Corporate social responsibility

Definition

The term "corporate social responsibility" became popular in the 1960s and has remained a term used indiscriminately by many to cover legal and moral responsibility more narrowly construed.

Business Dictionary defines CSR as "A company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates. Companies express this citizenship (1) through their waste and pollution reduction processes, (2) by contributing educational and social programs and (3) by earning adequate returns on the employed resources."

A broader definition expands from a focus on stakeholders to include philanthropy and volunteering.

Consumer perspectives

Most consumers agree that while achieving business targets, companies should do CSR at the same time. Most consumers believe companies doing charity will receive a positive response. Somerville also found that consumers are loyal and willing to spend more on retailers that support charity. Consumers also believe that retailers selling local products will gain loyalty. Smith (2013) shares the belief that marketing local products will gain consumer trust. However, environmental efforts are receiving negative views given the belief that this would affect customer service. Oppewal et al. (2006) found that not all CSR activities are attractive to consumers. They recommended that retailers focus on one activity. Becker-Olsen (2006) found that if the social initiative done by the company is not aligned with other company goals it will have a negative impact. Mohr et al. (2001) and Groza et al. (2011) also emphasise the importance of reaching the consumer.

Approaches

Some commentators have identified a difference between the Canadian (Montreal school of CSR), the Continental European and the Anglo-Saxon approaches to CSR. It is said that for Chinese consumers, a socially responsible company makes safe, high-quality products; for Germans it provides secure employment; in South Africa it makes a positive contribution to social needs such as health care and education. And even within Europe the discussion about CSR is very heterogeneous.

A more common approach to CSR is corporate philanthropy. This includes monetary donations and aid given to nonprofit organizations and communities. Donations are made in areas such as the arts, education, housing, health, social welfare and the environment, among others, but excluding political contributions and commercial event sponsorship.

Another approach to CSR is to incorporate the CSR strategy directly into operations. For instance, procurement of Fair Trade tea and coffee.

Creating Shared Value, or CSV is based on the idea that corporate success and social welfare are interdependent. A business needs a healthy, educated workforce, sustainable resources and adept government to compete effectively. For society to thrive, profitable and competitive businesses must be developed and supported to create income, wealth, tax revenues and philanthropy. The Harvard Business Review article Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility provided examples of companies that have developed deep linkages between their business strategies and CSR. CSV acknowledges trade-offs between short-term profitability and social or environmental goals, but emphasizes the opportunities for competitive advantage from building a social value proposition into corporate strategy. CSV gives the impression that only two stakeholders are important - shareholders and consumers.

Many companies employ benchmarking to assess their CSR policy, implementation and effectiveness. Benchmarking involves reviewing competitor initiatives, as well as measuring and evaluating the impact that those policies have on society and the environment, and how others perceive competitor CSR strategy.

Cost-benefit analysis

In competitive markets cost-benefit analysis of CSR initiatives can be examined using a resource-based view (RBV). According to Barney (1990), "formulation of the RBV, sustainable competitive advantage requires that resources be valuable (V), rare (R), inimitable (I) and non-substitutable (S)." A firm introducing a CSR-based strategy might only sustain high returns on their investment if their CSR-based strategy could not be copied (I). However, should competitors imitate such a strategy, that might increase overall social benefits. Firms that choose CSR for strategic financial gain are also acting responsibly.

RBV presumes that firms are bundles of heterogeneous resources and capabilities that are imperfectly mobile across firms. This imperfect mobility can produce competitive advantages for firms that acquire immobile resources. McWilliams and Siegel (2001) examined CSR activities and attributes as a differentiation strategy. They concluded that managers can determine the appropriate level of investment in CSR by conducting cost benefit analysis in the same way that they analyze other investments.

Reinhardt (1998) found that a firm engaging in a CSR-based strategy could only sustain an abnormal return if it could prevent competitors from imitating its strategy.

Scope

Initially, CSR emphasized the official behavior of individual firms. Later, it expanded to include supplier behavior and the uses to which products were put and how they were disposed of after they lost value.

Supply chain

Incidents like the 2013 Savar building collapse pushed companies to consider how the behavior of their suppliers impacted their overall impact on society. Irresponsible behavior reflected on both the misbehaving firm, but also on its corporate customers. Supply chain management expanded to consider the CSR context. Wieland and Handfield (2013) suggested that companies need to include social responsibility in their reviews of component quality. They highlighted the use of technology in improving visibility across the supply chain.

Implementation

CSR may be based within the human resources, business development or public relations departments of an organisation, or may be a separate unit reporting to the CEO or the board of directors.

Engagement plan

An engagement plan can assist in reaching a desired audience. A corporate social responsibility individual or team plans the goals and objectives of the organization. As with any corporate activity, a defined budget demonstrates commitment and scales the program's relative importance.

Accounting, auditing and reporting

Social accounting is the communication of social and environmental effects of a company's economic actions to particular interest groups within society and to society at large.

Social accounting emphasizes the notion of corporate accountability. Crowther defines social accounting as "an approach to reporting a firm’s activities which stresses the need for the identification of socially relevant behavior, the determination of those to whom the company is accountable for its social performance and the development of appropriate measures and reporting techniques." Reporting guidelines and standards serve as frameworks for social accounting, auditing and reporting:

In nations such as France, legal requirements for social accounting, auditing and reporting exist, though international or national agreement on meaningful measurements of social and environmental performance has not been achieved. Many companies produce externally audited annual reports that cover Sustainable Development and CSR issues ("Triple Bottom Line Reports"), but the reports vary widely in format, style, and evaluation methodology (even within the same industry). Critics dismiss these reports as lip service, citing examples such as Enron's yearly "Corporate Responsibility Annual Report" and tobacco companies' social reports.

In South Africa, as of June 2010, all companies listed on the Johannesburg Stock Exchange (JSE) were required to produce an integrated report in place of an annual financial report and sustainability report. An integrated report reviews environmental, social and economic performance alongside financial performance. This requirement was implemented in the absence of formal or legal standards. An Integrated Reporting Committee (IRC) was established to issue guidelines for good practice.

Verification

Corporate social responsibility and its resulting reports and efforts should be verified by the consumer of the goods and services. The accounting, auditing and reporting resources provide a foundation for consumers to verify that their products are socially sustainable. Due to an increased awareness of the need for CSR, many industries have their own verification resources. The include organizations like the Forest Stewardship Council (paper and forest products), International Cocoa Initiative, and Kimberly Process (diamonds). The United Nations also provides frameworks not only for verification, but for reporting of human rights violations in corporate supply chains.

Ethics training

The rise of ethics training inside corporations, some of it required by government regulation, has helped CSR to spread. The aim of such training is to help employees make ethical decisions when the answers are unclear. The most direct benefit is reducing the likelihood of "dirty hands", fines and damaged reputations for breaching laws or moral norms. Organizations see increased employee loyalty and pride in the organization.

Common actions

Common CSR actions include:

Social license

“Social license” refers to a local community’s acceptance or approval of a company. Social license exists outside formal regulatory processes. Social license can nevertheless be acquired through timely and effective communication, meaningful dialogue and ethical and responsible behavior.

Displaying commitment to CSR is one way to achieve social license, by enhancing a company’s reputation.

Potential business benefits

A large body of literature exhorts business to adopt non-financial measures of success (e.g., Deming's Fourteen Points, balanced scorecards). While CSR benefits are hard to quantify, Orlitzky, Schmidt and Rynes found a correlation between social/environmental performance and financial performance.

The business case for CSR within a company employs one or more of these arguments:

Triple bottom line

"People, planet and profit", also known as the triple bottom line form one way to evaluate CSR. "People" refers to fair labour practices, the community and region where the business operates. "Planet" refers to sustainable environmental practices. Profit is the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital (unlike accounting definitions of profit).

This measure was claimed to help some companies be more conscious of their social and moral responsibilities. However, critics claim that it is selective and substitutes a company's perspective for that of the community. Another criticism is about the absence of a standard auditing procedure.

The term was coined by John Elkington in 1994.

Human resources

A CSR program can be an aid to recruitment and retention, particularly within the competitive graduate student market. Potential recruits often consider a firm's CSR policy. CSR can also help improve the perception of a company among its staff, particularly when staff can become involved through payroll giving, fundraising activities or community volunteering. CSR has been credited with encouraging customer orientation among customer-facing employees.

CSR is known for impacting employee turnover. Several executives suggest that employees are their most valuable asset and that the ability to retain them leads to organization success. Socially responsible activities promote fairness, which in turn generate lower employee turnover. On the other hand, if an irresponsible behavior is demonstrated by a firm, employees may view this behavior as negative. Proponents argue that treating employees well with competitive pay and good benefits is seen as a socially responsible behavior and therefore reduces employee turnover. Executives have a strong desire for building a positive work context that benefits CSR and the company as a whole. This interest is driven particularly by the realization that a positive work environment can result in desirable outcomes such as more favorable job attitudes and increased work performance.

The IBM Institute for Business Value conducted a survey of 250 business leaders worldwide in 2008. The survey found out that businesses have assimilated a much more strategic view, and that 68% companies reported are utilizing CSR as an opportunity and part of a sustainable growth strategy. The authors noted that while developing and implementing a CSR strategy represents a unique opportunity to benefit the company. However, only 31% of businesses surveyed engaged their employees on the company’s CSR objectives and initiatives. The survey’s authors also stated that employee engagement on CSR initiatives can be a powerful recruitment and retention tool. As a result, employees tend to discard employers with a bad reputation.

Risk management

Managing risk is an important executive responsibility. Reputations that take decades to build up can be ruined in hours through corruption scandals or environmental accidents. These draw unwanted attention from regulators, courts, governments and media. CSR can limit these risks.

Brand differentiation

CSR can help build customer loyalty based on distinctive ethical values. Some companies use their commitment to CSR as their primary positioning tool, e.g., The Co-operative Group, The Body Shop and American Apparel

Some companies use CSR methodologies as a strategic tactic to gain public support for their presence in global markets, helping them sustain a competitive advantage by using their social contributions as another form of advertising.

Companies that operate strong CSR activities tend to drive customer’s attention to buy products or services regardless of the price. As a result, this increases competition among firms since customers are aware of the company’s CSR practices. These initiatives serve as a potential differentiator because they not only add value to the company, but also to the products or services. Furthermore, firms under intense competition are able to leverage CSR to increase the impact of their distribution on the firm’s performance. For instance, lowering the carbon footprint of a firm’s distribution network or engaging in fair trade are potential differentiators to lower costs and increase profits. In this scenario, customers can observe the company’s commitment to CSR while increasing company sales.

Whole Foods’ marketing and promotion of organic foods have had a positive effect on the supermarket industry. Proponents assert that Whole Foods has been able to work with its suppliers to improve animal treatment and quality of meat offered in their stores. They also promote local agricultures in over 2,400 independent farms to maintain their line of sustainable organic produce. As a result, Whole Foods’ high prices do not turn customers away from shopping. In fact, they are pleased buying organic products that come from sustainable practices.

According to a Harvard Business Review article, there are three theaters of practice in which CSR can be divided. Theater one focuses on philanthropy, which includes donations of money or equipment to non-profit organizations, engagement with communities’ initiatives and employee volunteering. This is characterized as the “soul” of a company, expressing the social and environmental priorities of the founders. The authors assert that companies engage in CSR because they are an integral part of the society. For instance, the Coca-Cola Company contributes with $88.1 million annually to a variety of environmental educational and humanitarian organization. Another example is PNC Financial Services' “Grow Up Great” childhood education program. This program provides critical school readiness resources to underserved communities where PNC operates.

On the other hand, theater two focuses on improving operational effectiveness in the workplace. The researchers assert that programs in this theater strive to deliver social or environmental benefits to support a company’s operation across the value chain by improving efficiency. Some of the examples mentioned include sustainability initiatives to reduce resource use, waste, and emission that could potentially reduce costs. It also calls for investing in employee work conditions such as health care and education which may enhance productivity and retention. Unlike philanthropic giving, which is evaluated by its social and environmental return, initiatives in the second theater are predicted to improve the corporate bottom line with social value. Bimbo, the largest bakery in Mexico, is an excellent example of this theater. The company strives to meet social welfare needs. It offers free educational service to help employees complete high school. Bimbo also provides supplementary medical care and financial assistance to close gaps in the government health coverage.

Moreover, the third theater program aims to transform the business model. Basically, companies create new forms of business to address social or environmental challenges that will lead to financial returns in the long run. One example can be seen in Unilever’s Project Shakti in India. The authors describe that the company hires women in villages and provides them with micro-finance loans to sell soaps, detergents, and other products door-to-door. This research indicates that more than 65,000 women entrepreneurs are doubling their incomes while increasing rural access and hygiene in Indian villages. Another example is IKEA's People and Planet initiative to be 100% sustainable by 2020. As a consequence, the company wants to introduce a new model to collect and recycle old furniture.

Reduced scrutiny

Corporations are keen to avoid interference in their business through taxation and/or regulations. A CSR program can persuade governments and the public that a company takes health and safety, diversity and the environment seriously, reducing the likelihood that company practices will be closely monitored.

Supplier relations

Appropriate CSR programs can increase the attractiveness of supplier firms to potential customer corporations. E.g., a fashion merchandiser may find value in an overseas manufacturer that uses CSR to establish a positive image—and to reduce the risks of bad publicity from uncovered misbehavior.

Criticisms and concerns

CSR concerns include its relationship to the purpose of business and the motives for engaging in it.

Nature of business

Milton Friedman and others argued that a corporation's purpose is to maximize returns to its shareholders and that obeying the laws of the jurisdictions within which it operates constitutes socially responsible behavior.

While some CSR supporters claim that companies practicing CSR, especially in developing countries, are less likely to exploit workers and communities, critics claim that CSR itself imposes outside values on local communities with unpredictable outcomes.

Better governmental regulation and enforcement, rather than voluntary measures, are an alternative to CSR that moves decision-making and resource allocation from public to private bodies. However, critics claim that effective CSR must be voluntary as mandatory social responsibility programs regulated by the government interferes with people’s own plans and preferences, distorts the allocation of resources, and increases the likelihood of irresponsible decisions.

Motives

Some critics believe that CSR programs are undertaken by companies to distract the public from ethical questions posed by their core operations. They argue that the reputational benefits that CSR companies receive (cited above as a benefit to the corporation) demonstrate the hypocrisy of the approach. Moreover, some studies find that CSR programs are motivated by corporate managers' personal interests at the cost of the shareholders so they are a type of an agency problem in corporations.

Ethical Ideologies

CEOs’ political ideologies are evident manifestations of their different personal views. Each CEO may exercise different powers according to their organizational outcomes. In fact, their political ideologies are expected to influence their preferences for the CSR outcomes. Proponents argue that politically liberal CEOs will envision the practice of CSR as beneficial and desirable to increase a firm’s reputation. They tend to focus more on how the firm can meet the needs of the society. As a consequence, they will advance with the practice of CSR while adding value to the firm. On the other hand, property rights may be more relevant to conservative CEOs. Since conservatives tend to value free markets, individualism and call for a respect of authority, they will not likely envision this practice as often as those identifying as liberals might.

The financials of the company and the practice of CSR also have a positive relationship. Moreover, the performance of a company tends to influence conservatives more likely than liberals. While not seeing it from the financial performance point of view, liberals tend to hold a view that CSR adds to the business triple bottom line. For instance, when the company is performing well, they will most likely promote CSR. If the company is not performing as expected, they will rather tend to emphasize this practice because they will potentially envision it as a way to add value to the business. In contrast, politically conservative CEOs will tend to support the practice of CSR if they hold a view that it will provide a good return to the financials of the company. In other words, this type of executives tend to not see the outcome of CSR as a value to the company if it does not provide anything in exchange.

Misdirection

Another concern is that sometimes companies use CSR to direct public attention away from other, harmful business practices. For example, McDonald's Corporation positioned its association with Ronald McDonald House as CSR while its meals have been accused of promoting poor eating habits.

Controversial industries

Industries such as tobacco, alcohol or munitions firms make products that damage their consumers and/or the environment. Such firms may engage in the same philanthropic activities as those in other industries. This duality complicates assessments of such firms with respect to CSR.

The Kizhakkambalam takeover

Textile company Kitex has taken over the administration of an entire Indian village called Kizhakkambalam near Cochin by winning the local body elections. Environmentalists and mainstream politicians of India point out that this can lead to a dangerous precedent because the company got actively involved in CSR only after they were caught red-handed in polluting the village.

Negative impact of corporate psychopathy

As corporate psychopaths have little or no conscience or care or empathy, it follows logically that they are not driven by any notion of social responsibility or commitment to employees or to the wider public.

Stakeholder influence

One motivation for corporations to adopt CSR is to satisfy stakeholders.

Branco and Rodrigues (2007) describe the stakeholder perspective of CSR as the set of views of corporate responsibility held by all groups or constituents with a relationship to the firm. In their normative model the company accepts these views as long as they do not hinder the organization. The stakeholder perspective fails to acknowledge the complexity of network interactions that can occur in cross-sector partnerships. It relegates communication to a maintenance function, similar to the exchange perspective.

Ethical consumerism

The rise in popularity of ethical consumerism over the last two decades can be linked to the rise of CSR. Consumers are becoming more aware of the environmental and social implications of their day-to-day consumption decisions and in some cases make purchasing decisions related to their environmental and ethical concerns.

Socially responsible investing

Shareholders and investors, through socially responsible investing are using their capital to encourage behavior they consider responsible. However, definitions of what constitutes ethical behavior vary. For example, some religious investors in the US have withdrawn investment from companies that violate their religious views, while secular investors divest from companies that they see as imposing religious views on workers or customers.

Creating shared value

Non-governmental organizations are also taking an increasing role, leveraging the media and the Internet to increase the visibility of corporate behavior. Through education and dialogue, the development of community awareness in pushing businesses to change their behavior is growing.

Creating Shared Value (CSV) claims to be more community aware than CSR. Several companies are refining their collaboration with stakeholders accordingly.

Public policies

Some national governments promote socially and environmentally responsible corporate practices. The heightened role of government in CSR has facilitated the development of numerous CSR programs and policies. Various European governments have pushed companies to develop sustainable corporate practices. CSR critics such as Robert Reich argued that governments should set the agenda for social responsibility with laws and regulation that describe how to conduct business responsibly.

Regulation

Fifteen European Union countries actively engaged in CSR regulation and public policy development. CSR efforts and policies are different among countries, responding to the complexity and diversity of governmental, corporate and societal roles. Studies claimed that the role and effectiveness of these actors were case-specific.

The variety among companies complicates regulatory processes. Self-regulation allows each corporate actor to balance profits and social responsibility without cumbersome governmental involvement. Studies suggest that mandated CSR distorts the allocation of resources and increases the likelihood of irresponsible decisions.

Bulkeley cited the Australian government's actions to avoid compliance with the Kyoto Protocol in 1997, over concerns of economic loss and national interest. The Australian government claimed that the pact would damage Australia more than any other OECD nation. In November 2007, the new Prime Minister Kevin Rudd ratified the protocol.

Canada adopted CSR in 2007. Prime Minister Harper encouraged Canadian mining companies to meet Canada’s newly developed CSR standards.

The ‘Heilbronn Declaration’ is a voluntary agreement of enterprises and institutions in Germany especially of the Heilbronn-Franconia region signed the 15th of September 2012. The approach of the ‘Heilbronn Declaration’ targets the decisive factors of success or failure, the achievements of the implementation and best practices regarding CSR. A form of responsible entrepreneurship shall be initiated to meet the requirements of stakeholders’ trust in economy. It is an approach to make voluntary commitments more binding.

Laws

In the 1800s,the US government could take away a firm's license if it acted irresponsibly. Corporations were viewed as "creatures of the state" under the law. In 1819, the United States Supreme Court in Dartmouth College vs. Woodward established a corporation as a legal person in specific contexts. This ruling allowed corporations to be protected under the Constitution and prevented states from regulating firms. Recently countries included CSR policies in government agendas.

On 16 December 2008, the Danish parliament adopted a bill making it mandatory for the 1100 largest Danish companies, investors and state-owned companies to include CSR information in their financial reports. The reporting requirements became effective on 1 January 2009. The required information included:

CSR/SRI is voluntary in Denmark, but if a company has no policy on this it must state its positioning on CSR in financial reports.

In 1995, item S50K of the Income Tax Act of Mauritius mandated that companies registered in Mauritius paid 2% of their annual book profit to contribute to the social and environmental development of the country. In 2014, India also enacted a mandatory minimum CSR spending law. Under Companies Act, 2013, any company having a net worth of 500 crore or more or a turnover of 1,000 crore or a net profit of 5 crore must spend 2% of their net profits on CSR activities. The rules came into effect from 1 April 2014.

Crises and their consequences

Crises have encouraged the adoption of CSR. The CERES principles were adopted following the 1989 Exxon Valdez incident. Other examples include the lead paint used by toy maker Mattel, which required the recall of millions of toys and caused the company to initiate new risk management and quality control processes. Magellan Metals was found responsible for lead contamination killing thousands of birds in Australia. The company ceased business immediately and had to work with independent regulatory bodies to execute a cleanup. Odwalla experienced a crisis with sales dropping 90% and its stock price dropping 34% due to cases of E. coli. The company recalled all apple or carrot juice products and introduced a new process called "flash pasteurization" as well as maintaining lines of communication constantly open with customers.

Geography

Corporations that employ CSR behaviors do not always behave consistently in all parts of the world. Conversely, a single behavior may not be considered ethical in all jurisdictions. E.g., some jurisdictions forbid women from driving, while others require women to be treated equally in employment decisions.

UK retail sector

A 2006 study found that the UK retail sector showed the greatest rate of CSR involvement. Many of the big retail companies in the UK joined the Ethical Trading Initiative, an association established to improve working conditions and worker health.

Tesco (2013) reported that their ‘essentials’ are ‘Trading responsibility’, ‘Reducing our Impact on the Environment’, ‘Being a Great Employer’ and ‘Supporting Local Communities’. J Sainsbury employs the headings ‘Best for food and health’, ‘Sourcing with integrity’, ‘Respect for our environment’, ‘Making a difference to our community’, and ‘A great place to work’, etc. The four main issues to which UK retail these companies committed are environment, social welfare, ethical trading and becoming an attractive workplace.

Anselmsson and Johansson (2007) assessed three areas of CSR performance: human responsibility, product responsibility and environmental responsibility. Martinuzzi et al. described the terms, writing that human responsibility is “the company deals with suppliers who adhere to principles of natural and good breeding and farming of animals, and also maintains fair and positive working conditions and work-place environments for their own employees. Product responsibility means that all products come with a full and complete list of content, that country of origin is stated, that the company will uphold its declarations of intent and assume liability for its products. Environmental responsibility means that a company is perceived to produce environmental-friendly, ecological, and non-harmful products.” Jones et al. (2005) found that environmental issues are the most commonly reported CSR programs among top retailers.

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