Theoretical Literature Review Of The CSR Approach

Chapter 2- Literature Review

2.1 Theoretical literature review.

There are a few theories that have garnered attention relating to CSR approaches. Three of these are widely talked about which form the basis of the focus of this study. These are Theory of social costs, the agency theory, stakeholder and rational theory.

2.1.1 Stakeholder Theory.

This theory underlines that the key responsibility of an organisation is that it needs to create wealth or increase value for its stakeholders by converting their stakes in to goods and services, (Clarkson, 1995). This theory was first presented in the form of a managerial theory. It stated that the firm should be managed in the best interest of its stakeholders who comprise of the creditors, customers,

It is essential that the Social responsibility of the business reflects the social power that the business possesses. The approach is both within the interactive and ethical theories, where the former emphasizes the integration of social demands and the later focuses on the right thing to achieve a good society, (Garriga & Mele, 2004).

In the stakeholder approach, the purpose of the firm is to create wealth or value for its stakeholders by converting their stakes into goods and services (Clarkson, 1995), or “to serve as a vehicle for coordinating stakeholder interests” (Evan and Freeman, 1988). Stakeholder approach has been developed as one of the strategies in improving the management of the firm. It is a way to understand the reality in order to manage socially responsible behaviour of a firm.

The term corporate citizenship was coined by practitioners, (Vidaver-Cohen & Altman, 2000). It was mentioned by Elibirt and Parket (1973) that a firm is not socially responsible if it just complies with the minimum requirement of the law. It was argued that a society is a series of socially binding contracts between members of society and the society itself, (Meade, 1973). It is also suggested that a firm does not just act in a responsible manner because it is in the commercial interest but mostly due to the fact that it is part of how the society expects businesses

From this perspective, there is an ideal level of CSR determinable by cost-benefit analysis and depending on several factors (McWilliams and Siegel, 2001). This requires a careful calculation of the optimal level of social output in each situation for maximizing shareholder value.

2.1.4 The Theory of social Costs

Problems of modern corporate responsibility deal with the fair allocation of social costs. Moreover, the social costs literature influences indirectly attempt at measuring social performance. The terms ‘social cost’ point out, at a very basic level of analysis, the same concept. Problems arise in the literature with regard to the study of ‘external economies’.

External economies have to be secured by the concentration of many small businesses of a similar character in particular localities or by the localization of industry, (Marshall,