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Corporate social responsibility in the 1920s: an institutional perspective


Richard C. Hoffman
Perdue School of Business, Salisbury University, Salisbury, Maryland, USA
Abstract
Purpose The purpose of this study is to better understand the origins of modern corporate social responsibility. The paper seeks to examine some factors that enabled the new industrial corporation to expand its role in society. Design/methodology/approach Using institutional theory, this paper describes how some of the institutional characteristics of the modern corporation itself provided some opportunities or challenges in terms of gaining social legitimacy. Findings The institutional features of the corporation, its technology and management created new demands on the corporation by society. These in turn led to the development of such concepts of corporate social responsibility as: public relations, service, trusteeship, and public welfare. Research limitations/implications Future research on social legitimacy should focus on demands placed by the institutional characteristics of new organizations. Other research might include comparative studies of corporate legitimacy in Europe or Asia or an examination of the evolving role of managers from the role of welfare capitalist to trusteeship. Practical implications Institutions that adapt to changing demands have the best chance to survive. Firms that adopt new social activities are likely to have to sustain them in the long run. Originality/value This study is the rst to argue that the features of the modern corporation itself stimulated some of the social activities it undertook. Contributions of scientic management scholars to the shaping of the emerging corporate role are also noted. Keywords Corporate social responsibility, Business ethics, Management history Paper type General review

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Ethical business practices are once again a topic of discussion on Main Street and Wall Street in the wake of recent scandals involving Enron, Tyco and other major corporations. While these scandals focus on some of the key decision makers, they also bring to the forefront the overall role of the corporation in society. Ethical behavior at the organizational level is frequently referred to under the rubric of corporate social responsibility. Corporate social responsibility (Davis, 1973, pp. 312-3):
. . . refers to the rms consideration of and response to issues beyond the narrow, economic, technical, and legal requirements of the rm, . . . in a manner that will accomplish social benets along with the traditional economic gains which the rm seeks.

The prevalent business model addressing corporate ethical behavior is that of the stakeholder concept that was rst introduced in the 1960s, a period of great social
The author would like to thank Fred Bateman and two anonymous reviewers and the guest editor for helpful comments on earlier drafts. Special thanks to the reviewer who encouraged me to examine the contributions of early management theorists.
Journal of Management History Vol. 13 No. 1, 2007 pp. 55-73 q Emerald Group Publishing Limited 1751-1348 DOI 10.1108/17511340710715179

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change in America (Preble, 2005). According to stakeholder theory, the corporation has responsibility to any group or individual who can or is affected by the corporations obligations (Mitchell et al., 1997). Ideas concerning the ethical behavior of corporations and its responsibility toward various stakeholders have their roots in the early decades of the twentieth century and reect the institutional environment in which the present modern corporation developed. The purpose of this present study is to examine the some of the origins and nature of modern corporate social responsibility during one of its early periods of development, the 1920s. It is hoped that historical studies such as this may serve to improve our understanding of the concept of modern corporate social responsibility by providing some knowledge of its origins, by demonstrating that it is not a novel idea, and by indicating that the specic nature of these responsibilities reects the social and institutional needs of the times in which they are invoked. The decade of the 1920s has been selected as the focus for this discussion because it represents what appears to be one of the rst eras of modern corporate social responsibility. First of all, according to historian Chandler (1962, 1977) the modern corporate enterprise was fully developed by 1917. Secondly, business (Krooss, 1970, p. 3) . . . nally emerged at the height of prestige in the 1920s when the businessman became the authority on matters economic, political, and even aesthetic. Finally, the corporate manager of the 1920s seemed to have developed, for the rst time, a concept of social responsibility from a corporate rather than an individual perspective. This was a period in American history that saw a decline in the individual ethic needed for westward expansion and the rise of the social ethic needed for industrial harmony (Scott, 1959). This discussion will center on the increased awareness of social responsibility by managers of large publicly-held corporations because they were faced with a greater challenge of legitimizing their positions in society than their entrepreneurial predecessors because of their more dispersed activities and ownership (Epstein, 1972). The thesis of this paper is that the emergence of social responsibility as a corporate responsibility was inuenced by the institutional characteristics of society at the time of the emergence of the large modern corporation. Towards this end, this study rst describes institutional theory used to frame the discussion. This is followed by a brief summary of the major philosophies or beliefs of businesss role in society in the decades preceding the 1920s. The main body of the paper then focuses on selected characteristics of the institutional environment of the 1920s and the social behaviors they engendered. In the nal section, the implications of the study for managers and future research are presented. Institutional theory and organizational legitimacy As a new institution in American society, the practices of the modern corporation were inuenced (in part) by existing institutions. As Kostova (1996) has noted, organizational practices are shaped by their institutional environment. Thus, as a relatively newer form of institution, the modern industrial corporation had to conform to the rules and belief systems of their broader environment to gain legitimacy (Scott, 1995). Management thinkers of the 1920s adopted a similar perspective, for example, Tead and Metcalf (1933, pp. 501-2), observed that, . . . institutions exist not for their own sake or for the benet of some small group which . . . controls them.

They exist to minister to the life of the entire community. Consequently, institutional theory provides as a useful framework for examining the change in the behavior of institutions. Institutions refer to the actions (individuals, groups, organizations) within a situation or society. The process of institutionalization involves the internalization of common values, norms, and behaviors by members in a society (Mayhew, 1982). Institutions consist of cognitive, normative, and regulative elements or structures that provide stability and meaning to social behavior (Scott, 1995). Regulatory structure includes the setting, monitoring, and enforcement of societal rules, e.g. government as a rule setting institution. Normative elements include the desirable goals and means of attaining them, e.g. societal beliefs and norms. Lastly, the cognitive element occurs when institutions adopt structures and processes that are consistent with that of other actors. Aldrich and Fiol (1994) have argued that the legitimacy of a new institutional form in society (e.g. modern industrial corporation) is established when the new institutions expand in number, in part, by adopting structures and activities that are consistent with the goals of prevailing institutional actors. Furthermore, legitimacy may be achieved to the extent external stakeholders such as the general public, government, unions, etc. accept the institution as appropriate and right. Institutional theory focuses on the processes by which new institutions gain legitimacy within a society usually by identifying and executing relevant rights and responsibilities in that society. Thus, institutional theory appears to be a particularly useful framework for examining the development of ethical business behavior from a responsibility undertaken by individuals to that undertaken by a new institution during the 1920s. Although institutional studies often focus on the process by which external institutions shape the role of newer ones, this study adopts a different perspective. As a new institutional form, the modern industrial corporation possessed some unique characteristics for their era. This paper examines how some of the institutional characteristics of the modern corporation provided some opportunities or challenges to the new institutional form in terms of gaining legitimacy. In part the corporation adapted by developing structures or activities that attempted to address some of the prevailing values, norms, and rules of society, thereby, helping it gain legitimacy and a new social role in society. Social responsibility of business prior to the 1920s To gain a perspective on the evolution of corporate social responsibility in the 1920s, three prior views of businesss social obligations are briey summarized; these include: the prot ethic, progressivism, and the gospel of wealth. America in the nineteenth century was a society of economic scarcity. Hence, economic growth and the accumulation of aggregate wealth were the primary goal, (Hay and Gray, 1974, p. 136). It was believed that rapid economic development could best be achieved by having businessmen earn large prots and then reinvest them into the business. The prot ethic was justied by relating it to some of the socio-economic and religious philosophies of the day. The progressive era (1890-1918) marked the growing disapproval by society with classical laissez-faire capitalism and the prot ethic (Weinstein, 1968). Consequently, progressives sought to: regulate the economy to distribute the wealth more widely; make elected ofcials more responsive to the people; and assist the socially and economically disadvantaged to improve their standard of living (Wiebe, 1962). These were achieved through a combination of legislation and regulation.

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The progressive era also initiated the businessmans assumption of social responsibility as reected in the Social Gospel movement. The most widely articulated example was the Gospel of Wealth that espoused (Walton, 1970, p. 125), . . . to make money is only half the task, the other half is to use it well. A business person could leave their wealth to their heirs, a foundation, or, alternatively they could make personal philanthropic donations during their lifetime. Industrial entrepreneurs gave considerable sums to social improvements. For example, Andrew Carnegie donated more than $350 million to: education, libraries, and to steel workers pensions (Hughes, 1973). By 1918 public displeasure with the gospel of wealth was evident; a congressional committee even denounced it as an intrusion on public affairs (Walton, 1967). Thus, the responsibility for social reform began to shift from individuals to institutions. The modern corporation of the 1920s and institutional legitimacy Business emerged from the progressive period having lost their suspicion of government intervention and having developed a keener awareness of social demands. Yet, the 1920s also emerged as an age of paradoxes, for while everyone yearned to return to normalcy the decade was faced with unparalleled economic growth. With growth came social changes such as urbanization and increased material wealth. As depicted in Table I the decade of the 1920s was a prosperous one based on a variety of indicators. Above all the 1920s was a business culture. As Galambos (1975, p. 222) indicates, Most middle class Americans had come to accept the giant corporation as a permanent feature of their society . . . They had not learned to love big business but they decided they could live with it. Before examining how some of the institutional characteristics of the modern corporation inuenced its efforts at gaining legitimacy, the inuence of three external institutions of the 1920s on the modern corporation are briey examined: the scientic management movement, government, and unions. Scientic management movement By the 1920s the scientic management movement was rmly established in corporate America. Initiated by Frederick W. Taylor, practitioner/consultants emphasized a more
Percent Economic growth Gross national product growth Consumption growth Average unemployment Output Productivity gains Manufacturing gains Corporate performance Prot increase Dividend growth Wealth held by top 200 rms Asset value of top 22 percent rms on NYSE Source: Berle and Means (1940), Soule (1947) and US Bureau of Census (1975) 45 22 5.2 32 30 62 64 50 80

Table I. Indicators of prosperity in the 1920s (1920-1929)

scientic (versus rule of thumb) approach to management that replaced class prejudice and arbitrary opinion with the development of facts/expertise in areas such as: job design, personnel selection/training, and functional planning. Taylor and his followers believed that, if rms were better managed, their performance would be more consistent, and this, in turn, would lessen the severe business cycles of entrepreneurial capitalism (Bruce and Nyland, 2001). During the 1920s the revisionist movement (Graham, 2000; Wren, 1979) within scientic management sought to make management practice more responsive to human needs as well as to that of production. Given the labor unrest in the USA and the actions of Bolsheviks in Europe, the proponents of scientic management were well aware that the future of the new industrial order in a democratic society rested on nding scientic rather than merely political solutions to the struggle between labor and management. Some of the chief representatives of these revisionists included Mary Parker Follett a social worker and political philosopher; Henry L. Gantt a colleague of Taylors and a Technical Executive; Lillian Gilbreth a Psychologist, University Professor, and a partner with her husband Frank in consulting on scientic management; and Ordway Tead a Manager, University Lecturer, and author of the rst text on personnel. To this group we also add Oliver Sheldon, an Executive with Rowntree & Co. in England. Sheldon was familiar with Taylorism and wrote two inuential books that were read on both sides of the Altantic[1]. Sheldon adopted a top management perspective in his writings and wrote explicitly on social responsibilities. These individuals, among others, had an effect in shaping the attitudes and practices of managers in the 1920s through their consultancy or writings and, thereby, contributed to the changing view of businesss social responsibility. Thus, in the ensuing discussion, the contributions of these revisionists will be noted where appropriate. Government and unions emergence of welfare capitalism Two institutions had a profound effect on the modern corporations efforts to seek legitimacy, the government and unions. In fact, both institutions took a less active role in business during the 1920s compared to the progressive era paving the way for the corporation to assume greater responsibility in a variety of arenas. Largely as a result of World War I and the vast business and economic legislation of the progressive era, business and government had learned they could coexist. Calvin Coolidge best described the governments attitude toward business during the 1920s when he noted that, (Eberstadt, 1973, p. 81) The business of America is business. . . The man who builds a factory, builds a temple. In effect the economic prosperity produced by large corporations had the effect of legitimizing its role in society, and the government institutions did not want to stand in the way. Although unions had gained power during the progressive era, this power waned due to a wave of strikes during 1919-1921, the inux of women and Negroes in the labor force; and the internal strife and racketeering within unions. As a result, 60 percent of the unions in the AFL either lost membership or remained the same from 1924 to 1929 (Rayback, 1966). Having weak unions permitted the modern corporation to assume greater responsibility for employee welfare on their own terms. Some of the corporate efforts in this regard were: . the open shop drive affecting 5 million workers (Soule, 1947); . employee representation plans or company unions 500 rms organized 1.5 million employees in such plans by 1928 (Pelling, 1960); and

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the growth of welfare capitalism pension plans, unemployment insurance, and prot sharing offered by most major rms, e.g. G.E., G.M., Hormel, and Harvester.

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Employee welfare was urged by contemporary management thinkers such as Ordway Tead who saw employee representation as a means for democratizing industry as he stated (OConnor, 2001, p. 26). We should accord equal representation to every genuinely different interest in the conduct of an enterprise. Follett, on the other hand was opposed to employee representation plans because they still placed labor and management in an adversarial as opposed to cooperative relationship. She advocated efforts that provided employees with ownership (Metcalf and Urwick, 1942). Other management scholars such as Lillian Gilbreth were actively involved in instituting new personnel practices including: performing job analyses and design, instituting selection and training methods at Macys department stores during 1925-1928 (Graham, 2000). By decades end, the establishment of permanent personnel departments offering a variety of employee centered programs stood as proof that the industrial corporation was adopting the institutional structures to insure employee welfare (Eilbirt, 1959). The following sections examine how certain institutional characteristics of the modern corporation itself contributed to the development of its social role in society. Specically, we examine the effect that the following had on the development of corporate structures and processes aimed at the social issues of the era: corporate size, the use of mass production technology, the separation of ownership and control, and the professionalization of management. Modern corporation: size and public relations The modern corporation of the twentieth century was especially distinguished by its large size. According to Chandler (1977) this phenomenal growth in the scale of operations had been the result of increased technology. Modern production technology, especially, created large-scale organizations, for corporations were forced by their new found capacity to produce large quantities of goods and services and to integrate horizontally and then vertically to insure an adequate market and sources of supply for their large output. The output of these corporations was no longer governed by the market place but by a hierarchy of professional managers who had to think in terms of long-run survival rather than short-run prot maximization. At this time, giant corporations dominated most of the nations major industries, between 1919 and 1929, the assets of the top 200 rms grew from $43.7 billion to $81 billion, and by 1930, 130 of the 573 corporations listed on the NYSE controlled more than 80 percent of the assets of all companies represented (Berle and Gardiner, 1934). Managers and consultants appeared to be acutely aware of the public visibility brought on by this sheer organizational size and began to consider the corporations impact of on the economy and society. As George Perkins of US Steel noted (Petit, 1967, p. 68), . . . The larger the corporation becomes, the greater becomes its responsibilities to the entire community. Similarly, a New England manufacturer observed that (Sharpe, 1929), . . . having plants nationwide calls for a broader conception of corporate social responsibility. Corporate management sought to buffer the effects of corporate size on society by adopting the use of public relations as a social obligation. It served as a surrogate for

the lack of face-to-face contact with the public that the corporation had lost due to their large size. One public utility executive described the social responsibilities of business as being the provision of good service, courtesy, and publicity (Kennedy, 1920). Alfred P. Sloan Jr, of G.M. (Heald, 1970, p. 90), noted the rationale for publicity was that . . . big business required public understanding, favored a policy of, frankness as one of the rst characteristics of management. Ivy Lee, the leading public relations consultant of the era, noted (Heald, 1970) that public relations served two purposes: (1) it aided in informing management of public needs and attitudes; and (2) it carried the business story to the people. Another consultant/lecturer noted that . . . Attention to sound publicity is essential to success, (Tead, 1935, pp. 41-2). It helps the rm to interpret facts to all concerned audiences. Tead was careful to distinguish publicity from propaganda, the latter serving selsh and often covert interests. He noted that the purpose of publicity is, . . . to impart ideas and points of view to inform followers or those desired as followers. Prior to World War I, public relations was primarily used by utilities such as AT&T and Insulls energy empire because of their size and role as publicly regulated monopolies. During the war, public relations gained respectability when the government established its own Committee for Public Information to keep the public informed of government activities. Certain events of the 1920s facilitated corporate interface with society via public relations including: the proliferation of trade associations, the merger of newspaper chains, and the growth of the electronic media (radio). Radio, in particular, made public relations a more effective means of social control because its messages were difcult to ignore. To handle the demand for public relations by corporations, large consulting rms such as those founded by Ivy Lee and Edward C. Bernays were established. One of the best known examples of the use of public relations to ameliorate the relationship between the large corporation and society was its use by Theodore Vail, President of AT&T. Prior to the war, he had established the rst modern Publicity Department to gain public support to have his utility declared a legally regulated monopoly. Throughout the 1920s, AT&Ts Publicity department was used to present a positive corporate image. For example, the rm produced lms about the business system for use in schools that had been viewed by over 53 million students during the 1920s (Raucher, 1968). Most other industry leaders such as those at US Steel and Standard Oil relied on public relations for similar purposes. Although public relations was most popularly known as an instrument of external communication, it also received wide use as an instrument for managing employee relations. Tead (1935, p. 41) advocated that publicity and personnel managers often had similar roles because . . . many publicizing efforts among employees [are] . . . similar to those with . . . the general public. Often used as a substitute for genuine changes in labor policies, publicity was used to win employee loyalty. By 1925, more than half of the rms in manufacturing utilized an employee magazine as a publicity mouthpiece (Raucher, 1968). Despite its extensive use, public relations had many critics both within and outside of business who felt that businesses had convinced themselves of their own publicity and failed to come to grips with the actual social attitudes of the time. Nonetheless, it had been articulated as a social responsibility of business whatever the motives.

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Mass production technology service While mass production technology greatly stimulated the growth of large-scale corporations, it also seemed to shape the corporations concepts of social responsibilities. Mass production was rst used in the auto industry and spread to other industries such as cigarettes, cereals, and machinery (Chandler, 1977). In all of these cases, mass production and distribution rms were characterized by high volume of output, lowered costs, vertical integration into supply and marketing channels, internal nancing and oligopolistic competition. Much of the efforts of the scientic management movement were devoted to improving the efciency of such systems. These advances suggested that mass production provided the possibilities for improving the performance of business for the benet of society. This attitude was initially demonstrated by the gospel of production that men such as Henry Ford emphasized by offering quality products at low prices to demonstrate businesss concern for the public. The high volume, mass production capabilities of these new institutions stimulated a need to more actively cultivate the consumer. The growing awareness of the broader implications of mass production and the need for improved public relations led to the expansion of the gospel of production into the concept of service during the 1920s. The term was originally coined in 1919 by Henry Gantt, a strong proponent of scientic management. Gantt (1919, p. 5) described his doctrine of service in the broader social context when he stated that the, . . .business system had its foundation in service, and as far as the community is concerned has no reason for existence except [for] the service it can render. He saw service as way to insure more democratic principles in business. Generally, service was dened as the corporations concern for the needs of consumers, employees, the community, and the nation in carrying out its economic function. The Gospel of Service was clearly more ambitious and inclusive than the gospel of production. It demanded of its apostles both a sense of trusteeship and a desire to put ones will and work at the service of others,(Fortune editors, 1949, p. 156). M.P. Follett believed that professionalizing management required the combination of science and service to the community (Metcalf and Urwick, 1942) and urged executive development in that direction. The concept of service was tied to the idea of new capitalism. New capitalism dictated that the pursuit of prots should not be the managers sole interest; however, those who provided service would reap the largest prot in the long run. There were as many explanations of what was meant by the concept of service as there were managers who espoused it. For the manager/author Sheldon (1923, p. 74) service was in producing goods, . . . that are socially requisite or for which a demand exists. To Edward A. Filene, a major retailer, it meant service to customers in the form of quality goods at low prices sold under just conditions; it also meant service to employees in the form of higher wages (Heald, 1970, p. 89). Gerard Swope of G.E. felt that the purpose of service was, . . . to produce more and better goods for more people at relatively lower prices, while preserving for those who work in industry and those who invest in it an adequate return. Another G.E. Executive Owen D. Young felt that service was equivalent to a trusteeship or the obligation of corporations to stockholders, workers, customers, and the general public (Krooss, 1970). Not all business executives favored the concept of service. Many viewed it as economic waste because the free gifts and added services provided in the name of service increased the costs to the consumer. One executive commented that the problem with

these services was that, (Taft, 1925, p. 38) Each one of them was invented by the seller of goods as a way of appearing to do something for nothing . . . Despite these criticisms, service was a popular concept championed by major corporations, for it became one of the major campaigns of their public relations efforts. The concept of service was motivated as much by pragmatic competitive needs as by the corporate institutions awareness of the social impact that mass production had on society. Separation of management and ownership trusteeship One of the major characteristics that distinguished the twentieth century corporate form of organization was its increased separation of ownership from management control. This separation was chiey due to the need to secure external nances to support the corporations rapid growth and because of the need to hire corps of managers to manage its multiunit operations. In 1926, Verity (1926, p. 544) the President of American Rolling Mills, observed that, The corporate business of the country is largely owned by great numbers of individual stockholders; as a matter of fact, he noted that the number of stockholders had increased by 25 percent in the 25 years leading up to 1923. Veritys observations were substantiated by Berle and Means (1940) study of the top 200 corporations of the 1920s in which they found that control and ownership appeared to be separate factors. The immediate impact of this wide dispersion of ownership was that corporate ownership had changed from an active to a passive role. Stockholders were primarily suppliers of highly liquid capital and their interest in the rm was transient. Thus, owners were limited in the demands they could place upon the corporation. Control was established by the creation of hierarchies of management which tended to further sharpen its distinction from ownership. Management now had de facto control over the corporation and its assets. Sloan (1926) of GM believed that the wide dispersion of ownership created the possibility that no one would be accountable for the corporations actions. Perhaps, the most signicant effect was managements de-emphasis of prots as their sole modus operandi. The following statement by Walter S. Gifford, President of AT&T, best reected managements new attitude (Fortune editors, 1930, pp. 37-8):
It . . . would be contrary to sound policy for the management to earn speculative or large prots for distribution as . . . extra dividends . . . Earnings in excess of these requirements must be either spent for the enlargement and improvement of the service furnished or the rates charged . . . just be reduced.

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The question of to whom was management responsible in the publicly-held corporation of the 1920s was partially answered by managements new social philosophy of Trusteeship. Trusteeship meant that corporate managers were responsible for maintaining an equitable balance among the various claims of employees, customers, suppliers, creditors, and the community as well as stockholders (Hay and Gray, 1974). The idea of the duciary position of management had its roots in the concept of the Trusteeship or Gospel of Wealth of the 1890s (Heald, 1957, p. 301):
Yet, the concept of managerial trusteeship had taken shape and found its rst concrete expression, in an era, the 1920s, when government posed little threat to freewheeling enterprise.

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Welfare capitalism and the concept of service were indications of managements growing awareness of their obligations to employees and customers, respectively. Tead (1935, p. 271) placed the notion of management as trustee in the broadest perspective. He believed that, in a democracy, institutions should develop a personal relation to their wider community, And the intermediary in helping to bring that relationship into being is the leader [manager] . . . According to the historian, Heald (1957), there were two major concepts of trusteeship during this period. The rst was the more restricted notion of Business as a partnership which stressed the cooperation between management, and the rms more immediate constituents/stakeholders: labor, consumers, suppliers and community. For example, Rockefeller felt that business was responsible for the advancement of the social well being of its constituencies as well as the production of wealth. H. J. Heinz felt his rm was chiey responsible to its employees, distributors; and consumers. The supporters of this concept of trusteeship tended to treat each of the rms constituents equally although they gave a slight preference to the shareholders. The other and more liberal interpretation of trusteeship was embodied in the Industrial Statesman who put the needs of the public and employees ahead of those of the stockholders. Orway Tead dened the managers role broadly as that of a custodian of human fulllment (OConnor, 2001). Sheldon (1923) identied two social aspects of management; these were its relation to employees and to the community. Furthermore, Sheldon noted that putting the interests of these two groups ahead of the rms suggests ethical as well as an economic motives for business, and the standards established should reect this notion. Mary Follett believed that members of the rm should recognize its relationship to stockholders, creditors, suppliers, competitors and the community (Wren, 1979). Elbert Gary (US Steel) was one of the rst executives to include the general public on the list of those for whom management served as trustee. G.E.s Owen D. Young extended the concept further by actively participating in public affairs as chair of a presidential committee on business cycles in 1923 (Heald, 1970). Thus, the concept of trusteeship was expanded from the internal relations between the immediate claimants of the corporation to include an ever growing circle of external relations and the consideration of ethical standards in business practices. Trusteeship, however, was not without its critics. Economist J. H. Clark, in an inuential book (Clark, 1939) of the time, distrusted management efforts toward self-regulation and suggested a social accounting system to control business externally. Also disappointed with industrial managers, Gantt (1919) suggested a more comprehensive solution. He proposed the development of public service corporations nanced with public funds and whose prots would be returned to the community. Nevertheless, trusteeship indicated the growing awareness of the importance of external relations by the large industrial corporation. The separation of ownership from management control created a situation in which (Heald, 1957, p. 381), Management stood in a position of balance between the other claimants and . . . reserve to itself the nal determination of their interests. Professionalization of management organized social responsibility:
. . . The twentieth century may be looked upon in retrospect as the period of the rise of management, characterized by more managers per worker . . . more studying and writing about how to manage the multifarious activities of advanced industrial society. . . (Cochran, 1972a, p. 221).

This was chiey stimulated by the growth of the multiunit corporation and the continued separation of ownership from control. As a matter of fact, Chandler (1977) observed that it was only, after creating a managerial hierarchy capable of replacing the market for planning, coordinating, and monitoring organizational activity, that the growth of the modern corporation was truly successful. By the end of World War I, America had seen the rise of a managerial class in business and government (Burnham, 1941). The professional managers of the 1920s were truly representative of the Weberian bureaucratic administrator. Managers were salaried; hired on the basis of their skills; and they derived their power from their dened organizational position rather than from ownership. From their ranks came some of the chief examples of the new managerial elite of the 1920s and the modern corporation. Men like Alfred P. Sloan of G.M. and Robert E. Wood of Sears, Roebuck and Company had developed management skills within large organizational bureaucracies and were able to encourage the growth of their rms through strategies of diversication and the use of decentralized, multidivisional management systems (Chandler, 1962). The notion of management as a profession had been identied with Taylors Scientic Management which emphasized that management was a science requiring both formal education and experience. The revisionists of this movement focused on training of managers and not just workers. Professions require intellectual training based on science and used in the service to others often with a code of ethics (Smiddy and Naum, 1954). As Mary Follett (Metcalf and Urwick, 1942, p. 131) wrote, Men must prepare themselves seriously for this profession as for any other . . . A part which . . . only trained and disciplined men can in the future hope to take with success. Lillian Gilbreth and her husband were actively involved in management training. They conducted summer schools on scientic management beginning in 1913; Lillian emphasized psychology and human factors in the programs (Schroyer, 1975). Sheldon (1923, p. 248) devoted a whole chapter to training for industrial management in his book The Philosophy of Management. He considered management a science that required a higher standard of training. As he noted, the . . . intricacy of management has necessitated the formulation of a managerial technique . . . Sheldon (1923, p. 254) also observed that, America also leads us in the sharing of knowledge, through the efforts of the Institute of Mechanical Engineers, the Taylor Society, and American universities. The increasing professionalization of management during the 1920s was also fostered by the development of management curricula in schools of engineering and the growth of university schools of business (Dewhurst, 1931). In addition to teaching techniques of management, business schools emphasized that managers had important obligations to society (Bowen, 1953). This increased professionalization was reected in the backgrounds of managers of the top corporations in 1928: 32 percent were college graduates with professional training, mostly in engineering (e.g. Alfred, Sloan, Robert Wood, and Gerard Swope), law (e.g. E. H. Gary and Theodore Vail), and to a lesser extent, business. The salaried professional manager had different motivations compared to his entrepreneurial predecessors. The entrepreneurs efforts were rewarded by the prots that accrued to him and the psychic satisfaction of having created something. On the other hand, the new managers were careerists who regarded business as a profession and an opportunity for accomplishment rather than as a means to acquire personal

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wealth. This notion is well illustrated in Alfred P. Sloans statement, (Krooss, 1970, p. 44) Making money ceased to interest me long ago. Its the job that counts. As such, the professional manager was motivated by his association with the organization and his advancement within it, because of their career interest and the large dollar commitments for which they were responsible, the professional managers of the 1920s adopted the long-run survival of the rm as their primary goal. Managers were, therefore, willing to accept a lower total prot in return for growth by expanding output. This was not their only goal, however; unlike the entrepreneur, they were extremely conscious about how they appeared to others because a managers advancement often depended on it. For most of the management scholars of the day, the managers social role was embedded in the notion of service to employees and the broader community. According to Mary Follett (Metcalf and Urwick, 1942, p. 131), . . . All professional men are assuming grave responsibilities . . . in one of the large functions of society,, e.g. decisions regarding resources, employees and service to the community. Tead (1935, p. 271) indicated that all human effort including management in a democracy is, . . . a fact of fruitful personal relation to the community. Furthermore, Gantt (1919, p. 15) warned that:
. . . the business system must accept its social responsibility and devote itself primarily to service, or the community will ultimately make the attempt to take over in order to operate it in its own interest.

Professional managers seemed to heed such warnings and began to view their role as one of mediator between the various constituencies of the corporation. As Gerard Swope put it, the corporate manager had the (Krooss, 1970, p. 44), . . . responsibility to the public, the worker, the shareholders and to the duty of perpetuity [to the corporation] itself. In the past, owner-managers had separated social obligations and business activities and became involved in the former either when they had left business or as an avocation. However, the professional manager was an extension of the new corporate institution and developed his social responsibilities as part of the duties of the job, in keeping with his role as trustee. The rise of professional consciousness among business leaders seemed to parallel the growth of organized corporate social activity aimed at the public beyond the corporations immediate claimants. Sheldon (1923, p. 78) optimistically observed, In taking that long view, management may perhaps espy the time when the [molding] of the spirit of the community will count as much as the production of goods. Hence, for the rst time, professional managers began to make use of corporate funds to engage in public works and philanthropic projects such as community health and welfare, the arts, and education. This can probably best be illustrated by briey examining the Community Chest movement. Organized corporate philanthropy had its early origins with the railroads support of the activities of the YMCA in the late nineteenth century. The development of the Community Chest movement between 1918 and 1929 (Heald, 1970) was inuenced by a number of factors. First of all, corporate managers were interested in stemming the growth of welfare legislation of the progressive era. Secondly, the growth of multiunit operations presented unique problems, for the outlying units could not afford to donate to all local charities. Finally, businessmen had developed improved management and fund raising techniques that could be transferred to public works. Community chests

were rst organized in major urban areas around 1915 by business and community leaders who volunteered their time to manage them. Their purpose was to pool all local health and welfare fund drives into one central community fund drive. The chief advantages of this organization was that donors were faced with having to give to only one fund, thereby, satisfying all segments of the community. The results of this concerted charitable effort by business were spectacular. In 1919, 40 cities had community chests, a decade later there were three hundred and fty, (Cochran, 1972b, p. 331). In 1920, some 2,652 rms gave $2.5 million in gifts and by 1929, some 33,977 rms had donated $12.9 million in gifts. Corporate giving represented 24 percent of total contributions to these funds (Heald, 1970). The success of these community fund drives led to the establishment of fund drives by corporations specically designed to support other social needs such as medicine and education. For example, massive fund raising campaigns were organized between 1921 and 1925 to endow universities. Organized corporate fund raising was not without its problems, however. Cooperation between business and the community chests was often hampered by: the diversity of solicitation practices; the difculty in deciding on what basis the amount of corporate contributions should be determined; and managements right to give away the shareholders money. The latter issue was not completely settled until the 5 percent Amendment to the Revenue Act was passed in 1935 which limited tax deductible corporate contributions to 5 percent of annual income. This act appeased some of the critics of corporate giving, and it also provided social approval for the use of corporate funds for social activities. Corporate philanthropy tapered off during the lean years of the depression; however, as Heald (1970) notes, it was one of the few social movements of the 1920s to survive the depression. This indicated that business had begun to focus on social problems and on effective means to address them. With the evolution of organized corporate social activities by the new managerial class of the 1920s, the concept of corporate social responsibility had begun to mature, for now (Heald, 1970, p. 19), . . . social responsibility was clearly seen as a charge not merely upon individual conscience and concern but upon corporate resources as well. Summary and implications The development of corporate social responsibility is inextricably involved in the historical, socio-economic, political, and organizational features of the society and time period under consideration. These are the institutional forces that seem to shape the concepts of what exactly that responsibility should be. During the prosperity of the 1920s, business had its greatest social and political support simply because it performed its economic functions well. The modern corporation was rmly established and well nanced during the 1920s; consequently, their managements could afford to take a long-run view, philosophize about their role in society (Moore, 1950), and pursue non-economic goals. This latter notion is probably best explained by the following statement (Galambos, 1975, p. 221):
Over all these activities [and organizational changes] shone the warm sun of prosperity. Assurances of a reasonable prot relaxed businessmen and encouraged their reform impulses.

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Furthermore, as a relatively new organizational form in the 1920s, the modern industrial corporation had to be more sensitive to the demands of other institutional groups to gain legitimacy within American society. Out of the events of the 1920s, the concept of social responsibility began to evolve from simply an individual duty of the businessman conducted after business hours with personal funds to an organizational responsibility pursued along with other goals using corporate resources. The vacuum left by the weak unions stimulated the corporations increased assumption of responsibility for employee welfare. The developing institutional characteristics of the corporation, its technology and management created new demands on them by society. These in turn led to the development of such concepts of corporate social responsibility as public relations, service, trusteeship, and public welfare. The relationship between the institutional characteristics of the corporation and the corporations assumption of certain responsibilities or actions toward society are summarized in Table II. The table reveals that, in response to societys reactions to certain institutional characteristics, managers developed concepts (e.g. service, trusteeship) to satisfy both internal and external constituents. These concepts were then implemented via certain structures (e.g. publicity depts) and activities (e.g. consumer credit, public relations), thereby, legitimizing the role of the modern corporation during the 1920s and beyond. Moreover, managers rarely undertook social responsibilities which they did not perceive as beneting them or their corporations directly. Thus, the concept of social responsibility today is not a novel one although what constitutes that responsibility has changed. Many of the social responsibilities of the 1920s have become institutionalized management functions today. This study has drawn on institutional theory to rst explain the rationale for corporate assumption of wider social responsibility the need for legitimacy as a relatively new organizational form in the era. Secondly, institutional theory itself draws attention to the institutional characteristics of the new corporation that may explain some of the added demands society placed on this new organizational form. A fully balanced discussion would also include those institutions such as governments, unions, and public activists whose actions or lack thereof also placed demands on the new corporations. However, that discussion is beyond the scope of this study. In this study, we have also indicated that the ideas of a few of the scientic management thinkers of the day also helped shape or dene some of the roles and responsibilities of the modern corporate manager. The historical knowledge of the corporations obligations to society offers perspectives for practitioners and scholars of today. The rst practical implication is that society and its institutions change. Thus, those institutions that adapt to changing demands are those that have the best chance to survive (Aldrich and Fiol, 1994). Secondly, what may have been considered a novel social activity of the corporation in the 1920s may become an accepted practice of professional management today, e.g. personnel management, public relations, and service. Thus, as rms adopt new activities in response to social demands, they are likely to have to sustain them in the long run. Thirdly, institutional theory demonstrates that change occurs, in part, because of the emergence of new institutions. Today, for example, globalization of communications, technology, and the economy is creating a whole set of new demands particularly for the multinational corporation. A look at any recent summit of the major

Institutional factors

Corporate social concept

Institutional structures or actions

External Scientic management revisionists

Cooperative government relations

Union decline Internal Corporate size Public relations Mass production technology Gospel of service Separation of management and ownership Trusteeship Organized social action

Managing responsibly was key to industrial success in a democratic society Permitted business assumption of new social activities Welfare capitalism Personnel depts., benets, company unions

Professionalization of management

Publicity depts., lms, employee magazines Quality goods, credit, higher wages Responsibility towards: direct stakeholders (suppliers, customers, etc.) general public Community chests, corp. philanthropy

69

Corporate social responsibility in the 1920s

Table II. Institutional factors and corporate social responsibility

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economic powers reveals the variety of interest groups and their demands resulting, in part, from this social change. Fourth, this study has noted that the changing characteristics of existing institutions themselves often create situations demanding of legitimacy. Managers need to identify how the changing characteristics of their organizations are likely to impact their stakeholders. For example, today, corporations use increasingly complex nancial arrangements and have adopted a variety of new information technologies. Concerns about access versus protection of privacy lies at the heart of the social impact information technologies. Todays corporate managers should be well aware that corporate efforts at properly addressing these and other issues in the eyes of society is likely to lessen public control of their affairs. This latter lesson, learned in the early twentieth century, is still true today. The implications for future research derived from this study include the need to investigate to a greater extent the impact that external institutions such as government, unions, and civic associations had on the changing corporate social role in the 1920s. Using institutional theory as a framework, researchers should also investigate other periods of social change in our society such as the 1960s and seventies to determine how the institutional changes during those decades created the need to redene the legitimacy of the corporation in society. Researchers might also conduct comparative studies of how corporate institutions in Europe or Asia gained legitimacy in their respective societies within a given time period. It is possible that, with increasing globalization, the forces impacting the legitimacy of multinational corporations are likely to be more similar regardless of their location. This is an avenue for further investigation as well. From a managerial perspective, future studies might examine the evolving role of managers from welfare capitalist to trusteeship. This evolution seems to suggest that a broader responsibility to society is important to professionalism. Management historians might also examine in more depth the contributions of the scientic management revisionists to the changing role of the corporate managers and their rms during the early decades of the twentieth century. In conclusion, in order to study broad institutional changes in society (Aldrich and Fiol, 1994, p. 665), We must pay more attention to economic and business history . . . at the level of eras and epochs. This study has attempted to follow this advice in a modest way, and I encourage others to pursue the study of the development of ethical corporate responsibilities in a similar vein.
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