Traits of Corporate Social Responsibility - Essay Example

? CORPORATE SOCIAL RESPONSIBILITY Corporate Social Responsibility Introduction Yes! The CRS report serves as a very important factor of informing the shareholders and stakeholders as well as communicating to the public on the environmental and social responsibility performance of a company. An organization maintains its public image through corporate social responsibility activities. This paper will support this argument by looking at the role of the CRS reports to the shareholders and stakeholders of an organization. Moreover, the paper will give the background information on the Corporate Social responsibility as well. Emphasizing on the corporate social responsibility has become a core part of the public policies for development of private sectors within the framework of the international cooperation development. It is considered a deliberate choice for an enterprise to give back to the community and to respond the environment crises while maintaining relations with the shareholders and stakeholders based on dialogue and transparency (Godfrey, Merrill & Hansen 2009). A CSR report, therefore, consists of all activities that the company has taken part. This includes the whole of their chain of value and it considers the effects on ecological, economic, and social parameters in dialogue with the shareholders and stakeholders. The report conveys the following information to the public and to the stakeholders: consumer interest, environmental care, air operating practices such as corruption and bribery, involvement to the community and firm’s governance. A company will therefore, use the report to reach to its consumers, shareholders, and stakeholders. Corporate managers and leaders have taken the initiative to call upon the government, as a stakeholder, to recognize their CSR participation and achievements. The companies can only achieve that by creating a CSR report that communicates to the society on its CSR activities. The government has gone ahead to encourage, support and to enforce Corporate Social Responsibility behavior of firms (Turker 2009). This has therefore resulted to multiple rationales, such as deregulation and competitiveness in companies by including their CSR reports in their annual reports. However, the legal standards and frameworks have been put in place in order to ensure the companies include the appropriate information. This is because some of the stakeholders and shareholders are non-profit agencies which require in knowing the benefit of the company to the community before investing in it. The government also requires knowing how the company responds to environmental issues such as pollution and global warming. It is important to note that most stakeholders including investors, community, markets, NGOs and the government need to know the role of a company to the society and their role in ensuring the environment is maintained. For instance, the mentioned groups expect organizations to put efforts in fighting global warming and feeding the poor. It is humble call for a company to do that, but it has a great effect to the consumers and to the investors. Consumers want to be associated with a company that understand their needs and which cares for their future. As well, investor will invest in a company that has responsible management and that which takes part in CSR activities. Background information Since the early years of 1990, an increase in the environmental awareness and development of sustainable economic growth redirected firms into environmental sensitivity. The recent economic events have resulted to a greater emphasis on the Corporate Social Responsibility in redefining the future of the society. Whereas companies and business organizations are responsible of creating wealth for the shareholders and driving company’ progress, they are directed and guided by regulations and governments, green consumer pressure and society pressure groups (Henriques & Sadorsky1999). A balance between needs of the society and economic growth attracts the attention of organizations into a competitive and strategic environmental responsibility to corporate survival. Firms have the responsibility to act well and realize the CSR projects that facilitate in distributing the social, economic, and political benefits to the society from which they get their power. Certainly, as the ethically, socially, and environmentally responsible actions by corporations are recognized by stakeholders and shareholders, the role of CRS reporting serves as an important mechanism to undertake duties of accountability and disclosure of firm’s social responsibility. Although, the interests of the shareholders and stakeholders collide with the practices of the corporation, the company’s disclosure through CSR reporting reflects the accountability and responsive to the needs of the society which serve as their market. Agency costs usually occur due to interest non-alignment and entrenchment between minority and majority shareholders. Majority shareholders have an eye for the long-term survival of the company and maintaining their reputation. This calls for the firm’s maximization of the environmental, social, and economic behavior and appropriate response and communication of company’s behavior to the society. This is because society is their market, and without a good reputation to the market would result to a slow economic growth of the company. The institutional investors also take part in the CSR decisions through the corporate governance mechanism. In this, the shareholders power and knowledge on the CSR reporting would be very significant to the investors. However, it must be emphasized that financial institutions, majority, and minority shareholders have different opinions and interests in the CSR (Tsoutsoura 2004). Discussion When a company is making decisions, it is important to take into consideration both the stakeholders and shareholders’ interests. Various literatures have different definition of stakeholder, but generally, a stakeholder refers to all groups of people who have interests in the objectives of a firm. They include the customers, managers, lenders, workers, and suppliers. By a company formulating a CSR report, they communicate to the stakeholders on their social and environmental performance. The communication via the CSR reports tends to be complex and detailed as the stakeholder’s expectations increases, especially after social and environmental crises. Although in some countries the disclosure and accountability of the information is confirmed, the factors that are used in explaining the environmental and social disclosures are discussed (McWilliams, Siegel & Wright 2006). The importance of the CSR information to the stakeholders is that it shows the relations between the social performance and disclosures and various factors that affect the performance of the firm. Factors that affect the success of a firm are relevant to stakeholders because they know which company they will invest in. The stakeholder’s theory states that a company can engage in CSR, which the non-financial stakeholders perceive to be useful. In absence of a company taking part in CSR, such stakeholders would pull out their support from the company. Therefore, by a company preparing a CSR reports, the stakeholders can know whether their interests are taken into an account. The theory stresses on the ethical and moral dimensions of the CSR participation. While companies are expected to communicate to the larger public voluntarily, they are expected to report to their owners, shareholders, and investors at least annually. The mechanism to do that is through use of annual report. The companies have added to the annual reports information such as presentations of accounts over the previous financial year that is accompanied with reports from directors and auditors. It has been observed that in recent years, companies have included the CSR reports that state their social responsibility to the society. Various researches have indicated that organizations are orienting themselves to the groups of stakeholders (Golob & Bartlett 2007). In recent years, stakeholders have taken a responsibility of increasing their attention in deciding what the company does with the extra resources, time, and energy. With the annual reporting and the ongoing social and environmental crises, the stakeholders have a stand in deciding what the company should do or should not do. They use annual CSR reporting in dictating some managerial tools and hence taking part in the managerial proportion. Identifying legitimacy, power, and urgency acts as an important tool for stakeholders in arguing their various combinations of attributes and needs. It is believed as much as the company as the interest of the shareholders and stakeholders may conflict; the company must observe some government and investors regulation in order to be at par. Organizations incorporate accounting theories on the decision making on the CSR activities disclosure that are associated with economic and social performance. CSR reporting and decision making is very essential for the stakeholders’ financial satisfaction. Positive theory of accounting which is important in regulating CRS reporting puts together social disclosure behavior and choices of management for an effective compulsory financial accounting. The positive accounting theory is used in fill in the gap which may exist between the expectations of the stakeholders, society and the performance of the firm. The positive accounting theory is significant for disclosing voluntary information. The theory focuses on the relationship between the Company and the stakeholders. The positive accounting theory is used in CSR reporting and it incorporates other theories such as agency theory, and legitimacy theory. The agency theory takes looks into agency problem. The agency problem arises among the management and stakeholders. It is driven by self interest. The stakeholders give resources to the firm, such as financial resources, and environmental resources. Environmental resources are represented by government Management and environmental foundations. The government (insiders) makes decisions based on their self interests, but the stakeholders (outsiders) concerns are also involved. Different stakeholders have different concerns for the Company. For instance, the environmental foundation is affected by the Company’s decision making because it looks after the environment. However, the environmental foundation has no power in dictating whether a polluting factory should be build or not. If the factory is profitable, the management will decide to build it. Managers make decision based on their self interests and at times their incentives differ with the stakeholder’s. A CSR reports will thereby inform the financial analysts and rating agencies on whether the Company is misusing the resources and funds given by investors. CSR reporting and voluntary disclosure serves as a tool for solving the agency problem and other solutions that are taken into considerations. In disclosing, management behavior will be monitored. Asymmetry of information is used to show the openness of a Corporation. When a firm is open the stakeholders and management usually have the same information. When important information is not shared with the stakeholders, the stakeholders can make different decisions. When a company discloses positive information, it attracts more investors. The lemon problem arises when a company’s good information is undervalued and the bad information/ investments are overvalued. The lemon problem comes about as result of information asymmetry. However, CSR reporting and voluntary disclosure acts as an important tool in reducing information asymmetry. The voluntary disclosure will reduce the distinction between the outsiders and insiders. Legitimacy theory explains why the management makes decisions in favor of the society. This is because a company operates in a society and that it is judged by the same society based on their performance. For instance, when a company announces bad news it also announces good news. This is because the stakeholders will make positive expectations about the firm when good news and bad news are announced, than when only bad news is communicated to the society. With positive news, the Company’s valuation from the society improves. CSR disclosures are used a vehicle for legitimacy. It has been observed that Companies that are poor environmental performers need to say more or to disclose more on environment in order to attain legitimacy level. The public gets Company’s information that is used to create legitimacy from voluntary disclosure and CSR reporting. The public will judge a firm in a positive way when CSR information is provided. The stakeholders’ theory explains that a Company is affected by some stakeholders. The ethical branch of this theory explains that all stakeholders; minority or majority, should be treated equally. The managerial branch says the there exists difference in stakeholders power in order to influence the firm. However, the stakeholders’ theory acknowledges that different stakeholders have different expectations. Therefore, a company should take into account all demands and expectations of the stakeholders. This can only be achieved through CSR reporting and disclosure on CSR activities. Corporations incorporate various approaches of accounting theories, such as the decision usefulness approach, economic consequences approach, and analysis of conflicts approach. These approaches are used in order to get rid of any under or over valuation in CSR reporting. The stakeholders believe that the managers may undervalue firms because of the existence of information asymmetry. Managers usually have more information more than the stakeholders and the shareholders. In incorporating the mentioned approaches, the stakeholders, especially the investors will be able to acquire useful information on the future performance of a firm. It is important for a firm to incorporate various accounting approaches, as well as involving credited auditors who verify the position of the CSR report. Accurate CSR report will send the right message to the stakeholders, investors and shareholders. CRS reporting tries to serve both the interest of the community and that of the shareholders and stakeholders,’ by balancing competing interests of the shareholders and taking care of the managers’ self-interests. Managers need to respond to the pressure from the community and in general from the government and other stakeholders. CSR reporting therefore serves as a driver for the performance of the Corporate Social responsibility, by reducing information asymmetry between the management, stakeholders, and the society (Kolk 2008). Conclusion Corporate reporting is not only a way to maintain a presentable public image, but it is also a means of communicating to the present and potential shareholders and stakeholders. Although, the interest of the shareholders and those of the stakeholders conflict, taking part CSR activities and reporting will remain a necessary tool for an organization to reach out to the society. Managers aim at maximizing the wealth of a shareholder but they do not neglect CRS activities. In taking part to CSR, a company will create good relations with the community and hence increasing their market share (Werther Jr & Chandler 2010). This will result to increased profits for the shareholders. Therefore, by reporting the shareholders will be able to know what the management is doing in maximizing their wealth. On the other hand, CSR reporting communicates to stakeholders. The government (stakeholder) requires a firm to take part in Corporate Social Responsibly. Reference Godfrey, P. C., Merrill, C. B., & Hansen, J. M. 2009, The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30(4), 425-445. Golob, U., & Bartlett, J. L. 2007, Communicating about corporate social responsibility: A comparative study of CSR reporting in Australia and Slovenia. Public Relations Review, 33(1), 1-9. Henriques, I., & Sadorsky, P. 1999, The relationship between environmental commitment and managerial perceptions of stakeholder importance. Academy of management Journal, 42(1), 87-99. 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