Corporate Social Responsibility: Financial Markets and Risk - Assignment Example

Corporate Social Responsibility: Financial Markets and Risk Executive Summary Corporate Social Responsibility (CSR) has been defined as the business commitment and contribution to the quality of life of employees, their families and the society overall to support sustainable development. CSR may be of three types based on their nature: ethical, altruistic, and strategic. It is a dynamic concept and voluntary in nature. CSR is different from Corporate Governance and larger in its extent. It includes many more aspects and relationships between company and shareholders. The main purpose of CSR initiatives by companies is to motivate businesses to contribute to the solution of problems in their society and environment, and benefiting as well in the process. It is desirable for a company to adopt CSR initiatives despite the costs because in the long term it benefits both the company and the society. There is already a trend, of adopting CSR policy, which is taking over the biggest businesses in the world. Introduction Corporate Social Responsibility (CSR) has been defined as “an organisation’s obligation to maximise its positive impact and minimise its negative effects in being a contributing member to society, with concern for society’s long-run needs and wants. CSR means being a good steward to society’s economic and human resources.” The World Business Council for Sustainable Development defines CSR as the business commitment and contribution to the quality of life of employees, their families and the society overall, to support sustainable development. In recent years, CSR has been incorporated into the business strategy of a majority of the companies and firms in UK and all over the world. This is because of a variety of considerations that have developed in recent years making it an essential component for the success of any business. Nature and Purpose of CSR There appear to be three mutually exclusive types of CSR based on their nature and purpose: ethical CSR, altruistic CSR, and strategic CSR. Ethical CSR is morally mandatory. It entails a “negative injunction” to avoid and correct activities that injure others, even if the business does not benefit from this. Altruistic CSR involves contributing to the common good at the possible, probable, or even definite expense of the business. It may be humanitarian, or philanthropic. Humanitarian CSR involves firms to go beyond preventing or rectifying harms they have done to assuming liability for public welfare deficiencies that they have not caused. This type of CSR is relatively rare. Strategic CSR is done to accomplish strategic business goals – good deeds are believed to be good for business as well as society. With this, corporations give back to their constituencies because it is in their best financial interests to do so. This is philanthropy aligned with profit motives. Social goals are found profitable in the long run since market forces provide financial incentives for perceived socially responsible behaviour. CSR is also a positive business driven response to the business environment of today. It is not an add-on. CSR is not static. It is a dynamic, multidimensional concept covering social, economic and environmental concerns, and is continually evolving with the diversity of the market. Innovation is a critical aspect of CSR initiatives. CSR is not an alternative to regulation. CSR is voluntary in nature. Purpose of CSR Initiatives It has become imperative for businesses today to incorporate CSR in their business activities. Apart from the pressures from various directions, there are several reasons that companies find CSR initiatives beneficial for them. A coherent CSR strategy based on integrity, sound values and a long-term approach offers clear business benefits to companies and a positive contribution to the wellbeing of society. A CSR strategy provides the opportunity to demonstrate the human face of business. Rapid political, economic and technological developments have increased the complexity of operating environments for business, governments and society. There is a need to develop new types of partnership between companies, and their secondary stakeholders – communities, governments, NGOs, and the general public. This opportunity is provided by CSR. Governments are no longer able to solve developmental challenges and achieve “sustainable development” on their own. Business sector is needed to help them with their CSR initiatives. It is argued that the leadership companies of the future will be those that base their mission and their corporate strategies about creating, measuring and managing “value”. CSR has become an international norm and a standard emphasising the importance of human and social capital for global development. The expanding role of private sector has resulted in increasing focus on their corporate behaviour that has led to the need to build reputation and relationships based on CSR. Today, consumers buy products, and stakeholders put their stake on those companies, which show corporate social and environmental action. Difference between CSR and Corporate Governance Corporate Governance (CG) is a set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered, or controlled. It spells out the rules and procedures for making decisions on corporate affairs and also provides the structure through which the company objectives are set, as well as means of attaining and monitoring the performance of those objectives. There are certain differences between CG and CSR. In CG, the principal (shareholder) delegates decision rights to the agent (manager) to act in principal’s best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. This is not possible in CSR. There are many principals and more than one agent involved. The difference between CG and CSR is that the latter has a more external focus – considering a wider range of stakeholders. In addition to its shareholders, a firm also interacts with employees, consumers, public authorities, and non-governmental organisations, all of which entertain differing expectations. As a response, companies develop strategies where they voluntarily integrate social and environmental concerns in their business operations. CG focuses more on the economic health of the company, while CSR focuses on environmental, social and economic health of the company. The highest priority in CG is given to the functioning of capital markets and the respect of shareholder interests. Maximising shareholder value becomes the final goal of the firm as well as the final duty of the board and management. CSR is more about sustainable value creation. Capital and shareholders are the reference base for all CG mechanisms. The legal ownership of some assets is of primary importance. But CSR stretches the boundaries of firm to include intangible assets like intellectual and social capital, reputation etc. CG can hold managers of companies liable for their financial and administrative performance only. CSR also holds strict liability to companies for social and environmental impact, like pollution, for example. Reasons for Adopting Policies on CSR Today enterprises have become aware that their business success does not depend solely on a strategy of maximising short-term profits, but on protecting the environment and on promoting their social responsibility, including the interests of consumers. The main benefits for companies that arise from adopting policies on CSR are as follows. Several academics have shown a direct correlation between socially responsible business practices and positive financial performance. An 11-year Harvard University study found that “stakeholder-balanced” companies showed four times the growth rate, and eight times the employment growth when compared to companies that are shareholder-only focussed. CSR offers a means by which companies can manage and influence the attitudes and perceptions of their stakeholders, building their trust and enabling the benefits of positive relationships to deliver business advantage. 44% of British Public believe that it is very important that a company shows a high degree of social responsibility when they buy the company’s product. BT plc believes that the reputation, it has gained as a result of ASR initiatives, is maintaining and building its market share in a competitive market. CSR offers more effective management of risk, helping companies to reduce avoidable losses, identify new emerging issues and use positions of leadership as a means to gain competitive advantage by influencing new regulation to strengthen competitive advantage. CSR is increasingly the key factor in attracting and retaining a talented and diverse workforce. Studies show that three in five people want to work for a company whose values are consistent with their own. 81% of young people have a strong belief in the power of responsible business practice to improve profitability over time. CSR stimulates learning and innovation within organisations helping to identify new market opportunities, establish more efficient business process and to maintain competitiveness. CSR is a key factor in helping companies access capital. Investors and insurers are increasingly considering a company’s social and environmental performance. An increasing number of investment funds are now managed according to the principle of SRI (Socially Responsible Investment) with portfolio managers either screening out businesses that so not meet high environmental or social standards or using their influence to improve the ethical performance of these companies. 33% of institutional investors claim to offer SRI products with a further 15% planning to. CSR opens opportunities to reduce present and future costs to the business and it serves to improve competitiveness, market positioning and profitability. Having a core purpose beyond making money can help to achieve long-term financial performance. CSR helps reduce operating costs and leads to increase in operational efficiency. Over time improved environmental management systems improve operational efficiency by reduced waste production and water usage, increasing energy efficiency and in some cases selling recycled materials. The more a company shows it is committed to CSR by complying with and going beyond legislation, the more lenient governments and regulators may be with the company. Some CSR Initiatives by Companies Case of Novo Nordisk In the pharmaceutical industry time-to-market is a critical factor. As a result, Novo Nordisk needed to develop a fast track approach to design and construction of production facilities. This involved the use of pre-assembled modules that are not necessarily the most resource-efficient. A new procedure was introduced in 2002 to ensure environmentally sound project design in construction, extension and conversion of production plants. The procedure was tested on a new plant in Denmark resulting in energy and water-saving measures in the design of up to 45%. The extra cost was less than 1% of the total investment with a payback of just over a year. The programme reduced operating costs by $1million, making it an attractive return on investment. Case of Marks and Spencer Marks and Spencer has taken the initiative of engaging with their customers on CSR. Research showed that 97% of M&S customers believe that CSR is very important. Another 78% wanted to know about the way their goods are produced, from standards for animal welfare and fish sourcing to the prices paid to producers in the developing world. In response to this, the company launched “Look behind the Label” campaign in Jan. 2006. In this movement the company has included better and innovative ways to produce and market products which are animal and environmental friendly. For example, the M&S Café Revive UK chain of coffee shops now sell 100% Fairtrade coffee and tea. To meet customer’s demands for more Fairtrade products, the company has introduced a small range of men and women’s T-shirts and socks made of Fairtrade certified cotton. M&S has been certified as a leading UK retailer for responsible fish sourcing. It has also introduced volumes of packaging with a lower environmental impact in response to customers’ demands. The company has introduced “Eat Well” label to indicate products with a healthier option. Over 1000 products or 20% of food lines are labelled “Eat Well.” The company has also moved well ahead of others in removing harmful ingredients and reducing salt from their products. This campaign by M&S has received encouraging response from customers and enhanced the reputation of the company considerably. Case of Centrica British Gas’ National Sales Centre (NSC) employs 2,700 people at Cardiff, South Wales, and is responsible for handling all of the company’s domestic gas, electricity and telephone sales enquiries. As Cardiff is a popular location for call centres, employee retention is a real issue. British Gas developed its employee community involvement programme in 2000 as a means of creating a degree of differentiation and improving retention. The results showed: • Higher Retention rates for individuals who volunteered. • Improved rating as an “above average” place to work - to 63%. • Increased job satisfaction levels - to 67%. • Increased advocacy rates - from 49 to 57% who would speak highly of the company. • 28% of Action Day participants achieved promotion. • Increased positive media coverage - 4.3 million media “opportunities to see” generated. • Absenteeism significantly reduced. • Improved customer satisfaction ratings: two points above the stretch target. Thus, CSR initiatives at Centrica led to greater employee satisfaction and retention. Conclusion The trend for CSR is developing to spread to all the major companies of the world. It has become a mandatory policy of most of the large businesses to come out with a Corporate Social Responsibility Annual Report, which gives an account of the company’s CSR activities for the shareholders as well as the stake-holders. This trend is beneficial for the companies as well as it engenders a philanthropic spirit to their work, and encourages new ideas and innovation that, in turn, increase profits. CSR is larger in extent as compared to Corporate Governance, but the direction of both is the same. CSR in most part has replaced CG in most companies. That does not mean that CG has been abandoned. It has simply been taken into its fold by CSR. Bibliography Berghe, Lutgart van Den and Louche, C. “The Interface between Corporate Governance and Corporate Social Responsibility and its relevance for the Financial and Insurance Sector.” Vlerick Leuven Gent Working Paper Series 2004/22. [Online] “Corporate Social Responsibility: An IOE Approach.” Mar 2003. International Organisation of Employers. [Online] “Corporate Social Responsibility Report 2006.” 2006. Marks and Spencer Group plc. www.marksandspencer.com Lockwood, Nancy R. “ Corporate Social Responsibility: HR’s Leadership role.” Dec 2004. [Online] http://www.shrm.org/research/quarterly/1204Rquartpdf.asp Toyne, Paul. “How Corporate Social Reponsibility can help manage risk.” CEO Strategy. 174-175, 2005. www.article13.com Yeldar, Radley and Csrnetwork. “ The Top10 Benefits of Engaging in Corporate Social Responsibility: The Business Case.” [Online] http://www.csrnetwork.com/downloads/OpinionWhyBother.pdf Read More