The Cost of Benefiting From Corporate Social Responsibility - Term Paper Example

The Cost of Benefiting From Corporate Social Responsibility The Cost of Benefiting From Corporate Social Responsibility Though Corporate Social Responsibility (CSR) has no universal or narrow definition, it is generally thought of as practices that exceed the moral, legal, and public expectations that society places on a business. CSR encompasses the many influences that a business practice has on its stakeholders, which include workers, customers, investors, and the local community. The factors can include worker health, product safety, safeguarding the environment, and socially conscious investing. A recent survey revealed that 24% of business leaders believed "the reputation and integrity of the brand" was nearly as important as product quality (Two-faced capitalism, 2004). Because the field is a relatively new effort by business and the effects of their actions are so far reaching, it is necessary to quantify what benefits a company derives from CSR as well as demonstrate to the public the benefit that society gains from it. The cost of CSR, sometimes met with a negative response, needs to be examined with an understanding that the benefits in some cases may be mutual and what may be good for society may also be good for business. Measuring the benefit that CSR has to a company has been complicated by the reluctance of business to embrace the concept and provide reasonable reports and audits. A forthcoming report from St. Andrews University contends that less than 4% of the world's major corporations produce CSR reports, and the results have been characterised by Rob Gray, professor from St. Andrews, as, "at best useless and at worst highly misleading" (qtd. in Edwards, 2006). There are, however, some economic indicators that can be used when comparing companies that have a strong CSR reputation to those that do not. Profits, revenues, customer loyalty, market response, worker safety, and legal liabilities can be examined for the impact they have on a business. Societal benefits that arise from worker and product safety, a clean environment, and ethical practices are readily apparent. However, more intangible benefits may not be as readily quantified, but may be reflected in better company reputation, brand loyalty, and public perception. When measuring CSR as an overall effect on a company, there is some correlation between good company citizenship and lower profitability. Indicators that can be measured indicate an overall negative effect on top CSR companies and their annual net income growth (Laffer, Coors, & Winegarden, 2004, pg. 5). It may be misleading to infer that market leaders also have the most ambitious CSR programs, for as Laffer, Coors, and Winegarden, 2004, conclude, "It is likely, therefore, that the businesses that are inclined to engage in CSR initiatives tend to be those that are already financially successful and that can afford the added CSR overhead" (pg. 6). Short-term benefits from CSR that are realised by society may take place at the expense of a company's core mission of generating profits. However, when CSR traits are examined on an individual basis, the results may reveal benefits for both the company and society. Worker safety is a paramount consideration for a company with strong CSR traits. The demand of a safe workplace is a mainstay of worker advocates and has, in many cases, been forced upon business through increased regulation. Workers have benefited greatly from these actions as the work environment continues to improve. But has business also reaped rewards from investments in safety Or has safety had a negative effect on profit Alcoa, the world's largest aluminium producer, made a strong commitment to safety in 1987. Since then its accident rate has fallen by 90% and is 10 times better than its industry peers (Jackson & Nelson, 2004). During this same period, Alcoa has been able to outpace the industry and its nearest competitor, Alcan, in both revenue and profitability. Safety contributes to profitability through a healthier and more productive workforce, as well as reducing insurance and liability considerations. A company may benefit from a positive campaign that attempts to correct or explain the public's perception of a company's business practices. Nike, a leading manufacturer of footwear, was embroiled in public controversy in the late 1990s due to abusive labour practices in their supply chain. Nike has since transformed its practices and CEO Phil Knight has committed to total transparency in disclosing their supply chain. Their efforts towards improved reporting has in Knight's words, "proved to us that the value of reporting goes far beyond transparency. It becomes a tool for improving both our management of business and in giving us clues about what we need to do next" (Knight, 2005). Nike's proactive approach to CSR has been a win-win situation for Nike, its workers, customers, and society. Public perception of company reputation can also have an impact on stock market psychology and increase or decrease shareholder value. During the 1999 meeting of the World Trade Organisation (WTO) activists focused on CSR as the media highlighted the events with stories of the protests over corporate abuses. During the four day period of protests at the WTO meeting, a study of 416 Fortune 500 firms showed that the share value for businesses lacking a social responsibility reputation had declined by 2.36%, while those having a positive reputation were down by less than half that amount (Schnietz & Epstein, 2004). Though much of the protest was geared toward global trade and supply chain, companies that had no global presence were affected similarly. Clearly, a good reputation, even in the absence of direct linkage to specific areas, is an overwhelming value to shareholders and is clearly identified by the public as desirable. While the intangible value of reputation and trust are difficult to quantify, other socially responsible practices may be easier to view from a strictly financial point of view. Recycling programs and waste minimisation has the benefit to society of protecting the environment from deterioration, but may come at a cost to the firm. Improved processing equipment and higher grade input material might not offset the savings realised by recycling and the reduction of waste management. Recent research by Chappelle, Paul, and Harris, 2004, conclude, "Overall, we find that waste reduction is associated with increased costs; the shadow value of waste reduction is negative and statistically significant" (pg., 20). Though the value of a clean environment may well be worth the cost to society, the cost for the program will be borne by increased product cost or reduced shareholder value. It should also be noted that in the context of waste management, the increased cost of environmentally sound practices might be viewed as a long-term investment rather than a cost of operation. The immediate costs may be offset in the future by aiding to protect the company from liability due to health issues. Going green may save the company many times the investment by eliminating the high cost of cleanup projects in the future. Voluntary CSR practices by industry may stem the tide of increased government regulation and unrealistic demands from activist groups. The value of CSR needs to be kept in light of a long-term commitment. The production of consumer friendly products can have a major impact on society as well as impacting a company's bottom line. Recent lawsuits against fast food vendors due to high fat content have been brought alongside more serious allegations involving pharmaceuticals and irresponsible trial data. A jury recently awarded a plaintiff $32 million dollars, of which $25 million was punitive, in a case that alleged Merck intentionally withheld important information about the risk of Vioxx (Robbins, 2006). Merck's lack of CSR not only put its customers at risk, but also damaged shareholder equity, company reputation, and threatened the survival of the firm. An effective CSR program at Merck may have been able to satisfy all the competing stakeholders through a policy of full disclosure. Customers with severe symptoms may have been willing to reasonably access the risk had Vioxx not been pulled off the market. Responsible marketing of products aimed at children may have one of the best possibilities of being a net gain for all stakeholders involved. Removing sweetened soft drinks from school lunch programs will have a minimum impact on a beverage supplier's bottom line. In most cases the void will be filled by another product from the same brand that has less sugar and fewer health risks. McDonalds, after enduring bad publicity over unhealthy food aimed at children, has recently seen a rebound in company value after adding healthier choices to the menu (Zadek, Merme, & Samans, 2005). Socially responsible investment is just beginning to take root in the mainstream financial community. With major amounts of stocks owned by mutual funds, pension funds, and insurance companies, it is becoming more imperative that financial investments be linked to CSR. But is there a gain for the individual stakeholder in a mutual fund by demanding a social or political litmus test on their investments Political instability and legal liabilities have begun to influence the investment strategies and Zadek, Merme, and Samans, 2005, warn that, "Market shifts associated with changing societal concerns are ignored at a company's risk". The public perception of poor company goodwill has the potential to limit available capital to a company while rewarding society with direct influence on business practices and their effect on social change. Fair hiring practices and workforce diversity are responsible actions that are not associated with high costs to the firm. In fact, the companies who are most widely recognised as ideal places to work will attract the best talent in their field at an identical wage. Genetech, a leading biotech company, has won numerous awards for its ethics and employee treatment. These awards attract the attention of graduates and as Kermani, 2006, observes, "... the best candidates in the job market will be attracted to work for a dynamic organization that takes care of its employees. Staff turnover can also be reduced because people feel as if they're part of a cohesive team" (pg. 37). In a competitive labour market this is a win for the company, the employees, and ultimately the shareholders. More research is needed to quantify the myriad of complex relationships that CSR has to company performance. What may seem like a trivial public relations practice may positively impact the company's bottom line, and may serve society as well. In addition, more complete reporting from the business community and more detailed auditing would aid in providing a greater depth of understanding the long-term value of CSR. However, compulsory government regulations may have a negative impact in assessing the true nature of CSR and may lead to increased negative reaction. Yet, even in the face of sparse data there can be little doubt that a well managed CSR program can benefit all the stakeholders in a company. CSR can result in better employees, a cleaner environment, healthier customers, and a more stable financial future for the firm. Companies who are actively pursuing aggressive CSR policies are flourishing and benefiting from a better company reputation. Safety concerns for employees and the environment reduces the risk of liability and presents the shareholders with a more predictable future while ensuring the well being of society. Where there is conflict among the parties involved, adequate evaluation is required to assess the actual future benefits of acting with good company citizenship. The trend toward CSR is not a fad promoted by a few radical activists. It is a step toward understanding our relationship with business and its obligation to enhance the world we live in. After all, what's good for the world, may be good for business. Works Cited Chapple, W., Paul, C. J., & Harris, R. (2004). Manufacturing and corporate environmental responsibility: Cost implications of voluntary waste minimisation. Retrieved July 12, 2006, from http://www.nottingham.ac.uk/business/ICCSR/pdf/ResearchPdfs/17-2004.pdf Edwards, R. (2006, June 25). Study slams 'trivial' social responsibility reports. Sunday Herald. Retrieved July 12, 2006, from http://www.sundayherald.com/56377 Jackson, I., & Nelson, J. (2004, December). Value-based performance. Retrieved July 12, 2006, from http://www.ksg.harvard.edu/cbg/CSRI/publications/workingpaper_7_jackson_nelsonFINAL.pdf Kermani, F. (2006). Why corporate social responsibility makes sense. Applied Clinical Trials, 15(5), 36-37. Knight, P. (2005). A message from Phil Knight. Retrieved July 12, 2006, from http://www.nike.com/nikebiz/nikebiz.jhtml;bsessionid=THJW5XQ3LEMCCCQFTBECF4YKAWMEUIZBpage=29&item=fy04 Laffer, A. B., Coors, A., & Winegarden, W. (2004). Does corporate social responsibility enhance business profitability . Retrieved July 12, 2006, from http://www.csrwatch.com/Sub/Resources/CSRProfitabilityStudy.pdf Robbins, M. A. (2006). Merck hit with $32M Vioxx verdict. New Jersey Law Journal. Schnietz, K., & Epstein, M. (2004). Does corporate social responsibility pay off. Retrieved July 12, 2006, from http://gbr.pepperdine.edu/042/responsibility.html Two-faced capitalism (2004, January 22). Retrieved July 12, 2006, from http://www.economist.com/business/displayStory.cfmstory_id=2369912 Zadek, S., Merme, M., & Samans, R. (2005, January). Mainstreaming responsible investment. Retrieved July 12, 2006, from http://www.accountability.org.uk/uploadstore/cms/docs/AccountAbility_WEF%20-%20Mainstreaming%20Responsible%20Investment.pdf Bibliography Alcan, Inc (2006). Retrieved July 12, 2006, from http://finance.yahoo.com/q/bct=my&s=AL&l=off&z=m&q=l&c=aa Chapple, W., Paul, C. J., & Harris, R. (2004). Manufacturing and corporate environmental responsibility: Cost implications of voluntary waste minimisation. Retrieved July 12, 2006, from http://www.nottingham.ac.uk/business/ICCSR/pdf/ResearchPdfs/17-2004.pdf Edwards, R. (2006, June 25). Study slams 'trivial' social responsibility reports. Sunday Herald. Retrieved July 12, 2006, from http://www.sundayherald.com/56377 Jackson, I., & Nelson, J. (2004, December). Value-based performance. Retrieved July 12, 2006, from http://www.ksg.harvard.edu/cbg/CSRI/publications/workingpaper_7_jackson_nelsonFINAL.pdf Kermani, F. (2006). Why corporate social responsibility makes sense. Applied Clinical Trials, 15(5), 36-37. Knight, P. (2005). A message from Phil Knight. Retrieved July 12, 2006, from http://www.nike.com/nikebiz/nikebiz.jhtml;bsessionid=THJW5XQ3LEMCCCQFTBECF4YKAWMEUIZBpage=29&item=fy04 Laffer, A. B., Coors, A., & Winegarden, W. (2004). Does corporate social responsibility enhance business profitability . Retrieved July 12, 2006, from http://www.csrwatch.com/Sub/Resources/CSRProfitabilityStudy.pdf Robbins, M. A. (2006). Merck hit with $32M Vioxx verdict. New Jersey Law Journal. Schnietz, K., & Epstein, M. (2004). Does corporate social responsibility pay off. Retrieved July 12, 2006, from http://gbr.pepperdine.edu/042/responsibility.html Two-faced capitalism (2004, January 22). Retrieved July 12, 2006, from http://www.economist.com/business/displayStory.cfmstory_id=2369912 Zadek, S., Merme, M., & Samans, R. (2005, January). Mainstreaming responsible investment. Retrieved July 12, 2006, from http://www.accountability.org.uk/uploadstore/cms/docs/AccountAbility_WEF%20-%20Mainstreaming%20Responsible%20Investment.pdf Read More