Development of basic stakeholder relations

Another way to consider the social responsibilities of business is to examine those affected by business decisions, namely, the stakeholders (Jones 1980). Stakeholder theory shows stakeholders as basically internal and external (Mitchell et al. 1997). Clarkson (1994) defined stakeholders as voluntary or involuntary risk-bearers. According to Freeman (1984) ‗stakeholders‘ are ‗any group or individual who can affect or is affected by the achievement of the organisation‘s objectives‘ (p. 46). Further, he argued that stakeholders are ―groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions‖ (Freeman 1998, p. 174). He went on to note that the decision-makers in companies (managers) should consider the shareholders as well as the stakeholders who are affected by business decisions (1998). In addition to shareholders, stakeholders include creditors, employees, customers, suppliers and communities at large. In contrast to the classical view, the stakeholder view holds that ―the goal of any company is or should be the flourishing of the company and all its principal stakeholders‖ (Werhane and Freeman 1999, p. 7). Mitchell et al. (1997) described stakeholders as ―primary and secondary stakeholders; as owners and non-owners of the firm; as owners of capital or owners of less tangible assets; as actors or those acted upon; as those existing in a voluntary or an involuntary relationship with the firm; as rights-holders, contractors, or moral claimants; as resource providers to or dependents of the firm; as risk-takers or influences; and as legal principals to whom agent-managers bear a fiduciary duty‖(p.854). On the other hand, Clarkson (1994) believes that "Voluntary stakeholders bear some form of risk as a result of having invested some form of capital, human or financial, something of value, in a

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firm. Involuntary stakeholders are placed at risk as a result of a firm's activities. But without the element of risk there is no stake" (p. 5).

Branco and Rodrigues (2007) pointed out that ‗stakeholder theory, asserts that companies have a social responsibility that requires them to consider the interests of all parties affected by their actions‘ (http://ejbo.jyu.fi/pdf/ejbo_vol12_no1_pages_5- 15.pdf). In addition, Hay and Gray (1977) described the early twentieth century CSR developed as a form of trusteeship, whereby the corporation recognised that multiple groups such as employees, customers, stockholders and creditors held competing claims. A corporate manager became a trustee for more than just the owner‘s concerns when making decisions for the corporation. Diffusion of corporate ownership through stock contributed to this situation, as no single owner or even small group of owners controlled the corporation. Multiple stakeholders, such as unions and government had an impact on corporations and influenced the corporation to address demands of multiple groups. This was partly influenced by the Christian notion of brotherhood in society.

In the 1960s and 1970s, US organisations were concerned about consumer and environmental protection activities. This led to a period of increasing efforts to regulate corporate activity. Prior to this, organisations had listened only to their shareholders‘ views and ignored any criticism of their corporate activities—that is, the organisations attended only to shareholders‘ responsibilities. However, this changed in the 1960s, which was a period of enlightenment for many stakeholders, especially consumers, when people began to consider the quality of products, human rights and natural resources; thus, they argued with organisations about their rights (Andriof 2002). In 1970s, US corporations as a business form of organisation developed rapidly, taken a commercial viewpoint that spelled out CSR duties and responsibilities of the top management to their shareholders.

Kuhn and Shriver (1991) examined some managerial metaphors in their book Beyond success, pointing out that in early 1900s CSR came to the organisation from outside the corporation in the form of employees‘ unions. They stated that managers and courts considered these unions third party outsiders that endangered corporate property. However, employees are now viewed as the internal voices of the corporation. Unions

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use rational efforts and the withdrawal of employees to criticise and change corporate policy. Therefore, even in its earliest form, CSR had the dual character of originating both from inside and outside the corporation.

Freeman (1984) stated that there are many stakeholders whose needs are ignored. However, Clarkson (1995) put forward that stakeholders can categorised as primary and secondary. The primary stakeholders are the internal stakeholder of the firms such as employees, customers, and stockholders. On the other hand, the secondary stakeholders are the external stakeholders of the company such as people in society, encouragement groups, religious organizations, and other non-governmental organizations (Clarkson, 1995).

Eesley and Lenox (2006) provide further explanations about secondary stakeholders. In their view, stakeholders cannot be ignored by the firms because they are looking at the company from the outside. Also, ―these stakeholder actions may have important consequences for a firm‘s reputation and its subsequent ability to attract customers and employees and appease regulators and shareholders‖ (p.765).

According to Wood (2008, cited in Agel et al. 2008) ―business and society research and theory—including stakeholder theorizing—has typically been focused on community, nurturance, opportunities, and avoiding harms; its finest articulations emphasize human rights, dignity, and justice, and the need for corporations to contribute to such desirable outcomes‖(p.161). Wood suggested that firms should realise their responsibilities, avoid stakeholder harm and contribute to social responsibility that should be beyond the law and economic mission. Wood (2008, cited in Agel 2008) also challenged the neoclassical models of business. She offers valuable insights around the relationship between CSR and stakeholder theory, both concepts being used to point to the need for social control to encourage the beneficial effects of stakeholder theory.

Ethics and strategic management are the main discussion in stakeholder theory. Noland and Phillips (2010) stated ―two important aspects of stakeholder theory. The first distinguishes between moral and strategic action and is called Habermasian. They explained that strategic actions pursue the individual and business ends whereas moral actions show good understanding through the communication. Secondly ‗strategists‘,

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deny the viability of the Habermasian distinction and the insistence of ethics and strategy necessarily constituting each other‖ (cited in Lindgreen and Swaen, 2010, p.4).

Moreover, Lindgreen and Swaen, (2010) conclude that ―Noland and Phillips generally prefer the Habermasian emphasis on legitimate, good-faith communication with stakeholders and recognition of the implications of power imbalances; they argue that distinguishing between moral and strategic action tends to undermine rather than enhance arguments for the just engagement of stakeholders‖ (p.4).

In the present study the researcher attempted to identify a CSR model including stakeholder relations. Theoretically, Mitchell et al.‘s (1997) stakeholder identification and salience framework is one of the few theoretical models to provide guidance to the conditions under which firms are likely to positively respond to the requests of secondary stakeholders. According to this framework, three attributes of stakeholders determine salience to managers. The three attributes deemed most important by Mitchell and colleagues are stakeholder power, legitimacy, and urgency. The greater the power, legitimacy, and urgency of the stakeholder group, the greater the stakeholder group‘s saliency will be in the eyes of managers. The appraisal of stakeholder and CSR theory might include a more holistic and dynamic perspective on the centrality of stakeholder theory to that of CSR, particularly as it claims that stakeholder approach is central to its methodology

 Economic relations

Some argue that CSR began with economics. According to Branco and Rodrigues (2007), ‗the classical view of CSR, based on neoclassical economic theory, defines it in purely economic profit making terms, focusing on the profit of the shareholders‘ (http:/ejbo.jyu.fi/pdf/ejbo). For example, Adam Smith, an eighteenth-century Scottish moral philosopher and pioneer of political economics, wrote An inquiry into the nature and causes of the wealth of nations in 1776. In this book, he claimed that the needs and desires of society could best be met by the free interaction of individuals and organisations in the marketplace, but he did not address CSR (Smith 1986). This concept developed, and by the mid-1900s it had become generalised throughout the business world (Mohammed 2007).

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Friedman (1984), an American economist, wrote a famous article in 1970 ‗The social responsibility of business is to increase its profits’ in the New York Times Magazine. In this article, he claimed that ‗the one and only social responsibility of business, is to increase profits for shareholders‘. By this time, the concept of CSR had been completely subverted to this economic notion (Carroll 1979). Friedman (1970) and Smith (1776) laid the foundations for business responsibility. At this time, consideration was given to the actions taken by organisations and not by their individual leaders (Pohle and Hittner 2008).

The accepted example of economic development in CSR is Friedman; in 1970 he presented his view of CSR as the management‘s fundamental goal is to increase value for its shareholders. However, shareholders thought the concept was a cost concept in the short term but the benefits go to both the company and wider society in the long- term (Friedman 1970; Young and O‘Byrne 2000). Under these circumstances, investors do not like to continue CSR, because the organisation makes losses in the short term (Bilson 2010). As a result, this has affected managers‘ view of maximise profits while theoretically being socially responsible.

Johnson (1971) defined CSR as relating to the economic perspective of profit maximisation. Accordingly, social responsibility states that ―businesses carry out social programs to add profits to their organisation‖ (Johnson 1971, p. 54). Agreeing with Johnson, Visser (2006) pointed out that the first responsibility of developing countries was economic. This was based on Carroll‘s (1979) four-part pyramid of CSR responsibilities. Visser (2006) further revealed that the positions of Carroll‘s three other responsibilities—legal, ethical and discretionary—are changed in his pyramid but economic responsibility is still in the same place in CSR.

The economic perspective of CSR progressed in the 1980s, approaching CSR studies by identifying the relationship between CSR and CP (Aupperle et al. 1985; Cochran and Wood 1985). These studies have shown that a company‘s profit might be increased or decreased when they implement CSR (Cochran and Wood 1985; Ruf et al. 2001; Stanwick & Stanwick 1998). Researchers have pointed out how the economic responsibilities translate into discretionary responsibilities. Carroll‘s conceptualisation

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is the best presentation for this claim (Carroll, 1991, 1994, 1998; Pinkston and Carroll, 1994).

In addition, some researchers have made claims about CSR-economic relations, providing opposing points. Wood (2010) considered Carroll‘s argument for measuring his CSR principles and responsiveness process. Again, this idea was reinforced by scholars that managers make philanthropic activities to measure CSR performance (Jamali and Mirshak, 2010). Also, Vogel (2005) stated that the direction of CSR research is moving, arguing that if Friedman were to revisit the subject today, ‗he would find much less to concern him‘ (Vogel 2005).

 Social relations

Adam Smith (1790-1796) completed two major works—The Theory of Moral Sentiments and The Wealth of Nations, as mentioned earlier. Smith‘s analysis of the evolution of liberal market systems, positive law and civic ethics is not segmented among these presentations. Smith envisioned these dimensions of humankind as a simultaneous system within which progress along any one dimension requires complementary progress in the other two (Evensky, 2005, chapters 3 and 4).

TheTheory of Moral Sentiments, suggested that business should conduct itself ethically. Firms have a broader sense of responsibility them merely to owners of capital. During the 1920s, American companies started reaching out to the community and facilitating benefits to their employees. In the 1930s, organisations established some activities of benefit to their employees such as pension plans, employee stock ownership, life insurance schemes, unemployment funds, limitations on hours and high wages. Further, those organisations started to build houses, churches, schools, and libraries; provide medical facilities and consulting services for legal affairs; and donate to their communities (Mitchell 1989, cited in Mohammed 2007). These activities are described in US organisations as philanthropic.

In 1975, Preston and Post devised a more suitable term for social responsibility- ‗public responsibility‘, as it stresses ‗the importance of the public policy process, rather than individual opinion and conscience, as the source of goals and appraisal criteria‘ (p. 102).

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They stated that the scope of managerial public responsibility is limited under the CSR concept. However, their view is not thoroughly recognised in CSR literature, because it has unlimited scope. Preston and Post‘s (1975) argument that public responsibility should be more developed because of the CSR is unclear according to Jones (1980). Furthermore, Preston and Post (1975) failed to address all the issues related to CSR. During the same period, Fitch (1976) suggested that CSR attempted to solve the social problems caused wholly or partly by the organisation (p. 38). According to this problem-solving perspective, initially the social problems of the organisation need to be determined then systematically ordered to ascertain which should be addressed first. problems and deciding on the problem solving process.

On this social theme, Carroll (1979) suggested that ethical and discretionary responsibilities are social responsibilities, contending that these two responsibilities extend beyond obedience to the law: ethical responsibility means ‗the kinds of behaviours and ethical norms that society expects business to follow. These extend to behaviours and practices that are beyond what is required by the law‘ (Carroll 1979, p.500). However, he explained that the organisations accept these ethical and discretionary responsibilities on a voluntary basis. The specific activities are decided by the organisation according to the ethical sense in its‘ business strategies. Carroll‘s (1991) examples of voluntary activities included ‗philanthropic contributions, conducting in house programs for drug abusers, training the hard-core unemployed, facilitating day care centres for the employees children, in-house program for drug users [and] training the hard-core unemployed‘ (p. 284).