Corporate Social Responsibility of Saudi Aramco Oil Company - Dissertation Example

?2. Literature Review 2 Introduction This chapter aims to explore the origins of CSR and find significant trends in the current era of CSR. This will further focus on CSR practices in the oil and gas industry, particularly in Saudi Arabia where this industry is the leading source of public and government income and expenditure. This will also provide results of research on the practices of CSR of the different organisations that aimed to involve Business Social Responsibility (BSR) practices with those of the oil and gas industry. Above all, this will provide a connection of CSR and environmental protection and sustainability. The scope of Business Social Responsibility (BSR) includes production and company operation. Moon’s (2002) concept of BSR expands to financial contributions to community and governmental causes. BSR focuses on the social responsibility of business while CSR is a general term that encompasses many aspects of CSR. CSR’s general concept is about the community, the employees, the environment, human rights, and so on. BSR is appropriate in the study of social responsibility of Saudi Arabia’s oil and gas industry since it focuses on governmental and public causes that include environmental protection and cause-oriented projects. This chapter scrutinizes the past and current issues on CSR and how they could be related in the context of the aim and objectives of this dissertation. 2.2 Definition of corporate social responsibility The term corporate social responsibility refers to a corporate framework consisting of economic, environmental and social issues (Tokoro 2007, p. 148) that are incorporated into the responsible performance of the firm. CSR is sometimes referred to as a corporate duty and responsibility to the community and the environment. CSR practices of firms emphasise environmental protection without financial consideration in return (Huang 2010, p. 642). The World Business Council defines CSR as an obligation to provide economic development and improvement of employees’ quality of life and the community they belong. CSR includes an interaction with the community and the different stakeholders. Some aspects of CSR aim for sustainable development. Sustainable development involves ‘systematic and long term use of natural resources’ (Huang 2010, p. 643) with the primary objective of having it available for the present and the future generation; meaning, CSR is meeting the needs of the present generation without disregarding the future generation. It may also refer to the necessities of development and progress for countries without damaging environmental resources. Sustainable development refers to development wherein the environmental indicators have the same significance with economic indicators. Sustainability involves long-term goals that concern ecological, political, economic and societal ramifications. (Huang 2010, p. 643) Many authors conclude that there is no universal definition for CSR. A common definition failed because CSR is a socially constructed concept. There are components in the different definitions that are common, for example voluntary, the stakeholder, legal obligation, economic, social, human right, etc., which when understood will lead to greater insight of what CSR is in the nation that is being practiced and the world at large. 2.2.1 Theories of CSR Social Responsibilities of the Businessman was an article written by Bowen in 1953 which shifted the social responsibility of business to CSR. Since then the study of CSR has grown bringing into the fore terminologies, theories and practices in the different fields. Topics on CSR have also evolved that included society and business, social issues management, stakeholder management, corporate accountability, and much more. Recently, authors added the topics on corporate citizenship and corporate sustainability. (Garriga & Mele 2004, p. 51) Popular concepts relate CSR theories with the environment (which relate to resources and economics), goal attainment (linked to politics), and social integration and pattern maintenance (related to culture and values). Theories are classified into four groups, namely: 1.) Instrumental theories 2.) Political theories 3.) Integrative theories 4.) Ethical theories The first group states that the corporation is the source of wealth and therefore has a social responsibility. This group focuses on the economic aspect and social activity which emphasises wealth creation. This group is termed instrumental theories as CSR is committed to create profits. (Garriga & Mele 2004, p. 52) Freeman’s (1984) stakeholder theory is related with this group. The theory emphasised that organisations have strong relationships with many constituent groups and the so-called stakeholders which are affected by and also affect the activities of the organisation. The stakeholder theory has emerged as the widely used paradigm in CSR and has been evolving in several new and interesting ways in their application. The theory also holds that business is responsible to society but has to maximise profits for the shareholders’ benefit (Friedman as cited in Garriga & Mele 2004, p. 53). Freeman (as cited in Claydon 2011) developed the stakeholder theory after the Brundtland report came out. Freeman rejected Friedman’s view that a company has social obligations to its shareholders and not on society and managers should be obliged to work for their shareholders and not on the community. The second group of theories, the political theories, focuses on the social power of the corporation, its relationship with the community and the political power it holds. The corporation is led to hold social duties and responsibilities. Political theories focus on interactions and relations between firms and society and ‘on the power and position of business and its inherent responsibility’ (Garriga & Mele 2004, p. 53). This includes political considerations among businesses, government and society. Business power as a new element is also an important aspect in this theory. The third group, the integrative theories, is the integration of business with social demands. It holds that business owes its existence to society. This pertains to how business has to relate to social demands and that business and society interact in such a way that the latter provides legitimacy and prestige to the former. The theories in this group pertain to detection and determining social demands that provide ‘social legitimacy, greater social acceptance and prestige’ (Garriga & Mele 2004, p. 58). The last group, the theories on ethics, focused on the ethical values that hold business and society. CSR is viewed from an ethical point of view. Firms have to conduct CSR because of their ethical obligation to society. Jones (1995) integrated ethics and economic theory by developing a model in which he emphasised that organisations conducting business with stakeholders on the basis of corporate and trust have to sincerely demonstrate to commitment to ethical behaviour thus making the organisation to have incentives. The ethical behaviour of an organisation enables the organisation and stakeholders to build long lasting relationships that will achieve a competitive advantage. The concepts of ethics and social responsibility are often interchanged. However, ethics refer to ‘individual moral evaluations or judgements of what is right or wrong in a particular decision making situation’, as social responsibility refers to a firm’s obligation ‘to maximize its positive impact and minimise its negative impact on society’ (Jobber & Lancaster 2003, p. 759). Business ethics is a social responsibility concern as it refers to the standard of morality in the workplace. It concerns managerial ethics and guides professional conduct in the office. Managerial ethics is required before application of CSR. The focus of ethics and social responsibility is to minimise negative impact of business to society. The environment and business are two terms that must be given focus. Employees must respect each other as members of the human race, regardless of race, creed, sex, and age. Sexual harassment has been occurring in the workplace. There are times that this is undetected when victims are afraid to report, or there are no protective measures being done by managers. Violence in the workplace is also another no-no where women are ordinary victims. A model of the pyramid of CSR was formulated by Carroll (2008 as cited in Claydon 2011), which focused on the importance of businesses answering to all aspects of the social world: economic, legal, ethical and philanthropic. This concept stated that all business responsibilities existed for the reason of producing profits for the shareholders. This feature of the pyramid is situated at the bottom as the foundation and only after this is fulfilled can other responsibilities occur. At the second level, there are the legal responsibilities, whereby the corporation has to follow the law in order to exist as a business corporation. The next tier pertains to the ethical layer, where businesses are required to do what is right, just and fair for the stakeholders. The last tier pertains to the philanthropic level, whereby the corporation should act as a good citizen to society, contributed resources where they are needed. (Caroll, 2008, as cited in Claydon, 2011, p. 409) 2.2.2 History of corporate social responsibility As early as the seventeenth century, there were some insinuations about the ‘invisible hand’ as something that regulated the market. Milton Friedman (1981) was a strong critic to this concept when he stressed that business was for profits. Friedman’s reasoning stressed that social responsibilities should not come from businesses because: human beings have the sole responsibilities for their action; the business manager has the obligation to act on his own to fulfil the interests of shareholders; and, governments have the responsibility to solve social problems (Friedman, 1981, as cited in Claydon, 2011, p. 406). At that time, the concept of social responsibility was seen as social responsiveness. The first generation writers of CSR observed that enough attention was not given by businesses. Business had more negative influence or impact on society and the environment because of globalisation. There was more need for CSR to address social problems. This was observed by Beesley and Evans (as cited in Claydon, 2011) in their writings. But there were many limitations to CSR at that time of its early observance. A prevailing issue that that business had gained so much power which was becoming uncontrollable and which created a lot of social problems. Business had a big influence on the emerging society which was harmful to society as business was controlling politics, economy, workforce, and production. (Claydon 2011, p. 406) Early practitioners of CSR were managers and CEOs of big firms, business leaders and CEOs of oil and energy firms, and the mushrooming automobile manufacturers (Frederick, 1980, as cited in Banerjee, 2007, p. 5). Business practices considered socially relevant were more on donations for charity, humanitarian services to society, providing for employee welfare and benefits, and other activities that benefited society and religious organisations. In 1951, Frank Abrams of Standard Oil wrote in the Harvard Business Review calling for managers to become good ‘corporate citizens’ by contributing to solutions of the many social ills of society because business is a part of society and grows because of the contribution of society. (Banerjee 2007, p. 5) The study of corporate social responsibility has always been linked to business ethics. Business ethics was first seen as a formal academic discipline in the 1970s (DeGeorge as cited in Marens, 2008, p. 55). There is strong evidence that details of the history of the study of CSR date back to the 1950s through Howard Bowen’s Social Responsibility of the Businessman, a seminal work on CSR (Caroll, Gerde & Wokutch, Wartick & Cochran, Wood & Cochran, as cited in Marens, 2008, p. 56). Harvard Business School Professors Theodore Levitt and Benjamin Selekman and Warton’s Ernest Dale were Bowen’s contemporaries, who were known as first generation scholars and succeeded by a new group in 1960s and 1970s, who were more focused on the subject of business ethics. In the 1980s, scholars in ethical philosophy, like Donaldson and Freeman, emerged as they influenced the work of other scholars trained in other disciplines (De George, Gerde & Wokutch, as cited in Marens, 2008, p. 56). These early CSR scholars lived through the struggles of the deep depression of the 1930s and 1940s, which was then followed by the broad-based prosperity, the Second World War and the Cold War, and the labour struggles of the 1930s. But these scholars were active participants in policy making bodies of the government and private firms. (Maren 2008, p. 57) Marens (2008) indicated that the pioneers in the study of CSR mentioned above were amateurs, knowledgeable and expert only in their own home fields, but lacking intellectual expertise ‘to establish a formal discipline for the study of CSR’ (Marens 2008, p. 56). Those who possessed intellectual advantage on the study of CSR were professors of elite schools and held government positions. Bowen (as cited Marens, 2008) wrote that the study of CSR needed more empirical research on the part of the business school professors. This was also the same recommendation by the Carnegie and Ford Foundations. Many of Bowen’s ideas have retained their relevance to these days’ concept and application of CSR. Bowen and his contemporaries were concerned of distribution of wealth and income, the importance of employee representation and collective bargaining with management, and control of business through independent political procedures. The first generation of CSR scholars however, had had a depth of personal experience with business, government, and other major institutions more than their successors. From the 1990s up to the present, corporate social responsibility has been an important issue in both national and international policy spheres. CSR is now applied to many social issues, particularly to environmental sustainability to labour and human rights issues. CSR is used by governments to address social problems and is recognised as important to both business and society. However, CSR has been studied from the business aspect of it and not on its relevance to society and business as a whole. This makes its impact on society less known. (Brejning 2012, p. 1) 2.2.3 Issues and debate on corporate social responsibility CSR’s relevance to business can be explained in two ways. First, corporations have to connect with society and show their good image. Most of them are perceived by the public as having environmental concerns as can be seen from their past actions. Since these companies are dependent on the community – where their customers reside – their track record should be maintained and upheld. Their activities have to be in line with their CSR objectives. Second, there are critical events that may happen in the course of conducting CSR. A critical incident refers to an activity “that is sufficiently complete in itself to permit inferences and predictions to be made about the persons performing the act” (Flannagan as cited in Vaaland & Heide, 2008, p. 213). The incident is known to the observer, and the context can be handled by what is termed CSR recovery. CSR activities include charities and donations, programs for the community, and protection from discrimination, gender, racial, and religious biases in society and in the workplace, health and safety, human rights, and above all, environmental preservation (Carter & Jennings, 2002, p. 147). Other complex issues include human resources management, the firms’ relations with local communities, and interactions with suppliers and customers (Branco & Rodrigues 2006, p. 112). There is a relation between corporate governance and CSR. It is obvious that good governance necessitates responsibility to the firm’s stakeholders (Kendall as cited in Huang 2010, p. 642). Related to this is the firm’s responsibility to be transparent, honest and accountable to its stakeholders (Dunlop as cited in Huang). Other definitions also emphasised CSR’s relation with ethical and moral responsibilities with respect to decision-making and organisational behaviour, and the social impact of the organisation’s activities (Branco & Rodrigues 2006, p. 111). There are those who oppose CSR activities. Some of them fail to see the economic, environmental, legal, and ethical benefits of it, thinking that business people are not better equipped to handle social activities which require core competencies. These social activities may require funds that may trigger increase in prices for their products. The most important criticism to CSR is the economic aspect – profits might not be maximized because of the cost to be added for CSR. (Mackey 2005, p. 29) A negative comment about CSR states that business has nothing to do with the community, but Dentchev (as cited in Sanders 2012, p. 160) argued that the argument is supported by the current practice of CSR supporting capitalist mainstream and the so-called ‘fangs’ of globalisation. Whatever CSR has created, it has benefited society and the environment. Globalisation has triggered CSR practices of big corporations. 2.2.4 Corporate social responsibility practice in oil and gas industries CSR practices in the oil and gas industries are important in this paper because CSR relates with environmental preservation and in oil and gas industries there are potential environmental problems. CSR is linked with sustainable development and is ‘the business level equivalent to sustainable development’ (Guenther, Hoppe & Poser 2006, p. 8). The Brundtland Commission Report in 1987 (as cited in N?ss, 2001, p. 504) stressed the need to protect the environment while providing economic development. The Commission emphasised that providing needs for everyone should be done in legitimate and democratic ways and natural systems must not be altered in pursuit of economic development. An important statement in the Brundtland Report said: “Living standards that go beyond the basic minimum are sustainable only if consumption standards everywhere have regard for long term sustainability. Yet many of us live beyond the world’s ecological means, for instance in our patterns of energy use.” (N?ss, 2001, p. 506) This means there should be prudent use of local and global natural resources and that firms should ensure that the resources and the earth’s carrying capacity is maintained to support peoples of the next generations (UNWCED as cited in Gonzales et al., 2011). Carrying capacity is how the planet can withstand environmental degradation by inhabitants of the earth. Sustainability is related to the concept of preserving the earth’s carrying capacity which involves changing people’s behavior to preserve the environment. Populations have to be controlled so that natural resources will be enough to feed and serve the present and the future generations. Preserving the environment and the earth’s carrying capacity is society’s responsibility. There has to be a balance in the factors involving human development, such as sourcing out raw materials from the natural environment, and institutional change to develop people’s needs and goals for the present inhabitants and future generations of the planet. Sustainable development can be attained “through sustainable consumption and production, confronting climate change, ensuring natural resource protection, and developing sustainable communities” (Willis, 2010, p. 311). According to this concept, sustainable consumption and production promote changes in the delivery of new products and services with the least effect on the environment. Sustainable development emphasizes distributive ethics with a stress on equal distribution of the earth’s wealth and responsibilities. The Brundtland Commission expressed the intrinsic value of nature and that protecting it is part of our obligation with life on earth (N?ss, 2001, p. 505). Increasing activities for environmental conservation and behavioural changes linking with environmental concerns are triggering the integration of protecting the environment with social issues and economic development. (Gonzales et al., 2011, p. 592) It cannot be denied that the oil and gas industries have significant impacts on the environment (Ali & o’Faircheallaigh as cited in Guenther et al., 2006, p. 9). These are the extractive companies because they continuously extract raw materials from the environment. Extractive companies have to be involved in CSR practices and support sustainable development. Environmental reporting is part of the CSR practices of the industries. Organisations like the International Petroleum Industry Environmental Conservation Association (IPIECA), the International Association of Oil and Gas Producers (OGP), and the American Petroleum Institute (API), formulated the Sustainability Reporting Initiative by publishing a guidance document on sustainability reporting in 2005 (IPIECA and API as cited in Guenther et al., 2006, p. 9). This practice is an integrated policy of the industries to enhance trust and approval of industry activities in reporting to stakeholders on environmental aspects. Environmental reporting was broadened with the application of ISO 14001 as it focused on the whole value chain. Sustainability became significant for companies in the industries. (Guenther et al. 2006, p. 9) Oil companies resort to CSR to counter negative public sentiments and to build reputational capital and attain legitimacy which is essential for their long term survival. Stakeholders also expect companies to practice CSR as a way of social responsibility, but despite this oil companies still face the legitimacy challenge. A study showed that controversial companies need to integrate CSR into their business operations, rather than treating it as strategic tool to gain legitimacy. (Du & Vieira 2012, p. 414) Some authors doubt the oil industry’s commitment to practice CSR, further saying that CSR is just used as cover so they can continue with their business operations. The companies’ credibility to practice CSR has been seen as not sincere; their practice can only be seen as credible if their motives are seen as genuine concern for the welfare of society. Companies must address environmental problems and employ cross-sector partnerships. (Du & Vieira 2012, p. 417) The gas and oil industry needs more activities to prove that they care for the environment and society. This sector exploits the environment; what has been exploited or abused must be restored. The environment and the community are at a disadvantage if no appropriate and down-to-earth CSR activities are practiced. 2.2.5 Corporate social responsibility practice in oil and gas industries of Saudi Arabia The Middle East and North Africa are the largest producers of oil in the world, accounting to about 57% of the world’s oil reserves (OAPEC as cited in Eljayash, Jaimes, & Kong, 2012, p. 203). Saudi Arabia owns 22.2% of the world’s oil reserve. Natural gas reserves in Middle East and North Africa (MENA) has registered at 17 percent of the world gas production. Environmental disclosures and environmental accounting are needed in these areas to ensure that environmental protection and preservation are made. This is where CSR comes in. Social and environmental research is not so well documented in Arab countries, and is believed scarce. In 2008 to 2010, Saudi Arabia had increased environmental disclosure. (Eljayash et al. 2012, p. 206) The oil industry is considered a controversial industry because there is unscrupulous business involved that impacts social, environmental, and ethical issues (Woolfson & Beck as cited in Du & Vieira 2012, p. 413). Moreover, production of oil affects the quality of air and water, and it causes global warming. In the context of Saudi Arabia oil and gas industry, CSR focuses on environmental protection. Oil disasters have caused much damage to the environment. Oil companies have been the subject of public criticism by the different sectors of society due to environmental violations, and negative impact to local communities because of labour and safety problems (BBC News, New York Times, Oil and Gas Journal as cited in Du & Vieira, 2012, p. 414). In a study of six oil companies of Saudi Arabia regarding their CSR activities, the researchers found that the companies used activities such as multiple domains to address a diverse range of social issues, for example, product safety, provision of quality, employee health and safety, environmental protection, and charitable activities benefiting the local communities. The environment and local communities were direct and immediate beneficiaries. Their particular activities included ‘enhancing energy efficiency, promoting biodiversity, fighting climate change by reducing greenhouse emission, and the preservation of natural resources’ (Du & Vieira 2012, p. 417). Other CSR activities included health programs, such as vaccinations, programs to fight malaria, AIDS, TB, etc. Production in the oil and gas industry involve considerable amount of risks to the environment. Companies like Saudi Aramco (Saudi Arabian Oil Company), a government controlled oil company in Saudi Arabia, conduct many studies and surveys before creating a real product, oil. Saudi Aramco also conducts diversification practices to maximise the use of resources and increase profit, practices which are healthy for the company but detrimental to the public because it involves extraction of new materials from the environment. (Garbie et al., 2008) CSR practices in the industry are in line with the government’s initiatives to control climate change when it signed the Kyoto Protocol on global climate change. The Saudi Oil Ministry recognised that the move of the government meant an impact on the country since Saudi Arabia is the world’s largest oil producer. The move involved reducing profits. (Pollution Engineering 2005) Saudi Aramco has control of production, refining, marketing and processing of oil through its many plants, refineries and merged companies. Saudi Arabia has approximately 5,000 to 8,000 oil wells which produce volumes of oil every day (Simons 2005, p. 102). Saudi Aramco’s operations cover the oil and gas industry, spanning the Arabian Gulf to the world. Aramco’s CSR practices include benefits for employees, including safety and healthcare. The organisation follows the highest standards of excellence for their work force in the many areas of operation, including safety and environmental standards. The company encourages worker creativity, and allow them to suggest ideas for company improvement and success of the organisation. Diversity in the workplace allows the company to value people. Their managers and supervisors are encouraged to get out of the office, talk and mingle with the other members of the team. (Saudi Aramco 2011) Saudi laws are in line with environmental safeguards. Aramco and other private companies in Saudi Arabia are involved in environmental preservation. Aramco is involved in preserving biodiversity. Its refineries have wastewater treatment plants. Treated water is also used for industrial purposes. The application of wastewater reuse with improved technology has reduced the cost of industrial water. (Ministry of economy, trade and industry 2009) 2.2.6 The Standard, Code and Principles of CSR The principle behind CSR is drawn from the fact that business should not only for economic purposes but also for social and environmental goals (Elkington as cited in Steurer, 2009, p. 50). This is opposed to the neo-classical concept that a firm has the sole purpose of doing business and making profits. For ethics proponents, CSR is the interest of businesses, as ‘stakeholders like employees, consumers, Civil Society Organisations (CSO) and governments demand and value the respective efforts’ (McWilliams & Siegel as cited in Steurer, 2009, p. 50). Businesses have great impact on society and CSR is seen as a measure behind this relation because it involves the triple bottom-line management which are the social, economic, and environmental aspects. Governments are concerned about CSR despite the fact that it is voluntary because it helps to meet policy objectives. CSR helps to meet sustainable development. Sustainable development is ‘profitable, green, and fair’ (Bartelmus, Campbel as cited in Lindsey, 2003, p. 165). Sustainable development is also ‘dynamic, complex process concerned with balancing the sometimes conflicting objectives of economic development, environmental protection, and equitable distribution’ (Campbell; Innes & Booher; Kaiser; Shepherd & Ortolano, as cited in Lindsey, 2003, p. 165). Sustainable development can be attained through controlled extraction of raw materials and ensuring that efforts are made to replace and repair damaged natural resources. Sustainable consumption and production promote changes in the delivery of new products and services with the least effect on the environment. Sustainable development emphasises distributive ethics with a stress on equal distribution of the earth’s wealth and responsibilities. CSR policies are also looked upon as attractive complement for hard-laws, or laws seen by governments as having oppositions or contradictions by societal sectors. CSR has a soft-law character and regulations the hard-law. Governments see CSR as a way of controlling contradictions and creating stakeholder interactions. But governments regard CSR as a negative influence to social and environmental regulations as the ‘voluntary business contribution to sustainable development starts where the legal framework ends’ (McWilliams & Siegel as cited in Steurer, 2010, p. 50). 2.2.7 Conclusion CSR encompasses activities to address economic, environmental and social issues. It focuses on responsible performance and its contradiction. CSR emphasises environmental protection and preservation. CSR is a firm’s obligation to provide sustainable development. It is building healthy relationships with the community through positive interaction. There are different issues pointed out in the literature carried out by most organisations, allegations of oil companies based on the social and environmental impact, causing media criticisms and even condemnation of the individual company, and human rights abuses due to inappropriate distribution of benefits evenly. However, different bodies have been established to provide guidance to firms and country to adopt in order to obtain a good CSR practice. Over the past decade, the world has seen that the emphasis on business has been that of greed and more power. Corporate behaviour is not seen as focusing on the environment but on profits, which lead us back to the origins of CSR in the first part of this essay when Friedman said that the purpose of business was for profits. Corporate greed and scandal were seen in the likes of Enron, the US energy company, which was beset with large capital losses in 2001 and subsequent accounting fraud. The stock price tremendously fell from $90 to $0.10 with losses of about $10 billion for its shareholders. (Claydon 2011, p. 407) CSR is not seen as a serious issue for CEOs and big corporations. Of course, this is only an example of some businesses, but it could also be a tip of the iceberg. Encouragements and motivations have been applied and inspired by some businesses and big firms when it comes to CSR. In Saudi Arabia, the picture is promising but the road to an effective CSR is still to come. The government and the big corporation, Saudi Aramco, are implementing CSR to the best of their ability but more moves have to be encouraged and introduced. Saudi Aramco is a government business and it cannot be obliged to fully apply ‘full’. Its primary purpose is mainly business because it is main income of Saudi Arabia. Oil’s impact on the environment cannot be controlled if no serious move and concerted effort from the government and the private sector are being done to control its negative flow. As a conclusion, for the oil and gas industries the concept of CSR should be aimed at the environment. This is a sector that truly exploits the environment – it gets is main business and income from nature. Needless to say, oil production and refinery harms the environment and if no amount of environmental protection is done, earth and its atmosphere will suffer. Global warming and climate change will push the world to its limit. 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