ABSTRACT
Corporate social responsibility (CSR) involves a set of practices that aim to improve the social and environmental regulatory standards of the markets in which the subscribing corporations operate (Paul and Siegel 2006). According to this definition, a socially responsible firm should be interested not simply in maximizing shareholders’ wealth, but also in the social and environmental consequences of its actions. When CSR is actually practised-and not merely proclaimed-it should shift corporate goals from the maximization of shareholders’ value to the satisfaction of the broader needs of such stakeholders as workers, customers, subcontractors, and local communities. This expanded focus has potential practical consequences since the goals of firms that aim solely to maximize profits can conflict with the subordinated interests of stakeholders. One relevant example of this is the conflict between shareholders and consumers. In many industries in which sellers have superior information about the characteristics of products and consumers cannot verify this quality in the short run, profit-maximizing firms may be tempted to reduce quality at the expense of consumers. Strangely enough, the topic of CSR was generally ignored by economists until the late 1990s. The reason for this neglect probably lies in the ‘tombstone’ argument that many economists uncritically share: in an ideal world, benevolent institutions devise proper regulation and fiscal instruments to correct for the divergence between the individual and social welfare generated by negative externalities and the insufficient provision of public goods. In such a world, any departure by corporate managers from their task of maximizing shareholders’ wealth is considered a betrayal of their mandate (Friedman 1962). This recurring argument has been clearly expressed by the Economist (2005: 11): ‘The goal of a well-run company may be to make profits for its shareholders, but merely in doing that-provided it faces competition in its markets, behaves honestly and obeys the law-the company, without even trying, is doing good works.’ An additional argument against CSR is that managers may generate cash flow waste in a context of asymmetric information, given the undeniably greater difficulty in measuring the outcome of a complex multi-stakeholder target such as CSR in comparison to the simpler mono-dimensional goal of profit maximization (Jensen 1986).
