Corporate social responsibility (CSR) as a model of extended corporate governance: an explanation based on the economic theory of social contract, reputation and reciprocal conformism

Liuc Papers n. 142, Serie Etica, Diritto ed Economia 10, suppl. a febbraio 2004. This paper first sets a definition of corporate social responsibility (CSR) as an extended model of corporate governance and then accounts for a voluntary approach to CSR, meant as voluntary compliance with CSR strategic management standards, in terms of an economic theory of self-regulation based on the concepts of social contract, reputation and reciprocal conformism. The paper argues that extended fiduciary duties toward all the firm's stakeholders are needed because of the same neo-institutional analysis of the firm that justifies it as a unified system of governance of economic transactions based on authority relations and residual rights of control. The key concept here is that of abuse of firm's authority vis-à-vis the stakeholders who hold incomplete contracts with the firm. Extended fiduciary duties are singled out from the model of a Social Contract amongst the firm's stakeholders. This provide for a clear cut and calculable criterion of strategic management no less able to set a bottom-line to the firm management than the profit maximisation principle, while being able of answering legitimate claims of fair treatment from all the firm's stakeholders. Such a task is accomplished by an application of the theory of bargaining games to the Social Contract of the firm, which employs the Nash-Harsanyi bargaining solution as a normative criterion for strategic management and corporate governance, providing an answer to the deficit of uniqueness problem raised by Michael Jensen (2001) against the notion of stakeholders value. Then, the paper distinguishes two models of self regulation (the discretionary one, and the explicit-norms-cum-self-enforcement one) and argues that while incomplete contracts and imperfect knowledge debar form resorting to reputation effects in order to support discretional self-regulation, on the contrary an explicit standard for CSR strategic management, based on general and abstract business ethics principles and precautionary protocols and rules of behaviour - both publicly shared by stakeholders and firms through social dialog - make possible to put again at work the reputation mechanism inducing endogenous incentives of compliance with a voluntary standard. The paper here suggests how (by both fuzzy logic and default reasoning ) a CSR Strategic Management Standard may work as a cognitive gap filling tool with respect to the firm's commitments and the stakeholders' expectations in presence of incomplete information. Moreover recent developments in the theory of conformist non-purely-self-interested preferences add motivational force to the basic result about self-enforcement of a CSR management standard. Hence, conformist preferences solve the problem of optimal mixed strategies that otherwise could enable the firm inducing the stakeholders to “trust” it without really conforming to a CSR standard. This result is given a formal proof in sec.11. The paper concludes with a collusion-proof design of intermediate social bodies (civil society institutions) that may answer the demand for assurance and external verifiability of CSR standards compliance by independent third-parties.