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Corporate Social Responsibility (Csr)

Corporate Social Responsibility (Csr)

by Yazeed Sagar Al Mohammad

INTRODUCTION

In this review, the primary subject is the ‘business case’ for corporate social responsibility (CSR). The business case refers to the underlying arguments or rationales supporting or documenting why the business community should accept and advance the CSR cause’. The business case is concerned with the primary question: What do the business community and organizations get out of CSR? That is, how do they benefit tangibly from engaging in CSR policies, activities and practices? The business case refers to the bottom-line financial and other reasons for businesses pursuing CSR strategies and policies. In developing this business case, the paper first provides some historical background and perspective. In addition, it provides a brief discussion of the evolving understandings of CSR and some of the long-established, traditional arguments that have been made both for and against the idea of business assuming any responsibility to society beyond profit-seeking and maximizing its own financial wellbeing. Finally, the paper addresses the business case in more detail. The goal is to describe and summarize what the business case means and to review some of the concepts, research and practice that have come to characterize this developing idea.
Corporate social responsibility (CSR), also known as corporate conscience, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance, is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its support to law, ethical standards, and international norms. Consequently, business would embrace responsibility for the impact of its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, CSR-focused businesses would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. Essentially, CSR is the intentional inclusion of public interest into corporate decision-making, and the honoring of the interest of people, planet, and profit.

OBJECTIVES AND HYPOTHESIS

The following research questions will be answered:

1) What are the prevailing CSR strategies and how these strategies help in strengthening the whole image?
2) How do the companies develop their CSR strategies with reference to operation?
3) How do these CSR strategies impact the competitiveness?

The main aim of this study is to understand how companies approach their corporate social responsibilities while in Operation. It would therefore require to:

1) Analyze how CSR strategies are being developed by companies.
2) Explore prevailing CSR strategies fit for the Market requirements.
3) Investigate effect of CSR strategies on acquiring competitive edge.

Hypothesis

The following Hypothesis has been advanced.

Hypothesis1

companies are actively engaged in social responsibility ventures adhere to strict issues of ethics and service to community especially on environment, health, education.

Hypothesis2

Adoption of cooperate strategies has given the companies competitive edge over local competitors in terms of business sustainability, consumer loyalty and profitability.

HISTORY OF THE CSR

The concept of corporate social responsibility (CSR) has a long history associated with how it impacts on organizations’ behavior. In order to understand CSR’s impact on organization behavior, therefore, it is necessary to comprehend its progression.

Over the decades, the concept of corporate social responsibility (CSR) has continued to grow in importance and significance. It has been the subject of considerable debate, commentary, theory building and research. In spite of the ongoing deliberations as to what it means and what it embraces, it has developed and evolved in both academic as well as practitioner communities worldwide. The idea that business enterprises have some responsibilities to society beyond that of making profits for the shareholders has been around for centuries. For all practical purposes, however, it is largely a post- World War II phenomenon and actually did not surge in importance until the 1960s and beyond. Therefore, it is largely a product of the past half century.

 In the 1950s the primary focus was on businesses’ responsibilities to society and doing good deeds for society. In the 1960s key events, people and ideas were instrumental in characterizing the social changes ushered in during this decade. In the 1970s business managers applied the traditional management functions when dealing with CSR issues, while, in the 1980s, business and social interest came closer and firms became more responsive to their stakeholders. During the 1990s the idea of CSR became almost universally approved, also CSR was coupled with strategy literature and finally, in the 2000s, CSR became definitively an important strategic issue.

As mentioned previously, the recent increased attention on CSR is a result of pertinacious work by governments, media and NGOs, holding large corporations responsible for the societal and environmental consequences of their business practices (Porter & Kramer 2006). The concept of Corporate Social Responsibility itself goes by many different names, thus creating a challenge to conclusively establish a definition of CSR within organizations. The most common labels used by companies in referring to CSR are:

  • corporate responsibility
  • sustainable development
  • sustainability
  • social enterprise
  • corporate citizenship
  • values-driven business
  • Triple Bottom Line

The foundation of CSR actually refers to the role of business in society, and to management practices that have a positive impact on society and environment. I structured the evolution of the definition by decades, naming the remarkable contributors and their particular emphasis. Back in 1953 Bowen, named as the ¡§father of Corporate Social Responsibility¡¨ discussed obligations of businessmen towards achieving the desired objectives, values and policies for the society, thus starting a ¡§modern era of CSR definitions (Carroll 1999, 268 – 273). Howard R. Bowen wrote in his book Social responsibilities of the businessman obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society. (Bowen 1953, 45)

During the 1960s discussions were mostly related to further establishment of relation-ship between business and society; and the concept of CSR has been basically about the extent responsibilities of companies beyond the legal and profitability obligations and fulfilling the expectations of the society.

 Keith Davis defined CSR as business decisions, which reflect an organization long-run objectives and socially responsible prospect rather than economic interests. (Davis 1960, 70-76) Milton Friedman, however, was the most-known opponent of CSR concept. He argued that there is one and only one social responsibility of business-use its re-sources and engage in activities designed to increase its profits so long as it stays within the rules of the game (Friedman 1962, 133)

ARGUMENTS

The first question anyone coming to the whole area of corporate responsibility and sustainability will ask is ‘is it good for business?’ How should this be answered? To find an empirical correlation between financial performance and social, economic or environmental performance it is vital to be clear about the definitions of:

1. Financial and economic performance

2. Social performance

3. Environmental performance.

Yet it is hard to disentangle social from economic or environmental performance, as there are many social variables and some of these will be closely correlated with each other. A company that pays good wages is also likely to have a good occupational health and safety record. It therefore appears that not only are social, economic and even environmental performances not independent variables, but also that there are a great number of different measures of performance in the social, economic and environmental dimensions. Any study which systematically addressed all of them would be enormous in scale – and in practice this has rarely been attempted. While there are some examples of systematic justification more usually takes the form of case studies. However inspiring this may be, it does not serve as a good basis for generalization. Where a more systematic study is attempted, use is usually made of some kind of proxy of social, economic or environmental performance, such as a commitment to corporate responsibility, perhaps evidenced by a published code of ethics. This latter approach, while it allows generalization, by itself does not establish the business case beyond the proxy indicator. In particular, it does not indicate which of the many kinds of social performance has the most financial impact.

The rise of the modern corporation created and continues to create many social problems. Therefore, the corporate world should assume responsibility for addressing these problems.

In the long run, it is in corporations’ best interest to assume social responsibilities. It will increase the chances that they will have a future and reduce the chances of increased government regulation.

Large corporations have huge reserves of human and financial capital. They should devote at least some of their resources to addressing social issues. Ever since the debate over CSR began, supporters and detractors have been articulating the arguments for the idea of CSR and the arguments against the concept of CSR. These arguments have been discussed extensively elsewhere, but a brief recapitulation of them makes sense as we lead up to presenting the ‘business case’. Embedded in the arguments both for and against CSR are points which have been made previously, perhaps on a piecemeal basis, supporting the business case.

The case against the concept of CSR typically begins with the classical economic argument articulated most forcefully by the late Milton Friedman (1962). Friedman held that management has one responsibility and that is to maximize the profits of its owners or shareholders. Friedman argued that social issues are not the concern of business people and that these problems should be resolved by the unfettered workings of the free market system. Further, this view holds that, if the free market cannot solve the social problems, it falls not upon business, but upon government and legislation to do the job. A second objection to CSR has been that business is not equipped to handle social activities.

This position holds that managers are oriented towards finance and operations and do not have the necessary expertise (social skills), to make socially oriented decisions. A third objection to

CSR is that it dilutes businesses’ primary purpose. The objection here is that to adopt CSR would put business into fields of endeavor that are unrelated to their ‘proper aim’ (Hayek 1969). A fourth argument against CSR is that business already has enough power, and so why should we place in its hands the opportunity to wield additional power, such as social power (Davis 1973)? A fifth argument is that, by pursuing CSR, business will make itself less competitive globally. It should be noted that the arguments presented here were introduced decades ago, though some still hold them, and that the oppositions to the concept of CSR applied when the idea was once more narrowly conceived.

Defining CSR for business case purposes

Over the past half century, many different definitions of what CSR really means have been set out. One recent study identified 37 definitions of CSR and this figure underestimates the true number, because many academically derived definitional constructs were not included owing to the methodology for identifying them. Most of the academically derived definitional constructs have been discussed elsewhere, so we will touch upon only a few of them here to illustrate the evolving nature of CSR’s meaning. What is particularly noteworthy of recent accounts of CSR definitions is how many of them have been introduced by various practitioner and quasi-practitioner groups. A recent Google search of CSR definitions, for example, revealed that the definitions most often found in articles and web pages have been set out by organizations such as BSR, the Commission of the European Communities and CSR wire. There are many different ways to think about what CSR includes and what all it embraces. A recent study found that definitions tended to identify various dimensions that characterized their meaning. Using content analysis, this study identified five dimensions of CSR and used frequency counts via a Google search to calculate the relative usage of each dimension. The study found the following to be the most frequent dimensions of CSR: stakeholder dimension, social dimension, economic dimension, voluntariness dimension and environmental dimension though these dimensions were identified via Google citations, no research attesting to their validity has been done.

One of the central concepts associated with stakeholder theory started gaining an accreditation with Freeman’s work in 1984. The International Finance Corporation, a part of the World Bank, gives an explicit definition of stakeholders as “persons or groups who are directly or indirectly affected by a project, as well as those who may have interests in a project and/or the ability to influence its outcome, either positively or negatively. Stakeholders may include locally affected communities or individuals and their formal and informal representatives, national or local government authorities, politicians, religious leaders, civil society organizations and groups with special interests, the academic community, or other businesses.

The measurement of financial performance suffers from the opposite problem. There are a great many well-defined measures of financial performance, based on dividends, return on capital, share price, total shareholder return, market value added, etc. The problem here is choosing the most appropriate one to correlate with social performance. Depending on the indicator chosen, and the time perspective over which it is viewed, different findings may emerge.

There are two slightly more subtle methodological problems which should also be borne in mind before turning to what some of the studies have found. The first is how to think about any correlation between good social performance and financial performance. If the correlation is more than merely a statistical quirk, what is the nature of the causality? In other words, how does good social performance cause good financial performance? If that is not clear, then such studies will remain an inspiration.

The second is that the relationship between financial and social performance may not be susceptible to such empirical analysis. There may be so many variables influencing financial performance, that it is not possible to isolate the influence of corporate responsibility. For practical purposes, the relationship may therefore seem to be a chaotic one, in the formal sense that small changes in corporate responsibility may have disproportionately large effects (good or bad) on financial performance. Statistical analysis can help untangle these effects but normally depends on a sizeable population of companies which can provide adequate data on their social performance on a regular basis.

One way to gain a broad perspective on the financial impact of corporate responsibility is the Dow Jones Sustainability Index (DJSGI) which is prepared from a global base of companies. It is clear that the difference in share price performance of the self-declared good sustainability performers is marginal, but favors sustainability – see a previous monthly feature on this.

Another reason why this definition is useful is that it specifies the firm’s economic responsibility as a factor to be considered in CSR, and this becomes very important in thinking about the ‘business case’. Business people, in particular, like to think of their economic/financial/profitability performance as something that they are doing not only for themselves, but also for society, as they fulfill their institutions’ mission to provide goods and services for society. Further, the definition separates out legal, ethical and philanthropic categories of responsibility/performance, and this provides for a sharper examination of different corporate actions. Business performance with respect to the environment, stakeholders and society (social) are captured along with the categories of economics and voluntariness (discretionary/ philanthropic). The four categories of CSR – economic, legal, ethical and philanthropic – address the motivations for initiatives in the category and are also useful in identifying specific kinds of benefits that flow back to companies, as well as society, in their fulfillment. Of course, these concepts can be overlapping and interrelated in their interpretation and application, but they are helpful for sorting out the specific types of benefits that businesses receive, and this is critical in building the ‘business case’.

Division of stakeholders

The stakeholder view groups the firm’s stakeholders into three categories according to the firm’s strategic environment, hence on the one hand integrating the resource-based view and the industry structure view into the stakeholder view framework, and on the other hand extending the framework by social and political aspects (groups of stakeholders are shown to be divided into three levels according to their importance and influence.

  • The first group comprises the firm’s own resources such as employees, customers, suppliers and investors. This category reflects the resource-based view as all of the company’s resources are represented in some way by various stakeholders. Be-sides, the company’s relationship with its stakeholders allows it to make the re-sources available and productively functional.
  • The second group consists of the stakeholders affecting the firm’s industry, i.e. regulators, unions, joint venture partners. Depending on the type of relationships that the company has developed with its stakeholders, they will be more or less collaborative and reliable in their dealings with the company, as stated in the industry structure view.
  • The third group includes the firm’s social and political environment, i.e. governments, communities, and NGOs. The stakeholder view thus provides a comprehensive perspective on the operations of the company; it penetrates the strategy-structure-culture nexus and leads the company to engage in continuous organizational learning.

Stakeholder prioritization

Another considerable aspect of stakeholder theory is the question of the effective allocation of time, energy and scarce resources to stakeholders. Thus, management of an organization needs to identify certain groups of stakeholders with which they want to build mutually beneficial relationships. The main arising dilemma is to identify how much attention does each stakeholder group require and deserve, because it is impossible that all stakeholders will have the same interests and expectations on the organization generally, the more a stakeholder group contributes to the organization, the greater their voice and share of value created should be.

The first criterion estimates the shareholders’ “interest” assessment, which analyses to which extent stakeholders are influenced by the organization. It evaluates the impact of targeted organization’s characteristics and operation on interests of each stakeholder group. The second criterion evaluates the “power” of stakeholders, meaning if and to which extend the stakeholder group is influencing the organization. It takes into examination economic power of stakeholders; authority power; their knowledge level credibility approachability and willingness to engage. As a result all stakeholders are classifies accordingly:

A-Stakeholders are the desired key stakeholders, most critical stakeholder group that organization needed to prioritize to design a CSR strategy in a most effective way.

B-Stakeholders are important stakeholder group that requires to be kept satisfied and, perhaps, are in need of empowerment.

C-Stakeholders should be kept informed about the organization as they can be useful for decision and opinion formulation, brokering. Thus, when coming to communication strategy, this category of stakeholders should not be left out.

Levels of CSR engagement

Most companies are already engaging in CSR at some level. To develop an effective CSR strategy, management needs to know where a particular company stands in the process. This requires a self-assessment. Figure 6 represents the 5-level pyramid of CSR involvement which companies generally pass through when engaging in CSR.

Stage 1: Defensive. Most companies enter the CSR space as a defensive move, in which all corporate sustainability and responsibility practices are undertaken to defend against attacks that could affect short-term sales, productivity and brand; or to fend off regulation or avoid fines and penalties.

Stage 2: Compliance. With the pressure on, company leaders know they need to do something to comply—preferably in a way that requires the minimum expenditures while demonstrating to critics that the company is taking action to address their concerns

Stage 3: Managerial. Ultimately, the company develops some sort of management process or system (for example, the ISO 26.000 environmental management standards) so that responsibilities can be assigned internally, the actions can be measured, and they get done. But as with most things that are risk mitigating, these activities tend to be viewed as a cost to the company, not a value or opportunity. And without looking at CSR as value creating, innovation or creativity are lacking in the CSR activities.

Stage 4: Strategic. Company integrates societal issues into core business strategy, hence CSR is seen as part of their value-creation and opportunity creating strategies. lined up with their business development, research and development, branding, and market-entry strategies. Indeed, the trend is finally changing with CSR.

Stage 5: Civil. The final stage in the CSR maturity process is when the company changes the rules of the game, raises the civil foundation, and changes society indelibly. A company at the highest stage of corporate social responsibility embeds CSR into its daily business operations, collaborates with other companies, and attempts to change the rules of the game or attack a problem or social issue at its cause.

CSR strategic planning process

One of the most important points to be made upfront is that there is no single universally accepted method for designing a CSR structure. CSR-related agendas are very subjective; what works for one company may not work for another, and vice versa. Creating and building a successful CSR management system is a complex, long-term project for any company. It involves a shift in the way a company conducts business, and can be likened to implementing other broad change initiatives such as total quality management. The ultimate goal of a CSR management system is to successfully integrate corporate responsibility concerns – social, environmental and economic – into a company’s values, culture, operations and business decisions at all levels of the organization, which can help create better management practices overall (BSR report 2002, 3). The major struggle at this point is the absence of the developed strategic plan for CSR implementation in a small firm. Therefore, the existing strategic approaches developed by various theorists, organizations and agencies to formulate and apply the comprehensive framework.

CSR Communication

The stakeholder relationship is assumed to consist of ‘interactive, mutually engaged and responsive relationships that establish the very context of doing modern business, and create the groundwork for transparency and accountability .In recent years, stakeholder theory has developed a focus on the importance of engaging stakeholders in long-term value creation. The emphasis is moved from a focus on stakeholders being managed by companies to a focus on the interaction that companies have with their stakeholders based on a relational and process-oriented view.

It has been explicitly shown that a lot of CSR is out there in the business world, but not a lot of it is actually an effective CSR. And even among the limited number of effective CSR strategy that exists, no company has yet captured the market on effectively communicating it in such a way as to maximize business value. Most companies are scared to death to communicate their CSR. The result is that the average consumer, employee, government regulator, or supplier has no idea what if anything the company is doing when it comes to corporate social responsibility. They therefore cannot factor the company’s CSR efforts into their choices when deciding what product to buy, where to work, or how to invest.

Different levels of stakeholder’s engagement have been established with a purpose to communicate with various stakeholders in accordance to the intensity that an organization has on a particular stakeholder. Hence, a stakeholder information strategy is the one-way communication approach that is applicable for those groups of stakeholders who have a certain interest in the organization, but have a low influence of decision-making process. The stakeholder response strategy is aimed at those stakeholders who have a high power to in CSR communication is a crucial part of a CSR implementation strategy that is often neglected or diminished by practitioners. All in all, even though the necessity to integrate CSR with corporate strategy has been established, the ultimate guidance for developing and sustaining CSR effectively is absent still. Fluency of the organization’s operations, but have rather low interest in it.

The essence of CSR: ethical and philanthropic responsibilities

A company that practices corporate social responsibility (CSR) embraces responsibility for its actions and, through its activities, positively affects the environment, society, consumers, employees, communities, and other stakeholders. One type of CSR is philanthropic giving. The roots of corporate philanthropy in the United States date back to the rise of industry in the 19th and early 20th century, when pioneering businessmen like Henry Ford and John D. Rockefeller established a number of philanthropic foundations. Today, corporate philanthropy can involve donating funds, goods, or services to another organization or cause. For example, the local branch of a bank might donate money to fund the purchase of uniforms for a school sports team, or a health care company might donate to the city opera.

While individual philanthropists use their own resources to change the world for the better according to their interests, corporate philanthropy directs organizational resources to support a worthy cause or address a societal need.

The idea of social responsibilities supposes that the corporation has not only economic and legal obligations, but also certain responsibilities to society which extend beyond these obligations.’ By identifying and distinguishing the ethical and discretionary/philanthropic categories, Carroll explicitly spelled out what McGuire referred to as the responsibilities that extend beyond the economic and legal responsibilities. Carroll then made the notion of CSR more explicit when he contended that the economic and legal responsibilities are ‘required’, the ethical responsibilities are ‘expected’, and the discretionary/philanthropic responsibilities are ‘desired’. By doing so, he made a distinction between the traditional and the new responsibilities of the corporation. The classical responsibilities of the corporation which are embodied in its economic and legal responsibilities reflect the old social contract between business and society. Alternatively, the new responsibilities of the corporation which are embodied in the ethical and discretionary/philanthropic responsibilities reflect the new, broader, social contract between business and society. Since what is debated in the subject of CSR are the nature and extent of corporate that extend beyond the economic and legal responsibilities of the firm, it may be understood that the essence of CSR and what it really refers to are the ethical and philanthropic obligations of the corporation towards society. Essentially CSR in the same way. They define CSR as ‘a commitment to improve community well-being through discretionary business practices and contributions of corporate resources’.

Implementing CSR communication strategy

CSR is all about how a company chooses to conduct its business. CSR communication is a rather tricky but an absolutely essential part of the overall implementation strategy. In recent years stakeholder theory has developed a focus on the importance of engaging stakeholders in long-term value creation. CSR communication is a true art and science to be developed and implemented, but it proved to be much easier for SMEs since the initial relations with stakeholders are less formal and more loyal.

Realizing the connection between the power of the brand and the effect of CSR should make a company to act responsibly. Communication of CSR does not only create awareness for CSR, it is also a way of creating a bond between the company and its stakeholders. However, the potential strategic engagement with CSR should be seen as an opportunity for where the right implementation of all the steps will raise an awareness of the organization as a sustainable one and enhance its bonding with key stakeholders at last.

Evaluate and Improve

CSR is an ongoing process and the evaluation step is all about learning. Simply aiming at achieving current short-term objectives, but striving for a sustainable advantage and constant improvements. Thus, management should always be on the alert to adapt to changing circumstances or to find ways for improving their approaches. An evaluation should involve stakeholder engagement, including comments and suggestions from management, CSR coordinators, managers and commit-tees, employees and outside stakeholders.

Main input for evaluation comes from the engagement with stakeholders, especially with the prioritized ones. By receiving their feedbacks, comments and suggestions, an organization is able to identify the gaps between a planned performance and the actual one. Yet, the timeline needs to be set. Due to the fact that this is a proposed frame-work.

Remarks on the economic and legal responsibilities of business

The concepts of business ethics and social responsibility are often used interchangeably, although each has a distinct meaning. The term business ethics represents a combination of two very familiar words, namely “business” and “ethics”. The word business is usually used to mean “any organization whose objective is to provide goods or services for profit” whereas organizations are defined as”

  • social entities that
  • are goal oriented
  • are designed as deliberately structured and coordinated activity systems
  • are linked to the external environment.

One of the most important organizational elements highlighted by this definition is that organizations are indeed open systems, i.e. they must interact with the environment in order to survive. “The organization has to find and obtain needed resources, interpret and act on environmental changes, dispose of outputs, and control and coordinate internal activities in the face of environmental disturbances and uncertainty. The fact that business organizations are open systems means that although businesses must make a profit in order to survive they must balance their desire for profit against the needs and desires of the society within which they operate. Hence, despite the fact that in market economies business organizations are traditionally allowed some degree of discretion … being “ostensibly free to choose what goods and services they produce, the markets they aim to serve and the processes by which they produce, organized societies around the world did indeed establish principles and developed rules or standards of conduct – both legal and implicit – in order to guide businesses in their efforts to earn profits in ways that do not harm society as a whole.

The word ethics in the term business ethics comes from the Greek word ethos meaning “character or custom”. Ethics has been defined in a variety of ways, inter alia, as: “the study of morality “inquiry into the nature and grounds of morality where the term morality is taken to mean moral judgments, standards and rules of conduct” and/or as “the code of moral principles and values that governs the behaviors of a person or group with respect to what is right or wrong. Based on these conceptualizations, the definition of business ethics adopted here comprises “the moral principles and standards that guide behavior in the world of business, whereas “an organization’s obligation to maximize its positive impact, and minimize its negative impact, on society” is being termed corporate social responsibility.

Corporate social responsibility is a multidimensional construct comprising four subsets of:

  • economic
  • legal
  • ethical
  • voluntary philanthropic responsibilities

The economic responsibilities of a business are to produce goods and services that society needs and wants at a price that can perpetuate the business and satisfy its obligations to investors. Thus social responsibility, as it relates to the economy, encompasses a number of specific issues including how businesses relate to competition, shareholders, consumers, employees, the local community and the physical environment. The legal responsibilities of businesses are simply the laws and regulations they must obey. It is the bare minimum required of business organizations by society in return for allowing them to obtain the inputs they need from the environment, transform inputs into outputs and dispose of outputs — in the form of goods and services acquired by consumers in order to satisfy their individual needs and wants. The legal dimension of corporate social responsibility thus refers to obeying local, national and international law regulating competition (procompetitive legislation) and protecting: workers’ human rights (equity and safety legislation); the consumer (consumer protection legislation); and the natural environment (environmental protection laws). Ethical responsibilities are those behaviors or activities expected of business by society — yet not codified in law. This subset of corporate social responsibilities may be interpreted as expressing the ‘spirit of the law’ vis-à-vis the ‘letter of the law’ in the previous case. Lastly voluntary philanthropic responsibilities are those behaviors and/or activities desired of business by society and referring to business contributions to society in terms of quality of life and society’s welfare – for example, giving to charitable organizations and/or supporting community projects.

Although there would appear to be little disagreement about the need for organizations to act responsibly toward the wider society and the natural environment in which they operate, organizations themselves have adopted a wide range of positions regarding corporate social responsibility. The various organizational stances vis-à-vis social responsibility in free-market economies fall along a continuum, ranging from a low to high degree of socially responsible organizational practices. The few organizations that take a social obstruction approach to social responsibility usually do as little as possible to solve social and/or environmental problems. In such a case. “The organization does stand apart from society and functions best when it gets back to basics, when it is freed of government regulation and constraints and discards social engineering in favor of just plain engineering”. One step removed from social obstruction is social obligation, whereby the organization does everything that is required of it legally but does nothing more. A firm that adopts the social response approach generally meets its legal and ethical requirements and sometimes voluntarily even goes beyond these requirements in selected cases. Finally, the highest degree of social responsibility that a firm can exhibit is the social contribution approach. Firms adopting this approach view themselves as citizens of a society and, as a result, proactively seek opportunities to contribute.

Business Ethics and Corporate Social Responsibility in the Old Economy: A Theoretical Framework

Economy has been defined as “a systematic way of describing how goods and services are exchanged among members of a given community”. The earliest economies were agricultural in nature and centered on producing, exchanging and consuming products derived from the natural world. In agricultural economies land and labor were understandably the most important factors determining economic and business success. The emergence of industrial economies, following the Industrial Revolution, was characterized by a drive of business organizations to produce goods for mass markets. In the industrial era capital and labor were by far the most important ingredients of success, leading to a hundred years of astonishing economic progress: “the industrialized countries are about 20 times better off at the end of this century than they were a hundred years earlier”.

The close link between economy and the nation state constitutes one of the most prominent features of the industrial era, with political power significantly surpassing economic power). Traditionally, national governments in industrialized countries tended to focus on economic growth and full employment via creating a business environment characterized by a fairly low degree of uncertainty. The most successful type of organization in this environment was the “make-and-sell” organization, namely the organization that was able to accurately predict what the market should demand, made the product and then went out and sold it. The dominant business-strategy adopted by make-and-sell organizations was internally-driven and management-centered — i.e. it was the manufacturers themselves who made all the hard decisions: what sorts of consumer needs they would attempt to meet; what markets they would serve; what products they would offer; and what prices they would charge. Moreover, due to the fairly high degree of environmental predictability, enhanced emphasis was placed by organizations on stability, efficiency and hence rigid bureaucratic organizational cultures stressing that “shareholder value is the only value that matters). Being a consumer in the industrial era meant “having very little direct power over what goods were available”, while public opinion regarding the social obligation and/or social response approach to corporate social responsibility was in fact mediated by government in the form of legislation and direct or indirect regulation.

Globalization and Society’s Changing Expectations of Business

Recently, however, society’s perception of corporate social responsibility issues has commenced to change in response to globalization. The term globalization is perhaps one of the most widely used and least precisely defined concepts in contemporary business. According to Schwartz and Gibb (1999) the term ‘globalization’ does not refer to a single process but “serves as shorthand for several related processes”, namely:

  • an increasingly shared awareness across many publics
  • a new international financial web
  • new open space into which dominating cultures can move
  • progress from ‘inter-national’ to ‘global’ institutions
  • declining importance of geography
  • dangerous new linkages possible
  • greater speed of events
  • trend away from nation-states

Whereby shared awareness across publics” highlights the remarkable growth of the contemporary NGO community: non-governmental organizations (NGOs) currently represent millions of citizens around the globe, while the new international media can mobilize those millions overnight if it chooses; the “new international financial web” implies that … ‘transparency, probity and rule of law are nowadays more important to more people than ever’; “open space for dominating cultures” indicates more and deeper debate over international values; the creation of “global” as opposed to “inter-national” institutions refers to the entrance of new unfamiliar players, the ‘stateless corporations’, in the business terrain; “declining importance of geography” suggests that the traditional link between production and place, between economy and the nation state is now breaking down, while more and more people all over the world consider themselves stakeholders in decisions made by businesses anywhere; “dangerous new linkages” relates to any number of emerging networks whose impacts the public (rightly) feels unsure of; the “greater speed” at which the world now operates emphasizes that companies that become insulated from their markets or communities can be blindsided by changing attitudes more quickly than ever; finally, the shift of power away from nation-states means that the public in general requires more accountability from other powerful actors, such as business, and expects them to respond directly to the demands of public opinion rather than waiting for that opinion to be mediated by government legislation or regulation .

Thus, society’s perception of corporate social responsibility seems to undergo a phase of fundamental change. A variety of forces -geopolitical, socio-economic, demographic and technological- appear to influence society’s changing expectations of business. First, the recent collapse of several communist regimes, such as the former Soviet Union, around the world has led to the development of a new integrated global business environment with market economies being the clear winner. Second, new problems are emerging -shaking up existing assumptions about our world- including: biotechnology and information technology concerns; the ageing of industrial nations; and mass unemployment. Profound technological change always involves economic upheaval and the impact of computerization is likely to prove of equal or even greater importance than that of electrification. Moreover, genetic engineering technologies being explored today raise more complex issues of scientific and social responsibility than corporate decision makers have ever faced.

The population of the industrial nations is ageing rapidly. The proportion over 60 in the industrialized countries that make up the OECD is predicted to rise from less than a fifth in 1990 to a third in 2030. While in one half of the modern industrialized world, continental Europe, more than a tenth of the population of working age is currently unemployed — and mass unemployment is here to stay as technology is making more and more workers obsolete. The combined effect of rapid technological progress, ageing and unemployment exerts an unbearable pressure on the kind of welfare state almost all the Western European nations have had in place since World War II, as the proportion of population that pays tax – both of working age and still employed – is continually thinning.

A shrinking world, radical technological advancement and the unavoidable end of welfare resulted in enhanced uncertainty and at the same time led to a realization that “problems are increasingly global and demand solutions that presuppose a framework of values acceptable everywhere”. Cultures around the world thus converged towards adopting some core values, comprising: truthfulness; fairness; freedom; community; tolerance; responsibility; and respect for life. These universally shared values led to establishing international principles regarding the ethical responsibilities of contemporary business to society. (CRT) Principles of Business- endorsed by the overwhelming majority of the world’s nations. This recognition of fundamental international rights and corresponding responsibilities was further codified into a global corporate code of conduct — grounded on the United Nations Universal Declaration of Human Rights (1948); the European Convention on Human Rights (1950); the Helsinki Final Act (1975); the OECD Guidelines for Multinational Enterprises (1976); the International Labor Office Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (1977); and the United Nations Code of Conduct on Transnational Corporations (1972) — covering five major business areas: employee practices and policies; basic human rights and fundamental freedoms; consumer protection; environmental protection; and political involvements.

The business case for CSR: What does it really mean?

Before presenting a review and summary of the ‘business case’ for social responsibility, it is important to discuss what this really means. When one examines the history and evolution of CSR, the idea of a business case for CSR has been developing almost since the beginning.

Reputation management

increasingly, corporations are trading not on products or services but on their reputations, brand value, ‘goodwill’, and ‘intellectual capital’. These are termed ‘intangibles’ and have an actual numerical value on the company balance sheet. For example, 96% of Coca Cola’s total value is intangibles9, and an estimated 53% of the total value of the Fortune 500 companies, worth $24.27 trillion, is made up of intangibles10. With 85% of consumers reporting that they have a more positive image of a company that is seen to make the world a better place11, CSR is an essential strategy for ensuring the company’s reputation.

Risk management

investing in a company is a gamble and investors want to see that a company is a safe bet. CSR means that companies have to be aware of the issues which might cause them to be targeted by campaigners. This doesn’t necessarily mean cleaning up their act. It can equally mean trying to occupy the ideological space around an issue or getting decision makers to agree with their point of view with a few strategic donations. One Ethical Corporation article, entitled ‘Stealing the NGO’s Thunder’12 advised companies, as part of their CSR work, to ‘develop at an early stage intellectual leadership in public on issues that in the future may present NGOs with opportunities for critical campaigns’, by, for example, developing corporate positions and speeches for CEOs, presenting the issue in interesting and innovative ways to generate positive headlines and commissioning research from ‘credible institutions’, and funding corporate front groups – supposedly independent research groups funded and controlled by the company13.

BP’s strategy of appropriating the language of environmentalists and positioning itself as a socially responsible company on the issue of climate change by buying up a solar company (for a fraction of the amount it spends on oil acquisitions) is a clear example of a company attempting to take intellectual leadership of an issue where it finds itself criticized, and has been well documented elsewhere.14

Employee satisfaction

With 3 out of 5 people reporting that they want to work for a company whose values are consistent with their own 15, being seen by employees as a responsible company as well as a fair employer helps to attract and retain the best staff. This only applies, however, when a company cares about the quality of its staff. Companies will go to great lengths to appear socially responsible to white collar or skilled workers in their offices in Northern countries. Unskilled workers in developing countries, and casual workers in the North, are rarely afforded the same labor rights, not to mention the volunteering schemes or welfare packages that the same company offers its more privileged workers.

Investor relations and access to capital many investors consider more ‘socially responsible’ companies to be more secure investments. 86% of institutional investors believe that CSR will have a positive effect on business16. Also, a growing number of institutional investors have some kind of socially responsible investment portfolio and therefore favor companies that are seen as socially responsible. (See section on socially responsible investment).

Competitiveness and market positioning

CSR is still breaking into the mainstream. Investing in CSR now means that a company can position itself as the market leader in its field, and will be ahead of the game if regulations are brought in or when other companies in the sector take up CSR as a business strategy. Buying out ethical alternative businesses, for example Cadbury’s recent purchase of Green & Blacks, supermarket sales of organics or Nestlé’s move into Fairtrade coffee, is one way that companies are able to cement their market position, and also control profits from niche markets.

Operational efficiency

CSR can save money. Some environmental measures such as minimizing waste or saving energy can also reduce operational costs. These are often the type of measures prioritized by companies. But what happens if measures necessary to protect the environment are not profitable?

Maintaining the license to operate Mistrust of corporations is widespread, if for no other reason than that few people even in the rich world actually gain from the level of power corporations have been granted in society. More and more people report increased stress, harder work and greater insecurity as they chase elusive gains. Companies see that the tacit license to operate society grants them is under threat. Their response is to attempt to convince society that they have a positive impact. CSR consultancy Sustainability has described CSR as ‘helping.

Documenting the business case for CSR

Attention to the business case for CSR has gained noticeable consideration. Observes a trend in the evolution of CSR theories that reveal ‘a tighter coupling [between CSR and the] organizations’ financial goals’. The focus of CSR theories has shifted away from an ethics orientation to a performance orientation. In addition, the level of analysis has moved away from a macro-social level to an organizational level, where the effects of CSR on firm financial performance are closely examined. Maintains that the close examination of the relationship between CSR initiatives and firm financial performance is a characteristic of the ‘new world of CSR’. He argues that ‘old style’ CSR of the 1960s and 1970s was motivated by social considerations. Economic considerations were not among the motives for CSR: while there was substantial peer pressure among corporations to become more philanthropic, no one claimed that such firms were likely to be more profitable than their less generous competitors’; in contrast, the essence of the ‘new world of CSR’ is ‘doing good to do well.

Vogel observes some features of the ‘new world of CSR’. He notes that the new world of CSR emphasizes the link between CSR and corporate financial success. Evidence for such emphasis, Vogel states, are the many works that promote the ‘responsibility–profitability connection’ and assert that CSR leads to long-term shareholder value. He also reports that according to a 2002 survey by PricewaterhouseCoopers, “70 percent of global chief executives believe that CSR is vital to their companies’ profitability” ’. This evidence suggests that CSR is evolving into a core business function which is central to the firm’s overall strategy and vital to its success.

Why are companies engaged in CSR?

Companies that are socially responsible in making profits also contribute to some, although obviously not all, aspects of social development. Every company should not be expected to be involved in every aspect of social development. That would be ludicrous and unnecessarily restrictive. But for a firm to be involved in some aspects, both within the firm and on the outside, will make its products and services (for example financial services) more attractive to consumers as a whole, therefore making the company more profitable. There will be increased costs to implement CSR, but the benefits are likely to far outweigh the costs.

Corporate social responsibility is not a new issue. The social responsibility of business was not widely considered to be a significant problem from Adam Smith’s time to the Great Depression. But since the 1930s, and increasingly since the 1960s, social responsibility has become an important issue not only for business but in the theory and practice of law, politics and economics. In the early 1930s, Merrick Dodd of Harvard Law School and Adolf Berle of Columbia Law School debated the question “For whom are corporate manager’s trustees?” Dodd argued that corporations served a social service, as well as a profit-making function, a view repudiated by Berle. This debate simmered for the next 50 years, according to Gary von Stanger, before it once again sprang into prominence in the 1980s in the wake of the “feeding frenzy atmosphere of numerous hostile takeovers”. This concern for the social responsibility of business has even accelerated since the fall of the Berlin Wall, which symbolized the collapse of communism and (more importantly) the onset of turbo-charged globalization. Further acceleration has occurred in the past few years. Global concerns have been given an additional edge by the awful events of 11 September. The collapse of Enron and WorldCom, and their auditor Arthur Andersen, due to dubious accounting practices, has raised the level of scrutiny of large companies, as well as their auditors. And this, at the time of writing, is in spite of the most company-friendly President of the United States known in modern times. Even the President has broached, albeit tamely, the notion of the responsibility of corporations. Moreover, previously quiet CEOs have begun to note the pressure. In a rare public appearance in June 2002, the Chairman and Chief Executive of Goldman Sachs, Henry M. Paulson Jr. noted, after the collapse of the Enron Corporation in late 2001, that “I cannot think of a time when business over all has been held in less repute.

The need to address questions of low living standards, exploitation, poverty, unemployment and how to promote social development in general, has to date been almost entirely the preserve of governments. Clearly, they will continue to have a, if not the, major role to play in this area. But, increasingly in the future, the promotion of social development issues must also be one of partnership between government and private and non-governmental actors and, in particular, the corporate sector. Until the 1970s, despite regulation and legislation, business continued largely along an autonomous path, ignoring its critics and listening only to its shareholders, to whom it felt somewhat responsible. But the decade of the 1960s was to be a period of enlightenment for many. The Korean War had ended indecisively, and new conflicts in South-East Asia seemed destined to follow the same pattern. Citizens were distrustful of government, business and the undefined “establishment”. Consumers had grown suspicious of adulterants in their food and dangerous defects in the products they bought. People were becoming aware of the fragile nature of the earth’s ecology, while simultaneously becoming more cognizant of human rights.

Different roles

Where are the boundaries between voluntary CSR initiatives and company “responsibility”, and the role of governments in the proper implementation and enforcement of national employment legislation? What are companies responsible for (should the objective be to meet international standards or national law)?

Principles and standards abound to such an extent that companies are puzzling about where to stand. The Global Reporting Initiative (GRI) is currently the industry leader in providing a set of voluntary principles for companies in the area of CSR. Impetus was given to its set of ‘voluntary’ principles when GRI formally launched its report at the World Summit on Sustainable Development The list of principles and indicators proposed by the GRI is very weighty, so that companies may start to ask themselves “why bother?” Financial regulation is tough enough, but at least it can help companies to know their main costs and benefits. Social, economic and environmental principles leading to three additional balance sheets seem to be an additional burden, particularly if the benefits are poorly understood, as they are now, and the costs increasing. Consequently, as much as I admire the sentiment behind “triple-bottom line” reporting and see its value as a short-hand formula for introducing the subject of CSR, I much prefer the clearer stakeholder model of reporting presented below in the section on measurement.

Even as companies struggle with voluntary principles and standards, which critics argue raise the cost of compliance, there is a gradual movement towards regulation. Part of this is coming from the European Union, but various drafts of its papers indicate the struggle within its walls as to whether or not to legislate! Its Green Paper in July 2001 argued: Corporate social responsibility should nevertheless not be seen as a substitute to regulation or legislation concerning social rights or environmental standards, including the development of new appropriate legislation. In countries where such regulations do not exist, efforts should focus on putting the proper regulatory or legislative framework in place in order to define a level playing field on the basis of which socially responsible practices can be developed.

Evidence of the business case for CSR

As stated previously, the business case for CSR refers to the ‘business’ justification and rationale; that is, the specific benefits to businesses in an economic and financial bottom-line sense that would flow from CSR activities and initiatives. In some cases, the effect of CSR activities on firm financial performance may be seen clearly and directly. In other cases, however, the effect of CSR activity on firm performance may only be seen through the understanding of mediating variables and situational circumstances.

In this section, we present evidence of the effect of CSR on firm performance in support of the business case. The evidence primarily illustrates the effect of CSR on firm performance through mediating variables and situational circumstances. First, the discussion highlights the prevalence of CSR activities and the range of their adoption by business. Second, the discussion reviews the benefits of CSR that flow from firms’ fulfillment of their ethical and philanthropic responsibilities, which we argued constitutes the essence of CSR. Discussion of the benefits flowing from each category of responsibility is organized according to the framework put forward by Kurucz et al. which identifies four categories of benefits that firms may attain from engaging in CSR activities:

  1. Cost and risk reduction
  2. Gaining competitive advantage
  3. Developing reputation and legitimacy
  4. Seeking

Win–win outcomes through synergistic value creation. Finally, we discuss some of the criticisms and limitations of the current arguments of the business case for CSR.

It may be worth reiterating at this point what aspect of CSR is especially relevant in the current discussion. As stated previously, essentially, CSR refers to the obligations of the corporation towards society which extend beyond its economic and legal obligations. These obligations are identified as the ethical and discretionary/philanthropic responsibilities. We hold that these two categories of responsibilities capture and embrace the essence of the concept of CSR, especially for building the business case. For, without a doubt, few business people would question the economic and legal responsibilities as being necessary for survival and growth.

Summary and conclusions

The business case for CSR refers to the arguments that provide rational justification for CSR initiatives from a primarily corporate economic/financial perspective. Business-case arguments contend that firms which engage in CSR activities will be rewarded by the market in economic and financial terms. A narrow view of the business case justifies CSR initiatives when they produce direct and clear links to firm financial performance. Mostly, the narrow view of the business case focuses on immediate cost savings. By contrast, the broad view of the business case justifies CSR initiatives when they produce direct and indirect links to firm performance. The advantage of the broad view over the narrow view is that it allows the firm to benefit from CSR opportunities. The broad view of the business case for CSR enables the firm to enhance its competitive advantage and create win–win relationships with its stakeholders, in addition to realizing gains from cost and risk reduction and legitimacy and reputation benefits, which are realized through the narrow view.

The broad view enhances the acceptance of the business case for CSR, because it acknowledges the complex and interrelated nature of the relationship between CSR and firm financial performance. Recognizing this complexity translates into a clearer understanding of the impact of CSR initiatives on firm financial performance while accounting for the effects of mediating variables and situational contingencies. The inconsistencies in the results of the responsibility–performance studies may therefore be justified. The benefits of CSR are not homogeneous, and effective CSR initiatives are not generic. Effective CSR rests on developing the appropriate CSR where CSR activities are those directed at improving stakeholder relations and, at the same time, improving social welfare. The right CSR strategy is the one that pursues issues which demonstrate a convergence between economic and social goals.

To formulate a successful CSR strategy, firms must understand that the benefits of CSR are dependent on mediating variables and situational contingencies. Illustrate the role of trust as a mediating variable which shapes the relationship between CSR activities and firm performance. The construct of stakeholder influence capacity, which illustrates how situational contingencies may affect the impact of CSR activities on firm financial performance. It is critical to apply the contingency perspective as suggested by Barnett and account for the role of mediating variables as proposed by Pivato et al. (2008) in the exploration of the relationship between CSR and firm financial performance. A contingency perspective would allow the development of justifications for the lack of a positive relationship between CSR and firm financial performance in certain circumstances. In addition it would provide a defense for the business case for CSR in environments where the business case is argued to have failed.

Categorized under four arguments:

(1) Reducing cost and risk

(2) Strengthening legitimacy and reputation

(3) Building competitive advantage

(4) Creating win–win situations through synergistic value creation.

Cost and risk reduction arguments posit that CSR may allow a firm to realize tax benefits or avoid strict regulation, which would lower its cost. The firm may also lower the risk of opposition by its stakeholders through CSR activities. Legitimacy and reputation arguments hold that CSR activities may help a firm strengthen its legitimacy and reputation by demonstrating that it can meet the competing needs of its stakeholders and at the same time operate profitably. A firm therefore would be perceived as a member of its community and its operations would be sanctioned. Competitive advantage arguments contend that, by adopting certain CSR activities, a firm may be able to build strong relationships with its stakeholders and garner their support in the form of lower levels of employee turnover, access to a higher talent pool, and customer loyalty. Accordingly, the firm will be able to differentiate itself from its competitors. Synergistic value creation arguments hold that CSR activities may present opportunities for a firm that would allow it to fulfill the needs of its stakeholders and at the same time pursue its profit goals. The pursuit of these opportunities is only possible through CSR activities. Growing support for the business case among academic and practitioners is evident. Generally, the business case for CSR is being made by documenting and illustrating that CSR has a positive economic impact on firm financial performance. The broad view of the business case, however, brings attention to the details of the relationship between CSR and firm financial performance. Mediating variables and situational contingencies affect the impact of CSR on firm financial performance. Therefore, the impact of CSR on firm financial performance is not always favorable. Rather, firms should understand the circumstances of the different CSR activities and pursue those activities that demonstrate a convergence between the firm’s economic objectives and the social objectives of society. Only when firms are able to pursue CSR activities with the support of their stakeholders can there be a market for virtue and a business case for CSR.

 

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