Corporate social responsibility

Corporate social responsibility (CSR) is an expression used to describe what some see as a company’s obligation to be sensitive to the needs of all of the stakeholders in its business operations.

A company’s stakeholders are all those who are influenced by, or can influence, a company’s decisions and actions. These can include (but are not limited to): employees, customers, suppliers, community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods, investors, and shareholders (or a sole owner).

CSR is closely linked with the principles of "Sustainable Development" in proposing that enterprises should be obliged to make decisions based not only on the financial/economic factors but also on the social and environmental consequences of their activities.

Development and analysis

Today’s heightened interest in the proper role of businesses in society has been promoted by increased sensitivity to environmental and ethical issues. Issues like environmental damage, improper treatment of workers, and faulty production leading to customers inconvenience or danger, are highlighted in the media. In some countries Government regulation regarding environmental and social issues has increased, and standards and laws are also 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. 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. philanthrophy, 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 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 will take into full account the impact on all stakeholders and on the environment when making decisions. This requires them to balance the needs of all stakeholders with their need to make a profit and reward their 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 organisations 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.

Corporate social responsibility reporting

The application of the principles of Sustainable Development through the introduction of a CSR policy is often accompanied by what is called triple bottom line reporting which declares not only financial results but also the social and environmental impact of the business. Some countries (e.g. France) have made such reporting mandatory. However the measurement of social and environmental performance is difficult and new measurement techniques need to be developed.

Many large companies now produce annual reports that cover Sustainable Development and CSR issues, and these reports are often externally audited. But there is no common template for the reporting and the style and the evaluation methodology varies between companies (even within the same industry). Critics often comment that some of these reports are little more than spin and as an example note that Enron produced a glossy "Corporate Responsibility Annual Report" every year and that tobacco corporations such as BAT also produce social reports.

The Global Reporting Initiative (GRI) is an attempt to standardize sustainability reporting and the AA1000 standard is an attempt to improve their legitimacy.

The history of CSR reporting (an example in Germany) goes back to environmental and sustainability reporting.

The business case for CSR

The benefits of CSR to businesses vary depending on the nature of the enterprise, and are typically very difficult to quantify. A major meta-analysis has been conducted seeking to draw a correlation between social/environmental performance and financial performance. This is Orlizty, Schmidt, Rynes 2002which found that corporate virtue is likely to pay off in this sense. The business may not be looking at short-run financial returns when developing its CSR strategy, however.

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.

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 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.

Diverting Attention

Major corporations which have existing reputational problems due to their core business activities may engage in high-profile CSR programmes to draw attention away from their perceived negative impacts. Thus British American Tobacco (BAT) will take part in health initiatives and the petroleum giant BP has installed very visible wind-turbines on the roofs of some petrol stations in the UK.

Critical points of view

Some critics of CSR, such as the economist Milton Friedman, argue that a corporation's principal purpose is to maximize returns to its shareholders, whilst 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 become clear that a CSR activity generally can only be effective at achieving social or environmental outcomes to the extent that it maximizes profits: hence the CSR slogan - "doing well by doing good". Note that this requires that the resources applied to CSR activities must have a higher return than those resources could obtain 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: 1. resources are available for investment 2. the CSR activity will yield higher profits than any other potential investment or activity 3. 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.

Views Regarding CSR

Some would argue that it is self-evidently “good” that businesses should seek to minimise 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 will be able (if it chooses) to promote its CSR credentials as well as increase profits.

Some commentators are cynical about the true level of commitment of corporations to ideas like CSR and Sustainable Development, and their actual motivations for responsible behaviour. (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 internalize the corporation's statutory obligations to maximize profits, sometimes to the extent that they abdicate their individual moral and ethical obligations as human beings. This tendency is, of course, encouraged by the desire to keep one's job, and by a system that judges and rewards performance strictly by bottom-line returns. The results of this tendency were clearly seen in the many corporate scandals of the late twentieth and early twenty-first centuries.

So the CSR movement may perhaps be understood 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.

External links

Canadian Critique of the Triple Bottom Line approach to measuring CSR
Reclaim Democracy. Essay on corporate responsibility
World Bank archived online discussion: "How Can Corporate Social Responsibility Initiatives Deliver Results?"
World Bank archived online discussion: "Will Responsible Business Increase the Competitiveness of Developing Countries?"
Milton Friedman on corporate responsibility
Center for Global, International, and Regional Studies History and Critique of Corporate Social Responsibility
Total Corporate Responsibility, System Change and Sustainable Development

Business ethics

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