Corporate Social Responsibility - Essay Example

CORPORATE SOCIAL RESPONSIBILITY Introduction Corporate social responsibility has acquired an increasing pivotal place in corporate management and practice. Firms usually stand to benefit from investment in ventures of social significance like extending support to community projects etc and these benefits may occur in terms enhanced customer trust and better financial performance. Socially responsible actions indicate a firm's commitment to its society and community which results in increased consumer confidence and thus better performance. Donaldson and Werhane (1983) noted that "almost everybody believes that corporations should be concerned about something more than making money, that they have responsibilities not only to stockholders but to their employees, to their customers, to the communities in which they work and to society at large." Theory and Assumptions Corporate social responsibility, though very important, may rarely come without a serious concern for better financial performance or increased market share. In other words, studies reveal that managers are more likely to opt for investment in social ventures if they are certain of monetary gains. Since in most cases social responsibility is closely linked with better financial performance, thus managers are willing to invest in ventures for public good. Lydenberg et al. (1986) maintain that "Companies fight hard for even a small percentage gain in market share for their products. If and when corporate managers become convinced that their company's social record affects market share, they will be forced to take social initiatives seriously." Social responsibility has also become a buzzword because of the availability of large variety of similar goods. When a product comes into the market, it has to fight very hard for consumer's attention because there are several other rival goods competing for the same. A marketing and design consultant (Neuborne, 1991) states: "There was a time when you bought a product just for its price or performance...but with the number of products available, it is increasingly difficult to differentiate one product from another." In this situation, a consumer may base his buying decision on company's image and its commitment to public good. This is clearly indicated by a book, 'Shopping for a Better World' that has been selling millions of copies since it first came out in the market. the book rates and ranks companies according to their social responsibility performance. As a result of this in 1989 alone, 78% buyers switched brands. (Davids1990). World Bank defines CSR as: "Corporate Social Responsibility is a term describing a company's obligations to be accountable to all of its stakeholders in all its operations and activities." While it is now true that corporate social responsibility is highly desired, it has not always been the accepted practice for corporations. In 2004 for example Henry Miller in The Miami Herald, Henry Miller wrote, "Businesses do not have social responsibilities; only people do." (Miller, 2004). Similarly 'The Economist' failed to see why corporations must be forced to adopt a socially responsible framework. Thus in its 2005, issue The Economist skeptically reviewed the firms that were contributing to tsunami relief effort: "All things considered, there is much to be said for leaving social and economic policy to governments."(The Economist) Milton Friedman was probably the first theorist and economic expert to reject the theory of "social conscience of business" when in 1970 essay, he declared: "There is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits." The most important framework in which this issue must be studied is the traditional model. Milton Friedman was a good representative of this traditional conflict as he argued that money spent on social ventures was most likely coming from employees or stakeholders. This neoclassical model states that when social responsibility becomes one of the concerns, profits suffer. As the result of which any dollar spent on community projects is stolen from stakeholders' money. This is also consistent with the views expressed by The Economist in its Jan, 2005 issue. it was argued that money that corporations were spending on relief effort had indeed been coming from equity owners. The supporters of this model maintain that social responsibility and profits must be viewed as exclusive goals. McDonough and Braungart (2002) further clarify the conflict in Cradle to Cradle: "We are accustomed to thinking of industry and the environment as being at odds with each other, because conventional methods of extraction, manufacture, and disposal are destructive to the natural world. Environmentalists often characterize business as bad and industry itself (and the growth it demands) as inevitably destructive. On the other hand, industrialists often view environmentalism as an obstacle to production and growth.... It appears these two systems cannot thrive in the same world." While firms have become conscious of their roles as socially responsible units, there still exists a deeper conflict between this desire to achieve this image and maximize profits. Many firms would still prefer to invest in projects that are profitable even if at the cost of environmental safety or community good. Indigo Teiwes, Research Analyst for the Portland-based socially responsible investment fund Portfolio 21, cites the example of Scottish and Southern Energy, a firm that recently acquired two coal-fired power stations. However these two plants are ranked as the worst four stations in UK in terms of greenhouse gas emissions. This clearly illustrates serious conflict that still persists in corporations between profit maximization and public good. Susan Ariel Aaronson and James T. Reeves (2002) explain in Corporate Responsibility in the Global Village: The Role of Public Policy: "Although market forces are increasingly pressing companies to act responsibly, markets have not succeeded in prodding corporations to 'do the right thing' everywhere they operate. To some degree, public policies to promote CSR arise from market failures." This traditional mindset argues that tax breaks and such other incentives would help a firm become more socially responsible. There must be some awards or other forms of recognition extended to companies with a socially responsible behavior in order to encourage other firms to follow suit. This kind of competition can prove to be more effective than governmental regulations because "firms bristle at more government mandates," (Bross, 2003) How social responsibility affects business: Social responsibility is closely connected with concern for financial growth. According to this belief, firms seek to maximize their profits by investing in a healthy environment and other public good projects. The firms that have successfully attained the prestigious image of being socially responsible follow this ideology. These firms choose to be more socially conscious not because of any real intention of creating a healthier society but because their actions seem to influence buyer behavior in a positive manner. Companies are thus rapidly developing serious CSR policies with exclusive departments dealing with this. New and better corporate mission statements have emerged that incorporate ethical code of conduct. By the end of 2003, more than 2000 firms had presented their CSR reports. These firms have successfully found a way to turn social responsibility into financial boom. CSR is now seen as the main strategy to attract customers since it seems to have a positive impact on customers' buying preferences. Kara Hartnett of BSR states, "Brand differentiation is important for known companies. Social responsibility can set them apart." (Hartnett, 2003) Companies are vying for increased customer attention by developing a reputation for good corporate citizenship. Executive Linda Wright explains that, "when you give back to the community, it comes back to you. Accounts have been opened with US Bank because of the respect people have for the company." (Wright, 2003) Microsoft similarly believes in CSR that is "all about the bottom line" and tries to connect it with economic success. It seeks to maximize its market share by investing in public projects. (Bross) CSR is thus all about developing connections and sustaining the same. When a company makes a conscious effort to listen to their customers and their concerns, it helps them build a deeper connection with them and that results in increased profitability. For example when Microsoft realized that most of its Xbox customers were concerned about labor and environmental problems, it started paying greater attention to environmental issues of areas where their production houses were located. CSR doesn't only help attract more customers- it also increases business to business relations. Levi's developed a code of conduct for vendors, which has earned the status of certification among purchasers all over the world. Apart from that CSR strategy also brings a company closer to its community as Duncan Wyse, President of the Oregon Business Council, explains, "A lot of business is connections. Companies are not islands, they are not isolated from the world; their business depends on their engagement in networks. When a company strengthens its relationship with the community, this is part of its mission." (Wyse, 2003) Arthur D. Little further adds in "The Business Case for Corporate Citizenship,": "The perceptions that stakeholders have of a company's corporate citizenship performance can significantly affect the business's license to operate. Companies with a poor reputation in this area can find themselves continually responding to criticism of their approach to a whole range of environmental and social issues." (Little, 2002) CSR is also seen as an important strategy for attracting and retaining quality employees. In other words, employee turn over rate decreases significantly when a firm is actively involved with community. In a 2004 survey, it was found that more than three fourth of MBA graduates would prefer working for an organization that is considered socially responsibly even if it means lesser pay. (Roner, 2004) It has also been noticed that employee do not only view active involvement in community projects as CSR but excellent treatment of employees is another slid indicator of a firm with ethics. When the subject was discussed with Human Resources Director of fast-food chain, In-N-Out, he remarked: "Efficiency wages are self-serving. Our store managers may make 100 to 120 percent over industry norms, but the money spent on salaries is seen as an investment. Our wages not only broaden the applicant pool from which we can choose employees, but increase performance levels and retention rates.... Although you can never know for sure why people stay with a company, I certainly believe it may influence why people like their job here". (Iriart, 2003) A firm needs to reserve some compensation resources in case of emergencies. When a firm ensures that its employees are treated well and their medical and contingency expenses are adequately covered, it automatically increases productivity and efficiency of its employees. According to International Labor Organization (ILO): "on the job accidents and illnesses annually take some two million lives and cost the global economy an estimated 1.25 trillion, or four percent of annual global GDP." (ILO, 2003) Therefore safer working conditions along with sound compensation plans translate into greater productivity. Studies also reveal that when firms invest in corporate community service programs, they increase their chances of facilitating valuable research and innovation by "developing a variety of competencies, including teamwork, planning and implementation, communication, project management, listening skills, and customer focus." (BSR.org) This may help further in risk management and avoidance. Simon Zadek explains: "Advocates advance two primary arguments for how CE [Corporate Engagement] can help a company manage its risks. The first claim is that engaging in CE can help avoid harms associated with socially irresponsible or illegal behavior perpetrated by employees, and to mitigate the harms to the corporation created by accidents or mistakes.... The second, more complex claim, is that engaging in increased CE will help companies better understand and manage risks that come from new and unfamiliar sources." (Zadek, 2000) Community service, environmental protection and closer connection with the people translate into better risk management and risk avoidance. This is especially in the case of more accident prone industries including Petroleum and construction. With a sound CSR strategy, a firm can avoid negative publicity when something goes wrong and it can also avoid lawsuits to a large extent. Vice President of Communications and Public Affairs at Occidental Petroleum, Lawrence Meriage explains: "In the indigenous communities where we operate in Ecuador, we have a long-standing relationship with the people. Having them look at us as friends, instead of enemies, means our operations will not be disrupted and we will be able to negotiate new agreements later on. Building these relationships helps us avoid protests, strikes, or other disruptions such as people blocking roads." (Meriage, 2003) Companies need to be aware of the political issues which are affecting the community. It helps in formulation correct policies as CSR strategy should incorporate company's stand of issues of importance. Political awareness also means that firm would be able to correctly anticipate future legislation. It is important to take a stand on issues before laws are formed because this shows a firm's commitment and courage of conviction. Sidney Espinosa at Hewlett Packard (HP) asserts, "It is important for a company to identify policy issues that are hot and take a stance/find a position before laws are passed." (Espinosa, 2003) Recommendations: While most firms would either reject social responsibility or adopt it for financial gains only, we recommend a different approach. Firms must be concerned about environmental and other social issues without connecting them with financial gains. In such a firm CEOs and managers aim for the greater good because they believe in it and not because it serves any financial purposes. Wyse adds: "A large part of CSR is the individuals involved in senior ranks. CEOs like to be involved in policy and service; it helps them to lead a fulfilling life. Just like others, executives feel good about giving back to their community and consider it part of their responsibility as a professional." (Wyse) This is however an uncommon sight. We don't normally come across firms that would pursue public good without profits in mind but regardless of how uncommon this might be, there are still some firms who practice this belief. Such firms are most commonly headed by philanthropists or environmentalists who feel strongly for the community and thus economic success is secondary to them. Many such firms even believe in not publicizing their charity work. If they are working for the greater good, why advertise it. Social and Environmental Affairs Manager at Adidas, Gregg Nebel explains: "Why market what you are doing if you are simply doing what is right' The feeling here is that there is an expectation that a company will do the right thing, and there is no reason to advertise that we are fulfilling this obligation." Social responsibility is an important concern of corporations and community alike. It has been receiving increased attention with media focusing on ethical and moral obligations of large corporations and with the world chanting slogans against ever-spreading wings of these firms. However the definition of social responsibility or CSR varies from firm to firm and the model mentioned above are just three most common ways in which this is implemented. CSR is something each firm needs to define for itself and it is something we must consistently aim for. References Miller, H. "Businesses don't have social responsibilities; people do." The Miami Herald 21 July 2004. "The Good Company." The Economist. 22-28 Jan. 2005: 11. Braungart, M; McDonough, W. Cradle to Cradle. New York: North Point Press, 2002. Aaronson, S; Reeves, J. Corporate Responsibility in the Global Village: The Role of Public Policy. Washington, DC: National Policy Association, 2002. Bross, D. Director, Community Outreach, US Legal-Community Affairs. Microsoft Corporation. Personal Interview. 23 June 2003. Little, A. "The Business Case for Corporate Citizenship." Distributed at the World Economic Forum Annual Meeting. 31 Jan.- 4 Feb. 2002. Roner, L. "MBA graduates want jobs with ethical companies." Ethical Corporation Online. 2 Aug. 2004. Iriart, K. Vice President of Human Resources. In-N-Out Burger. July 2003. International Labour Organization. "ILO: Work hazards kill millions, cost billions." World of Work Magazine. ILO Online, 23 May 2003. "Overview of Business and the Community." www.bsr.org Zadek, S. Conversations with Disbelievers. The Ford Foundation, 2000. Meriage, L. Vice President of Communications and Public A'airs, Occidental Petroleum. Personal Interview. July 2003. Edmonds, B. Director, Environmental Policy, Paci'corp. Personal Interview. 24 June 2003. Davids, M. "The Champion of Social Responsibility." Business and Society Review, Summer 1990, pp. 40-43. Donaldson, T., and Werhane, P. H. Ethical Issues in Business (2nd Ed.), Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1983. Friedman, M., and Friedman, R. Free to Choose. New York, Avon, 1981. Lydenberg, S. D., Marlin, A. T., Strub, S. O., and the Council on Economic Priorities. Rating America's Corporate Conscience. Reading, Massachusetts: Addison-Wesley Publishing Company, Inc., 1986. Neuborne, E. "Cause Packaging: Message is in the Bag." U.S.A. Today, July 1, 1991. INTERVIEWS CITED: Teiwes, I. Portfolio 21 Research Analyst. Personal Interview. Bross, D. Director, Community Outreach, US Legal-Community Affairs. Microsoft Corporation. Personal Interview. Hartnett. K. Senior Manager, Business for Social Responsibility. Personal Interview. Wright, L. Vice President, Community Relations. US Bank. Personal Interview. Wyse, D. President. Oregon Business Council. Personal Interview. Read More