Donovan Bank Ltd is a major retail bank that operates in the Republic of Southland, a ?prosperous, developed economy in Europe. Like many other financial insti
Donovan Bank Ltd is a major retail bank that operates in the Republic of Southland, a prosperous, developed economy in Europe. Like many other financial institutions, the bank was adversely affected by the global financial crisis but recovered both quickly and strongly. In the past 10 years the bank has been consistently profitable and has grown at a faster rate than most of its competitors. The bank offers competitive products and adopts an aggressive sales strategy. Managers and staff working in customer facing roles are given demanding sales targets, with generous performance-related rewards comprising annual bonuses based on the value and volume of products sold and linked to the profitability of the bank. Experts working in the capital markets regard investment in the shares of Donovan Bank Ltd very positively. The bank has increased its dividend payments for eight consecutive years and analysts believe that the financial performance of the bank will continue to be robust, especially in the short-term. These factors have driven up the share price, and hence the market capitalisation, of the bank. The financial regulator of the Republic of Southland arranges annual review visits to all major financial institutions in the country. At the most recent review meeting, regulatory officials raised several matters of concern with the board and executives of Donovan Bank. Two years ago, the regulator introduced a set of ‘Putting Customers First’ guidelines to promote positive outcomes for customers. These included a requirement to put the interests of customers at the heart of all banks’ activities, to ensure that products and services meet customer needs, to ensure fair dealings at all stages of the customer journey and to provide appropriate after sales service. The regulator’s concerns included the following: • The number of customer complaints against Donovan Bank were at least 20% higher than any of the banks’ major competitors. The complaints related to lack of transparency in relation to fees and charges, poor administration and delays in responses to routine communications, failure to address errors and obstacles to deter customers from closing accounts and switching to competitors. • The regulator noted that Donovan Bank was often regarded negatively by the financial press, with frequent articles accusing the bank of complacency towards existing customers, as it could rely on securing new customers based on the strengths of the products offered. • The regulators’ statistics showed evidence of a high level of customer attrition, suggesting that the bank was selling products that were not consistent with customer needs. This resulted in some customers closing accounts soon after opening them. It was also suggested that customers were being advised to buy more products than they actually needed, and it was possible that some existing customers would 3 continue to maintain account relationships that were not actually beneficial for them as a result of customer inertia. • Several former managerial employees of the bank had written in confidence to the regulator complaining that they had left to pursue alternative employment because they had felt pressurised to achieve increasingly demanding sales targets. The board of Donovan Bank convened after the annual review meeting to discuss these issues. Several of the non-executive directors who had attended the review meeting were concerned at the findings of the regulator and insisted that it was imperative to change the culture of the bank by moving away from an aggressive, sales-led approach in favour of a more customer-centric approach. The regulator had made it clear that it regarded compliance with its ‘Putting Customers First’ guidelines as mandatory and it would not hesitate to take action if it felt that service standards at any bank were compromised, even if the bank was financially strong. When discussing the best way forward, the board was divided. Some directors argued that as a public company listed on the stock exchange, its primary duty was to its shareholders, and that they bank had exceeded all expectations in recent years. Conversely, the majority of directors concluded that they would have to act to ensure that customers’ interests were served at all times and that urgent change was necessary. Required: As an independent consultant engaged by the board of Donovan Bank Ltd, prepare a report addressing the following: a) The ethical case for aligning the strategy of the bank with customer interests and how these interests may be reconciled with the objective of maximising shareholder value. b) Actions that the board should implement to change the culture of the bank to ensure that customers’ interests are consistently protected and promoted at all times
Carroll, Archie B.
The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, Business Horizons, July-August 1991
For the better part of 30 years now, corporate executives have struggled with the issue
of the firm’s responsibility to its society. Early on it was argued by some that the
corporation's sole responsibility was to provide a maximum financial return to
shareholders. It became quickly apparent to everyone, however, that this pursuit of
financial gain had to rake place within the laws of the land. Though social activist groups
and others throughout the 1960s advocated a broader notion of corporate responsibility,
it was not until the significant social legislation of the early 1970s that this message
became indelibly clear as a result of the creation of the Environmental Protection
Agency (EPA), the Equal Employment Opportunity Commission (EEOC). the
Occupational Safety and Health Administration (OSHA), and the Consumer Product
Safety" Commission (CPSC).
These new governmental bodies established that national public policy now officially
recognized the environment. employees, and consumers to be significant and legitimate
stakeholders of business. From that time on, corporate executives have had to wrestle
with how they balance their commitments to the corporation's owners with their
obligations to an ever-broadening group of stakeholders who claim both legal and
This article will explore the nature of corporate social responsibility (CSR) with an eye
toward understanding its component parts. The intention will be to characterize the
firm's CSR in ways that might be useful to executives who wish to reconcile their
obligations to their shareholders with those to other competing groups claiming
legitimacy. This discussion will be framed by a pyramid of corporate social
responsibility. Next, we plan to relate this concept to the idea of stakeholders. Finally,
our goal will be to isolate the ethical or moral component of CSR and relate it to
perspectives that reflect three major ethical approaches to management—immoral,
amoral, and moral. The principal goal in this final section will be to flesh our what it
means to manage stakeholders in an ethical or moral fashion.
EVOLUTION OF CORPORATE SOCIAL RESPONSIBILITY
What does it mean for a corporation to be socially responsible? Academics and
practitioners have been striving to establish an agreed-upon definition of this concept for
30 years. In 1960, Keith Davis suggested that social responsibility refers to businesses'
"decisions and actions taken for reasons at least partially beyond the firm’s direct
economic or technical interest." At about the same time, Eells and Walton (1961)
argued that CSR refers to the "problems that arise when corporate enterprise casts its
shadow on the social scene, and the ethical principles that ought to govern the
relationship between the corporation and society.”
Figure 1 Economic and Legal Components of Corporate Social Responsibility
Economic Components (Responsibilities)
Legal Components (Responsibilities)
1. It is important to perform in a manner consistent with maximizing earnings per share
1. It is important to perform in a manner consistent with expectations of government and law.
2. It is important to be committed to being as profitable as possible.
2. It is important to comply with various federal, state, and local regulations.
3. It is important to maintain a strong competitive position.
3. It is important to be a law-abiding corporate citizen.
4. It is important to maintain a high level of operating efficiency.
4. It is important that a successful firm be defined as one that fulfills its legal obligations.
5. It is important that a successful firm be defined as one that is consistently profitable.
5. It is important to provide goods and services that at least meet minimal legal requirements.
In 1971 the Committee for Economic Development used a "three concentric circles"
approach to depicting CSR. The inner circle included basic economic functions—
growth, products, jobs. The intermediate circle suggested that the economic functions
must be exercised with a sensitive awareness of changing social values and priorities.
The outer circle outlined newly emerging and still amorphous responsibilities that
business should assume to become more actively involved in improving the social
The attention was shifted from social responsibility to social responsiveness by several
other writers. Their basic argument was that the emphasis on responsibility focused
exclusively on the notion of business obligation and motivation and that action or
performance were being overlooked. The social responsiveness movement, therefore.
emphasized corporate action, proaction, and implementation of a social role. This was
indeed a necessary reorientation.
The question still remained, however, of reconciling the firm’s economic orientation with
its social orientation. A step in this direction was taken when a comprehensive definition
of CSR was set forth. In this view, a four-part conceptualization of CSR included the
idea that the corporation has not only economic and legal obligations, but ethical and
discretionary (philanthropic) responsibilities as well (Carroll 1979). The point here was
that CSR, to be accepted as legitimate, had to address the entire spectrum of
obligations business has to society, including the most fundamental—economic. It is
upon this four-part perspective that our pyramid is based.
In recent years, the term corporate social performance (CSP) has emerged as an
inclusive and global concept to embrace corporate social responsibility, responsiveness,
and the entire spectrum of socially beneficial activities of businesses. The focus on
social performance emphasizes the concern for corporate action and accomplishment in
the social sphere. With a performance perspective, it is clear that firms must formulate
and implement social goals and programs as well as integrate ethical sensitivity into all
decision making, policies, and actions. With a results focus, CSP suggests an all-
encompassing orientation towards normal criteria by which we assess business
performance to include quantity, quality, effectiveness, and efficiency. While we
recognize the vitality of the performance concept, we have chosen to adhere to the CSR
terminology for our present discussion. With just a slight change of focus, however, we
could easily be discussing a CSP rather than a CSR pyramid. In any event, the long-
term concern is what managers do with these ideas in terms of implementation.
THE PYRAMID OF CORPORATE SOCIAL RESPONSIBILITY
For CSR to be accepted by a conscientious business person, it should be framed in
such a way that the entire range of business responsibilities are embraced. It is
suggested here that four kinds of social responsibilities constitute total CSR: economic,
legal, ethical. and philanthropic. Furthermore. these four categories or components of
CSR might be depicted as a pyramid. To be sure. ail of these kinds of responsibilities
have always existed to some extent. but it has only been in recent years that ethical and
philanthropic functions have taken a significant place. Each of these four categories
deserves closer consideration.
Historically. business organizations were created as economic entities designed to
provide goods and services to societal members. The profit motive was established as
the primary incentive for entrepreneurship. Before it was anything else, business
organization was the basic economic unit in our society. As such, its principal role was
to produce goods and services that consumers needed and wanted and to make an
acceptable profit in the process. At some point the idea of the profit motive got
transformed into a notion of maximum profits, and this has been an enduring value ever
since. All other business responsibilities are predicated upon the economic
responsibility of the firm, because without it the others become moot considerations.
Figure 1 summarizes some important statements characterizing economic
responsibilities. Legal responsibilities are also depicted in Figure 1, and we will consider
Society has not only sanctioned business to operate according to the profit motive; at
the same time business is expected to comply with the laws and regulations
promulgated by federal, state, and local governments as the ground rules under which
business must operate. As a partial fulfillment of the "social contract" between business
and society firms are expected to pursue their economic missions within the framework
of the law. Legal responsibilities reflect a view of "codified ethics" in the sense that they
embody basic notions of fair operations as established by our lawmakers. They are
depicted as the next layer on the pyramid to portray their historical development, but
they are appropriately seen as coexisting with economic responsibilities as fundamental
precepts of the free enterprise system.
Figure 2 Ethical and Philanthropic Components of Corporate Social Responsibility
Ethical Components (Responsibilities)
Philanthropic Components (Responsibilities)
1. It is important to perform in a manner consistent with expectations of societal mores and ethical norms.
1. It is important to perform in a manner consistent with the philanthropic and charitable expectations of society.
2. It is important to recognize and respect new or evolving ethical moral norms adopted by society.
2. It is important to assist the fine and performing arts.
3. It is important to prevent ethical norms from being compromised in order to achieve corporate goals.
3. It is important that managers and employees participate in voluntary and charitable activities within their local communities.
4. It is important that good corporate citizenship be defined as doing what is expected morally or ethically.
4. It is important to provide assistance to private and public educational institutions.
5. It is important to recognize that corporate integrity and ethical behavior go beyond mere compliance with laws and regulations.
5. It is important to assist voluntarily those projects that enhance a community’s "quality of life."
Although economic and legal responsibilities embody ethical norms about fairness and
justice, ethical responsibilities embrace those activities and practices that are expected
or prohibited by societal members even though they are not codified into law. Ethical
responsibilities embody those standards, norms, or expectations that reflect a concern
for what consumers, employees, shareholders, and the community regard as fair, just,
or in keeping with the respect or protection of stakeholders' moral rights.
In one sense, changing erl1ics or values pre- cede the establishment of law because
they become the driving force behind the very creation of laws or regulations. For
example, the environmental, civil rights, and consumer movements reflected basic
alterations in societal values and thus may be seen as ethical bellwethers
foreshadowing and resulting in the later legislation. In another sense, ethical
responsibilities may be seen as embracing newly emerging values and norms society
expects business to meet, even though such values and norms may reflect a higher
standard of performance than that currently required by law. Ethical responsibilities in
this sense are often ill-defined or continually under public debate as to their legitimacy,
and thus are frequently difficult for business to deal with.
Superimposed on these ethical expectations emanating from societal groups are the
implied levels of ethical performance suggested by a consideration of the great ethical
principles of moral philosophy. This would include such principles as justice, rights, and
The business ethics movement of the past decade has firmly established an ethical
responsibility as a legitimate CSR component. Though it is depicted as the next layer of
the CSR pyramid, it must be constantly recognized that it is in dynamic interplay with
the legal responsibility category. That is, it is constantly pushing the legal responsibility
category to broaden or expand while at the same time placing ever higher expectations
on businesspersons to operate at levels above that required by law. Figure 2 depicts
statements that help characterize ethical responsibilities. The figure also summarizes
philanthropic responsibilities, discussed next.
Philanthropy encompasses those corporate actions that are in response to society’s
expectation that businesses be good corporate citizens. This includes actively engaging
in acts or programs to promote human welfare or goodwill. Examples of philanthropy
include business contributions to financial resources or executive time, such as
contributions to the arts, education, or the community. A loaned-executive program that
provides leadership for a community’s United Way campaign is one illustration of
The distinguishing feature between philanthropy and ethical responsibilities is that the
former are not expected in an ethical or moral sense. Communities desire firms to
contribute their money, facilities, and employee time to humanitarian programs or
purposes, but they do not regard the firms as unethical if they do not provide the desired
level. Therefore, philanthropy is more discretionary or voluntary on the part of
businesses even though there is always the societal expectation that businesses
One notable reason for making the distinction between philanthropic and ethical
responsibilities is that some firms feel they are being socially responsible if they are just
good citizens in the community. This distinction brings home the vital point that CSR
includes philanthropic contributions but is not limited to them. In fact, it would be argued
here that philanthropy is highly desired and prized but actually less important than the
other three categories of social responsibility, In a sense, philanthropy is icing on the
cake—or on the pyramid, using our metaphor.
The pyramid of corporate social responsibility is depicted in Figure 3. It portrays the four
components of CSR, beginning with the basic building block notion that economic
performance undergirds all else. At the same time, business is expected to obey the law
because the law is society's codification of acceptable and unacceptable behavior. Next
is business's responsibility to be ethical. At its most fundamental level, this is the
obligation to do what is right, just, and fair, and to avoid or minimize harm to
stakeholders (employees, consumers, the environment, and others). Finally, business is
expected to be a good corporate citizen. This is captured in the philanthropic
responsibility, wherein business is expected to contribute financial and human
resources to the community and to improve the quality of life.
No metaphor is perfect, and the CSR pyramid is no exception. It is intended to portray
that the total CSR of business comprises distinct components that, taken together,
constitute the whole. Though the components have been treated as separate concepts
for discussion purposes, they are not mutually exclusive and are not intended to
juxtapose a firm’s economic responsibilities with its other responsibilities. At the same
time, a consideration of the separate components helps the manager see that the
different types of obligations are in a constant but dynamic tension with one another.
The most critical tensions, of course, would be between economic and legal, economic
and ethical, and economic and philanthropic. The traditionalist might see this as a
conflict between a firm’s "concern for profits versus its "concern for society," but it is
suggested here that this is an oversimplification. A CSR or stakeholder perspective
would recognize these tensions as organizational realities, but focus on the total
pyramid as a unified whole and how the firm might engage in decisions, actions, and
programs that substantially fulfill all its component parts.
In summary, the total corporate social responsibility of business entails the
simultaneous fulfillment of the firm's economic, legal, ethical, and philanthropic
responsibilities. Stated in more pragmatic and managerial terms, the CSR firm should
strive to make a profit, obey the law, be ethical, and be a good corporate citizen.
Upon first glance, this array of responsibilities may seem broad. They seem to be in
striking contrast to the classical economic argument that management has one
responsibility: to maximize the profits of its owners or shareholders. Economist Milton
Friedman, the most outspoken proponent of this view, has argued that social matters
are not the concern of business people and that these problems should be resolved by
the unfettered workings of the free market system. Friedman's argument loses some of
its punch, however, when you consider his assertion in its totality. Friedman posited that
management is "to make as much money as possible while conforming to the basic
rules of society, both those embodied in the law and those embodied in ethical custom"
(Friedman 1970). Most people focus on the first part of Friedman's quote but not the
second part. It seems clear from this statement that profits, conformity to the law, and
ethical custom embrace three components of the CSR pyramid—economic, legal, and
ethical. That only leaves the philanthropic component for Friedman to reject. Although it
may be appropriate for an economist to take this view, one would not encounter many
business executives today who exclude philanthropic programs from their firms' range
of activities. It seems the role of corporate citizenship is one that business has no
significant problem embracing. Undoubtedly this perspective is rationalized under the
rubric of enlightened self interest.
We next propose a conceptual framework to assist the manager in integrating the four
CSR components with organizational stakeholders.
CSR AND ORGANIZATIONAL STAKEHOLDERS
There is a natural fit between the idea of corporate social responsibility and an
organization's stakeholders. The word "social" in CSR has always been vague and
lacking in specific direction as to whom the corporation is responsible. The concept of
stakeholder personalizes social or societal responsibilities by delineating the specific
groups or persons business should consider in its CSR orientation. Thus, the
stakeholder nomenclature puts "names and faces" on the societal members who are
most urgent to business, and to whom it must be responsive.
By now most executives understand that the term "stakeholder" constitutes a play on
the word stockholder and is intended to more appropriately describe those groups or
persons who have a stake, a claim, or an interest in the operations and decisions of the
firm. Sometimes the stake might represent a legal claim, such as that which might be
held by an owner, an employee, or a customer who has an explicit or implicit contract.
Other times it might be represented by a moral claim, such as when these groups assert
a right to be treated fairly or with due process, or to have their opinions taken into
consideration in an important business decision.
Management's challenge is to decide which stakeholders merit and receive
consideration in the decision-making process. In any given instance, there may be
numerous stakeholder groups (shareholders, consumers, employees, suppliers,
community, social activist groups) clamoring for management's attention. How do
managers sort out the urgency or importance of the various stakeholder claims? Two
vital criteria include the stakeholders' legitimacy and their power. From a CSR
perspective their legitimacy may be most important. From a management efficiency
perspective, their power might be of central influence. Legitimacy refers to the extent to
which a group has a justifiable right to be making its claim. For example, a group of 300
employees about to be laid off by a plant-closing decision has a more legitimate claim
on management's attention than the local chamber of commerce, which is worried about
losing the firm as one of its dues-paying members. The stakeholder's power is another
factor. Here we may witness significant differences. Thousands of small, individual
investors, for example, wield very little power unless they can find a way to get
organized. By contrast, institutional investors and large mutual fund groups have
significant power over management because of the sheer magnitude of their
investments and the fact that they are organized.
With these perspectives in mind, let us think of stakeholder management as a process
by which managers reconcile their own objectives with the claims and expectations
being made on them by various stakeholder groups. The challenge of stakeholder
management is to ensure that the firm’s primary stakeholders achieve their objectives
while other stakeholders are also satisfied. Even though this "win-win" outcome is not
always possible, it does represent a legitimate and desirable goal for management to
pursue to protect its long-term interests.
Figure 4 Stakeholder/Responsibility Matrix Types of CSR Stakeholders Economic Legal Ethical Philanthropic Owners – – – – Customers – – – – Employees – – – – Community – – – – Competitors – – – – Suppliers – – – – Social Activist Groups – – – –
Public at Large – – – – Others – – – –
This matrix is intended to be used as an analytical tool or template to organize a
manager's thoughts and ideas about what the firm ought to be doing in an economic,
legal, ethical, and philanthropic sense with respect to its identified stakeholder groups.
By carefully and deliberately moving through the various cells of the matrix, the
manager may develop a significant descriptive and analytical data base that can then
be used for purposes of stakeholder management. The information resulting from this
stakeholder/responsibility analysis should be useful when developing priorities and
making both long-term and short-term decisions involving multiple stakeholder's
To be sure, thinking in stakeholder responsibility terms increases the complexity of
decision making and may be extremely time consuming and taxing, especially at first.
Despite its complexity, however, this approach is one methodology management can
use to integrate values—what it stands for—with the traditional economic mission of the
organization. In the final analysis, such an integration could be of significant usefulness
to management. This is because the stakeholder/responsibility perspective is most
consistent with the pluralistic environment faced by business today. As such, it provides
the opportunity for an in-depth corporate appraisal of financial as well as social and
economic concerns. Thus, the stakeholder/responsibility perspective would be an
invaluable foundation for responding to the firm’s stakeholder management question
about strategies, actions, or decisions that should be pursued to effectively respond to
the environment business faces.
MORAL MANAGEMENT AND STAKEHOLDERS
At this juncture we would like to expound upon the link between the firm's ethical
responsibilities or perspectives and its major stakeholder groups. Here we are isolating
the ethical component of our CSR pyramid and discussing it more thoroughly in the
context of stakeholders. One way to do this would be to use major ethical principles
such as those of justice, rights, and utilitarianism to identify and describe our ethical
responsibilities. We will take another alternative, however, and discuss stakeholders
from the context of three major ethical approaches—immoral management, amoral
management, and moral management. These three ethical approaches were defined
and discussed in an earlier Business Horizons article (Carroll 1987). We will briefly
describe and review these three ethical types and then suggest how they might be
oriented toward the major stakeholder groups. Our goal is to profile the likely orientation
of the three ethical types with a special emphasis upon moral management, our
preferred ethical approach.
Three Moral Types
If we accept that the terms ethics and morality are essentially synonymous in the
organizational context, we may speak of immoral, amoral, and moral management as
descriptive categories of three different kinds of managers. Immoral management is
characterized by those managers whose decisions, actions, and behavior suggest an
active opposition to what is deemed right or ethical. Decisions by immoral managers are
discordant with accepted ethical principles and, indeed, imply an active negation of what
is moral. These managers care only about their or their organization's profitability and
success. They see legal standards as barriers or impediments management must
overcome to accomplish what it wants. Their strategy is to exploit opportunities for
personal or corporate gain.
An example might be helpful. Many observers would argue that Charles Keating could
be described as an immoral manager. According to the federal government, Keating
recklessly and fraudulently ran California's Lincoln Savings into the ground, reaping $34
million for himself and his family. A major accounting firm said about Keating: "Seldom
in our experience as accountants have we experienced a more egregious example of
the misapplication of generally accepted accounting principles" ("Good Timing, Charlie"
The second major type of management ethics is amoral management. Amoral
managers are neither immoral nor moral but are not sensitive to the fact that their
everyday business decisions may have deleterious effects on others. These managers
lack ethical perception or awareness. That is, they go through their organizational lives
not thinking that their actions have an ethical dimension. Or they may just be careless or
inattentive to the implications of their actions on stakeholders. These managers may be
well intentioned, but do not see that their business decisions and actions may be hurting
those with whom they transact business or interact. Typically their orientation is towards
the letter of the law as their ethical guide. We have been describing a sub-category of
amorality known as unintentional amoral managers. There is also another group we
may call intentional amoral managers. These managers simply think that ethical
considerations are for our private lives, not for business. They believe that business
activity resides outside the sphere to which moral judgments apply. Though most
amoral managers today are unintentional, there may still exist a few who just do not see
a role for ethics in business.
Examples of unintentional amorality abound. When police departments stipulated
applicants must be 5'10" and weigh 180 pounds to qualify for positions, they just did not
think about the adverse impact their policy would have on women and some ethnic
groups who, on average, do not attain that height and weight. The liquor, beer, and
cigarette industries provide other examples. They did not anticipate that their products
would create serious moral issues: alcoholism, drunk driving deaths, lung cancer,
deteriorating health, and offensive secondary smoke. Finally, when McDonald's initially
decided to use polystyrene containers for food packaging it just did not adequately
consider the environmental impact that would be caused. McDonald's surely does not
intentionally create a solid waste disposal problem, but one major consequence of its
business is just that. Fortunately, the company has responded to complaints by
replacing the polystyrene packaging with paper products.
Moral management is our third ethical approach, one that should provide a striking
contrast. In moral management, ethical norms that adhere to a high standard of right
behavior are employed. Moral managers not only conform to accepted and high levels
of professional conduct, they also commonly exemplify leadership on ethical issues.
Moral managers want to be profitable, but only within the confines of sound legal and
ethical precepts, such as fairness, justice, and due process. Under this approach, the
orientation is toward both the letter and the spirit of the law. Law is seen as minimal
ethical behavior and the preference and goal is to operate well above what the law
mandates. Moral managers seek out and use sound ethical principles such
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