Corporate Social Responsibility and Profit - Essay Example

Corporate Social Responsibility and Profit: Mutually Beneficial or Irreconcilable? Introduction The debate concerning whether companies should put more effort into being socially responsible has been alive for many years now (Porter & Kramer, 2002), though it has recently increased. CSR is often criticised as being against the main principles of companies, that is, to maximise profit for its shareholders (Husted & Salazar, 2006). Followers of CSR on the other hand state that being socially responsible is more important because of the social contract, as well as the argument that CSR can actually increase profit. Others in favour of CSR say that it is already an obligation, and the issue is simply one of finding ways in which companies can act in ways that are socially responsible (Zadek, 2001). Even companies who agree that CSR is important often have problems putting CSR principles into practice. This paper will explore the arguments both for and against CSR; the profit maximisation argument formed by Freidman, and the CSR argument. The paper will also assess if there can be a link found between CSR and increased profit so that an alternative to the two grounds can be found. Arguments Against Corporate Social Responsibility The main critics of CSR claim that standards of living have greatly improved over the past 100 years, and that this improvement is a result of “the success of free enterprise” (Blowfield and Murray, 2008: 342). Critics of CSR attack those in favour of it by saying that profit is a needed and helpful advantage of business because it is this very profit which allows businesses to put funds into helping society. The reduction of profits gained by companies caused by CSR can actually have bad effects on society, because lesser profits mean less ability to help society. If companies spend more time paying for functions that make them socially responsible, they will not be able to focus on the profit which is important for shareholders. Without shareholders, the company does not exist, and so it cannot help society by giving it funds. Many people in favour of CSR say that many business ethics of big corporations are unethical, but critics reply by saying that it is unethical for managers to think of anything else than maximising shareholder profits. Also, making companies responsible for many different aspects of society risks managers and directors being distracted. Critics also say that there is a big difference between taking account of society’s interests and being accountable for society’s interests; only the former element should be imposed on managers and businesses (Blowfield and Murray, 2008: 342). It is important to note that critics of CSR do not say that businesses should not take care to ensure the safety and wellbeing of the society, but they question whether actual obligations should be put on companies to do this (Henderson, 2001; Kapstein, 2001). People fear that followers of CSR in top positions of companies will aim for improvements to better the world based on personal ideas of what they think a company should be and how it should run. This risks them spending the money of shareholders on improper actions, without thinking about what effect their spending will have on shareholders’ interests. Specialised companies also suffer if they follow CSR because they fail to put the right funding into making proper products at cheap prices for their customers. Of course, the main critic of CSR is from Milton Friedman, who famously said that businesses should only have one single aim in their sights: “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud” (Friedman, 1962: 60-61). Friedman attacked theories that tried to expand corporate responsibilities beyond reasonable limits, and criticised the absence of specific statements as to what CSR should actually consist of. This is not to say that Friedman thought that companies could act as they wished without any obligations to society (Smith, 1990). He did say that companies have a certain role which should not have activities which go beyond this role. He said, however that, by observing the normal activities of companies within their natural role, one can see that businesses fulfil their societal obligations. The content of this normal role of businesses is based on the simple fact of making products and providing services at prices that people are able to pay (Smith, 1971). Therefore, Friedman said that expanding the role of corporations would prevent them from seeking their general role of competition in a capitalist structure. He said that it was not right to spend the money that did not belong to the corporation (because it belongs to the shareholders) which could cause the aims of the company to be confused, causing it to put profit below CSR aims. This would also cause the corporation to be at a disadvantage competitively due to the focus on CSR rather than profit. Freidman also thought that managers and directors were not able to achieve CSR aims because they were trained to make profit rather than be socially responsible, which is what the government should be able to achieve and regulate. His main statement in response to CSR was that “social responsibility of business is to increase its profits” (1970: 212). There is also a great deal of theory that argues in favour of Freidman’s approach; it is generally stated that the main target of companies is economical profit (Garriga & Mele, 2004). Such theorists argue that companies have little chances of survival if they put more effort and funds into CSR because this will cause them to lose their shareholders who are an important part of the corporation in terms of it achieving success. Arguments for Corporate Social Responsibility There are of course many who argue that CSR is not only an obligation that companies should be aware of, but that if it is implemented, that profit can actually be increased. More critical theorists state that “profit has nothing to do with the public good, and that the pursuit of profit drives companies to put crippling burdens on society and the environment” (Blowfield & Murray, 2008: 342). The argument states that good business is not based on good profit; it is rather based on “good behaviour” (Griseri & Seppala, 2010: 14), and companies who do not take care of the social environment lose face and credibility. This causes their profit to suffer in any case, and thus they lose their shareholder support. Such arguments try to create a link between good profit and good social responsibility in companies, saying that profit is not only to do with making money from marketing, but from also having a good status as a company. Such theories also base their arguments on the social contract theory which states that businesses are dependent on the consent of the society in which they function; they could not exist or gain profit if the society within which they work does not support or cooperate with their existence. Donaldson is the main theorist of the social contract in this context; he says that if a company exists based on the conditions of society, then it must also provide certain conditions for the society on which its existence depends (1982: 42). Principles of CSR can thus be used to assess what the company needs to do for society, seeing as it exists as a result of that society; the existence must be mutual. This principle can be seen in the historical events of Nike and the bad press it received for underpaying its workers in third world countries, as well as polluting the societies by the factories that it used. Nike attracted a lot of criticism and as a result lost a lot of custom; because Nike failed to meet its end of the contract, society began to drop out of its end also. This example makes it clear that if a company is not willing to adopt CSR principles as part of its business code, it will eventually lose the support of society that is so important for its actual achievement of profit (Davis, 1960). This can be put forward as a self-interest argument; if the company takes care of its employees and workers, it can enjoy a good image and thus have the profits it desires while being good to society (Hay et al, 1976, Ackerman & Bauer, 1976). CSR requires moral business codes (Carroll, 1987); that the company function in a way that does not damage or pollute the environment, that does not abuse or underpay its workers, and that provides good conditions for society in general (Siegel & Vitaliano, 2007). This is seen as incompatible with the cheap way of seeking profit because the ‘cutting corners’ that is needed to have quick and big profit does not allow companies to fulfil its CSR aims (Carroll, 1979). CSR does need funds put into improving the company’s way of functioning, and his is why it has been the subject of debate for such a long time (Windsor, 2006). Such CSR based on moral considerations and principles tries to achieve a balance between the profits that companies want and the ethical practices that society desires (Reidenbach & Robin, 1991). If companies are able to be aware of the society around them, they must also consider the ethical aspects of their business codes and actions as well as the profit they mainly aim to achieve. Perhaps the most important argument in favour of CSR is the fact that it is a growing need in today’s business world. Companies are under increasing pressure to adopt CSR strategies as the interest in the environment and sustaining third world countries increases and becomes a bigger priority for people. Also the practices of corporations have become easier to access and see due to transparency; this has caused the release of company’s data that is not socially responsible to lose its good image quickly (Elkington, 1999). It can thus be argued that CSR makes good business in society, for the people who purchase the goods or services of the company and for the people who work for the company. Rates of competition are higher today, monopolies are rare and vulnerable to boycotts and lost image if they fail to follow CSR principles; this increases the need for CSR from a business point of view. Mainly, arguments in favour of CSR state that business and society cannot be separated; the actions of a company attract both social and economic consequences, and as a result the criticism of Freidman is mistaken (Mintzberg, 1983: 12). Implementation of Corporate Social Responsibility: Is there an Inherent Link to profit? While there may be strong arguments in favour of adopting CSR strategies, it is another thing to implement them effectively in reality. Firstly, this is due to the problem of defining what activities can be defined as applying to CSR; companies may have major problems in realising and also implementing CSR because there are problems in determining with certainty what responsibilities any single company should have in relation to society (Smith, 2003: 1). It is evident that the term CSR is very vague and many have problems trying to define with certainty what it actually includes (Sethi, 1975); CSR is often a subjective concept which means different things to different individuals. There is little framework for companies to follow in applying CSR principles (Morsing & Thyssen, 2003). For example, companies that claim to follow CSR principles are still considered by many to be socially irresponsible and face criticism. If it is difficult to define CSR with any proper certainty, companies find it pointless to put funds into something that will not make their image any better. While CSR can be linked to obligations to society, how such obligations are to be fulfilled is another matter, and it is generally stated that the company must simply constantly aim to fulfil and be aware of society’s safety and needs (Frederick 1994). Nonetheless, CSR is a very broad concept and it needs to be cut down into more specific definitions so that companies can follow and implement it more closely than they are able to now (Windsor, 2001). But can there be a link found between CSR and profit so that it can be argued that the actual following of CSR principles can increase (or at least not reduce) the profits of companies? Many state that a company’s ability to be socially aware increases the value of its shareholder’s stakes because consumers are more willing to buy, for example, Fair Trade products than they are general products, regardless of the price (Martin, 2002). Furthermore, studies which have examined a link between CSR and increased profit show that there is a link in that better CSR increases the profits of companies considerably (Margolis & Walsh, 2001). Though more research needs to be conducted on the relationship between profit and CSR, there is some evidence that profits can be increased by following CSR principles. However, more research is needed because other studies show that no increase in profit was caused by following CSR principles. Aupperle et al claim that no connection between profit and CSR was found, but that this was not conclusive because “the problem in assessing levels of corporate social responsibility is objectively determining appropriate criteria and standards of corporate performance” (1985: 446). There is also an area of importance linked to the efforts of companies to implement CSR principles. Because it has no specific definition, companies often claim that they are socially responsible when in reality they have done little to improve their actions. Companies often spend more advertising their CSR claims than they actually do on implementing CSR actions (Alsop, 2002), which can be very misleading. It is often the case that companies abuse their media advantages in order to advertise or claim CSR principles that they do not fully implement in reality. Does this undermine the actual effectiveness of CSR? Conclusion It seems that the arguments for and against CSR are equal in their propositions. While arguments against CSR claim that the main aim of companies is and should be the gaining of profit, they also argue that taking CSR principles into account can restrict the company’s ability to maximise its profit. If a company has any other priorities than satisfying its shareholders, its existence is threatened. However, as has been stated, those against CSR do not say that companies should seek to maximise profit at any cost or damage to society; they rather argue that good management is a better way of looking at CSR rather than using CSR to impose obligations on companies which are beyond their proper abilities and responsibilities. Also, arguments that state that companies which do not follow CSR principles will lose their credibility is not always true. Some companies can spend many years abusing society because “in reality, some unethical behaviour may not get its just deserts within a normal lifetime, and only long afterwards is there any retribution for what has been done” (Griseri & Seppala, 2010: 14). Additionally, the link between responsible company practice, profit and competition needs to be the subject of much more research before reliable conclusions can be drawn about the effects of CSR on profit. It seems that for now the arguments are in favour of balancing profit and CSR, and that a general definition of CSR can be found which states fundamental and basic actions needed to be socially responsible. This concept will develop over time, as will the proof behind the link between CSR and profit. 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