Value creation and CSR

Abstract

A more robust, inclusive model of value creation will sharpen dominant normative theories of Corporate Social Responsibility (CSR) such as stakeholder theory and the theory of communicative/deliberative democracy. When measuring value creation, CSR theories oscillate between traditional, exchange-based approaches utilizing narrow financial metrics and value-oriented approaches embedded in prominent CSR theories. The two are often in conflict. The problem is aggravated by CSR’s assumption that all firms, regardless of industry, possess the same generic responsibilities. A mining company, a sports betting service, and a medical device manufacturer are on all fours when measuring CSR success. The paper identifies a contradiction between settled normative convictions and the corporate decision making that normative CSR theories prescribe. Using the pharmaceutical industry as an example, it references the widespread conviction that during the 2019 Covid-19 pandemic some pharmaceutical companies had a responsibility to reach beyond the goal of financial optimization. It then explains why this conviction cannot be rationalized using two prominent normative theories of CSR, namely, stakeholder theory and the theory of communicative/deliberative democracy. The problem hinges on a defective model of value creation. One implication of the analysis is that healthcare companies should readjust corporate governance in order to make health a focal goal alongside that of profit. At the same time, a semiconductor firm might satisfy its CSR responsibilities by only designating profit as its focal goal. The thrust of the paper is to show why reconceiving the model of value creation can advance not only stakeholder and communicative/deliberative democracy theories, but all CSR.

Introduction

Corporate Social Responsibility (CSR) is a value-denominated concept. The idea of responsibility is action-guiding and has an inexpugnably “normative” aspect. Society wants corporations to behave responsibly, and CSR researchers want their work to contribute to responsible corporate behavior. Yet motivated CSR researchers are mindful of the headwinds that confront CSR today. Who can deny that CSR sits uncomfortably amidst the dominant paradigms of rational choice theory, shareholder primacy, and factor-analytic research methods (Donaldson 2021)?

The good news is that in recent decades CSR researchers have witnessed paradigm-changing advances in the development of alternative decision-making models, alternative corporate governance models, and alternative research methods. Yet despite these advances, CSR researchers bump their heads on the glass ceiling of values. The enduring seductiveness of a simple model of value creation persists (Gümüsay and Reinecke 2022). Too often CSR researchers justify corporate acts of responsibility using worn metrics that despite their mathematical refinement amount to little more than financial optimization (Zott et al. 2011; Freudenreich et al. 2020). They do so bashfully because they know that while financial optimization may be the proper, dominating goal of a for-profit corporation, it is far from its only responsibility.

This paper explains why relaxing the hold of many existing paradigms upon CSR means strengthening the model of value creation that guides the normative portion of CSR. It explains why a more robust, more inclusive model of value creation can sharpen normative theories such as stakeholder theory and the theory of communicative/deliberative democracy. The analysis in the paper assumes that reasoned moral judgments should align with normative theory. When misalignment occurs, either the theory should be adjusted, or the judgments should change.1 If, for example, we have a settled conviction that marketing a deadly product as “safe” is not acceptable, then any normative theory that concludes it is acceptable requires adjustment.

In what follows, a thought-experiment identifies a settled normative conviction about what corporate responsibility requires but cannot explain in terms of dominant CSR theories. The paper targets the conviction that during the 2019 Covid-19 pandemic some pharmaceutical companies had a responsibility to reach beyond the goal of financial optimization. It explains why this conviction cannot be rationalized using two prominent normative theories of CSR, namely, stakeholder theory and the theory of communicative/deliberative democracy. Finally, the paper shows how the conviction can successfully be rationalized using a better model of value creation. An early version of a new model was offered by the stakeholder theorist, Ed Freeman in 2010 (Freeman), which was followed by other attempts (Freeman et al. 2020a, b; Donaldson 2021). The paper shows how reconceiving our model of value creation advances not only stakeholder theory and theories of communicative/deliberative democracy, but all CSR.

Explanatory failure

The Covid-19 pandemic

Consider an intriguing case for CSR theory: the Covid-19 crisis. Did at least some pharmaceutical companies have special corporate social responsibilities in the sale and distribution of their vaccines? Almost all observers say they did. One way of framing their conviction is through the language of human rights. A near universal endorsement of some right to healthcare exists, despite variance in the definition of the right. Article 25(1) of the Universal Declaration of Human Rights states that “Everyone has the right to a standard of living adequate for... health and well-being...” The sense that people have a right to healthcare and that everyone suffering from a serious disease is entitled to some kind of professional treatment helps explain the near-universal agreement among international organizations that at least in some instances pharmaceutical companies have a responsibility to help to make essential medicines available to patients (Santoro and Shanklin 2020). This same responsibility is reflected in the United Nations Guiding Principles on Business and Human Rights (2011) and in the Human Rights Guidelines for Pharmaceutical Companies in Relation to Access to Medicines (2008).

Pharmaceutical companies seem to agree. In the Covid-19 crisis, healthcare companies adopted high-sounding policies toward intellectual property and Covid-19 vaccines. In 2020 Moderna said it would not enforce patents related to its Covid-19 vaccine while the pandemic emergency continued, although it would seek to license its patents to other companies once the pandemic emergency was over. At the same time, a Pfizer spokeswoman said the company did not expect intellectual property to be a barrier to the availability of its vaccine and that any desired third-party licenses would be available on reasonable terms (Loftus 2021). Many institutional investors vetted these progressive policies. In 2022, a group of 65 top institutional investors wrote to leading pharmaceutical companies urging them to prioritize equitable global distribution of Covid 19 vaccines (Klasa and Mancini 2022).

Many researchers have endorsed the broader idea that pharmaceutical companies should “do more” in certain situations. Jackson (1993) extends the implications of Rawls’ theory of justice (1971a, b, 1999) to a corporate obligation to render aid under certain circumstances on behalf of the inhabitants of developing countries. Leisinger (2005) supports a “new social contract” that would endorse “Big Pharma” doing more in instances such as the global HIV/AIDS pandemic. Wettstein (2010) invokes the notion of "private political authority" held by corporations to justify the duty to improve “the state of affairs” when doing business abroad.

For our purposes the salient question is not whether Moderna and Pfizer’s policies went far enough, but whether their reasons for those policies should have given priority to the value of health in addition to long-run financial optimization. The companies’ press releases imply that making a life-saving vaccine available, not merely profit, influenced their decision making. The settled conviction of most observers is that this is the correct approach—and remains the correct approach even if Moderna and Pfizer’s actual approach turned out to be disingenuous, that is, if it was only PR camouflage. Part and parcel of this conviction is the belief that healthcare companies, in contrast to, say, semiconductor or mining companies, have special duties to defend the basic value that defines their industry, “health.”

How are we to rationalize this conviction about the correct approach of Moderna and Pfizer in Covid-19 with the two leading approaches to CSR? One well-known CSR approach is the normative stakeholder model (Phillips et al. 2019). Its broadest prescription is that corporations shall be managed in the interests of its stakeholders. The issue of who counts as a stakeholder and how to weigh owners’ interests in relation to others remains disputed, but stakeholder theory’s normative core is clear: enhance the interests of all stakeholders, not merely owners. Another well-recognized normative approach to CSR is that of “communicative/deliberative democracy theory.” Inspired by Habermas’s work on communicative/deliberative democracy (1996) (1984) and applied to business decision-making by Scherer, Palazzo (2006) (2007) and others, communicative/deliberative democracy theory offers a procedural mechanism for corporate decision-making. In its simplest version the theory recommends establishing a well-formed, well-structured set of conversations among groups and individuals in relation to a particular corporate decision and then using the fruits of that conversation to inform decisions (Scholz et al. 2019).

We shall see that neither CSR approach successfully explains our moral convictions about Covid-19. To summarize the argument that will follow, neither approach explains our normative convictions about Covid-19 because neither privileges the intrinsic value of health that lies at the bottom of our conviction. Both approaches can reference health in normative calculations but must do so indirectly, whereas the independent value of health is needed to fully support our convictions. Discursive methods may be the best means to broach issues such as health, and more generally, to reach corporate decisions. Yet discursive methods remain methods, not conclusions; and methods can fail for predictable reasons. To be sure, a well-structured conversation may conclude that profits should be sacrificed for values in a particular instance, but it can offer no independent reason why a firm in the healthcare industry in contrast to firms in other industries should assign a priority to the value of health that sometimes subordinates profit to long-term owners’ interests.

Similarly, normative stakeholder allocation schemes may be sufficiently flexible to count the poor in developing countries as “stakeholders” (even though they constitute a stakeholder group that may not be able to pay for Covid-19 products). But flexibility gives no guarantees. For one thing, it is clear that the much-discussed descriptive stakeholder properties of salience, legitimacy and urgency (Mitchell et al. 1997) cannot automatically justify the sacrifice of profit for the sake of non-shareholder interests. For another, no normative stakeholder allocation scheme can explain the unique profit + health profile of pharmaceutical companies. Let us now examine each argument in more detail.

Because theories of communicative/deliberative democracy are incomplete, they fail to explain our convictions about Covid-19

Communicative and deliberative analysis, otherwise known as theories of “deliberative democracy” or “communicative action,” are powerful tools for illuminating the decision-making discovery process for corporate actors and for informing CSR decisions. As Scholtz and Reyes explain (2019), early advocates of this view drew upon the deliberative democracy and communicative action philosophy of Jurgen Habermas (1984, 1996) in order to display the power of deliberative decision-making for CSR. Andreas Scherer and Guido Palazzo (Palazzo and Scherer 2006; Scherer and Palazzo 2007) were prominent advocates who broke step with positivist conceptions of CSR, emphasizing normative legitimacy through communicative action, a legitimacy that prioritizes process over output to ensure fully responsible corporate decision making. The crux of a communicative/deliberative action approach to CSR lies in viewing the firm as a political actor, one that needs to engage in rationally designed, deliberative discussions with a wide variety of discussants, including governments.

The communicative/deliberative democracy perspective has proven extremely helpful for normative CSR analysis. Yet the strength of this procedure-based approach conceals an epistemic weakness, or more precisely, an incompleteness. Any procedural method for reaching a conclusion is logically distinct from the conclusion itself. Over time, any procedural method must be tested by the quality of the decisions it reaches. Such testing requires independent criteria, i.e., criteria that are independent from the procedure itself; otherwise, there is no true test. Procedures in a court of law are a good example. Court procedures aim to ensure justice but now and then fail. When later DNA evidence reveals that a disproportionate number of black suspects convicted of murder are innocent, we must return to the jurisprudential procedures, including the failed evidence models, they permitted. Analogously, if the procedural norms of communicative action happen to regularly permit models that can be shown to fail on independent grounds, we must return to the procedures.

This carries direct relevance for the Covid-19 conundrum faced by pharmaceutical companies during the pandemic. Communicative and deliberative discussion may be the best process for a pharmaceutical company to reach a decision about a Covid-19 vaccine, but discussion alone cannot reject a failed model that happens to conflict with an independently grounded conviction. In some instances, the conflict may become obvious in the conversation itself; in others it may not. In the case of Covid-19 and matters of corporate purpose generally, pharmaceutical executives are often confused about whether to affirm health as an independent value or whether to fold that value into long-term financial optimization. Different decision-making models are at play, the most prominent of which, i.e., the shareholder primacy model, would prohibit the development of any vaccine that failed to optimize the interests of owners over the long term. Here, existing models point in one direction while moral convictions point in another. No well-structured deliberation can ensure that existing models will be dropped in favor of ones that conform to the moral convictions, i.e., models that prioritize both profit and health. We shall return to this issue when considering a revised model of value creation.

Because normative stakeholder theories are incomplete, they fail to explain our convictions about Covid-19

Normative stakeholder theories promise to solve the incompleteness problem of discursive approaches by establishing a foundation of normative concepts. In contrast to instrumental or descriptive stakeholder theories (Donaldson and Preston 1995) normative stakeholder theories are meant to guide corporate decision-making in an all-things-considered manner by affirming that corporate decision-making must reflect the interests of all stakeholders, not merely owners. In its broadest version normative stakeholder theory holds that corporations shall be managed in the interests of all their stakeholders, including at least employees, owners, customers, and communities. Owners’ interests may be primary, but do not dominate in all instances. No CSR normative strategy has achieved greater impact on scholars and practitioners. Testimony to this impact lies in that fact that stakeholder language now guides the influential Business Roundtable’s mission statement (2019). It is no secret, however, that difficulties arise when making trade-offs among stakeholder interests. The gold standard for decision-making, of course, is to make no trade-offs at all. “Managing for stakeholders,” writes Ed Freeman, “is about creating as much value as possible for stakeholders, without resorting to tradeoffs” (Freeman 2010). The same reluctance to make trade-offs is echoed in another well-known CSR perspective, that of “Creating Shared Value,” which urges managers to move “beyond trade-offs” and to stop presuming that business and society are in conflict (Porter and Kramer 2011). But even as Porter and Kramer’s shared value approach emphasizes avoiding trade-offs, it concedes that in instances where trade-offs are necessary, social values must be subordinated to competitive ends (Crane et al. 2014). Stuff happens. Trade-offs are real.

Normative stakeholder theory does not go to the extreme of subordinating social values to profit in all trade-off situations, a move that would place stakeholder theory on all fours with the doctrine of shareholder primacy in which shareholders’ interests are the ultimate and only basis for evaluating the success of corporate activity. The move to extend beyond shareholder’s interests even in trade-off contexts takes at least two forms. First, Robert Phillips argues that the value of “fairness” implies that when stakeholder trade-offs are necessary, stakeholders, because they have voluntarily accepted the benefits of a mutually beneficial scheme of cooperation, should be rewarded in proportion to the benefits accepted (Phillips 1997). This is in line with another stakeholder approach advanced by Blair and Stout (Blair and Stout 1999), i.e., the “team production model,” which suggests that when collective action problems arise, then particular stakeholder groups deserve greater than market-based rewards. For example, when firm-specific talents are a big advantage to a corporation, then the employees who cultivate firm-specific, non-marketable skills and are “locked in” should be compensated with higher wages.

However, Phillips’ approach cannot solve, nor was it intended to solve, trade-off problems of the sort posed by the Covid-19 crisis. The obvious difficulty from a collective action (or team production) perspective is that because the distribution scheme the stakeholder approach endorses allocates corporate benefits in proportion to corporate benefits received from stakeholders, and because Covid-19 vaccine’s potential customers, i.e., the stakeholder group of poor vaccine customers in developing countries, are unable to pay for the proposed vaccine, those stakeholders provide no reciprocal benefit to the firm.

More recently, trade-off problems have been addressed directly by Freeman, Martin and Parmar’s their book, The power of and: responsible business without trade-offs (2020a). The book is an attempt is to move beyond simple distribution schemes to tell a new story of business. The authors explain why the old story of business must be augmented by five ideas to achieve fully responsible business. Whereas the old story was dominated by the ideas of profits and shareholder value, the new story leverages “the most powerful word in our language, “AND,” to achieve profits AND purpose, shareholders AND stakeholders,” markets AND society, economics AND humanity, and business AND ethics (Freeman et al. 2020a). This is a better story of business. A much better story. Furthermore, the new story cements the normative direction of the entire stakeholder movement. A related article by Freeman, Phillips, and Sisodia identifies the strongly normative legacy of stakeholder theory. “In these early days, the main idea was not merely the narrow scientific effort to find the underlying causes for why one firm outperformed another. Rather, it was the explicitly normative idea of helping decision makers make better decisions” (2020b).

This very normative legacy is reflected in stakeholder theory’s new story and the power of “AND.” However, Naude (2022) has criticized the “AND” approach because it chooses an “additive” mechanism in contrast to an “integrated” one. Naude notes that the idea of profit-and-stakeholders-and markets-and humanity-and—business and ethics... etc., is inherently less attractive than a model that might integrate these considerations into a single framework. He makes a good point. The “AND” approach lacks the parsimony of a simpler integrated model, and for this reason stumbles in hard cases. In the Covid-19 dilemma, for example, while it is helpful to understand Pfizer and Moderna’s vaccine challenge in the broader context of markets and profits and stakeholders, etc., doing so amounts to multiple conflicting navigation maps drawn to reach a single destination. We can ask about markets with questions such as “What markets exist for the vaccine?”; “What are the costs of research and development?”; and “Who are the competitors?” We can ask about profit with questions such as, “Will the net long-term contribution to profit be positive or negative?” And finally, we can ask about stakeholders, for example, asking “How will each of the stakeholders’ interests be affected?”; or “Are potential vaccine customers in poor countries true stakeholders?” But in the final analysis one can easily remain confused about whether Pfizer or Moderna should make the Covid-19 vaccine available to poor Covid-19 customers in an instance where long-term corporate profits are negative.

How to fix the incompleteness problem in communicative/deliberative democracy and stakeholder theories

To solve the incompleteness problems in communicative/deliberative democracy and normative stakeholder theories we require a better model of value creation. In the background of both discursive and stakeholder strategies, there lurks an opaque concept of how value is created. This heralded standard for measuring corporate success, namely, “value creation,” is as muddled as it is narrow. The patchwork of attempts to define “value creation” reveals a confusing pattern (Zott et al. 2011). Most definitions rely upon a simple, two-way, exchange-based, flow of value between the firm and the customer, where the “value” created is denominated entirely in terms of economic value for the firm (Freudenreich et al. 2020). Attempts to stray beyond this and integrate values other than economic values, such as Freeman’s (2010), are exceedingly rare.

But unless “value creation” is merely a clever euphemism, values should matter if only because more than one kind of value can be created. Sometimes non-financial values such as health, fairness, and sustainability are salient in the value-creating activity of a corporation—albeit at the margin. The stakes are high. Unless values other than financial values can be embedded in the value-creation equation, then CSR, which addresses social responsibility, becomes definitionally estranged from the golden metric for business success. A narrow model of value creation is doomed to cash corporate aims into the currency of financial calculations. For this reason, to the extent stakeholder and communicative/deliberative democracy theories lack an integrative notion of value creation, each becomes vulnerable. Values such as fairness or sustainability can become unglued and left unhomogenized inside business decision-making. Narrow-minded managers can conveniently forget to add relevant values to the decision-making mix or to abandon them in the face of profit pressures. In the instance of Covid-19, the absence of the basic human value of “health” prevents stakeholder or communicative/deliberative democracy theory from confirming the strong conviction that Moderna and Pfizer should develop and distribute their vaccines even if doing so reduces long-run profits. The models’ axioms are incomplete in a way that blocks special attention to the value of “health.”

Better value integration in the value creation story involves giving due attention to an early, but neglected normative seed in stakeholder theory, namely, the idea of “intrinsic value.” Even in early days of stakeholder theory, the concept of intrinsic value is invoked. Donaldson and Preston in “The Stakeholder Theory of the Corporation” write,

“The interests of all stakeholders are of intrinsic value. That is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the shareowners” (Donaldson and Preston 1995).

Because human groups express value that is intrinsic, not all value can be cashed by financial metrics. The authors defending stakeholder theory in The power of “AND” (Freeman et al. 2020a) agree, and they include non-economic values alongside other relevant stakeholder consideration. In a 2010 article, one of the The Power of “AND”’s authors, Ed Freeman, highlights the importance of an expanded model of value creation for completing the stakeholder theory framework and suggests construing value creation as a collaborative effort that ideally benefits not only the focal business but all its stakeholders (Freeman 2010; Freudenreich et al. 2020).

More recently, Freeman et al. (2020b) expand on this early concept by sketching a formal model of value creation.

$$\text{Total Value Created}(\text{TVC})=f(\text{Customer TVC},\text{Employee TVC},\text{Supplier TVC},\text{Community TVC},\text{Financier TVC}),$$

where the terms of “f” refer to the total value created for those stakeholders.

This attempt to integrate multiple values into an integrated process of managerial decision making takes a major step towards solving the “AND” problem. It points towards satisfying Naude’s (2022) concern that the idea of profit-and-stakeholders-and markets, etc., is inherently less attractive than a model that might integrate them all. A model of value creation that integrates these factors under a single roof adds clarity to difficult trade-off decisions by corporations. The model follows Freeman’s original interpretation of value creation, which relies on summing up the perceived needs and values of the relevant universe of stakeholders (Freeman 2010). The formula is an upgrade to the ubiquitous concept of value creation now in use (Zott et al. 2011), which, as mentioned earlier, is dysfunctionally opaque and relies narrowly on a simple two-way, exchange-oriented flow of value between firm and customer.

But the TVC model remains undeveloped, as Freeman, Phillips and Sisodia acknowledge: “We are certain,” they write, “there are other fruitful ways to explore this issue, and we need more research here” (Freeman et al. 2020b). The principal difficulty for TVC lies in its defective amalgamation of fact and value. As Freudenreich notes, because different individuals have different needs and hold different values, each recipient will have a different understanding of what constitutes value. The facts about their preferences do not add up to an independent value. This problem is precisely similar to the problem that currently plagues the effort by economist Oliver Hart and the finance theorist, Luigi Zingales to reinterpret shareholder primacy. Hart and Zingales (2017a, b) argue that the maximization of shareholder welfare is not the same as the maximization of market value, and that other values of shareholders must be included in managerial decisions. Theirs is a significant advance over the existing shareholder primacy model, but a close analysis reveals a deadly fact/value problem. Hart and Zingales’s model works well only if shareholders happen to possess good values. It fails when they have bad ones. As Santiago Mijia has demonstrated in two BEQ articles, if most shareholders favor selling cigarettes to children, those preferences should be discarded: our strong conviction is that a company should not sell cigarettes to children. Mijia concludes correctly that managers should only maximize the ethically permissible preferences of shareholders (Mejia 2019, 2021).

The same is true of values as perceived by non-shareholder and shareholders alike. The customers and shareholders of a company may not care about, or even think about, whether a company’s services happen to encourage rights violations in North Korea. But an enlightened, responsible management team should care. The current formulation of value creation, i.e., Total Value Created (TVC) = f (Customer TVC), Employee TVC, etc., cannot signal the need for caring because it relies exclusively on perceived values, not intrinsic ones. The philosopher, Charles Taylor, crystalizes the reason why perceived values cannot add up to intrinsic ones: “This model is false,” he notes, “to the most salient features of our moral phenomenology. We sense in the very experience of being moved by some higher good that we are moved by what is good in it rather than it is valuable because of our reaction” (Taylor 1989).

Consider how this issue affects the dilemma faced by pharmaceutical companies of whether to distribute a Covid-19 vaccine to developing countries at a loss. A TVC calculation of the existing values of Customer TVC, Employee TVC, Supplier TVC, Community TVC, and Financier TVC could easily reject such a decision to distribute. Stakeholder preferences around values may be dominated by preferences for lower customer prices and higher financier returns. The facts about perceived values, most often ones that are interpreted through market economic terms using ordered preference rankings, miss the higher good, the central value of health, that should play a special role in the healthcare industry.

At bottom, the problem is one of perceptions about values versus basic values themselves. Many, including Van der Linden and Freeman, discourage a sharp distinction between facts and values (2017), pointing to the existence of “thick concepts” that populate the business lexicon and which reflect both facts and values. Their conclusion is correct, but only to a point. Thick concepts such as “lie,” “cruelty,” and “friendship” (Van der Linden and Freeman 2017) successfully represent an amalgam of facts and values, but cannot obviate the logical distinction between justification and causation, a distinction that requires separating facts from values and which is required by practical reasoning. It is practical not theoretical reasoning that underpins stakeholder theory insofar as normative stakeholder theory is an action-guiding, “managerial” concept, as frequently noted (Donaldson and Preston 1995; Jones and Wicks 1999; Phillips et al. 2019).

Happily, practical reasoning is being explored increasingly in the management literature (Warren 1991; Young 2001; Flyvbjerg 2006; Nonaka and Toyama 2007; Feldman and Orlikowski 2011; Sandberg 2011; Reinecke and Ansari 2015). It is a ubiquitous concept in the philosophical literature (Wallace 1990; O’Neill 1998; Neiman 1999; Raz 1999). While practical reasoning requires the combination of facts and values, each must be considered separately to facilitate practical reasoning itself. Single terms that represent amalgams of fact and value are not enough. Consider the so-called “practical syllogism,” one standard version of practical reasoning. In a practical syllogism, a value premise works in tandem with a factual one (Kant 1788; Broadie 1968; Aristotle and Apostle 1981; Neiman 1999; Schreck et al. 2013) to generate an action. Here is a simple version:

1. (Value premise) Organization ABC values fairness.

2. (Fact premise) Creating diverse hiring pools is the most efficient means to achieve fairness.

3. (therefore) (Justified action) Organization ABC creates diverse hiring pools.

A simple, generic version of practical reasoning will suffice for our analysis of value creation, namely, Focal value + Facts → Justified action. The values of the acting agent “causes” the action, while at the same time the action itself is justified by the values and facts that it integrates. Either bad facts or bad values make for bad decisions. Notice that the value creation direction goes from top to bottom, and the justification direction goes from bottom to top. An adequate model of value creation, then, displays two directional arrows: an “up-arrow” of justification, and a “down-arrow” of causation (Fig. 1; Value Creation Architecture). Salient values for a corporations’ action may include fiduciary duties to shareholders and a contribution to overall economic welfare, but may also include non-economic values such as health or fairness. “Focal value” in Fig. 1 refers to the goal that dominates the practical reasoning process. Often, a company’s focal goal is profit or a tightly connected subordinate goal such as cost-reduction. But focal goals eventually stand in need of justification by higher-order goals. For example, the focal goal of profit may be justified by the value of discharging duties to owners. Moreover, such a higher-order value, as discussed below, must also be consistent with other higher-order, intrinsic values such as fairness or human dignity.

Fig. 1.

Value Creation Architecture

The intrinsic, higher-order values shown at the top of Fig. 1 are the key to value creation. Practical reasoning requires independent or “intrinsic” values, not merely perceived values or “preferences.”

The intrinsic values needed for practical reasoning reach beyond psychological perceptions of value and have been discussed in detail (Donaldson and Walsh 2019; Donaldson 2021).2 Flyberg explains that the values needed for practical reasoning go “beyond analytical, scientific knowledge (episteme) and technical knowledge or know how (techne),” to judgments and decisions made in the manner of an exemplary social actor (Flyvbjerg 2006). Intrinsic values are good by definition; they stand on their own two epistemic feet. They are non-instrumental, non-derivative, full-stop justifiers/explainers of action. The concept has been articulated by philosophers, economists, and legal theorists (Sunstein 1994; Kreps 1997; Dorsey 2012; Zimmerman Spring 2015 Edition). Intrinsic values count as “reasons for acting” where “the object of the act is seen as worthy of pursuit” (Donaldson and Walsh 2015). Lists vary, but most lists would include basic values such as freedom, fairness, environmental sustainability, economic welfare, contract-keeping and human dignity. Freedom stands as an impressive member of this list, but even ardent defenders of freedom’s intrinsic status allow that values such as health care, science, art and culture must ultimately be reconciled with freedom (Ostermaier and Van Aaken 2020). Intrinsic values are also “synoptic,” which is to say that their meaning must be adjusted in the context of other intrinsic values. The intrinsic value of freedom of speech, for example, must be adjusted if paired with the intrinsic value of physical security when considering whether it is OK to yell “fire” in a crowded theater. For corporations, higher-level, intrinsic values such as discharging duties to owners must be compatible with values such as fairness or human dignity.

The long-term convergence between companies that take values seriously and enhanced profits is striking. Studies vary about whether better ethics increase or decrease long-term financial success. Margolis and Walsh’s (2001) study of 95 studies on this issue claim a positive long-term correlation between Corporate Social Performance (CSP) and financial success. But their claim is subject to dispute. However, even if the correlation turned out to be slightly negative instead of positive, almost everyone agrees that the convergence between ethics and long-term profit is striking. Even if some decrease in financial success happened to be the norm, research suggests strongly that it would be slight. As Preston and Sapienza (1990) showed, the benefits to the three major stakeholder groups of corporations, shareowners, employees, and customers do not constitute a zero-sum game; rather, they rise or fall in tandem. Instances where profits and deep values diverge when viewed from the heights of the truly long term are exceptions, not the rule, and, indeed, this paper’s utilization of the Covid-19 decision, where profits must be subordinated to even long-erm profit, constitutes an exception, not the norm.

Why a revised model of value creation solves the Covid-19 puzzle

We are now ready to return to the CSR challenges faced by pharmaceutical companies in the Covid-19 pandemic, and to explain why CSR models missing intrinsic values are incomplete. Again, neither the theory of communicative/deliberative democracy nor stakeholder theory satisfies our conviction that Pfizer and Moderna have weightier responsibilities because they are in the healthcare industry and why, unlike other companies, they should sometimes allow concerns about health to outweigh those of profit. Both firms were correct to profess a commitment to extend the availability of a miraculous Covid-19 vaccine even if it meant losing money. But CSR theories cannot show why they were correct.

As mentioned above, the present analysis assumes that reasoned moral judgments should align with normative theory. When misalignment occurs, either the theory should be adjusted, or the convictions should change. This approach is similar to the moral method of “reflective equilibrium” utilized by Rawls and many other moral philosophers (Goodman 1955; Rawls 1971a, b). The reflective equilibrium approach is grounded on the rational requirement of consistency. Normative coherence is sought through a dynamic process of reasoning that makes incremental changes while going back and forth between on the one hand, (a) considered moral judgments and (b) relevant background theories (Kim and Donaldson 2018) until equilibrium is achieved. The method has nearly unlimited scope, and is capable of informing decisions and moral theories relevant to marketing, finance, accounting, strategy, and government policy (Donaldson 2019). The exact nature of the process of reflective equilibrium is discussed in detail in the philosophical literature (McMahon 2009).

Moral intuitions will diverge in hard cases. The ethics of price gouging (Zwolinski 2008) or of commodification, e.g., selling human organs on markets, are well known examples (Roth 2007; Sandel 2012; Brennan and Jaworski 2015). In many instances, reaching equilibrium will mean ultimately adjusting intuitions to theories rather than theories to intuitions. However, in the present instance Covid-19 presents us its question against the backdrop of a powerful consensus among both companies and outsiders: a consensus that concludes the companies should do more. For this reason, it serves present purposes perfectly. It presents a simple, not a hard, case, and implies clearly that our prevailing CSR models should be reexamined. Here, the simplest of this method’s implications is what matters: that when a given theory is radically out of step with non-controversial, settled moral convictions, then that theory, i.e., in this instance CSR theories, should be adjusted. The logical possibility that the consensus around Covid-19 was wrongheaded cannot be ruled out. To be sure, a small chance exists that this consensus is wrongheaded. But the consensus in this instance speaks loudly in the direction of examining the theory, not the moral intuition.

What revision might match convictions to theory? As suggested above, revising the model of value creation that underlies CSR theories in order to emphasize intrinsic values and practical reason is able to show why Pfizer and Moderna’s extra effort makes moral sense. Value creation underlies the justification of the entire business system, and this has important implications for the dilemma faced by Pfizer and Moderna. Walsh and Donaldson have argued the purpose of business is to use economic means, i.e., activities of production, distribution and exchange, to contribute to society’s “optimized collective value” (Donaldson and Walsh 2015). Optimized collective value, in turn, is defined in terms of the satisfaction of intrinsic values. All of society’s institutions should contribute to optimized collective value, but business’s role is distinctive—it contributes through the functions of production, distribution, and exchange. In turn, the single intrinsic value that stands as business’s shining beacon is economic welfare. Satisfying the value of economic welfare is the universal and mandatory obligation of any business conceived as a social entity; it stands as business’s normative sine qua non.

In the construction of its background institutions, society has learned over centuries that the satisfaction of economic welfare is most efficiently achieved when businesses operate in a system of private property and markets. Business works best, we have learned, when investors freely take private property interests in business organizations, secured by commitments from those organizations to satisfy owners’ interests. This in turn, identifies another intrinsic value as a mandatory function for any business enterprise, namely, to satisfy its duty to owners. Any for-profit company must make its duty to owners a focal goal. Businesses in a market economy should contribute to the contextual value of economic welfare and satisfy their duty to owners. This is the principal way that for-profit firms optimize collective value.

Such considerations help to understand why the rosy picture painted by Porter and Kramer’s “Shared Value” model (2011) contains a glaring omission, a point made by many critics (Crane et al. 2014; Donaldson 2014). According to Porter and Kramer, a firm should optimize financial performance while at the same time contributing to social value. But in instances where the two clash, the latter is sacrificed to the former. Profits cannot be sacrificed under any circumstances. Porter and Kramer’s model thus offers no theoretical reason for why a for-profit firm should even try to achieve both at the same time. Optimizing profits may utilize socially beneficial strategies, or socially damaging strategies. However, from the optimized collective value model utilized here, the answer to the question of why a firm should pursue social value is obvious. When firms can satisfy another intrinsic value at the same time, that is, while at the same time optimizing benefit to owners, they should do so, because overall collective value is thereby optimized.

But that is not all. In the pursuit of optimized collective value, a business may have a special requirement to satisfy other intrinsic values, or to avoid subtracting from them. Sometimes businesses have special roles by virtue of their special capacity to contribute to a non-economic value. The healthcare industry is an example. Satisfying the intrinsic value of health is embedded in the identity of a healthcare firm. Becoming fully “who you are,” Sandra Waddock points out, is the key to intellectual wisdom (Waddock 2015). To become fully “who it is,” a pharmaceutical firm embeds the intrinsic value of health into its identity by specifying health as a focal goal alongside its duty to owners. Health becomes a focal goal side-by-side with profit, not a contextual goal like that of contributing to overall economic welfare. The same is not true for other firms, even when their actions impact health. A semiconductor firm, for example, may optimize collective value by targeting its duty to owners as its sole focal goal, even though semiconductor manufacturing can impact issues of health (however, other non-focal values such as environmental integrity must, of course, serve as side constraints for the semiconductor firm).

Hence, Donaldson and Walsh’s redefinition of business helps explain why health should be a focal goal for Pfizer and not, say a semiconductor company. The concept of optimized collective value is denominated in terms of the satisfaction of intrinsic values (Donaldson and Walsh 2015). The business system is justified by the intrinsic values it satisfies when the stakeholders of business organizations engage in practical reason in order to produce value. When an industry happens to be defined in terms of a specific intrinsic value, a focus upon that value flows naturally from the firm’s identity. Moderna and Pfizer have weightier large-scale obligations vis a vis the social right to healthcare because their industry identity is denominated by the intrinsic value of health. In turn, a pharmaceutical company such as Pfizer or Moderna can be required to make its Covid-19 vaccine more accessible to Covid victims in developing countries even at the expense of optimizing its profits in the long run.

Individual firms vary widely in how they contribute to optimized collective value and this fact should be reflected in the corporate governance mechanisms and procedures that guide a firm’s practical reasoning. As Ed Freeman has said, “there are few limits on the kinds of purpose that can drive a business” (2010). Healthcare firms contribute by enhancing economic welfare, by satisfying the interests of owners, and by enhancing health. A firm’s distinctiveness, its underlying identity, should align with its corporate governance, i.e., its allocative mechanism of control over its resources (McCahery 2009). How control is allocated is, in turn, should be a function of the goals against which the firm measures its success or failure. A successful corporate governance mechanism achieves its goals successfully. The intrinsic value of keeping commitments, such as satisfying duties to shareholders, is not an option for a for-profit corporation. It is mandatory. Beyond this, however, a firm might contribute to optimized collective value by specifying discretionary goals. BlueAvocado, for example, adopted the noble discretionary goal of providing “thoughtful designs and creative solutions for a greener, simpler life.” Similarly, a firm might adopt a discretionary focal goal that is linked to their core competency, such as Walmart’s: “To save people money so that they can live better.” Of course, such discretionary goals, whether focal or not, must be consistent with the firm’s mandatory goal of honoring fiduciary duties to shareholders and with its contextual mandatory goal of contributing to optimized collective value.

Owing to its industry identity a firm may come to have a mandatory focal goal because its industry is defined in terms of a given intrinsic value. We have been discussing the healthcare industry, but the healthcare industry is not alone. Law firms are intimately connected to the intrinsic value of justice, and hence should have justice as a mandatory focal goal. Education firms are intimately connected to the intrinsic value of knowledge, and hence should have knowledge as a mandatory focal goal. For a healthcare firm, health is a mandatory not discretionary goal; just as justice is a mandatory goal for a law firm and knowledge for an education firm. The structure of mandatory and discretionary purposes in a given firm’s governance has been described as “constitutional purpose” (Donaldson 2022).

It is a short step to the conclusion that Pfizer and Moderna were correct to profess a commitment to extend the availability of a Covid-19 vaccine even if it meant losing money. Adding the mandatory value of health as a mandatory focal goal for Pfizer and Moderna means that not all value can be hostage to the satisfaction of owners’ interests. While owners’ interests usually converge with the goal of enhancing health, specific contexts may offer special opportunities to enhance health. The facts of the Covid-19 pandemic offer such an opportunity. Whether or not doing so enhanced owners’ interests or not, Pfizer and Moderna’s commitment to extend the availability of a Covid-19 vaccine was the right thing to do.

An obvious question, then, is why other industries do not also have mandatory values linked to their productive focus. Why, for example, would the Burlington Coat Factory not have a mandatory focal value connected to human subsistence? Food and clothing are key elements of human survival and in turn to the intrinsic value of subsistence. The difference between Burlington and Pfizer lies in the identity of firms in the apparel industry versus the healthcare industry. The intrinsic value of health is a mandatory focal value for Pfizer because it dominates the proper definition of Pfizer’s central activity, i.e., what it produces. It is thus an integral part of its identity, its self-understood focus. Subsistence, in contrast, is not an integral part of the identity of the Burlington Coat Factory and does not serve as a focal point for practical reasoning. Establishing a firm’s identity is challenging and deserves further research. As discussed elsewhere, however, a firm’s identity might be discerned by examining the “microsocial contracts” or in other words, the implicit and explicit expectations of a firm’s various stakeholders (Donaldson and Dunfee 1999; Donaldson 2022).

Limitations and caveats

A warning label should be placed on the preceding analysis. The question of how a revised theory of value creation should identify other industries—or individual exceptions in any industry—where intrinsic values should sometimes trump long-term financial concerns, remains unexplored in this paper. Next, the interpretation of Pfizer and Moderna activities during Covid-19 depends upon empirical assumptions that are incapable of full verification. Finally, if Pfizer and Moderna should do more than maximize profit in the instance of Covid-19, it does not follow that they or other pharmaceutical companies should often sacrifice profit to intrinsic value. Nor does it follow that even if Pfizer and Moderna should do so in the particular case of Covid-19, they (or other pharmaceutical companies) should do the same in every similar instance. More explanation of these three points will help.

Consider the question of how a revised theory of value creation should identify other industries where intrinsic values should sometimes trump financial concerns. Two obvious cases, mentioned above, are legal services firms and for-profit educational organizations. It has been argued (Donaldson 2022) that law firms are intimately connected to the intrinsic value of justice, and hence should privilege justice as a mandatory constitutional purpose in their governance system; and that, similarly, education firms because they are intimately connected to the intrinsic value of knowledge, should privilege knowledge as a mandatory constitutional purpose in their governance system. But surely there are other industries that satisfy the same criteria. Might banking need to incorporate the value of integrity? Say, by institutionalizing the value of systemic financial integrity? Or might energy firms need to incorporate the value of the environment? These questions lie exposed, but wholly unanswered in this paper.

Consider next how in the Pfizer/Moderna example, the truth about motives and hypothetical future facts is hazy at best. Happily, such problems about motives or future facts need not impeach the conclusions reached so far. As noted earlier, both companies might have been motivated solely by profit and then cleverly created high-sounding window-dressing to disguise their true motives. Perhaps they lied for the sake of profit. But if so, it poses no problems for the argument, since the reasoning rests not upon the companies’ underlying motives, but on the settled convictions about the need in Covid-19 to do more, a conviction reflected in their statements (however disingenuous) and supported by a wide variety of other authoritative voices. We can say that they should have had the right motives, no matter what their true motives were.

One final note of explanation. When an industry’s identity enshrines a particular intrinsic value, thereby necessitating a profit-only + intrinsic value process of practical reasoning, it might seem that firms are doomed to sacrifice profits often. But this is not so. A point made earlier in this discussion bears repeating. Widespread evidence demonstrates the remarkable long-term convergence between profit and the honoring of ethical principles. To be sure, the convergence is not perfect, yet even should some divergence turn out to be the norm, research suggests it is slight (Margolis and Walsh 2001). Instances where profits and deep values diverge when viewed from the heights of the truly long term are the exception, not the rule, and this paper’s utilization of the Covid-19 decision, where profits may need to be subordinated to profit, stands as an exception to the general rule. Of course, other exceptional instances are bound to arise, and resolving them will require sound practical reasoning by pharmaceutical decision makers; doing so will involve a form of normative reasoning that weighs and balances more than one intrinsic value. A limitation of the present paper is that it has said nearly nothing about how such weighing and balancing should occur. Nonetheless, if the present analysis is correct in concluding that profit + health should stand as a mandatory constitutional goal in the practical reasoning of pharmaceutical firms, then coming to understand better how to weigh and balance values is essential.

A connected issue is when and under what circumstances firms that are not centered upon a specific intrinsic value should sacrifice long-term profits. Everyone agrees that that in some exceptional instances any for-profit firm may be morally required to sacrifice profits to values. A firm whose factory dumps mercury into the bay of a poor country whose laws are either rigged by corrupt politicians or misinformed by bad science, should stop dumping the mercury. The moral imperative to stop injuring people applies regardless of industry. But how to characterize such “exceptional instances” stands in need of sophisticated inquiry and analysis. We currently have little to go on in the current literature. To my knowledge, no researcher has even begun to formalize an answer this question.

Conclusion

This paper demonstrates how a revised model of value creation can enhance existing normative CSR theory. A mismatch can be shown between settled convictions about what dominant theories of CSR should be able to prescribe for corporate practical reasoning on the one hand, and what they are capable of prescribing on the other. By referencing the CSR challenge for pharmaceutical companies during Covid-19, the paper shows that even though a settled conviction exists that Pfizer and Moderna were correct in making Covid-19 vaccine available even if it meant losing money, that conviction cannot be confirmed by either of the two dominate CSR theories, i.e., communicative/deliberative democracy and stakeholder theory. The theories fall short because each lacks a model of value creation that privileges intrinsic values, a move that establishes health as a mandatory focal value for healthcare firms. A theory of communicative action may recommend the best process for a pharmaceutical company’s deliberations but cannot confirm either the special intrinsic value of health for pharmaceutical companies or, in turn, confirm the clear moral conviction that pharmaceutical companies should shoulder more than profit-only responsibilities. Similarly, a stakeholder theory, even if fitted with an improved TVC model of value creation, falls short because its model of value creation is limited to the perceived values of stakeholders, not intrinsic ones.

When measuring value creation, normative CSR theories now oscillate between traditional, narrow exchange-based approaches using financial metrics and broader conceptions of value embedded in various CSR theories. Because these two approaches to value creation sometimes recommend conflicting actions in difficult cases such as Covid-19, confusion results. The problem is aggravated by the assumption that all firms, regardless of industry, can be measured against a similar pattern of values. The most popular ways of measuring the social responsibility of a corporation, i.e., by stakeholders, stockholders, and “shared value,” adopt a one-size-fits-all approach. A mining company, a sports betting service, and a medical device manufacturer are on all fours when measuring CSR success. However, as we have seen, healthcare companies should make the intrinsic value of health a focal goal alongside that of profit, while a semiconductor or a mining company might satisfy its CSR responsibilities by specifying only the focal goal of profit.

It is time to rethink the one-size-fits-all truism for CSR and to adopt a value creation model that makes trade-offs easier. While communicative/deliberative democracy and stakeholder theories have contributed hugely to our knowledge about business responsibility, they can contribute even more when fitted with an improved model of value creation.

Funding

The author declares that no funds, grants, or other support were received during the preparation of this manuscript. The author has no relevant financial or non-financial interests to disclose. The article was written entirely by the author. Data sharing not applicable to this article as no datasets were generated or analysed during the current study.

Data availability

None.