The Business Case for Csr
The concept of Corporate Social Responsibility is a relatively new in the management field and there is no single definition of it since everyone’s interpretation of the term is different. “Corporate Social Responsibility means something, but not always the same thing to everybody. ” (Votaw, 1972, p. 25) and from my understanding of the concept, CSR to me is “The voluntary business activities within the boundary of law that contributes to the wider community for a more sustainable environment”.Since everyone has a unique interpretation of CSR, the range of relevant CSR practices across businesses has been quite diverse as there is no such thing as features of CSR (Marcel van Marrewijk, 2003).
Rising environmental and social concerns in recent years have leaded a large number of managers to focus on the importance of the contemporary concept of corporate social responsibility. “91 percent of executives believe that corporate responsibility creates shareholder value, or that 80 percent say that non-financial indicators are essential to characterize future financial performance. (Blowfield and Murray, 2008, p. 131; Figures from Ethical Corporation and Nima Hunter Inc, 2003) Therefore they generally agree with Davis that “A better society produces a better environment for business” (1973, p. 313).
Many researchers have shown that CSR can bring competitive advantages to businesses and suggested that in the long- run it can generate positive business performances (Blowfield and Murray, 2008). If that is the case, why isn’t every business doing it? Although the number of supporters of the business case for CSR is large, but so do the opposite view.Hence in this essay, I will explore the arguments and evidences both for and against the business case for CSR to provide a more solid foundation for my thesis that “Corporate social responsibility contributes to businesses”. The basis of the debate for CSR has been constructed by two famous academics, Milton Friedman and Henry Mintzberg. The former argued that businesses should consider the maximization of shareholders’ values as their main objective whereas the latter supported the business case for CSR. Milton Friedman in 1970 erected the first significant argument against the implication of CSR.
The social responsibility for business is to increase its profits” (Friedman 1970). He argued that corporate executives do not have the right to spend the shareholders’ money as they are just an agent acting on behalf of the investors. In addition, managers were hired for their expertise in the particular business field, so they may not necessarily know how and what to focus on, regarding social responsibilities. Furthermore, he believed that CSR prevents the society in deciding the public interests as mangers have taken on their role when practicing the social responsibilities which they thought were appropriate (Friedman 1970).Therefore he viewed CSR as undemocratic.
An opposite view of the argument was from Henry Mintzberg who provided 3 main arguments for CSR (Mintzberg 1983). Firstly, it is an enlightened self-interest which the business itself might actually benefit from acting responsibly. The second argument, the Sound Investment Theory, was developed most completely and accurately by E. Bowman. The denial of the conflict of interests between corporate social responsibility and the investors has been raised as Bowman believed that the share price of a company is strongly influenced by its social behavior (1973).
The third argument is Avoiding Interference. Businesses operating in the community receive pressures from different groups in the society, e. g. the political groups, regulators and NGOs. Therefore the emphasis on CSR is a possible way to avoid corporate governance from acting against them. As a summary of his argument, three cases for CSR can be applied: the Moral case, relating to enlightened self-interest; Rational case, to minimize the restrictions that society imposes on business; the Economic case, which CSR can be used to avoid financial loses and contribute to business performances.
Drawing from these debates, Archie Carroll has developed “the Pyramid of Corporate Social Responsibility”, one of the most significant concepts of CSR. There are four kinds of social responsibilities that contribute total CSR, he suggested, Economic, Legal, Ethical, and Philanthropic (1991). Therefore being socially responsible does not mean forgetting the fundamental aspect of business, to make profit. The obligation of Law restricts business activities and they are the rules of the game which businesses have to obey. Being ethical is to perform actions that are fair, morally good, and of stakeholders’ interests, even outside the boundary of aw.
Considering corporate citizenship, philanthropic responsibilities are responses to the rising society’s expectations to business (Carroll, 1991). The notion of discretionary and voluntary distinguishes philanthropic responsibilities to ethical responsibilities. A good CSR firm should “strive to make a profit, obey the law, be ethical, and be a good corporate citizen” (Carroll, 1991, p. 43) and without simultaneous fulfillment of the four responsibilities, the business should not be characterized as operating within CSR.James Fieser disagreed with Carroll, he argued that law clearly set out what people or businesses are allowed to do and what they are not. Therefore businesses have no obligation to perform ethically beyond what the law requires.
“By its nature, business is supposed to be unscrupulous and drive by the need for success, so where is there room for ethics? ” (Fieser, 1996) Vincent Di Lorenzo countered his argument by suggesting that there are weaknesses in law. His publish provided examples, e. g. the securities and automobile industry, for proving the importance of business ethics beyond the law.From analyzing how the industry responded to different level of legal regimes, the effectiveness of the legal compliance could be deduced.
In general, he discovered that industries do response to the changes in the level of regulatory regime and the correlation was positive. Therefore the tightening of law influences business activities to be more ethical and socially responsible. However, he added, “a clear legal mandate is frequently not useful or appropriate for legislative or judicial pronouncements. Legal standards in legislation or common law judicial pronouncements are typically in general (i. .
vague) terms so that they can be applied to a variety of factual situations in the future. ” (2007, p. 288). This statement is strong in addressing weakness of corporate governance in influencing corporate conduct. Therefore managers need to take into account of CSR in order to provide themselves a more sustainable business environment or prevent the probability of having tougher regulations in the future that against their operations and influence their external and internal environment. Since law is not effective enough to determine corporate conduct, businesses hould focus on the ethical and philanthropic component of the CSR model (Carroll, 1991).
In order to do so, stakeholder engagement is essential. Contrasting the conventional theory that business should focus on maximizing its profits (Friedman 1970), an alternative approach had been introduced by Edward Freeman in 1984. The Stakeholder theory describes that managers have a fiduciary relationship to stakeholders instead of, solely, shareholders (Freeman 1984). He described stakeholders as “any group or individual who can affect, or is affected by, the achievement of a corporation’s purpose. (Freeman, 1984: vi) As a strategy, managers in any organizations should identify the specific groups of stakeholders, understand their stakes, and take these stakes into account during strategic management and decision making. These three levels of analysis are named the Rational level, the Process level and the Transactional level (Freeman 1984).
A successful utilization of these analyses can lead to a superior stakeholder management capability which provides the business competitive advantages over those who failed to understand the concept of responsibility towards stakeholders.The theory has been brought forward by Donaldson and Preston (1995) after a series of developments in the stakeholder theory during the decade after Freeman introduced the concept. They argued that there are 4 types of stakeholder theory: Descriptive, Instrumental, Normative and Managerial with the normative base serves as the critical underpinning for the theory in all its forms (Donaldson and Preston, 1995). Normative stakeholder theory states that there are corresponding interests between the company and its stakeholders with each interest from the stakeholders having its own intrinsic value.The managerial aspect is built on this normative base.
Stakeholder management is about attitudes, structures and practices instead of purely predicting cause-effect relationship (Donaldson and Preston, 1995). The notion behind indicates that managers must take into account the legitimate interests of stakeholders and integrate them to every business activity to achieve an effective stakeholder management. One example of a firm which failed in stakeholder management is Foxconn, a Taiwanese technology manufacturer who is the main supplier of Apple products.
Its mega plant in Shenzhen is so large that it is like a fully equipped town inside a city with its own supply of health care, supermarkets, swimming pool and even police station. Therefore it is offering the employees, one of its major stakeholders as it is employing 800,000 people in China (FT, 2010), all they need for living within the industrial district. By doing so, it displayed a great sense of commitment towards its employees which echoed the argument for the importance of human rights that Muchlinski suggested (2003).Although the company provided extensive focus on its employees, a scandal of 10 employee suicides happened in 2010 which has flipped the company’s image to being socially irresponsible. Many have suggested the reason for the suicides was due to the poor working condition of the plant, but Michael Phillips, director at Shanghai Mental Health Centre stated that Foxconn has done reasonable preventions e. g.
providing health centres to avoid issues as such happening. Others argued that the monthly wage was too low which many employees were willing to work overtime to obtain a more decent income which in turns increased their stress. The base monthly salary at the Longhua plant is RMB950 ($140) but staff said they made almost RMB2,000 per month including over time. ” (FT, 2010) Therefore employees were willing to work twice as much as they were required to. It is a failure of stakeholder management as Foxconn was unable to identify what its employees really needed.
On the positive side, after the suicides, Foxconn was immediately addressing the issue by sending investigation teams to observe the working conditions and it soon raised the salaries by 20% to address the problem.This immediate response and solution is an example of the political theory of CSR as a tool to retain customer confidence and avoid further government intervention (Garriga and Mele, 2004). The main argument for a business case is that it pays to be good. For businesses, there is no point in allocating to some CSR practices which do not benefit them. Hence it is important to analyze in what aspect CSR contributes to the business. There are four main arguments supporting the business case for CSR (Blowfield and Murray, 2008): .
Engaging with CSR is a way avoid financial loss 2. Engaging with CSR can obtain tangible financial gain 3. Engaging with CSR as part of strategic management 4. Engaging with CSR to learn, innovate and manage risk In order support the business case for CSR, evidences supporting the 4 major arguments are needed. Because the market place is one of the most important areas when considering CSR and it is closely related to the business case, therefore I shall discuss the arguments in relation on 3 practical examples.
British Petroleum The oil spilt in May 2010 in the Gulf of Mexico has caused British Petroleum a lot of trouble in terms of criticism of its operations and other business aspects. As a result, its reputation has fallen, and so did its share price. Soon after the accident, BP took immediate action to control the negative consequences, e. g. working with the government and experts to explore ways in containing the leak, and committing to the onshore and offshore clean-up.
This has therefore showed BP integrating CSR into its strategies to defend the brand’s image as a way to avoid financial loss.From its share price gradually recovering from the lowest point in July 2010 at GBp305. 73 to GBp452. 45 at the moment, the firm was successful in regaining confidence from the market. Therefore the engagement in extensive CSR practices has shown its dedication and commitment which limited its financial loss.
Alliance Boots Another example was Alliance Boots who took into account a wide range of relevant stakeholders and it successfully contributed to the ecological environment through innovations and simultaneously achieved a high level of tangible financial gain. Innovating to meet regulations can bring offsets: using inputs better, creating better products, or improving product yields” (Porter and Van Der Linde, 1995, p. 125). The understanding of the importance of innovation has lead boots to various creative approaches to addressing environmental issues. One innovative approach has leaded the company to a large reduction in financial costs. They analyzed the issue of recycling and extended their strategy from increasing recycling every year to decreasing the actual amount of waste being generated.
From that they reduced the total amount of Christmas packaging which as a result 900tonnes of total gift weight had been reduced, 500,000 fewer cardboard outers were used in transit packaging and 8. 8 million fewer polythene bags were used in transit. As a result, GBP1. 3 million savings gained from this waste cutting programme. Therefore the environment, a key stakeholder of the company as it identified, and the company benefited simultaneously from this CSR practice which supported the argument that CSR produce tangible financial gains.British Airway has integrated CSR into its core strategy to provide a sustainable future and environment for the aviation industry.
One of its targets is to improve its carbon efficiency by 25% by 2025 by reducing the grams of carbon dioxide per passenger kilometre from 111 to 83 grams (BA). In order to do so, it cooperated with Solena and Rolls Royce to develop sustainable biofuels to replace the existing energy source. As a result, the company will benefit as being the first mover into an eco-friendly fuel market and the company can save costs in reducing the need for carbon quota.So implementing CSR into strategies can bring a diverse range of benefits to the company including cost saving and competitive advantages which proved Mintzberg’s argument (1984). The 3 cases above showed that CSR provides positive effects to companies and therefore suggest an alignment with my central thesis that CSR contributes to businesses. From the examples above, I can also conclude that CSR benefits are interrelated.
One CSR practice is capable in providing a number of benefits.It therefore sets out the importance of strategic CSR. Burke and Logsdon suggested that CSR, when used in strategy, can be conductive to a long-term profitability and there are five dimensions which managers should focus on: Centrality, Specificity, Proactivity, Voluntarism and Visibility (1996). After focusing on these dimensions, the company should then integrate the strategy throughout the whole organization, from board-level accountability to introducing CSR to every business unit (Blowfield and Murray, 2008).This would therefore change the position of the employees as a receiver of CSR to a participant of CSR (Maclagan, 1999).
After the analysis of the views and arguments, it seemed very sensible for business to engage with CSR practices. However, undoubtedly, the fundamental objective of business is still to make a profit, as Carroll put it as the foundation of the CSR pyramid (1991). “In the current Anglo-American version of stock market capitalism, the criterion of success is shareholder value, as expressed by a company’s share price” (Handy, 2002, p. 50).Therefore unless a clear evidence of CSR contributing to business performance is unveiled, it would be difficult to persuade businesses to take CSR practices (Vogel, 2005).
Bowman and Haire researched the relationship between the percentage of prose on CSR and the median return on equity by analyzing the 1973 annual reports of 82 food processing companies. The results indicated that companies which practiced CSR performed significantly better than those with none. Therefore it supports the argument that CSR contributes to better business performance. In addition, an interesting aspect has also been observed.Firms with 0. 1 to 8 percent of prose on CSR in the annual reports actually performed the best out of the 82 companies researched and for those who contributed higher than 8 percent have experienced a diminishing return.
“It pays to be good, but not too good” (Mintzberg, 1983, p. 7) as CSR would only contributes to the business up to a certain level. Hence Bowman and Haire proposed that “the mean really is golden” (1970, p. 57) as they viewed being within the crowd should be the best option when concerning the amount of CSR practices that companies should take. I raised a few concerns on the validity of the results.The sample size of was too small and the study is outdated, therefore it could only be used as a basic framework for evidence on CSR and business performance.
In addition, the research focus was too narrow that the authors only concentrated on one industry so the results generated may not be applicable to the general public. As a result, further investigations have to be constructed to examine the mysterious relationship between the two variables. One main and most commonly used assessment of business performance is the analysis of a firm’s financial performance.There has been over 30 years of research on the relationship between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP) and between 1972 and 2002, 127 published studies empirical examined the relationship between companies’ socially responsible conduct and their financial performance (Walsh, 2003). 54 of the results showed a positive association between CSP and CFP, 7 showed a negative relationship and 28 reported non-significant relationships, while 20 reported a mixed set of findings (Walsh, 2003, p.
276).Although there hasn’t been a strong correlation between CSP and CFP in the past studies, there was certainly not much harm to the businesses when engaging in it because the only 6% of the studies have shown that the two variables were negatively correlated. Orlitzky et al did a meta-analysis, a useful method of analyzing multiple individual studies, on 52 previous studies on the relationship between CSP and CFP (2003). The results were similar to the previous findings which indicated a positive relationship between CSP and CFP as the means and correlations were positive.However, the statistics did not give any explanations to the result.
No direct causation effect was found. Therefore it could actually be that companies put more emphasis on CSR because they are financially performing well which then caused the positive correlation. This statement would oppose my argument that CSR contributes to business performances. Even if my assumption was right that CSR influences CFP, the results from the meta-analysis did not provide enough information on how strong the influence was.In addition, it is very difficult to believe the research a fair test as the companies’ financial performances were affected by a large number of external factors e.
g. political and economical factors. In order in improve the research and predict the effectiveness of CSP on CFP, researchers must think of a way to isolate CSP from other factors that can affect CFP and focus purely on the relationship between the two. Moreover, there might have been problems when analyzing and comparing CSR reports across organizations because there was no formal reporting standard back at he time when these studies were done (Gray et al, 1997). Today, the styles of reports are converging due to the establishment of reporting guidance like ISO 26000. Therefore new researches are needed to response to the development in CSR and CSR reporting which would enhance the comparability and accuracy of the relationship between CSP and CFP.
In conclusion, the analysis has lead us from the early believe that business and society opposes each other, to a more harmonizing view that business and society have a shared value (Porter and Kramer, 2011).Therefore businesses do benefit the society and vice versa in a wide range of aspects. Some may argue that the money and resources spent on CSR could have been allocated elsewhere that yields a larger tangible return. But evidences did not show a negative relationship between CSR and business performance either. Although researchers and arguments were strong on supporting the business case for CSR, there were insignificant findings which sustain the argument that CSR contributes to the business.
To extent, in my personal view, CSR does not always contribute to a tangible gain in financial performance because some of the practices would not be direct profit generating. For example an improvement in working condition would not be shown on the CSR reports and may not affect the firm’s profitability to a great extend. But it would certainly influence employee’s moral and motivation. Therefore further research can be done to examine the relationship of CSR with other business areas so the Business case for Corporate Social Responsibility can be analyzed from a wider perspective.
