Corporate social responsibility

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Corporate Social Responsibility (CSR) is a concept that organisations, especially (but not only) corporations, have an obligation to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all aspects of their operations. This obligation is seen to extend beyond their statutory obligation to comply with legislation.

CSR is closely linked with the principles of Sustainable Development, which argues that enterprises should make decisions based not only on financial factors such as profits or dividends, but also based on the immediate and long-term social and environmental consequences of their activities.

Contents

[edit] Development and analysis

Today’s heightened interest in the role of businesses in society has been promoted by increased sensitivity to and awareness of environmental and ethical issues. Issues like environmental damage, improper treatment of workers, and faulty production that inconveniences or endangers customers are highlighted in the media. In some countries government regulation regarding environmental and social issues has increased. Also, standards and laws are often set at a supranational level (e.g., by the European Union). Some investors and investment fund managers have begun to take account of a corporation’s CSR policy in making investment decisions (so-called ethical investing). Some consumers have become increasingly sensitive to the CSR performance of the companies from which they buy their goods and services. These trends have contributed to the pressure on companies to operate in an economically, socially, and environmentally sustainable way.

It is important to distinguish CSR from charitable donations and "good works" (i.e., philanthropy, e.g., Habitat for Humanity or Ronald McDonald House). Corporations have often, in the past, spent money on community projects, the endowment of scholarships, and the establishment of foundations. They have also often encouraged their employees to volunteer to take part in community work and thereby create goodwill in the community, which will directly enhance the reputation of the company and strengthen its brand. CSR goes beyond charity and requires that a responsible company take into full account its impact on all stakeholders and on the environment when making decisions. This requires the company to balance the needs of all stakeholders with its need to make a profit and reward shareholders adequately.

A widely quoted definition by the World Business Council for Sustainable Development states that "Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large." (CSR: Meeting Changing Expectations, 1999). This holistic approach to business regards organizations as (for example) being full partners in their communities, rather than seeing them more narrowly as being primarily in business to make profits and serve the needs of their shareholders.

[edit] Auditing and reporting

To demonstrate good business citizenship, firms can report compliance with a number of CSR standards, including:

Some nations require CSR reporting, though agreement on meaningful measurements of social and environmental performance is difficult. Many companies now produce externally audited annual reports that cover Sustainable Development and CSR issues, but the reports vary widely in format, style, and evaluation methodology (even within the same industry). Critics dismiss these reports as lip service, a charge that carries some weight given notable examples: Enron's yearly "Corporate Responsibility Annual Report" and tobacco corporations' social reports.

CSR reporting draws much inspiration from its much older cousin, environmental and sustainability reporting (e.g., in Germany).

[edit] The business case for CSR

The benefits of CSR to businesses vary depending on the nature of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt measures beyond financial ones (e.g., Deming's Fourteen Points, balanced scorecards). Orlizty, Schmidt, and Rynes found a correlation between social/environmental performance and financial performance. However, businesses may not be looking at short-run financial returns when developing their CSR strategy.

The definition of CSR used within business can vary from the strict "stakeholder impacts" definition used in this article and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or PR departments of a company, or may be given a separate unit reporting to the CEO or in some cases directly to the board. Progressive companies do not have a CSR department or function at all -- the concept is so ingrained in the company itself that employees implement the company's values directly.[citation needed]

The business case for CSR within a company will likely rest on one or more of these arguments:

Human resources

Corporate Social Responsibility can be an important aid to recruitment and retention, particularly within the competitive graduate student market. Potential recruits are increasingly likely to ask about a firm's CSR policy during an interview and having a comprehensive policy can give an advantage. CSR can also help to build a "feel good" atmosphere among existing staff, particularly when they can become involved through payroll giving, fundraising activities or community volunteering.

Risk management

Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. These events can also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of 'doing the right thing' within a corporation can offset these risks.

Brand differentiation

In crowded marketplaces companies strive for 'X Factors' which can separate them from the competition in the minds of consumers. Several major brands, such as The Co-operative Group and The Body Shop are built on ethical values. Business service organisations can benefit too from building a reputation for integrity and best practice.

License to operate

Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps they can persuade governments and the wider public that they are taking current issues like health and safety, diversity or the environment seriously and so avoid intervention. This also applies to firms seeking to justify eye-catching profits and high levels of boardroom pay. Those operating away from their home country can make sure they stay welcome by being good corporate citizens with respect to labour standards and impacts on the environment.

Critics of CSR will attribute other business motives, which the companies would dispute. For example, some believe that CSR programmes are often undertaken in an effort to distract the public from the ethical questions posed by their core operations. Some that have been accused of this motivation include British American Tobacco (BAT) which produces major CSR reports and the petroleum giant BP which is well known for its high profile advertising campaigns on environmental aspects of their operations.

[edit] Criticism

Some critics of CSR, such as the economist Milton Friedman, argue that a corporation's principal purpose is to maximize returns to its shareholders, while obeying the laws of the countries within which it works. Others argue that the only reason corporations put in place social projects is utilitarian; that they see a commercial benefit in raising their reputation with the public or with government. Proponents of CSR, however, would suggest a number of reasons why self-interested corporations, solely seeking to maximise profits are unable to advance the interests of society as a whole.

Key challenges to the idea of CSR include:

  • The rule of corporate law that a corporation's directors are prohibited from any activity that would reduce profits
  • Other mechanisms established to manage the principal-agent problem, such as accounting oversight, stock options, performance evaluations, deferred compensation and other mechanisms to increase accountability to shareholders.

Because of this, it has been suggested that CSR activity is most effective in achieving social or environmental outcomes when there is a direct link to profits: hence the CSR slogan "Doing Well by Doing Good". Note that this requires that the resources applied to CSR activities must have at least as good a return as that that these resources could generate if applied anywhere else, e.g. capital or productivity investment, lobbying for tax relief, outsourcing, offshoring, fighting against unionization, taking regulatory risks, or taking market risks—all of which are frequently-pursued strategies. This means that the possible scope of CSR activities is drastically narrowed. And corporations, with their constant incentive to maximize profits, often have identified all areas where profits could be increased, including those that have positive external social and environmental outcomes. The scope for CSR is thus narrowed to situations in which:

  • Resources are available for investment
  • The CSR activity will yield higher profits than any other potential investment or activity
  • The corporation has been remiss in identifying this profit opportunity

A conflict can arise when a corporation espouses CSR and its commitment to Sustainable Development on the one hand, whilst damaging revelations about its business practices emerge on the other. For example the McDonald's Corporation has been criticised by CSR campaigners for unethical business practices, and was the subject of a decision by Justice Roger Bell in the McLibel case (which upheld some of these claims, regarding mistreatment of workers, misleading advertising, and unnecessary cruelty to animals). Similarly Shell has a much publicised CSR policy and was a pioneer in triple bottom line reporting, but was involved in 2004 in a scandal over the misreporting of its oil reserves which seriously damaged its reputation and led to charges of hypocrisy.

Universities and business schools, many of them with keen advocates of CSR amongst their teaching staffs, have themselves come in for criticism concerning their dealings with corporations (note the different stances taken by ESADE and Wheeling Jesuit University with regard to Aramark).

Critics of the role of business in society argue that:

  • Corporations care little for the welfare of workers, and given the opportunity will move production to sweatshops in less well regulated countries.
  • Unchecked, companies will squander scarce resources.
  • Companies do not pay the full costs of their impact. For example the costs of cleaning pollution often fall on society in general. As a result profits of corporations are enhanced at the expense of social or ecological welfare.
  • Regulation is the best way to ensure that companies remain socially responsible.

Supporters of a more market based approach argue that:

  • By and large, free markets and capitalism have been at the centre of economic and social development over the past two hundred years and that improvements in health, longevity or infant mortality (for example) have only been possible because economies - driven by free enterprise - have progressed.
  • In order to attract quality workers, it is necessary for companies to offer better pay and conditions which leads to an overall rise in standards and to wealth creation.
  • Investment in less developed countries contributes to the welfare of those societies, notwithstanding that these countries have fewer protections in place for workers. Failure to invest in these countries decreases the opportunity to increase social welfare.
  • Free markets contribute to the effective management of scarce resources. The prices of many commodities have fallen in recent years. This contradicts the notion of scarcity, and may be attributed to improvements in technology leading to the more efficient use of resources.
  • There are indeed occasions when externalities, such as the costs of pollution are not built into normal market prices in a free market. In these circumstances, regulatory intervention is important to redress the balance, to ensure that costs and benefits are correctly aligned.
  • Whilst regulation is necessary in certain circumstances, over regulation creates barriers to entry into a market. These barriers increase the opportunities for excess profits, to the delight of the market participants, but do little to serve the interests of society as a whole.

[edit] Other perspectives

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Some argue that it is self-evidently good that businesses should seek to minimize any negative social and environmental impact resulting from their economic activity. It can also be beneficial for a company’s reputation to publicise (for example) any environmentally beneficial business activities. A company which develops new engine technology to reduce fuel consumption would be able to promote its CSR credentials as well as increase profits.

Some commentators are cynical about the level of commitment of many corporations to CSR and Sustainable Development, and question their motivations. (Corporations that create the appearance of acting responsibly just for its public relations value are said to be "greenwashing.")

Such commentators also say, citing Friedman's dictum, that the idea of an “ethical company” is an oxymoron, since the corporation is by its nature compelled to maximize its own interest, whatever the external price. Corporate executives and employees in turn have strong incentives to use the corporation's statutory obligations to maximize profits, sometimes to the possible detriment of their moral and ethical standards. This tendency is, of course, encouraged by the desire to keep one's job, and by a system that tends to judge and reward performance primarily accordingly to profitability. The results of this tendency were clearly seen in many corporate scandals of the late twentieth and early twenty-first centuries.

So the CSR movement is seen by some as an attempt not so much to regulate the activities of corporations per se, as to remind the people who constitute these corporations that they nonetheless have other responsibilities beyond the corporate ones.

[edit] See also

[edit] External links

CSR Advocates

CSR Critiques

[edit] Further reading

  • Carroll, A. and Buchholtz, A. (2003) Business and Society: Ethics and Stakeholder Management. Thomson. Ohio
  • Carroll, A. (1998) The Four Faces of Corporate Citizenship. Business and Society Review, September, vol. 100, no. 1, pp. 1-7
  • Clarkson, M. (1995) A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review. Vol.20, pp.92 -117.
  • Davis, K. and Blomstrom, R. (1975) Business and Society: Environment and Responsibility, McGraw - Hill, New York.
  • Fombrun, C. (2000) The value to be found in corporate reputation The public's view of a company not only acts as a reservoir of goodwill, but also boosts the bottom line. Financial Times December 4 2000
  • Griffin, J. and Mahon, J. (1997) The Corporate Social Performance and Corporate Financial Performance Debate: Twenty five years of incompatible research. Business and Society. Vol. 36. pp.5 -31
  • Maignan, I., Ferrell, O. and Tomas, G.(1999) Corporate Citizenship: Cultural Antecedents and Business Benefits. Journal of the Academy of Marketing Science. Volume 27, No. 4, pages 455-469.
  • Maignan, I., and Ferrell, O. (2001) Corporate citizenship as a marketing instrument - Concepts, evidence and research directions. European Journal of Marketing. Vol.35 No.3/4 pp.457-484
  • Matten, D, Crane, A. and Chapple, W. (2003) Behind the mask: Revealing the true face of corporate citizenship. Journal Business Ethics Vol. 45, Issue1 pp109
  • Menon, A. and Menon, A. (1997) Enviropreneurial marketing strategy: the emergence of corporate environmentalism as marketing strategy. Journal of Marketing. Vol. 61, pp.51 - 67
  • Millennium Poll on Corporate Responsibility ‘Environics International Ltd’ in cooperation with The Prince of Wales Trust September 1999.
  • Waddell, S. (2000) New institutions for the practice of corporate citizenship; Historical Intersectoral, and Developmental Perspectives'. Business and Society Review, Vol. 105, pp.323 - 345.
  • Wartick, S. and Cochran, P. (1985) The Evolution of the Corporate Social Performance Model. Academy of Management Review, Vol.10, pp.767.
  • Wood, D. (1991) Corporate Social Performance Revisited. Academy of Management Review, Vol.4, pp.691 - 718.
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