>Corporate Social Responsibility
Corporate Social Responsibility recognises that organisations need to take account of the social and ethical impact of business decisions on the environment in which they compete (Henry, 2011). It is a commitment by organisations to behave ethically and contribute to economic development while improving the quality of life of the workforce, the local community and society at large (Johnson, Whittington, Scholes, Angwin & Regnér, 2014). Legislative and regulatory frameworks set only the minimum operating standards expected of businesses and past corporate failures have shown how these mechanisms still allow space for significant corporate irresponsibility (Bakan, 2004).
The size of many businesses (particularly when supply chains are included) means that they will inevitably have a significant impact on society. Whilst many Governments have sought to capture CSR obligations through legislation these rarely keep pace with the societal expectations placed on businesses. Consequently, CSR is concerned with how businesses seek to exceed these minimal legal obligations.
- Voluntary activities that go beyond the corporate obligations outlined in legislation and regulation.
- The development of self-regulation initiatives by businesses to recognise emerging societal concerns and norms. Examples include the rise of “Fair Trade Partnerships” (Nicholls & Opal, 2004).
- Managing externalities. Externalities are both the positive and negative effects of economic behaviour borne by those outside of the business. Examples include pollution and human rights. CSR approaches seek to ‘internalise’ these issues i.e. investing in modern technology to prevent pollution at source.
- A broad stakeholder approach. CSR considers how a company must engage the other agencies that are core to its continued profitability. How the broader, more ethical concerns of stakeholders are balanced against the specific interests of shareholders is a key CSR debating point.
- Aligning social and economic responsibilities. Maintaining a good reputation is good business and creating a sustainable profit base, (rather than profit at any cost) underpins this alignment.
- Developing core values and beliefs capturing CSR approaches, setting clear social and ethical expectations.
- Non-discretionary. Rather than philanthropy, CSR is tied to all business operations. The concern is about how business functions affect society.
(Crane, McWilliams, Matten, Moon & Siegel, 2008)
Ultimately, an organisation that actively pursues a socially responsible strategy can enhance their corporate reputation. This, in turn, can both build and sustain a competitive advantage.
A business can adopt or consider a range of attitudes towards CSR, including:
- An extreme view is the ‘laissez-faire’ approach, focussed on basic legal compliance. CSR is an issue for lower/middle management and the company is likely to be defensive when challenged about CSR.
- Enlightened self-interest. CSR is seen as a market opportunity. Leaders are prepared to interact with a broader stakeholder community and when external CSR pressures are experienced, the company will react to maintain its competitive position.
- Stakeholder interaction. Sustainable business practices are seen as critical to maintaining a competitive advantage. Companies set targets that include environmental and social objectives. This is often referred to as the ‘triple bottom line’. A partnership approach to stakeholder engagement is often adopted.
- Shaper of society. The company is built around social and market change, placing CSR considerations at the heart of the business model. CSR is reflected in the values of the organisation. Numerous multi-organisational alliances involving stakeholders can be built to develop the CSR agenda. The leadership is often considered to be inspirational, using business strategy to articulate a ‘better future’.
Two key philosophies capture these aspects - shareholder value theory and stakeholder theory.
Shareholder Value Theory (SVT) states that making profits is the overriding corporate purpose. Social activities (outside of legal requirements) should only be considered if they increase shareholder value. SVT is underpinned by Agency theory, where managers owe shareholders a ‘fiduciary duty’ to maximise profitability.
The core SVT argument is that the market is superior to individual organisations when allocating resources and that with the manager acting as agent improved financial performance can be achieved. CSR challenges SVT as it introduces broader concerns. However, when social responsibilities can be turned into business opportunities this can move attitudes from a ‘laissez faire’ approach to one of more enlightened self-interest.
It is therefore generally accepted that meeting certain social interests can contribute to maximising shareholder value. Most large companies pay significant attention to CSR, supporting the development of Strategic Corporate Social Responsibility (SCSR). SCSR focuses on CSR activities yielding substantial business-related benefits, but such efforts can be seen as self-serving by external stakeholders.
Stakeholders are those individuals or groups which affect or are affected by the achievement of an organisations objectives (Henry, 2011). Stakeholder Theory argues that a business should consider the requirements of broader stakeholder base (e.g. customers, suppliers, employees and communities) as well as shareholders. In protecting the legitimate interests of stakeholders, the leadership of a company is also protecting future business competitiveness by considering the environment it operates within.
Seven principles of stakeholder management have been proposed:
- Managers should understand and address the concerns of all legitimate stakeholders.
- Managers should engage stakeholders about their concerns, contributions and any associated risks.
- Business processes and behaviours should consider the concerns and capabilities of stakeholders.
- There should be a fair distribution of the benefits and burdens of corporate activity between stakeholders.
- Managers should work cooperatively with stakeholders.
- Corporate activities that prejudice inalienable human rights must be avoided.
- Managers must acknowledge the conflicts that can exist between their role (as corporate stakeholders) and their legal and moral responsibilities to all stakeholders.
(Clarkson Center for Business Ethics, 1999).
Early examples of philanthropy include the provision of housing, hospitals, lunch-rooms and recreational facilities. Many business leaders also supported the arts, education and religious communities. These early approaches often challenged prevailing business attitudes (captured by SVT and Agency Theory) and corporate philanthropy (e.g. worker access to libraries and education) was seen as exceptional, reflecting the ideals and values of individuals rather than business objectives.
Today, corporate philanthropy is more easily recognised, particularly when businesses support activities that provide no perceived direct business benefit. This philanthropy can be shaped by two distinct issues - corporate reputation and the senior leadership. Business leaders with a strong personal commitment to socially responsible causes are more likely to support corporate philanthropy that has no direct business benefit, even where it decreases profitability.
Corporate philanthropy can also be used to create a binding ethos, developing corporate values shared by all employees. In such cases, all employees are invited to suggest a cause that the business could support.
Corporate sustainability concerns the management of economic, environmental and social obligations to create long-term competitive advantage (often referred to as people, planet and profit) (PwC, 2015). Sustainability is about meeting the needs of the present without compromising the ability of future generations to meet their own needs (Nemetz, 2013).
Studies have highlighted common conceptual threads surrounding corporate sustainability and sustainable development:
- The concept of natural capital - maintaining a constant/renewable resource base and the environment that sustains it.
- A focus on social stability, empowerment and equity e.g. reducing poverty.
- Addressing development rather than growth e.g. utilising technology to improve margins, rather than just increase the consumption of resources.
- The precautionary principle. Recognising that business practices must change now to protect the global ecosystem.
The central idea of sustainability is that the current generation must leave the next generation a stock of capital (e.g. raw materials) that is no less than that which exists now (Nemetz, 2013).
Sustainability is comprised of three core elements - social, environmental and economic - essentially people, planet and profit’. This ‘triple bottom line’ becomes more important when it is considered how modern companies are now held accountable. Stakeholders will introduce measures of environmental and social success which can affect competitive positioning, reputation and profitability.
As a result, most major corporations report on CSR, including social and environmental objectives. This reporting of the ‘triple bottom line’ demonstrates how CSR should be considered a core element of any successful corporate strategy.
Business ethics should address:
- The values that underpin the way business is done.
- A set of principles bringing together these values into a clear standards statement.
- A corporate governance to ensure compliance with the published principles.
The Institute of Business Ethics (IBE) states that an organisation cannot be genuinely “responsible” without an embedded and inherent culture that is based on ethical values such as trust, openness, respect and integrity (Hopkins, 2016). The IBE therefore believes that a distinction can be drawn between ethics - the way of doing business - and CSR which could be stated to focus on outputs - what is done. Fair Trade Partnerships provide a good example of how these more ethical concerns form core elements of some CSR strategies.
Business ethics proposes the concept of a fair and efficient ‘social contract’ between a company and its stakeholders. The basic tenets of CSR reflect the core conditions of any social contract:
- The interests of all parties are at least consideration.
- All stakeholders are kept informed and not deceived.
- Agreements are reached on a rational and voluntary basis.
- No stakeholders have suffered, been constrained by corporate actions or subjected to unfair power relationships.
Maintaining such a social contract generates key benefits:
- The resulting corporate standards will counteract conduct that could harm legitimate stakeholder expectations of ‘well-being’. A social contract approach focusses on partnerships rather than a purchasing power relationship.
- If the trust associated with a functioning social contract exists, then governance and monitoring costs are likely to be lower.
- The negative social effects of any corporate activities are highlighted more rapidly (thus minimising downstream costs associated with rectification or restoring business reputation).
Many businesses are able to create a clear financial case for CSR. Arguments include:
- Cost and Risk Reduction. The CSR business case is built around an appreciation of how stakeholders can present possible threats to the business and that its economic interests are best served by mitigating them through social and environmental performance measures.
- Competitive Advantage. Stakeholder CSR concerns are not seen as constraints but as opportunities to be leveraged.
- Reputation. An enduring competitive advantage is secured by enhancing and protecting the reputation and legitimacy of the company through well-publicised CSR policies and objectives.
- Synergistic value creation. This challenges the traditional interpretation of value being limited to one company. The intent is to create ‘win-win’ business outcomes by engaging numerous stakeholders (such as those in the supply chain) to develop shared CSR approaches and linked objectives.
- CSR is a public relations exercise, focussed on brand image and public relations by appealing to consumer conscience and public desires to ‘do good’.
- Avoiding regulation. Corporate CSR efforts are seen as a means of avoiding the introduction of legislation and regulation as mandatory standards setting introduces increased costs and can undermine competitive advantage. Companies would prefer the freedom to set their own CSR standards as this maintains competitive tension (through differentiation) and minimises Government interventions through legislation.
- CSR undermines the core aims of business, as CSR efforts divert valuable resources away from profitable ventures.
- CSR reinforces corporate power by undermining the balance between democracy (the ideals of the citizen) and capitalism (the needs of the consumer). In essence, CSR has now become a corporate tool, as businesses seek legislation and regulation that provides them with a distinct advantage in relation to their competitors.
- CSR causes unintended consequences, as the power and influence exercised by large multinationals threatens prosperity in poorer, less-developed countries by reducing competition and undermining local market economies.
A company’s approach to CSR will consider both the legislative and regulatory obligations that exist and those policies pursued to reflect corporate values and standards. CSR is rooted in the desire of both businesses and their customers/consumers to operate in a more ethical manner. The analytical challenge is to consider if CSR is now just one more facet of corporate competitive advantage.
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