Although most corporate managers agree that engaging in socially responsible behavior is the correct thing for corporations to do, few can articulate a strong analytical foundation for this belief. The fact that engaging in this type of behavior may help to make corporations more profitable offers a partial reason for engaging in such behavior. However, profit-seeking fails to explain if or why corporations should engage in socially responsible behavior in circumstances in which no financial benefit to the corporation exist or the financial consequences are uncertain.
The reason for this confusion over the obligation to engage in corporate responsibility rests on the fact that the essential nature of the corporation is not well understood. Each of the prevailing theories of the firm, ie, concession theory, real entity theory, and aggregate theory, describe part of how the corporate form exists, but they fail to explain why the corporation exists. Because these theories are at times contradictory, yet each has some foundation in reality, some have argued for simply backing away from the question and embracing the indeterminacy of the corporation by embracing all three theories. Although this is tempting, resolving the essential nature of the corporation is necessary to help resolve a myriad of legal issues.
As a result, this Essay and my other works introduce a new theory of the firm, collaboration theory. This theory views the corporation as a collaborative effort among a state government and those individuals organizing, operating, and owning the business entity to pursue economic development and economic gain. This theory is superior to the prevailing essentialist theories of the corporation because it explains both how and why the corporation exists.
Under this theory, corporations are obligated to seek profit based on the deal struck among the state and individuals owning, operating, and organizing the corporation, but the co-adventurers in the corporation are obligated to treat each other in good faith whenever possible. This means corporations should only engage in socially irresponsible ways in which the financial benefit to the corporation is clear. Because of the uncertainty of life, this is only going to be the rarest of circumstances. In these rare circumstances, to control bad behavior on the part of the corporation, the government must engage in affirmative lawmaking and regulation to alter the cost–benefit analysis to force corporations to be ethical.
Chaffee, Eric C, The Origins of Corporate Social Responsibility (April 24, 2017). University of Cincinnati Law Review, Vol 85, 2017.