With operations scattered around the globe, the modern corporation is a
different animal from its predecessors. Yet the notion of corporate social
responsibility (CSR) has not changed much over the years. As a result, just as
stakeholders are holding corporations more responsible for their actions,
corporations understand their responsibilities to stakeholders even less. To
resolve this paradox, firms must update their CSR practices. The authors predict
that the European Union will set the tone for product and environmental
regulations, the United States will lead on governance guidelines, and
international NGOs will drive human rights and labor laws.
In Early 2007, thousands of cats and dogs in North America fell ill with
kidney ailments. Many of the pets had dined chez Menu Foods Inc., a company in
Ontario, Canada, that manufactures pet foods for more than 100 brands, including
Procter & Gamble, Iams, Colgate-Palmolive's Science Diet, and Wal-Mart's Ol'
Roy. By mid-April, investigators had traced the animals' illnesses to melamine,
an industrial chemical that tainted a few of Menu Foods' raw ingredients. They
then followed the thread to two suppliers in China, which had spiked the
ingredients to cut costs and boost profits.
So where should the public point its finger? Procter & Gamble,
Colgate-Palmolive, Wal-Mart, and the many other corporations that own the pet
food brands? Menu Foods, which mixed the kibble? The Chinese manufacturers,
which adulterated the ingredients? The U.S. Food and Drug Administration, which
failed to detect anything amiss? The stores that didn't remove the foods from
the shelves, even after Menu Foods recalled them?
Traditional notions of corporate social responsibility say that companies are
beholden to the communities in which they are located. But globalization has
made it difficult to discern exactly which communities to include. With
far-flung value chains, decentralized governance, and churning employees,
multinational corporations have become what British journalist Martin Wolf calls
Before it went private in 2006, for example, Tommy Hilfiger had its corporate
headquarters in Hong Kong, its legal incorporation in the British Virgin
Islands, its shares on the New York Stock Exchange, its annual meeting in
Bermuda, and most of its manufacturing in Mexico and Asia.1 Likewise,
Royal Caribbean International has its headquarters in Miami; registers its ships
in the Bahamas, Malta, and Ecuador; and is legally incorporated in Liberia,
where it is subject to neither Liberian nor U.S. income taxes. The Liberian
corporate registry, in turn, is a business housed in a nondescript office park
near Washington Dulles International Airport in suburban Virginia.
What does Tommy Hilfiger owe to Hong Kong, Bermuda, New York, and Mexico –
not to mention to the countless malls where its goods are sold? What are Royal
Caribbean's responsibilities to Liberia, which few of its executives could
locate on a map?
Although firms have changed drastically with globalization, their
understandings of corporate social responsibility have not kept pace. This
presents corporations with a paradox: At a time when more stakeholders than ever
are calling them to account, firms have but a foggy notion of what, exactly,
their obligations are.
We propose an updated notion of corporate social responsibility – global
corporate social responsibility – that reflects the fact that people hold
firms responsible for actions far beyond their boundaries, including the actions
of suppliers, distributors, alliance partners, and even sovereign nations. Our
research suggests that the standards for global CSR will be just as
international as corporations themselves: the European Union will set the tone
for product and environmental standards, the United States will largely shape
governance guidelines, and international nongovernmental organizations (NGOs)
will drive human rights and labor rules.
The Firm Evolves
The multinational corporation of the 21st century bears little resemblance to
its forebears. In the 1950s and 1960s, U.S.- based corporations aimed for
continuous growth in revenues and employment, which they often brought about
through mergers and acquisitions. Employees of large American firms viewed their
jobs as lifetime commitments, with regular raises and generous benefits upon
retirement. Most large corporations had widely dispersed ownership, and so
shareholders – mostly individuals – were relatively powerless.
By the early 1980s, however, two sets of changes eroded the sharp separation
of corporate ownership and control that had characterized American-style
capitalism for at least half a century. First, individuals began putting their
savings into mutual funds rather than into savings accounts. Consequently,
institutional investors began replacing individual investors as the direct
owners of the nation's largest public companies. As institutional investors
increased their ownership of corporate America, they exercised their new power
by wringing better performance from companies – particularly the poorly
performing manufacturing behemoths that had been assembled over the previous two
Second, the Reagan administration relaxed its antitrust standards, and
several court decisions facilitated hostile takeovers. As a result, a wave of
buyouts and takeovers dissolved many of the conglomerates that had started the
decade.2To cut costs, corporations focused on a narrower range of
activities, outsourcing and off-shoring many of their processes. And it wasn't
only the rank-and-file employees who saw their jobs go to temporary employees
and contract business services: Executives also received pink slips when their
companies' earnings disappointed or stock prices sagged.3
Meanwhile, globalization, international economic deregulation, and new
information and communications technologies intensified competition between
corporations. American firms watched their profit margins decline decade by
decade from the 1950s to the 1990s. To cut costs and increase profits,
corporations amped up their outsourcing and downsizing throughout the '90s,
aided by technological advances. Firms like General Motors and Ford, which once
viewed their vertical integration as a source of strength, spun off new
companies to manufacture their parts and components, thereby unburdening
themselves of costly union labor. Following a model pioneered by Nike, companies
like Sara Lee sold off nearly all their manufacturing plants and became, in
essence, "virtual" manufacturers, taking charge of design, marketing, and
distribution but outsourcing the actual manufacturing to suppliers. Indeed, by
the turn of the century, a number of large "manufacturing" firms were in fact
manufacturing nothing at all.
At the same time, the actual manufacturers began handling production for many
different companies. Ingram Micro, for instance, assembled personal computers
for four of the five largest PC manufacturers on the same assembly lines in the
1990s. And the Canadian factory responsible for the tainted pet food of summer
2007 was cooking kibble for more than 100 brands.
Well into the 21st century, corporations continue adding more links to their
supply chains, stretching ever farther across the globe for cheaper materials
and labor. Consequently, consumers can no longer unambiguously define a car as
"American" or a tool as "Japanese" when their raw materials, production, and
assembly often take place in several different countries. Indeed, by 2003,
nearly half of the United States' total imports reflected transactions between
different parts of a single firm rather than arm's-length sales to final
consumers, according to the A.T. Kearney/Foreign Policy Globalization Index.
Corporations Take Responsibility
This blurring of corporations' institutional and national boundaries has
complicated the question of what their responsibilities are. Is the corporation
simply a nexus of contracts, with "no soul to damn, no body to kick," as Baron
Thurlow, lord chancellor of England in the late 18th century, is quoted as
saying, 4 and therefore responsible only to its shareholders? Or is
the modern multinational corporation, with its global reach in both production
and sales, a social being with responsibilities to all its stakeholders –
employees, customers, shareholders, creditors, suppliers, communities, even
society as a whole? And if so, what are the scope and limits of these
History has favored the latter interpretation. Corporate social
responsibility – meaning the voluntary actions a corporation takes to improve
the lot of its various stakeholders – is a relatively recent term. But firms
have practiced CSR almost from the beginning of the industrial revolution. In
the late 18th century, for example, factory owners had to provide both physical
and social infrastructure – everything from roads, canals, and housing to worker
education and health care – to support large-scale manufacturing.
Well into the late 19th century, owners still provided housing and community
services, both out of beneficence and out of the desire to control and
discipline their workers. As noted by one observer of Pullman, Ill., the company
town created for workers who manufactured Pullman railroad cars: "It is
benevolent, well-wishing feudalism, which desires the happiness of the people,
but in such way as shall please the authorities."5 (In 1894,
"pleasing the authorities" apparently fell out of favor when Pullman became the
site of one of the most brutal labor disputes in U.S. history.) Company towns
still feature prominently in some developing economies. For example, the Tata
conglomerate in India continues to operate the town of Jamshedpur on behalf of
its steel manufacturing facility.
The great fortunes created in the late 19th and early 20th centuries inspired
CSR that went beyond the communities where corporations were located. Andrew
Carnegie, for instance, funded public libraries across the country, far from the
origins of his steel fortune. Carnegie also started TIAA, which became the major
vehicle for academic faculty pension support in the United States.
By the early part of the 20th century, corporate-sponsored welfare capitalism
provided employees with health care, pensions, and many other services Europeans
would increasingly consider to be the province of the state. During the
post-World War II era, however, Americans began to debate how much
responsibility corporations should assume beyond their own boundaries. On the
one hand, as the Michigan Supreme Court's decision in Dodge v. Ford Motor
Company in 1919 plainly stated, corporations could not justify expenditures
for anything other than improving profits: "A business corporation is organized
and carried on primarily for the profit of the stockholders. The powers of the
directors are to be employed for that end."
On the other hand, commentators such as economist Carl Kaysen noted that the
modern corporation is "the single strongest social force shaping its career
members," and that it should strive to be "soulful."6 "No longer the
agent of proprietorship seeking to maximize return on investment," Kaysen wrote
of the soulful corporation, "management sees itself as responsible to
stockholders, employees, customers, the general public, and, perhaps most
important, the firm itself as an institution."
The Three Sectors Collide
While corporate executives debated how much social responsibility they should
voluntarily assume, the U.S. federal government – often at the urging of
domestic NGOs – began codifying what had been the corporation's spontaneous
beneficence. Thus the three sectors began their delicate dance over which
obligations corporations must fulfill and which they can ignore. For instance,
the Equal Employment Opportunity Act of 1972, the Occupational Safety and Health
Act of 1970, and the establishment of the Environmental Protection Agency in
1970 aimed to reduce discrimination on the job, to create safer products and
workplaces, and to improve environmental quality.
As production and markets shipped overseas, so too did efforts to hold
corporations accountable for their actions. NGOs went international, and
international lawmaking bodies went into the business of regulating business. In
1977, for example, European NGOs banded together to protest Nestlé's marketing
of infant formula to low-income nations of the global south. The Infant Formula
Action Coalition (INFACT) argued that Nestlé's marketing efforts were unethical:
Mother's milk is more healthful than formula, and consumers often used unclean
or too much water to mix the formula, resulting in disease and malnutrition for
their infants. Nestlé's inaction in response to INFACT prompted the latter to
call for an international boycott of Nestlé. By 1981, the boycott had resulted
in U.S. Senate hearings and the development of a UNICEF/World Health
Organization code that prohibited the advertising, promotion, and provision of
samples of infant formula. The boycott ended in 1984, when Nestlé agreed to
abide by the new code. The Nestlé boycott became a model for subsequent global
In the 1990s, international NGOs and lawmaking bodies began holding
corporations responsible not only for their own behavior, but also for the
behavior of their suppliers. Nike was one of the first corporations to discover
that its legal boundaries no longer set the limits of its responsibilities. In a
highly publicized campaign, a number of NGOs alleged that the apparel giant's
suppliers in Southeast Asia violated labor rights. More recently, several
plaintiff groups have used the Alien Tort Claims Act to sue American firms in
American courts for allegedly helping foreign governments violate human rights.
The case against Unocal in Myanmar was settled out of court, and the case
against ExxonMobil in Nigeria is still in litigation (see "Getting Human Rights
Right" on p. 54 for more on these cases).
To stave off further outside regulation, a growing number of American firms
are attempting to regulate themselves. As early as 1972, when GM published its
first public interest report, corporations began to study and report on their
own practices. By 2005, 52 percent of the Fortune Global 250 firms produced
corporate responsibility reports. And the growing demand for third-party
monitoring has ushered in a long and growing list of monitoring organizations
and processes. Some of these monitoring efforts are partnerships between firms,
NGOs, and, in some cases, governments. Others fall strictly under the control of
one group, often creating mutual antagonism and suspicion.
But figuring out how to deal with the expanding boundaries of corporate
social responsibility remains very much a work in progress. Our research gives
some hints on whence corporations should take their cues. Traditionally,
corporations have followed the standards set by local and national regulators
and stakeholder groups. But successful multinational corporations will soon have
to look beyond national boundaries to discover which standards to follow, and
perhaps to exceed.
Europe Pushes Product Safety
When it comes to product safety and environmental standards, corporations
should look to the European Union for the shape of things to come. With the
recent addition of 10 new members, the European Union's 25 nations together
constitute the world's largest market – surpassing the United States. Non-E.U.
companies that compete in the global marketplace, or hope to do so, must
therefore design and manufacture their products to conform to E.U. requirements.
This is because customizing products to meet different rules and standards in
different countries vastly increases complexity and expense.
Because the European Union's environmental and product safety standards tend
to be the strictest, the race for lowest production costs will ironically spur
the adoption of more responsible processes and products. In the past, firms
often chased the lowest-cost labor forces housed in the most lax regulatory
environments, thus inducing states to provide a docile labor force and to turn a
blind eye to pollution. But the European Union strongly abides by the
precautionary principle, which holds that, in cases where the likelihood of harm
is unknown, rules and standards should err on the side of caution.
The European Union's precautionary principle has not always prevailed in
cases brought before the World Trade Organization. But its success in creating
de facto global law is impressive. As Jeffrey Immelt, CEO of General Electric,
put it: "Europe in many ways is the global regulatory superpower. It can speak
with one voice and a degree of certainty."7
For example, the European Union's 2006 ban on lead, cadmium, and mercury in
electronic products is forcing the electronics industry to eradicate these heavy
metals from their supply chains, affecting thousands of firms around the world.
Similarly, European cradle-to-grave standards, which require producers to
recycle their own products, led U.S.-based Dell to design more easily
disassembled computers. Dell now also offers free computer pickup and recycling
in both the European Union and the United States.
Perhaps the greatest impact of the European Union's precautionary principle
is on farmers, primarily but not exclusively American, who grow genetically
modified crops. The European Union has stringent restrictions on genetically
altered foods. Fearing marketing problems in the European Union, multinational
food processors increasingly refuse to buy genetically modified crops. The
global reach of such decisions is broad: Food-scarce African nations allegedly
avoid planting higher-yield genetically modified seeds because they fear that
they cannot export the resulting crops to E.U. countries.
European pressures also influence the processes involved in international
commerce. For instance, over the past few years, some 200 U.S. companies,
including Microsoft, have signed agreements to abide by E.U. Internet privacy
rules. These rules affect the transfer and use of online data, and thus
virtually every firm that has workers, suppliers, or customers within the
The European Union has also raised environmental standards. When the United
States announced that it would not ratify the Kyoto Protocol in 2002, the
European Union built a consensus among enough countries to ratify the treaty. As
a result, companies are adopting the protocol's standards, even though the
United States did not sign it. In fact, though, most E.U. countries are not
meeting their emissions-reduction benchmarks. This failure has led its critics
to argue that the overall goals set for 2012 are unlikely to be met.
Furthermore, they note that as long as such large, fast-growing countries as
China and India are under no similar obligations, even successful progress
toward the protocol's targets would not prevent a substantial increase in global
CO2 emissions. More generally, critics of the European Union's strict product
standards argue that, in a number of cases, they are unnecessarily costly and
without scientific basis.
The United States Guides Governance
Although product and environmental regulations will reflect European
standards, corporate governance will reflect an American-style orientation to
transparency, consistent profitability, and shareholder protection. When
companies list their shares in the United States, they must meet all the rules
of the market on which they are listed, as well as U.S. securities regulations.
Because the quest for capital and industry dominance is leading global
corporations to list their shares in the United States, American standards have
become international standards for capital markets.
By 2005, all but two of the world's 25 largest corporations were listed on
the New York Stock Exchange (the exceptions are Germany's Volkswagen and
France's Carrefour). Indeed, more foreign firms were listed on U.S. markets than
German firms were listed on the Deutsche Börse. Although anecdotal evidence says
that the Sarbanes-Oxley Act's rigorous demands may have slowed this process, and
may even lead some foreign firms to delist, so far there has been more grumbling
than action, and relatively few firms have defected.
The consequences of not complying with American securities rules and
regulations can be dire. For example, in 2004, the Royal Dutch/Shell Group paid
the U.S. Securities and Exchange Commission (SEC) $120 million in penalties to
settle charges that the firm had inflated its reported oil reserves. And then in
2006, the owner and top executive of Mexico's U.S.-traded TV Azteca paid $7.5
million to settle fraud charges. In both cases, the SEC was far more aggressive
than home-country regulators in its pursuit of fraud charges.
At the same time, foreign funders are pressing other industrialized nations
to pay more attention to governance, accountability, and profitability. By 2000,
for example, Americans owned roughly $1 trillion in European equities.
Institutions such as TIAA-CREF and Fidelity used their new clout to intervene in
matters traditionally left to management. TIAA-CREF, for instance, stepped in to
prevent Telecom Italia's plan to spin off its wireless unit, and Fidelity
publicly opposed the same firm's proposed merger with Olivetti.
In addition, foreign pension funds, mutual funds, and other intermediaries
have begun to emulate the shareholder activism of their American counterparts.
For example, Jang Ha Sung, the dean of the Korea University business school, has
sought to improve the governance of opaque, family-dominated South Korean firms
for more than a decade. His group, People's Solidarity for Participatory
Democracy, convinced SK Telecom to create an independent audit committee and
Samsung Electronics to make its accounting more transparent. Through his current
work with Lazard's $280 million Korea Cor porate Governance Fund, he hopes to
reduce the "Korea discount" – the undervaluation of Korean stocks relative to
those in other Asian nations, which Jang attributes to poor corporate
One result of the global spread of profitability pressures is that the
American boardroom revolution of the 1990s appears to be going global. A study
of the world's 2,500 largest listed companies by the consulting firm Booz Allen
Hamilton revealed that the number of chief executives dismissed worldwide rose
significantly in 2002, increasing from 2.3 percent in 2001 to 3.9 percent in
2002, as compared with only 1 percent in 1995. Board and shareholder impatience
with poor financial performance underlay these dismissals: Companies that
dismissed their CEOs generated 6.2 percentage points lower total shareholder
returns than did companies whose CEOs retired voluntarily.
Shareholder-oriented governance can bring its own issues. The corporate
scandals that inspired Sarbanes-Oxley, and the more recent imbroglios about
stock options at dozens of U.S. companies, show that commitment to shareholder
value can have unintended consequences. Moreover, emphasis on shareholder value
sometimes translates into a short-term orientation that puts companies at odds
with other emerging global standards. This is yet another reason why both firms
and financial analysts should shift their focus toward longer-term viability and
NGOs Head Human Rights
As globalization increases, international and indigenous NGOs are developing
their presences in low-income countries and demanding changes in corporate
policies. These demands can not only disrupt local production, but also sully
the reputations of corporations in their home countries. For example, in the
early 1990s, the Ogoni people of Nigeria began a series of protests against
Shell and Nigerian National Petroleum. Shell's environmental impact on the
Ogoni, coupled with its lack of economic impact, prompted large-scale protests
at Shell facilities in 1993. In response, the Nigerian military destroyed more
than three dozen villages and executed nine Ogoni protest leaders. Global social
movements supported the Ogoni by launching an international boycott and a
shareholder campaign against the oil giant.8
A number of NGOs and freelance activists have also mounted an international
antiglobalization movement. Believing that transnational trade agreements
benefit multinational corporations to the detriment of ordinary working people,
the poor, and the environment, these activists kicked off the antiglobalization
movement in 2000 with their disruptive demonstrations against the World Trade
Organization meeting in Seattle. Since that time, they have regularly protested
other international financial and trade arrangements, including the North
American Free Trade Agreement in 2004. Although these protestors seem united in
a single global justice movement, they are in fact transient teams of activists
from a number of disparate movements. Despite its ragtag origins, the
antiglobalization movement has forced global issues onto both corporate and
public agendas. For example, NGOs have put pressure on a number of multinational
consumer goods producers, beginning with Nike, to take responsibility not only
for their own behavior regarding workers' rights, but also for the behavior of
their globally dispersed suppliers.
To respond to heightened human rights standards, managers and executives must
not only respond in a forthright matter to the complaints of local residents and
NGOs; they must also develop a systematic way of thinking about the possible
impacts of the corporation on local populations. Some corporations have joined
international certifying agencies that measure compliance with voluntary
standards. Others are learning on their own – and sometimes the hard way – how
to mitigate possible damages from their operations.
Regulation Begets Responsibility
What we now call corporate social responsibility evolved out of practices
that companies developed for clear business purposes during industrialization.
Contemporary multinational corporations are vastly different from their
predecessors, and so are the standards that they are expected to meet. For the
future of global CSR, we suggest that corporations look to the European Union
for product safety and environmental standards, to the United States for
corporate governance guidelines, and to international NGOs for human and labor
Critics of the regulation of corporate activities fear that regulation will
ultimately undercut the realization of social goals. For example, T.J. Rodgers,
CEO of Cypress Semiconductor, responded to the Clinton administration's efforts
to induce more corporate good works with an op-ed in The New York Times
(April 29, 1997): "When good works cease to be voluntary and become compulsory,
charity becomes confiscation and freedom becomes servitude. Philanthropy is a
byproduct of wealth, and wealth is best created in free markets whose workings
embody a fundamental and true moral principle long forgotten in Washington."
We disagree with Rodgers. Although the literature on CSR supplies plenty of
anecdotal evidence of corporate altruism – for example, the oft-repeated story
of Merck's development of its river blindness drug (see "Sharing Power" in the
fall 2005 issue of the Stanford Social Innovation Review) – our research
shows that regulation is the surer path to soulful corporate behavior. Using KLD
Research & Analytics' annual ratings of several hundred public corporations,
we find the following patterns: 1) the corporations most engaged with their
communities, particularly through corporate philanthropy, are financial
institutions whose contributions are effectively mandated by the Community
Reinvestment Act of 1977; 2) corporations with the best environmental records,
which include petroleum refining, primary metals, rubber and plastic, and
utilities, are those with the most contact with the Environmental Protection
Agency; and 3) the industries with the best employment practices, which include
metal extraction, airlines, petroleum refining, and transportation, are among
the most heavily unionized.
This suggests that if we want multinationals to exceed standards of
responsible behavior, then we need to understand how and where those standards
are defined. It also means that, in the absence of such standards – regulation
and other forms of organized social pressures – multinationals are unlikely to
adopt best practices. The paradox of responsibility may paralyze them, rather
than move them to action.
CSR has been a contested concept, as many have argued that the responsibility
of the corporation is solely to make a profit. Now and in the future, however,
management that ignores its social responsibilities will always be behind the
The authors thank the Center for Advancing Research and Solutions for
Society at the University of Michigan for supporting this research.
1 Gerald F. Davis and Mayer N. Zald. "Social Change, Social Theory, and the
Convergence of Movements and Organizations." Social Movements and
Organization Theory, Gerald F. Davis, Doug McAdam, W. Richard Scott, and
Mayer N. Zald, eds. (New York: Cambridge University Press, 2005): 335-350. 2
Gerald F. Davis, Kristina A. Diekmann, and Catherine H. Tinsley. "The Decline
and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an
Organizational Form." American Sociological Review 59 (1994): 547-570. 3
Marina v.N. Whitman. New World, New Rules: The Changing Role of the American
Corporation. Boston: Harvard Business School Press, 1999. 4 John C. Coffee
Jr. "No Soul to Damn, No Body to Kick: An Unscandalized Inquiry into the Problem
of Corporate Punishment." Michigan Law Review 79 (1981): 386-459. 5
Richard Ely. "Pullman: A Social Study." Harper's Magazine 70 (1885):
452-466. 6 Carl Kaysen. "The Social Significance of the Modern Corporation."
American Economic Review 47 (1957): 311-319. 7 Marc Gunther. "Cops of the
Global Village." Fortune ( June 27, 2005): 158-162. 8 Andrew Van Alstyne.
"Global Social Movements and Global Corporate Social Responsibility."
Unpublished Sociology Department paper, University of Michigan, 2005.
GERALD F. DAVIS is the Wilbur K. Pierpont Collegiate Professor of
Management at the Ross School of Business and a professor of sociology at the
University of Michigan. His work focuses on corporate governance and the social
impact of financial markets.
MARINA V.N. WHITMAN is a professor of business administration and
public policy at the University of Michigan. Her research focuses on
international trade, investment, and corporate governance. She has also served
as a member of the Council of Economic Advisers, a group vice president of
General Motors, and an independent director of several leading multinational
MAYER N. ZALD is a professor emeritus of sociology, social work, and
management at the University of Michigan. He has written extensively on
organizations and social movements.