Corporate Social Responsible Theories

3.1. Corporate Social Responsible Theories

Environmental responsibility as a part of corporate social responsibility as far had been explained by using four theories. In the Oxford Handbook of Corporate Social Responsibility, Mele (2008) explained the evolution of the theory methodically; thus, this sub chapter is in debt by his works. 

3.1.1. Corporate Social Performance Theory

Mele (2008) explains that Archie B. Carroll was the first scholar who suggests the theory of corporate social performance. Carroll argued   the existence of social responsibility and the attitude of business responses to social concerns. Sociologically, company is responsible for the social problems caused by the activities or operations of the company. Thus, company has to enact the policies and principles as responds of the social requirements. Carroll (1979) proposed a ‘Pyramid of Corporate Social Responsibility” that consists of four categories: economic, legal, ethical, and philanthropy. 

During the time, supports of this theory appear and even expand the original theory. Warwick and Cochran (1985) believed that a company engages in a social contract and moral agency. Hence, economic responsibility is one of the elements of social responsibilities. Engaging in environmental responsibility, companies will be measured by how the company assembles philosophical orientation, institutional orientation, and organizational orientation. Furthermore, another noteworthy contribution related to the theory was proposed by Wood (1991), He describes three level analysis of social responsibilities into three institutional, organizational, and individual. His framework influences most scholars to follow and becomes a most widely used framework in corporate social performance theory (Mele, 2008).

However, Mele (2008) noted the advantages and disadvantages of the corporate social performance theory. He mentioned that the coherency of the theory’s structure promotes further studies to take advantages for examining the business and society relationship. On the other hand, the disadvantages are lies on the tranquilly ambivalent in the implementation process might exist; therefore, scholars mostly combine this theory with the stakeholder perspective to reduce the ambiguity (Mele, 2008). The second disadvantage is lack of ethnics-normative aspects and business activities in this theory. As cited from Freeman and Liedtka, Mele (2008) argued that corporate social performance seems to propose capitalism with separation of economics and ethics.

3.1.2. Shareholder Theory

Stakeholder concept is emphasized by Brummer (1991), justifying the theory from the perspective of descriptive, instrumental, and normative justifications. The main question is “Why would anyone accept the stakeholder theory over alternative conceptions of the corporation?” The conceptual model assume that corporations whose managers adopt stakeholder principles and practices will perform better financially than those that do not, summarizing in four central theses. The instrumental approach is essentially hypothetical; it says, in effect, "If you want to achieve (avoid) results X, Y, or Z, then adopt (don't adopt) principles and practices A, B, or C. The normative approach, in contrast, is not hypothetical but categorical; it says, in effect, "Do (Don't do) this because it is the right (wrong) thing to do. Corporations practicing stakeholder management will, equal to relatively successful in conventional performance terms like profitability, stability, growth, etc. The tradition of classic stakeholder theory appeared by Dodd (1932), has been develop to concept of corporate social responsibility by Friedman's (1970). The argument is based on the neoclassical economic theory that believes a company can do activities as long as it is tranquil with the laws or the activities able to contribute to shareholders maximization. It is believed that shareholder theory supports the advantages of economic wealth creation. Profits set by the shareholders approach allows the company to performing the innovations, cutting cost, producing products with higher economic added value, investing on projects, and the last, maintaining the company’s competitiveness of the market. The stakeholder theory is also managerial, main arguments is not only to resolve the problem of identifying the property objective of corporations but also to considers economics and ethics issues where companies take social responsibilities.

Some future research questions:

•        What is the relationship between stakeholder management models and firm financial performance?

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3.1.3. Stakeholder Theory

The second approach is the stakeholder theory, which considers the presence and the influence of stakeholders who have claims on the company (Mele, 2008). Mele (2008) also mentioned thart stakeholders can be defines as individuals or groups that obtain benefits from or are harmed by corporate actions. In the previous section, the shareholder theory urges managers for prioritizing profits maximization for the shareholders, however, in the stakeholder theory, the value creation is aims to a wider range of stakeholders. Jones (1995) explained the Freeman’s model in 1984 as the most important postulation of the stakeholder approach. This model considers some issues: 1) what are managers do to maintain relationships with stakeholders, 2) what are the consequences if managers maintain the stakeholder management principles, and 3) what managers should do when dealing with the stakeholders. This theory clearly suggests that companies have responsibilities to all the parties influenced by positive or negative business activity; that is called as a responsibility to the stakeholders of the firms (Mele, 2008). 

Mele (2008) revealed the strength and weakness of stakeholder theory. The main advantage is the consideration to respect human rights and environmental responsibility. The idea is to adopt social responsible concept as a management strategy to achieve various goals, not only profits orientation. However, some arguments oppose the theory by stress the idea of this theory is a suggestion of socialism perspective applied in the business. Another critique is the need for balancing all the stakeholders’ interest make corporate objective becomes unspecific. The reason is once stakeholder theory is applied, stakeholder management would contradict with the shareholder oriented, in the sense of value creation is a pro-shareholders goal, not for stakeholders. As a result, Mele (2008) suggests that the need of scholars to improve the normative stakeholder theory. However, the stakeholder theory contributes to explain the business-society relationship.

3.1.4. Corporate Citizenship

Another theory related to the social responsibility is pointed out by Mele (2008). Even though, he argues that this theory, called the corporate citizenship was a different concept of social responsibility, current studies believed that both terms are similar. Mele (2008) argued that corporate citizenship is more innovative than social responsibility. As business becomes an essential part of the society and social responsibility is more referring to social actions, the terminology of ‘citizenship’ used subject to an individual who has duties and rights. Therefore, as a citizen, a company has rights, responsibilities, and partnerships with societal groups and institutions. Mele (2008) argued that corporate citizenship is to understand how business should act to respect the stakeholders. A Company is not considered having a social responsible unless its behavior falls in a certain way according to the law. In the other words, a good corporate citizen would behave to its stakeholder for some reasons. 

The theory of corporate citizenship also has advantages and disadvantages. Mele (2008) explained several strengths of this theory. The first advantage is the concept of ‘business ethics’ and ‘social

responsibilities’ in the contrary with the business for profits. Consequently, corporate citizenship is more appropriate to refer the ability of companies to develop a relationship with other member of society. Second advantage is the ability of the theory to answer that the social responsible action would lessen profits. Based on this theory, the managers able to  pursue for profits without disrespecting human rights and undervaluing social purpose. Third is that the citizenship theory similar with the social philanthropy. On the other hand, criticism of the theory is because of measurement of the effectiveness is difficult to measured because of it contains various interpretations and topics.

3.1.5. Institutional and Legitimacy Theories

Another theories which also important, but were not explained by Mele, are mentioned by Cortez (2011); the legitimacy theory and institutional theory. Campbell (2007) suggests the institutional theory to explain the institutional system behavior in social responsibility. This theory argues that institutional conditions, such as state regulations, are getting more powerful;  therefore, they tend to force the company to behave more responsible. Then, the conditions create a set of institutions, either politic or eonomic, where the companies exist and operate their businesses. 

Legitimacy theory aims to explain the idea of a company contract with the society. As companies agree to perform various social

responsibility actions in return for the approval of the operation, they need to disclose any social information sufficiently. Therefore, the information used by the society to assess whether the companies has a good corporate citizenship or not, and to legitimize further existence (Guthrie and Parker, 1989). Other scholars applied the legitimacy theory to analyze the phenomenon of corporate social reporting and also the rational background of the actions (Cortez, 2011).