, not necessarily increase profits? Should firms as legal "persons" act beyond their usual functions as agents of the shareholders? Should firms pursue political projects that might reduce profits, or should firms return profits back to shareholders and let shareholders decide what politics they wish to support? Do corporate social responsibility (CSR) policies represent agency conflicts whereby managers use shareholders' wealth to pursue their political and personal agendas, and, if so, should such managers face legal sanctions or at least be sanctioned by the stock market, an institution dedicated to enhancing shareholders' wealth?
The theoretical and normative aspects of the CSR debate are fascinating. While the commitment to pursuing CSR policies varies across firms, sectors, and countries, the salience of these policies is particularly striking in the realm of environmental management. While some firms have adopted CSR policies (or corporate environmentalism) unilaterally, others have sought to pursue CSR under the aegis of a formal program or club. Indeed, scholars are trying to examine conditions under which voluntary clubs might have a greater payoff for firms in relation to unilateral CSR actions.
To begin thinking about policy payoffs, one needs to examine how external stakeholders perceive CSR policies. What are their preferences? Do they have the capabilities to sanction or signal appreciation for CSR, thereby shaping firms' commitment to CSR? Scholars such as Michael Porter find win-win scenarios to be pervasive (specifically in the environmental arena) while others such as David Vogel are skeptical about the "market for virtue."
How do various institutions in which a firm is embedded influence its incentives to pursue CSR? One can argue that CSR is not likely to be viewed as managerial malfeasance: one seldom finds the United Sates Securities and Exchange Commission or shareholders suing firms for pursuing CSR. There is mixed evidence about the reaction of stock markets to CSR. The stock market seems to punish firms for not pursuing CSR in certain circumstances: research suggests that when the Toxics Release Inventory data were released, firms identified as major polluters saw declines in their share prices although their emissions were legal. There is no evidence, however, that the stock market will reward firms for pursuing CSR policies in every context. The message from the stock market seems to be: if CSR can avoid bad publicity for the firm, then it is acceptable; by itself, CSR does not constitute "good" news. And a similar story seems to hold for consumers' response to CSR. By and large, the market demand for socially responsive products has remained small. Furthermore, the current surge in the market for organics arguably reflects consumers' private interests in their own health, rather than their willingness to pay more to save the environment.
The debate about corporate social responsibility boils down to two questions: under what conditions will firms adopt CSR policies, and under what conditions will CSR policies enhance firms' social/environmental and financial performance? The debates on these issues have been particular intense in the context of corporate environmentalism—adoption of policies that are beyond firms' legal requirements with the explicit purpose of generating social externalities. For those favoring corporate environmentalism, the key challenge is to persuade firms to adopt such policies given that firms often cannot monetize and internalize the economic benefits of doing so, and have to incur non-trivial costs. Thus, while CSR might enhance firms' social/environmental performance and generate (non-tangible) goodwill benefits, these benefits might not be captured in the traditional measures of financial performance, at least not in the short run.
It is fair to say the assumption in the policy literature has been that firms will be reluctant to incur private costs to create positive social externalities, such as a cleaner environment. To persuade them to do so, coercion is required. Because governments are specialists in the production of coercion, they are perhaps in the best position to supply such policies. Thus emerged the rationale for the command and control approach to environmental governance. The idea is that...