CSR Theories and Models

Introduction

Corporate social responsibility (CSR) is not simply a collection of charitable activities. It is a way of understanding how business organisations relate to society, how they create and distribute value, and how they should respond to social, environmental and ethical expectations. CSR theories provide the intellectual foundations for answering questions such as:

• For whom is a company responsible?
• Why should a business address social and environmental concerns?
• How can corporate responsibility be integrated into strategy?
• What should managers do when the interests of shareholders, employees, communities and the environment conflict?

The theories and models in this chapter offer different answers. Shareholder theory gives priority to owners’ interests within the law. Stakeholder theory recognises a wider group of affected parties. Legitimacy, social contract and institutional theories explain why organisations seek social acceptance and conform to wider expectations. Carroll’s CSR pyramid classifies different responsibilities, while the triple bottom line and creating shared value provide practical approaches for integrating social and environmental concerns with business performance.

No single model explains every CSR decision. Effective practice requires managers to understand the assumptions, strengths and limitations of each perspective.

Learning Objectives

By the end of this chapter, you should be able to:

1. Explain shareholder and stakeholder theories and compare their implications for management.
2. Describe legitimacy theory, social contract theory and institutional theory.
3. Apply Carroll’s CSR pyramid to business decisions.
4. Explain the triple bottom line and creating shared value.
5. Distinguish ethical responsibility from legal compliance and philanthropy.
6. Use CSR theories to analyse organisational decisions and stakeholder conflicts.
7. Identify limitations, governance risks and practical challenges in applying CSR models.

1. Why CSR Requires Theory

A theory is an organised explanation of relationships, behaviour or events. In CSR, theories help interpret why companies undertake responsible actions and whether those actions are genuine, strategic or primarily symbolic.

For example, a company may publish a climate strategy because:

• its owners believe environmental protection is morally important;
• customers and employees demand stronger environmental performance;
• regulators require emissions reporting;
• the company needs public legitimacy after criticism;
• reducing energy use lowers costs and creates competitive advantage; or
• competitors and industry associations have adopted similar practices.

These explanations correspond broadly to ethical, stakeholder, legitimacy, institutional and strategic perspectives. A theory does not automatically tell managers what is morally right. Rather, it provides a lens for understanding responsibility, power, motivation and accountability.

Important distinctions include:

• CSR concerns an organisation’s responsibilities and impacts in society.
• Corporate citizenship presents the company as a member of the community with rights and duties.
• Corporate sustainability focuses on maintaining economic, social and environmental systems over the long term.
• ESG generally refers to environmental, social and governance factors used in assessment, investment and reporting. ESG and CSR overlap, but ESG is often more measurement- and risk-oriented, whereas CSR has a broader ethical and societal dimension.

2. Shareholder Theory

2.1 Central idea

Shareholder theory holds that the primary responsibility of managers is to serve the owners of the company. The classic formulation is associated with Milton Friedman, who argued that a corporate executive is an agent of the owners and should pursue their interests while obeying the law and accepted ethical norms.

In its strongest form, this view treats profit maximisation as the central corporate objective. However, responsible management is not necessarily inconsistent with shareholder interests. Long-term shareholder value may depend on employee commitment, customer trust, environmental resilience, regulatory compliance and a strong reputation.

Shareholder theory therefore does not necessarily mean that managers may ignore society. It means that social initiatives should generally be justified by their contribution to the lawful and sustainable interests of the company’s owners.

2.2 Agency and governance implications

The theory is connected to the agency relationship between shareholders and managers. Shareholders provide capital and delegate decision-making authority to managers. Because managers may pursue personal goals, governance mechanisms are needed to align managerial conduct with organisational objectives.

These mechanisms include:

• board oversight;
• financial and non-financial performance reporting;
• executive incentives;
• external audit;
• shareholder voting; and
• legal duties imposed on directors and officers.

A narrow shareholder approach may treat expenditure on community programmes as unjustified if it does not contribute to corporate performance. A broader long-term approach may support such expenditure where it reduces risk, develops markets, protects reputation or strengthens relationships.

2.3 Strengths and limitations

Shareholder theory has several strengths. It provides a clear purpose, emphasises accountability for the use of investors’ resources and discourages managers from spending corporate funds according to personal preferences. It also highlights the importance of financial viability: an organisation that consistently destroys value may be unable to protect jobs or meet other responsibilities.

Its limitations are equally important. A narrow focus on short-term profit can encourage cost externalisation, whereby social or environmental costs are shifted to workers, communities or future generations. It may also understate the legitimate interests of people who do not own shares but are significantly affected by corporate decisions.

3. Stakeholder Theory

3.1 Central idea

Stakeholder theory, strongly associated with R. Edward Freeman, defines stakeholders as individuals or groups that can affect, or are affected by, the achievement of organisational objectives. Stakeholders commonly include:

• shareholders and lenders;
• employees and trade unions;
• customers and suppliers;
• governments and regulators;
• local communities;
• civil society organisations;
• future generations; and
• the natural environment, represented through institutions or advocates.

The company is viewed not merely as property owned by shareholders, but as a network of relationships through which value is created and distributed.

3.2 Stakeholder salience

Not all stakeholders have equal influence in every decision. Managers often assess stakeholder salience using three attributes:

• Power: the ability to influence the organisation;
• Legitimacy: whether the stakeholder’s claim is regarded as appropriate or valid; and
• Urgency: the degree to which the claim requires immediate attention.

A regulator may possess legal power, an affected community may have strong legitimacy, and employees may have both power and urgency during a strike. Salience is not fixed; it changes with circumstances.

3.3 Stakeholder management process

A practical stakeholder process includes:

1. Identify stakeholders and affected groups.
2. Assess their interests, influence, vulnerability and potential impacts.
3. Engage them through appropriate and accessible methods.
4. Analyse conflicts and possible trade-offs.
5. Make and explain decisions using transparent criteria.
6. Monitor outcomes and provide remedy where harm occurs.

Stakeholder theory does not mean that every demand must be accepted. It requires managers to recognise legitimate interests and justify decisions rather than assuming that shareholder preferences automatically prevail.

3.4 Strengths and limitations

The theory improves risk identification, promotes dialogue and reflects the reality that companies depend on many relationships. It is particularly useful for supply-chain responsibility, community relations, employee welfare and environmental management.

Its difficulty lies in prioritisation. Stakeholders may have incompatible interests, and managers may lack a clear rule for deciding whose claim should prevail. There is also a risk of superficial consultation, in which engagement occurs without meaningful influence or accountability.

4. Legitimacy Theory

4.1 Organisational legitimacy

Legitimacy theory proposes that an organisation’s survival depends partly on society’s belief that its actions are appropriate, desirable or acceptable within prevailing values and norms. Organisations operate under a tacit expectation that they will contribute benefits and avoid unacceptable harm.

A legitimacy gap arises when there is a difference between:

• society’s expectations of corporate conduct; and
• the organisation’s actual performance or perceived performance.

For example, a company may face a legitimacy gap if it markets itself as environmentally responsible while its production causes serious pollution.

4.2 Legitimacy strategies

When legitimacy is threatened, organisations may attempt to:

• improve actual performance;
• disclose more information;
• change public perceptions through communication;
• alter expectations by explaining technical or economic constraints; or
• associate themselves with respected causes and institutions.

The most credible strategy is to correct the underlying problem and communicate evidence of improvement. Communication without performance improvement can become greenwashing or social-washing.

4.3 Uses and limitations

Legitimacy theory helps explain sustainability reporting, public commitments, community investment and crisis communication. It is particularly useful when studying why companies disclose information after controversies or adopt voluntary standards.

The theory is less concerned with whether an action is intrinsically ethical than with whether it maintains social acceptance. An organisation may therefore appear legitimate while continuing to impose hidden costs. Analysts must distinguish actual accountability from impression management.

5. Social Contract Theory

5.1 The corporate social contract

Social contract theory holds that organisations operate because society permits them to do so. This permission is not usually a single written agreement. It is an implicit or explicit arrangement involving laws, institutions, public trust, economic benefits and social expectations.

Under this perspective, corporations receive privileges such as limited liability, access to public infrastructure, legal personality and the right to conduct economic activity. In return, they are expected to respect rights, obey laws, contribute to economic welfare and avoid serious harm.

The contract can change over time. Conduct once considered acceptable may later be rejected because of new knowledge, social movements, technological change or environmental evidence.

5.2 Implications for CSR

Social contract theory supports the view that corporate responsibility extends beyond minimum legal compliance. Law is one formal expression of society’s expectations, but ethical duties may arise before legislation is enacted. For example, companies may have responsibilities concerning data privacy, artificial intelligence, worker surveillance or supply-chain conditions even where regulation is incomplete.

The theory also clarifies why corporate rights are not unlimited. If an organisation repeatedly violates social expectations, society may respond through regulation, litigation, consumer pressure, investor action or withdrawal of its operating licence.

5.3 Critical perspective

A social contract is not negotiated equally. Large corporations may influence laws, public debate and economic policy more strongly than vulnerable communities. Consequently, managers should not treat current legal permission as conclusive evidence of social acceptability. Human rights due diligence, participation and remedy are necessary to make the contract more equitable.

6. Institutional Theory

Institutional theory explains how organisations are shaped by the rules, norms and shared beliefs of their institutional environment. Companies do not make decisions in isolation; they respond to governments, professional bodies, industry associations, investors, civil society and cultural expectations.

Three institutional pressures are commonly identified:

• Coercive pressures: formal requirements from governments, regulators, courts, lenders or dominant business partners.
• Normative pressures: expectations arising from professional standards, education, ethics codes and expert communities.
• Mimetic pressures: imitation of other organisations, especially under uncertainty.

For example, a company may adopt a sustainability reporting framework because regulators expect it, accountants promote it and competitors already use it.

Institutional conformity can create stability and shared standards. However, it may also produce ceremonial compliance: the organisation adopts policies, committees or reports without changing operational behaviour. This is sometimes described as a gap between formal structures and actual practice.

Managers should therefore ask whether a CSR initiative is embedded in decisions, budgets, incentives and accountability systems, rather than merely displayed in public documents.

7. Carroll’s CSR Pyramid

Carroll’s model presents four layers of corporate responsibility: economic, legal, ethical and philanthropic. The pyramid is a teaching model, not a universal legal hierarchy. In practice, the responsibilities overlap and may sometimes conflict.

7.1 Economic responsibilities

The foundation is to be economically viable and produce goods or services that customers value. A company must generate sufficient resources to pay employees, suppliers, lenders and taxes, invest in safety and innovation, and continue operating.

Economic responsibility does not justify harmful conduct. It means that social programmes must be supported by an organisation capable of long-term operation.

7.2 Legal responsibilities

Companies are expected to obey laws and regulations, including requirements concerning employment, taxation, consumer protection, competition, health and safety, environmental protection and reporting.

Legal compliance is a minimum standard, not the complete meaning of responsibility. Law may be weak, incomplete or poorly enforced.

7.3 Ethical responsibilities

Ethical responsibilities concern conduct that society expects even when it is not explicitly required by law. Examples include honesty in advertising, fair treatment of suppliers, respect for human rights, responsible data use and avoiding exploitation of regulatory gaps.

Ethical responsibility requires attention to the consequences and fairness of decisions, not merely technical compliance.

7.4 Philanthropic responsibilities

Philanthropy involves voluntary contributions to community welfare, such as donations, scholarships, volunteering and support for cultural or social programmes. It is desirable but generally less fundamental than legal and ethical responsibility.

Philanthropy cannot compensate for labour abuse, pollution or misleading claims. A company that donates to schools while violating workers’ rights has not fulfilled its broader CSR obligations.

8. The Triple Bottom Line

The triple bottom line, associated with John Elkington, evaluates organisational performance through three dimensions: people, planet and profit.

• People concerns employees, human rights, communities, inclusion, health and social wellbeing.
• Planet concerns resource use, pollution, biodiversity, climate impacts and ecological resilience.
• Profit concerns financial viability, productivity, innovation and economic value.

The model challenges the assumption that corporate success should be measured only through financial results. It encourages organisations to consider how economic activity affects social and ecological systems.

A useful application is to examine a proposed factory project across all three dimensions. Financial analysis may show attractive returns, but decision-makers should also assess employment quality, community displacement, water use, emissions and long-term environmental costs.

The triple bottom line is not a mathematical equation that guarantees an optimal decision. The three dimensions cannot always be reduced to a common unit or simply added together. It is a decision framework requiring explicit criteria, stakeholder participation and transparent trade-offs.

A common weakness is selective reporting: organisations may publish positive social and environmental indicators while omitting negative impacts. Credibility requires materiality, balanced disclosure, reliable data and independent assurance where appropriate.

9. Creating Shared Value

Creating shared value (CSV), associated with Michael Porter and Mark Kramer, argues that companies can strengthen competitiveness by addressing social problems through their core business activities. It differs from philanthropy because the social benefit is connected directly to the business model.

Three broad approaches are commonly identified:

1. Reconceiving products and markets: developing products or services that meet social needs, such as affordable healthcare or energy-efficient technologies.
2. Redefining productivity in the value chain: improving resource efficiency, worker conditions, logistics, supplier capability or health and safety in ways that benefit both society and the company.
3. Enabling local cluster development: strengthening infrastructure, skills, suppliers and institutions in regions where the company operates.

For example, a food company may support smallholder farmers with training and improved inputs. Farmers may gain income and productivity, while the company obtains a more reliable supply of quality materials.

CSV is strategically useful because it links responsibility to innovation and competitive advantage. Nevertheless, it has important limitations. Not every social problem creates a profitable market, and commercial value cannot replace duties of justice, rights protection or remedy. A company may create shared value in one activity while causing serious harm elsewhere. CSR must therefore include accountability for negative externalities, not only opportunities for mutual gain.

10. Comparing the Theories and Models

These perspectives are complementary. Stakeholder theory helps identify affected parties; social contract theory explains why duties exist; legitimacy theory highlights public acceptance; institutional theory explains external pressures; Carroll’s model classifies responsibilities; and the triple bottom line and CSV support strategic implementation.

11. Applied Case: A Garment Manufacturer and Living-Wage Expectations

This is an illustrative case based on common CSR challenges; it is not a report of a specific company.

Background

BrightWear Ltd., a garment manufacturer, supplies international retailers. Its production facilities comply with the minimum wage and working-hour rules of the country in which they operate. However, workers and civil society organisations argue that wages do not cover basic living costs. Retail customers are increasingly asking for evidence of responsible sourcing.

Problem

Increasing wages may raise production costs. Maintaining the existing system may preserve short-term margins but expose the company to strikes, reputational damage, worker turnover and possible loss of customers. Management must decide whether and how to improve wages and working conditions.

Analysis through the theories

• Shareholder theory: A wage increase may be justified if it improves productivity, quality, retention, customer relationships and long-term profitability.
• Stakeholder theory: Workers have direct interests and vulnerability; retailers, consumers, investors, regulators and local communities are also affected.
• Legitimacy theory: Public criticism indicates a possible legitimacy gap between the company’s responsible-sourcing claims and workers’ experience.
• Social contract theory: The company benefits from legal protections and public infrastructure and therefore has duties beyond minimum technical compliance.
• Institutional theory: Buyer codes, labour standards, investor expectations and industry norms create pressure for improved practice.
• Carroll’s pyramid: The company must remain economically viable, comply with law, meet ethical expectations of fair treatment and consider responsible community investment.
• Triple bottom line: The decision must assess financial costs, worker wellbeing and environmental or operational effects.
• Creating shared value: Training, stable employment, better production planning and worker participation may improve both wages and productivity.

Approach

BrightWear establishes a wage-improvement programme with the following elements:

1. Conduct an independent assessment of wage adequacy and working conditions.
2. Consult workers and representative organisations, including vulnerable and contract workers.
3. Introduce staged wage increases linked to a transparent plan.
4. Review purchasing practices so that unrealistic delivery schedules do not undermine labour standards.
5. Provide a confidential grievance mechanism and protection against retaliation.
6. Publish progress, limitations and unresolved issues.
7. Use independent verification rather than relying solely on management declarations.

Outcome

In the short term, unit costs increase. Over time, worker turnover declines, quality improves and the company strengthens relationships with major retailers. The programme does not eliminate all labour risks, but it creates more credible accountability than a public code of conduct alone.

Learning points

The case demonstrates that CSR decisions cannot be assessed only by asking whether an action is legal or charitable. The central questions include who bears the costs, who receives the benefits, whether affected stakeholders have voice, and whether the response changes underlying business practices.

12. Professional Application and Governance

CSR theories become useful when translated into governance and management processes. Organisations should:

• assign board-level responsibility for material social and environmental risks;
• integrate CSR objectives into strategy, budgeting and risk management;
• define measurable indicators and baselines;
• establish due-diligence processes for human rights and environmental impacts;
• align procurement, sales and incentive systems with responsible conduct;
• protect whistleblowers and provide effective grievance mechanisms;
• distinguish outputs from outcomes; and
• report both achievements and failures.

Technology can support these processes through supply-chain traceability, data analytics, remote environmental monitoring and stakeholder-feedback systems. However, technology does not solve ethical problems automatically. Poor data, biased algorithms, exclusion of low-connectivity communities and excessive surveillance can create new harms. AI-based systems used in CSR should therefore be subject to human oversight, data-protection controls, explainability appropriate to the context and clear accountability for decisions.

13. Challenges and Limitations

Conflicting interests

A decision may benefit customers but harm suppliers, or improve environmental performance while reducing employment in a particular location. Managers should disclose trade-offs rather than claiming that every decision benefits everyone equally.

Measurement difficulty

Social outcomes such as dignity, trust and empowerment are difficult to quantify. Quantitative indicators are useful, but they should be combined with qualitative evidence and stakeholder testimony.

Greenwashing and social-washing

Greenwashing occurs when communication exaggerates or misrepresents environmental performance. Social-washing similarly presents an organisation as socially responsible without adequate evidence. Clear claims, credible boundaries, comparable data and independent assurance reduce these risks.

Voluntary versus mandatory action

Voluntary CSR may encourage innovation, but it can be inconsistent and weakly enforceable. Regulation can establish minimum standards, but poorly designed regulation may encourage box-ticking. Strong practice combines law, ethical leadership, stakeholder participation and transparent accountability.

Global supply chains

Multinational companies operate across jurisdictions with different laws and institutional conditions. They should not use weaker local regulation as an excuse for avoidable harm. Risk-based due diligence, responsible purchasing and access to remedy are especially important.

Chapter Summary

CSR theories explain why corporations have responsibilities and how those responsibilities should be understood. Shareholder theory prioritises owners’ interests, but long-term shareholder value may depend on responsible relationships and risk management. Stakeholder theory expands attention to all groups affected by corporate activity and provides a basis for engagement and balancing interests.

Legitimacy theory explains the importance of social acceptance and the danger of a gap between public claims and actual performance. Social contract theory views corporate rights as dependent on society’s permission and associated obligations. Institutional theory explains how laws, professional norms, industry practices and imitation shape organisational behaviour.

Carroll’s CSR pyramid identifies economic, legal, ethical and philanthropic responsibilities. The triple bottom line broadens performance assessment to people, planet and profit. Creating shared value links social problem-solving with core business strategy, although it cannot replace duties grounded in rights and justice.

For professional practice, these models should be used together. Managers should identify stakeholders, assess impacts, comply with law, address ethical risks, measure outcomes, disclose trade-offs and provide remedy. CSR is credible only when it is embedded in governance, operations and accountability rather than treated as public relations.

Key Terms

Shareholder theory: The view that managers’ primary responsibility is to protect and advance owners’ interests within legal and ethical boundaries.

Stakeholder theory: The view that organisations have responsibilities to groups that affect or are affected by corporate activity.

Stakeholder salience: The importance of a stakeholder claim based on power, legitimacy and urgency.

Legitimacy: Social acceptance of an organisation’s actions as appropriate or desirable.

Legitimacy gap: A perceived difference between social expectations and organisational conduct.

Social contract: The implicit or explicit relationship through which society grants organisations rights and expects responsible conduct.

Institutional theory: A perspective explaining how organisations are shaped by external rules, norms and shared beliefs.

Coercive pressure: Pressure arising from laws, regulation or powerful business relationships.

Normative pressure: Pressure arising from professional values, standards and ethical expectations.

Mimetic pressure: The tendency to imitate other organisations under uncertainty.

Carroll’s CSR pyramid: A model comprising economic, legal, ethical and philanthropic responsibilities.

Economic responsibility: The duty to remain viable and create sustainable economic value.

Ethical responsibility: The duty to act fairly and responsibly beyond minimum legal requirements.

Philanthropy: Voluntary support for social, cultural or community purposes.

Triple bottom line: An approach assessing performance through people, planet and profit.

Creating shared value: The strategy of generating business advantage by addressing social needs through core activities.

Greenwashing: Misleading communication that exaggerates environmental responsibility.

Externality: A cost or benefit imposed on others that is not fully reflected in a market transaction.

Due diligence: A systematic process for identifying, preventing, mitigating and accounting for actual or potential impacts.

Review Questions

5 Short Answer Questions

1. What is the central concern of shareholder theory?
2. Name the three attributes commonly used to assess stakeholder salience.
3. What is meant by a legitimacy gap?
4. Identify the four responsibilities in Carroll’s CSR pyramid.
5. What are the three dimensions of the triple bottom line?

5 Long Answer Questions

1. Compare shareholder theory and stakeholder theory, including the strengths and limitations of each.
2. Explain how legitimacy theory and social contract theory provide different but related explanations of CSR.
3. Describe coercive, normative and mimetic pressures under institutional theory, using business examples.
4. Explain Carroll’s CSR pyramid and discuss why legal compliance is not sufficient for responsible business conduct.
5. Evaluate the benefits and limitations of creating shared value as a CSR approach.

3 Analytical / Application Questions

1. A mining company complies with environmental law but has poor relations with a local Indigenous community. Use at least three CSR theories to analyse the situation and recommend a response.
2. A company publishes a climate report highlighting reduced office electricity use while omitting emissions from its supply chain. Analyse this disclosure using legitimacy theory and the concept of greenwashing.
3. A retailer is considering whether to pay suppliers more for improved labour standards. Apply stakeholder theory, the triple bottom line and creating shared value to develop a decision framework.

Multiple Choice Questions with Answers

Question 1

Which theory gives primary emphasis to the interests of company owners?

A. Shareholder theory

B. Institutional theory

C. Social contract theory

D. Legitimacy theory

Correct Answer: A. Shareholder theory

Question 2

Which combination represents stakeholder salience attributes?

A. Profit, growth and liquidity

B. Power, legitimacy and urgency

C. Law, policy and taxation

D. Quality, price and convenience

Correct Answer: B. Power, legitimacy and urgency

Question 3

A legitimacy gap exists when:

A. A firm has more employees than competitors

B. A company’s share price falls below book value

C. Society’s expectations differ from perceived organisational conduct

D. A firm operates in more than one country

Correct Answer: C. Society’s expectations differ from perceived organisational conduct

Question 4

Which is an example of normative institutional pressure?

A. A government imposes a pollution limit

B. A company copies a competitor’s sustainability report

C. A professional association promotes an ethical reporting standard

D. A court orders compensation

Correct Answer: C. A professional association promotes an ethical reporting standard

Question 5

Which responsibility is at the foundation of Carroll’s CSR pyramid?

A. Philanthropic responsibility

B. Ethical responsibility

C. Legal responsibility

D. Economic responsibility

Correct Answer: D. Economic responsibility

Question 6

The triple bottom line evaluates organisational performance through:

A. People, planet and profit

B. Price, promotion and place

C. Power, policy and participation

D. Production, procurement and payment

Correct Answer: A. People, planet and profit

Question 7

Which activity best illustrates creating shared value?

A. Making an anonymous donation unrelated to the business

B. Improving supplier skills while increasing supply reliability

C. Avoiding all investment in local communities

D. Publishing only favourable environmental statistics

Correct Answer: B. Improving supplier skills while increasing supply reliability

Question 8

Why is legal compliance not equivalent to complete CSR?

A. Laws always prohibit profitable business

B. Ethical expectations may extend beyond minimum legal requirements

C. Legal rules apply only to charitable organisations

D. CSR excludes all regulated activities

Correct Answer: B. Ethical expectations may extend beyond minimum legal requirements

Question 9

Which practice most directly reduces the risk of greenwashing?

A. Using vague environmental language

B. Reporting only successful projects

C. Providing balanced, verifiable information about material impacts

D. Replacing operational changes with advertising

Correct Answer: C. Providing balanced, verifiable information about material impacts

Question 10

Under stakeholder theory, managers should primarily:

A. Ignore groups without voting shares

B. Recognise and assess the legitimate interests of affected groups

C. Treat philanthropy as the only corporate duty

D. Imitate competitors in every decision

Correct Answer: B. Recognise and assess the legitimate interests of affected groups