Principles of Corporate Social Responsibility - Term Paper Example

Principles of Corporate Social Responsibility Introduction The nature and characteristics of modern business has undergone tremendous change in the last few years. Business organisations have changed their organisational and operational process by implementing modern business management concepts and tools. Entrepreneurs have identified various factors that affect business and its profitability. Traditional concept of business was more focused on profitability. For example, traditional business organisations used to focus more on ‘sales’ rather than ‘marketing’. This widened the nature of business responsibilities. The organisations have realised their responsibility towards society, stakeholders and environment. ‘Corporate Sustainability’ is one of the major concerns of the prevailing business organisations. For meeting the objectives of corporate sustainability, organisations resort to corporate social responsibility in its strategic management process. Dyllick and Hockert defines corporate sustainability as “meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders, employees, client, pressure groups, communities etc.), without compromising its ability to meet the needs of future stakeholders as well” (Wankel and Stoner, p.118). Specifically, corporate sustainability can be termed as ‘corporate social responsibility’. Corporate social responsibility helps firms to achieve its corporate sustainability. It has become an important phenomenon in the corporate world. This paper will attempt to explain the principles of ‘Corporate Social Responsibility’, its importance in the corporate world and the extent to which recession has affected its activities. The study will be analysed in the background of financial crisis of 2007-2008. Its significance has become all the more conspicuous because of its ability to enhance the value of a firm. The conclusion will attempt to sum up the major finding of the entire discussion. Importance of Corporate Social Responsibility Increasing awareness regarding corporate sustainability explain the increasing importance given to corporate social responsibility (CSR). CSR has become an integral part of strategic management process. Modern organisations include primary objectives of CSR in their mission and vision statements. CSR activities strive to enhance the value of business. The main objective of corporate social responsibility is to take care of factors that are not directly related with operational and financial process. CSR activity is a voluntary attempt to bring improvement in society. According to Cramer and Bergmans, CSR activity focuses on three Ps i.e. people, profit and planet. The following figure shows the interrelationship between these three factors. Figure 1: Three Ps of Corporate Social Responsibility (Source: Cramer and Bergmans, p.2) In the above figure, that triangle stands as a metaphor for business organisation, with each vertex being the area of corporate responsibility. A profit making organisation must strike a balance between these three areas of responsibilities. ‘People, planet and profit’ denote “social well being”, “ecological quality” and “economic prosperity” respectively (Cramer and Bergmans, p.2). Only if a firm is able to meet these three areas of responsibilities, will it be able to serve its stakeholders, community, society and government. In recent years, firms have become more interested in CSR related activities. There are several factors that are responsible for it. The role of CSR in developing value-based management has made firms realise it importance. Some of the reasons are given discussed below. CSR as a part strategy: CSR is a crucial strategic process responsible for organisational growth. CSR activities offer various benefits to a firm. It helps to reduce waste and cost, improve brand value; reduce risks related to political, legal, economic fluctuations. It also helps to motivate its employees to be aware of their social responsibility. CSR helps a firm to incorporate value based management. Value based management and CSR both focus on improving the value of a firm and its shareholders. Government Policies: Governments impose certain civil regulations on a firm to reduce its exploitation of people, society and environment. The operational activities of a farm often lead to increase in carbon emission and pollution in the environment. In order to avoid government restrictions on operational activities, firms aim to meet their CSR activities. Long Term and Stable Growth: For achieving long term stable growth, CSR is very necessary. The consumers and investors have become aware of global warming. They prefer to select companies who are socially responsible. For example, many investors assess the CSR performance of a company before making investments. Assessment of CRS performance is an inevitable part of fundamental analysis. Retail customers also prefer to buy re-cycled and healthier products. Effective communication tool: CSR is an important tool in communication and marketing. CSR is the primary task of non-profit making organisation. However, profit-making corporations communicate with its target audience by conducting CSR activities. In this process, the organisations try to convey their dedication to the welfare of stakeholders and society. It helps to increases their trustworthiness. Principles of Corporate Social Responsibility In order to incorporate the CSR within a firm, management needs to understand the basic principles of CSR. Post, Fredrick and Lawrence have identified two basic principles of CSR. These are charity principle and stewardship principle. The charity principle explains that wealthy corporate should help the poor section of society. Many leading organisations offer charities for bringing improvement in society. These charities are used for providing medical, educational and other necessary facilities to the unprivileged community. Business organisations prepare proper financial budgets to meet this principle. Stewardship principle is meant to meet the public interest. As per this principle, business executives and managers treats “themselves as trustees or steward of society acting public interest” and “despite of economic motives the managers started concentrating on social causes to justify as being public trustees” (Sunita, p.256). Russian Managers Association Corporate Responsibility Committee has identified different CSR priorities. These priorities can be explained as distinct CSR principles. These priorities are given below (Russian Managers Association, “CSR Priorities”). Fare business practice and business development: For serving the society it is very necessary to develop a stable and profitable business. In this respect, it is important to mitigate the costs of society for business expansion and to enhance labour effectiveness and efficiency. Development of personnel: For bringing personnel development in society, a business must offer standard and just benefits and compensation to its human resource. Sound health and higher safety level: A business must maintain higher level of health and safety in the organisation. Resource and environment management: Firms must try to reduce the negative impact on environment by managing resources and by reducing wastes. Responsible for restructuring business: A business institution must restructure its organisation as per the demands of local community. Proper organisation structure helps to serve the society in a better way. Improvement of local communities: Business organisations must support and assist its local communities to enhance its managerial efficiency. Promoting voluntary duties and charity: Firms should encourage charity and voluntary works for bringing about improvement in society (Russian Managers Association, “CSR Priorities”). The above priorities help a firm to meet its prime principles of CSR activities. The above discussed priorities cover important activities of CSR. This principle includes three Ps of CSR i.e. concern for people, planet and profit. World Business Council for Sustainable Development (WBCSD) has developed four main priorities of corporate social responsibilities. The members of WBCSD specifically focus on “Development”, “Energy & Climate”, “The Business Role” and “Ecosystems” (World Business Council for Sustainable Development, “About the WBCSD”). Corporate social performance is a reflection of corporate behaviour towards the CSR activities. The corporate performance of CSR is affected by three main factors. These reasons are “(1) social obligation (proscriptive), (2) social responsibility (perspective) and (3) social responsiveness (anticipatory and preventive)” (Salzmann, p.9). For understanding corporate social performance, Woods have developed a model that includes three principles of CSR. Figure 2: Corporate Social Performance Model (Source: Salzmann, p.11) As per the above the model, the primary principles of CSR are public responsibilities legitimacy and managerial discretion. Based on these principles, corporate social performance can be identified. Corporate Social Responsibility during Financial Crisis Corporate social performance is often affected because of several reasons. Business cycle poses as the biggest challenge as well as the most formidable opportunity for CSR activities. Recession is a potent threat to CSR activities. An organisation can serve its society, economy and community only if it is in a stable position in term of organisational and financial growth. CSR activities require investments and during recession, the business world suffers from financial crunch and hence it becomes tougher to meet CSR principles. According to Wyburd, during the recession period, competition among companies increases significantly and it becomes difficult to measure the social benefits as other factors like budgets and management time are devoted to counter the increasing competition (Wyburd, p.109). Financial Crisis of 2007-2008 is the latest recession period that has affected the entire world economy. USA and European countries were the worst affected. During this time, many US companies avoided their social responsibility. However, the failure of corporate governance was the major reason behind this financial crisis. Lending institutions including banks did not take any action to reduce the market risk. Besides they went against corporate responsibility and misguided their investors and regulatory authorities by providing misleading information related to risk measurement. Therefore, it can be said that the US lending institution neglected CSR before the global down turn. Leading US companies, other than financial institutions and banks, also suffered huge losses due to financial crisis. However many of them kept working for the social causes but the rate of CSR activities reduced drastically. In this respect, Yasemin Zengin Karaibrahimoglu conducted a research to determine the rate of CSR activity during financial crisis. After conducting a statistical research, he found that CSR projects carried out by the companies of US, European and other countries have decreased drastically. This research included companies listed in Fortune 500 and their corporate social performances showed a negative growth (Karaibrahimoglu, “Conclusion and Discussion”). However, there are some exceptional examples of increasing CSR activities during financial crisis. The share price of Starbucks was down by 50% during the financial crisis but its contribution towards social activities was not affected. Besides, other companies like General Electric showed concern towards protection of environment. During financial crisis, it developed highly efficient products that strived to reduce the negative impact on environment (Radu, “The Impact of Financial Crisis on the Concept of CSR”). Many US and other European companies failed to meet CSR objective during Financial Crisis. They have failed to realize that CSR is a necessity not a luxury. They could have use CSR as an important tool for bringing trust in the market. However, the failure of corporate governance was the major drawback for the US companies. They were not sensitive towards the social responsibilities and finally the economy collapsed. Conclusion The above paper has discussed various aspects of corporate social responsibilities. The popularity of CSR activities has increased significantly due to modernisation of trade and business. Modern business organisations have realized their responsibility towards their society, community and people. The primary objective of this paper is to explain the principles of CSR and the impact of recession on its activities. This paper has dealt with three major sections. The first section has described the increasing importance of CSR in the present business world. Primarily CSR focuses on welfare of people, planet and profit and it has become an integral part of strategic management. The second section has laid down the principles of CSR. The management has to understand the basic principles of CSR for meeting its primary objectives. This section has also included specific priorities of CSR in the context of a company. The final section has discussed the impact of recession on CSR. Specifically, this section has analysed the effect of Financial Crisis 2007-2008 on CSR activities. US and other European financial institutions were found to have neglected corporate governance and social responsibility. The rate of CSR activities was reduced significantly during 2007 and 2008. Reference Cramer, J. and Bergmans, F. Learning about corporate social responsibility: the Dutch experience. IOS Press. 2003. Karaibrahimoglu, Y. Z. Conclusion and Discussion. January10, 2010. Corporate social responsibility in times of financial crisis. December 02, 2010. . Salzmann, O. Corporate sustainability management in the energy sector: an empirical contingency approach. Gabler Verlag, 2008. Sunita. Politics, Ethics and Social Responsibility of Business. Paragon Books. 2005. Radu, L. The Impact of Financial Crisis on the Concept of CSR. No date. The Significance of CSR and the Effects Of The Financial Crisis. December 02, 2010. . Russian Managers Association. CSR Priorities. 2006. On Principles of Corporate Social Responsibility. December 02, 2010. Wankel, C. and Stoner, A. F. S. Management Education for Global Sustainability. IAP. 2009. World Business Council for Sustainable Development. About the WBCSD. 2010. World Business Council for Sustainable Development. December 02, 2010. . Wyburd, G. Competitive and ethical?: how business can strike a balance. Kogan Page Publishers. 1998. Read More