Corporate social responsibility
Firms have a range of responsibilities to various stakeholders including the wider community in which they operate. These responsibilities are often called Corporate Social Responsibility (CSR). A successful range of socially aware policies should engage more members of the public and boost trade. They might also reduce costs as law suits and lost orders should be less. Customer loyalty, employee morale and retention should also improve as a result of a more socially aware strategy and its concurrent objectives.
CSR is an umbrella term which covers firm's ethical objectives. However, although CSR is about behaving ethically, there is a distinction between CSR and ethics. Ethical behaviour is about individuals and an ethical policy produced by an organisation is about managing the behaviour of individual employees and possibly, other stakeholders. CSR is focused on the behaviour of the organisation itself as opposed to the actions of individuals within it. It is about the role of the organisation in its environment and managing how that interaction takes place.
However, there are a number of barriers to corporate responsibility that prevent businesses behaving in the most socially desirable manner. The first and most important of these constraints is cost. Behaving in a socially responsible way for many businesses will raise their costs and given the pressure on them to maintain their global competitive advantage, they may be unwilling to change their method of operation. Firms may often act ethically when profits are high, but change their behaviour when under economic pressure.
Business has a responsibility to the society in which it operates. Members of society are stakeholders (have an interest in how the business operates) and need to be treated accordingly.
By being socially responsible firms hope to be seen as:
- Good employers
- Responsible capitalists
- Preserving a good image, which should allow them to build sales
- Being trustworthy and a worthy of customer loyalty
You may like to read Texas Instruments section on Corporate Social Responsibility:
- 2009 Corporate Citizenship Report summary.
Being socially responsible is likely to increase costs. It may also take time for employees to adjust to what, for some, may be radical changes. It may also be that what seems to be a good idea to one set of stakeholders is not fully appreciated by another. For example, the cutting of dividends to restore confidence in the business may not be popular with shareholders.
Differing views on Social Responsibility
There is much debate about the role of business and the level and extent of its responsibilities to society. Indeed, some commentators argue that it is not the job of business organisations to be concerned about social issues and problems.
There are two main schools of thought:
It is the free market (capitalist) view that the prime objective of a business is not to act in a socially responsible manner if, the extra costs incurred reduces the distributable profit to its key stakeholder, the owners of that business. It is argued that it is the role of government and the legal system to protect the environment and individuals affected by production. The following points are made:
- Managers are employed to generate wealth for the shareholders - not give it away
- Social improvements, such as better health care and greater life expectancy are the result of free market economies driven by the free market
- Free markets contribute to the effective management of scarce resources
- Any additional costs will be passed onto the customer in the form of higher prices reducing social welfare
- Regulation should be kept to a minimum since because it stifles competition as it creates an additional barrier to market entry.
The corporate social responsibility view is that business organisation like all 'citizens' have a responsibility to society to minimise the effects of business operations.
- Those managing business need to recognise that they rely on society to provide a profitable environment, and no business has the right to operate at the expense of that society
- There is a contract between business and society involving mutual obligations and responsibilities
- A business should not act just for profit, but do what is right, just and fair, promoting human welfare.
However, the middle ground can be argued that acting socially responsibly is a form of enlightened self interest. Although acting responsibly is costly and possibly inconvenient, it is believed to be in the firm's best long term interests. This is a 'short-run versus long-run argument', that you will see arise many times in your business and management course.
A key area of corporate social responsibility is the impact that a firm has on the environment and this attracts perhaps more media and other coverage than many other areas of this important topic. We consider this area in more detail later in this topic (section J13).
Policies to implement objectives of Social Responsibility
Many businesses now produce an 'environmental audit' or 'sustainability report' (generally produced by a specialist consultancy firm) to try to show clearly to their stakeholders the impact they are having on the environment.
Why not try a wider web search to try to find some examples of environmental audits? Or perhaps you could have a look at BP's 2009 sustainability review to see what they choose to report on. This is also available from the environment and society section of their web site.
Of course, although environmental statements show intent to be socially responsible, it is not always the case that actual business practice matches that intent. The 2010 oil spill in the Gulf of Mexico led to much criticism of BP and its environmental credentials. Friends of the Earth produced a synopsis of the oil-spill and the environmental disaster, including a YouTube videos and downloadable factsheet and resource links which you can read by following the link to their site.
- Define the terms:
- Corporate social responsibility
- Environmental audit
- Explain the different views that firms may take of their social responsibility in an international context.
- Analyse the value of social and environmental audits to different stakeholder groups.
- To what extent will the 2010 oil spill affect BP's strategy to present itself as a socially responsible company?
Changes in a firm's view of its social responsibility over time
A firm's attitude to social responsibility will be moulded by its internal environment and by factors outside of the business.
- A business is made up of individuals, who are also consumers and citizens. The attitudes and norms of a business, therefore, must reflect the views and norms of these individuals, who in turn are influenced by the society in which they live.
- Corporate cultures evolve and change over time with staff joining and leaving the business. New recruits, particularly at a senior level may bring new views and attitudes to the business.
- Profitability and cash-flow may influence how socially responsible a business can afford to be.
- The attitude of key stakeholders may be crucial. Shareholder may be able to force through changes at an AGM or elect managers that will reflect their views - whether in favour of more socially responsibility or against.
- Government laws and regulations will constrain business behaviour.
- The state of the economy will influence how much firms are prepared to spend on measures to improve their socially responsible image. In times of recession there may be less room for this 'voluntary' expenditure.
- Pressure groups may force firms to change business practices by 'naming and shaming', creating bad media stories and lobbying government to take action. All of these may undermine a firm's image and reduce its profitability.
- The behaviour of competitors is crucial. If competitors take their responsibilities less seriously and have lower costs, they may undercut firms prepared to be good citizens. This may prove disastrous and force a change to a less responsible policy.
Changes in attitudes to social responsibility over time
The external environment is dynamic and social attitudes and norms change over time. This can be seen in all walks of life such as in attitudes to discrimination, working conditions, education and smoking, all of which have altered radically over a relatively short period of time.
It must be remembered, however, that these social changes are not consistent form country to country or culture to culture. For example, attitudes to the role of women in societies, including rights in the workplace are very different across the globe and indeed from region to region.
Firms will need to monitor trends in society and adapt their objectives if necessary. Firms may wish to be responsible, but most will seek to benchmark their behaviour against the industry norm.
Corporate social responsibility index
Business in the Community (a UK organisation) has been producing a 'Corporate Responsibility Index' since 2002. Many UK companies are now using participation in this index for benchmarking purposes - to compare their performance against other companies.
The index results are published in the Financial Times.
The index considers their approach to corporate responsibility under four headings:
- Corporate strategy - this looks at how the nature of a business's activities, influences the company's values and how these are related to strategy.
- Integration - how well does the company organise, manage and integrate corporate responsibility throughout their operations.
- Management - under this heading the index looks at how well the firm manage their stakeholder responsibilities to the community, the environment, the marketplace and the workplace.
- Performance and impact - under this heading, the company's performance is assessed from two key impact areas; global warming and waste management. The company's are also assessed on two areas they choose from six which include human rights, product safety, occupational health and safety, workplace diversity and community investment.
Business in the Community has gathered statistical data to show a link between CSR and improved financial performance. On their site you will find a link to a PDF report on The Value of Corporate Governance. This report provided details on the statistical basis for the claim that firms which focus on CSR obligations, perform better in the market place.
Fortune magazine produces a global list of the world's most admired companies. Apple, for example, topped the 2010 list. One of the assessment criteria is social responsibility, and Fortune publishes a list of the best and worst companies in this category. In 2010, the three highest regarded companies for social responsibility were UPS, Starbucks and Marriott International. The least admired companies were Las Vegas Sands, Japan Airlines and Dillard's.
For further information on the criteria used for the Business in the Community corporate CR Index, you may like to look at the following web links:
- Executive summary 2009 Corporate Responsibility Index
The following are links to the three best companies for social responsibility in the 2010 Fortune list:
Using one of the above companies as an example, analyse the advantages of being socially responsible.