Social Contract Theory

The central tenet of social contract theory is that society consists of a series of
explicit and implicit contract between individuals, organizations and
institutions. These contracts evolved so that exchanges could be made between
parties in an environment of trust and harmony. According to social contract
theory, corporations, as organizations enter into these contracts with other
members of society, and receive resources, goods and societal approval to
operate in exchange for good behavior. Davis (1960) was one if the first to
explore the role of power. In doing so, he introduces business power as a new
element in the debate of CSR. He held that business is a social institution and
it must is a power responsibly. Additionally, Davis noted that the causes that
generate the social power of the firm are not solely internal of the form but
also external. Their locus is unstable and constantly shifting, from the
economic to the social forum and from there to the political forum and vice
versa.

Davis formulated two principles that express how social power has to be managed.

·      The social power equation: This states that social
responsibilities of businessmen arise from the amount of social power that they
have. 

      The iron law of responsibility: This refers to negative consequences
of the absence of use of power.