The Origins of Corporate Social Responsibility

Eric C. Chaffee is a professor of law at The University of Toledo College of Law. This post is based on Professor Chaffee’s recent article, forthcoming in the University of Cincinnati Law Review, that was presented as part of symposium hosted on Corporate Social Responsibility and the Modern Enterprise.

The area of corporate social responsibility is awash in rhetoric. Although most corporate managers and business advisors agree that engaging in socially responsible behavior is the correct thing for businesses to do, few can articulate a strong analytical foundation for this belief. The fact that engaging in this type of behavior may help to make corporations more profitable offers a partial reason for undertaking such behavior. However, profit-seeking fails to explain if or why corporations should engage in socially responsible behavior in circumstances in which no financial benefit to the corporation exists or the financial consequences are uncertain. The reason for this confusion over the metes and bounds of the obligation to engage in socially responsible behavior is that the essential nature of the corporate form is not well understood. Once the nature of the corporation comes into focus, the extent of the obligation to engage in socially responsible behavior becomes apparent as well.

From the existing literature three prevailing essentialist theories of the corporation have emerged. First, the artificial entity theory, or concession theory as it is sometimes known, suggests that corporations are artificial entities that owe their existence completely to the government. Second, the real entity theory, which is also referred to as the natural entity theory, provides that each corporation has an identity and existence that is separate and independent from the state and the individuals who organize, operate, and own it. Third, the aggregate theory, which is also known as the nexus of contracts theory, suggests that corporations are merely collections of individuals tied together through the intersection of various obligations.

Although each of these prevailing theories of the corporation has some validity, none of these theories offers a complete description of what a corporation is. The artificial entity theory understates the role of individuals in organizing, operating, and owning the corporation by arguing that corporations exist based upon the will of the state alone. This theory also underplays the identity of the corporation as a collective of individuals and the state acting together. The real entity theory underemphasizes the role of the state and individuals in organizing, operating, and owning the corporation by focusing on the corporation as a distinct entity. Finally, the aggregate theory underplays the role of the state in the creation of the corporation by focusing on the individuals who organize, operate, and own the corporation and the relationships among them. Beyond that, each prevailing theory of the corporation focuses on how the corporation exists without getting at why the corporation exists. The question of why a corporation exists should be part of formulating any essentialist theory of the corporation because the development of corporations is well-documented, and because understanding why corporations exist goes to their essential nature.

As a result, this article and my other works introduce a new theory of the firm, collaboration theory. This theory views the corporation as a collaborative effort among a state government and those individuals organizing, operating, and owning the business entity to pursue economic development and economic gain. Collaboration theory not only explains how corporations exists, i.e., as a common effort between or among multiple entities, but it also explains why corporations exist, i.e., to pursue economic development and economic gain. This theory of the corporation provides a better description of the corporate form because it fully entails what corporations are.

In regard to corporate social responsibility, under collaboration theory, corporations are obligated to seek profits based on the deal struck among the state and individuals owning, operating, and organizing the corporation, but the co-adventurers in the corporation are obligated to treat each other in good faith whenever possible. This means beyond engaging in socially responsible behavior when it supports profit maximization, those organizing, operating, and owning corporations should engage in such behavior in two additional circumstances to fulfill their implied duty of good faith. First, in instances in which the socially responsible behavior neither financially benefits nor financially harms the corporation, which means it is cost neutral, the corporation should engage in socially responsible behavior to fulfill the implied duty of good faith within the collaboration. Second, in instances in which the financial benefit to the business entity is uncertain, the corporation should engage in socially responsible behavior to fulfill the implied duty of good faith within the collaboration. Because the future is often uncertain, this means that in many instances corporations should engage in the socially responsible course of action.

Of course, this does mean that corporations should engage in socially irresponsible ways when the financial benefit to the corporation is clear and the activity is legally permissible. Because of the uncertainty of life, this is only going to be the rarest of circumstances. The collaboration with the state is based upon the notion that those organizing, operating, and owning the corporation can and should pursue economic development and economic gain, even if at times it involves bad behavior. In these rare circumstances, to control bad behavior on the part of corporations, the government must engage in affirmative lawmaking and regulation to alter the cost-benefit analysis to force corporations to be ethical.

The complete article is available for download here.

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