Engagement of Companies in CSR - Essay Example

Companies engage in CSR because, for a number of reasons, they think it will be good for their profit margins Contents Contents 2 Summary 3 Introduction 3 Literature Review 4 Methodology 7 Case Study 8 Discussion 11 CSR in other organizations 11 Conclusion 13 Summary The importance of CSR in organizations is profound and this could be attributed to the benefits that can be earned by organizations in incorporating CSR. The present research has shown that Toyota, one of the most dominant players in the automobile industry mainly incorporates CSR practices to improve its environmental and social responsibility. The motive of profit comes later and is almost secondary for implementing CSR. CSR is a topic that involves the analysis of multiple disciplines for gaining proper understanding and these disciplines need to be simultaneously followed by organizations so as to create competitive advantage. This research had adopted the environmental and social aspect of CSR. This is because adapting CSR influences stakeholders in ways which cannot be described in terms of profits alone. It has been observed that sustainability is the primary agenda that drives Toyota to incorporate CSR. The company aims for a long-term sustainable development and this in turn can influence profitability as well. This finding is consistent with the findings of most of the empirical studies which state that the link between profitability and CSR is rather weak. This however does not deter companies from adopting CSR. This research has used Hart’s sustainability framework to analyze the steps that has been taken by Toyota to improve its sustainability standard. This has allowed the organization to improve its social accountability. Introduction There is a considerable debate among researchers regarding the reason for which companies engage in CSR activities. Some cite that profit may be one of the reasons for which companies engage in CSR and others argue that they use this to improve their social image in the public. The passage of time had witnessed the transformation of CSR as an integral part of the business strategy. The introduction of stakeholders in the CSR became important with major contribution from Peter Drucker. This idea was completely opposite to that introduced by a famous economist, Friedman, who held the notion that the sole emphasis of a business is on ways to improve the level of its profits. It is nowadays argued that CSR is a multi-dimensional concept that encompasses philanthropy, environmental sustainability, transparency and innovation (Kaptein and Tulder, 2003). Researchers have found that majority of the global giants are incorporating CSR based on multiple facets in order to improve organisational profitability. This increased awareness among companies to incorporate CSR in their management practices is the main motivation behind this paper. There are multiple benefits for using CSR. Benefits constitutes indirect internal benefits to an organization, arising from reduction in costs from multiple sources. Innovation and increased productivity are also indirect benefits that are derived by following corporate benefits. Reduction of costs have a direct impact on ac company’s profitability, which is facilitated from lower turnover costs, lower costs of disputes and accidents among employees and savings made from compliance with the industry standards. Stakeholder driven innovation, customer driven innovation and society driven innovation are some of the practices, which allow companies to come up with better products. Indirect external benefits accrued to the firms are in the form of higher capital access. Capital access becomes extremely important for future expansion and developmental prospects of a company (GIZ, 2012). The purpose of this paper is to analyze the reasons for which companies have been adopting CSR policies. The purpose is to find the main drivers that guide organizations to implement CSR practices. The concept of CSR has become extremely relevant in the existing literature as adopting CSR practices have been found to improve organizational health. Ever since corporate culture was introduced with the concept of social responsibility, there has been a shift in the term from social responsibility to corporate social responsibility. This relatively new field in the corporate world has fast experienced development of a large number of theories, terminology and approaches. The importance of CSR in present academic literature has motivated the researcher to take up this topic and find reasons for which companies implement CSR. This research uses the case of Toyota to understand the type of practices that has been used by the company to improve the level its sustainability in the long-run. The idea is to analyze whether Toyota have introduced CSR only for the purpose of profitability or any other purpose. Literature Review The relation between introduction of CSR and profitability has been widely debated among researchers. There are three main forms of CSR models that have been discussed by researchers in their works. The first one is the socio-economic framework, the second one is the stakeholder analysis and the final one is the triple-bottom line approach (Broomhill, 2007). There have been numerous researchers that have focused on the link between adaptation of CSR activities and profitability. Researchers have pointed out that the chief link between CSR and profitability is through the channel of cost savings that can be realized by the organization. It has been argued that commitment to CSR reduces the level of risks undertaken by an organization and this in turn improves its social image and improves profitability. Investment in technologies that reduces the level of toxic environmental emission is bound to improve the financial position of the company in the long-run (Carroll, 1979). Some researchers have pointed out that it is almost impossible to separate the idea of sustainability and profitability from one another. Firstly, adaptation of CSR practices reduces economic costs for the organization and secondly, it makes the company environmentally responsible. Most of the researches that have been conducted in this field have focused on cost savings that have accrued to the organization for adapting CSR practices. To show impact of CSR on profitability, researchers that have tried to establish a link between corporate social performance and corporate financial performance (Davis, Lukomnik and Pitt-Watson, 2006). Other researchers have concentrated on the marketing aspect of CSR by suggesting that companies maximize the level of sales by developing brand image through ethical dimension. These researches have not stressed upon the social identity though. Especially under conditions of imperfect competition, it has been found that companies can significantly improve their overall value on account of strict adherence to the CSR strategies, thereby adding to the benefit derived. The study conducted by Rushton (2002) had concluded that the performance of Dow Jones Sustainability Index is better than that of Dow Jones Index by 36% (Rushton, 2002). Another study conducted by EIU has shown that there is a direct positive correlation between profitability and adaptation of CSR practices. There are other researchers who have pointed out that the implementation of CSR can be traced to motives beyond the aspect of profitability and focuses on innovation as the primary objective for which companies implement CSR. Only few researchers have pointed out that organizations have introduced CSR to drive their process of innovation. It is perhaps due to this difference in nature of the approach of scholars that there are multiple definitions of CSR. The analysis of the literature points out nearly five dimensions related to the reason for which CSR companies implement CSR (Frederick, 1987). The five dimensions are environmental dimension focusing specifically on the natural environment; social dimension that focuses on the relationship between business and the broader business community; stakeholder’s dimensions that is related to role played by the stakeholders in organisational growth; and finally, the voluntary dimension that stresses on ethical behaviour not prescribed by law. Hence, it is difficult to foreground one single definition that encompasses all the five dimensions. A basic definition of CSR is that of a process that aims towards improving commitment made by the business houses to improve their ethical practices for facilitating economic development by concentrating on quality of life and the community as a whole. This definition is consistent with most of the ideas presented by researchers in this field (Dahlsrud, 2006). The theoretical perspective of CSR can be categorized into four different groups of theories. The first group of theory assumes that an organization is merely a medium of creating wealth and accomplishing this goal is its only social responsibility. Friedman was the main proponent of instrumental theories and this concept has found resonance in the works of other researchers who had focused on maximizing shareholder’s value, strategies for creating competitive advantage through social investments and natural resource based views (Smith and Higgins, 2000). The second group of theories is political in nature, which deals with the social responsibility of an organization and the political influence it creates on the society. The social duties of firms are also highlighted in this approach. The political theories comprise the Corporate constitutionalism, corporate citizenship and integrative social contract theory. All of these theories had a common point, which is the power of a business in influencing a society on a broader level (Wood and Lodgson, 2002). The third group of theory is integrative theories, which focus on the fact that the relationship between business and society is interdependent and business depends on the society for experiencing continuous growth. This theory stresses on social responsiveness of a business, corporate responsibility towards the public, stakeholder’s management perspective and normative stakeholder theory. The final theory is related to ethical theories, which point at ethical duties of an organization towards the society. Corporate sustainability and universal rights are a part of this theory (Solomon, 1992). The study conducted by researchers have shown that for the industries involved in the provision of consumer based services it can be said that there is a positive correlation between corporate social performance and corporate financial performance and the exact opposite relationship can be viewed in case of industrial firms (Friedman and Miles, 2006). Though studies at an individual level fails to produce any conclusive results yet studies taken on a macro level and involving meta-analysis of data indicates that there is a positive relationship between profitability and CSR. The direction of relationship between the two is even more paradoxical as some researchers suggest that better financial performance causes adopting better CSR and vice-versa (Jenkins, 2005). Methodology This research has used the framework of Hart’s sustainability to analyze the CSR strategies that has been adopted by Toyota to improve its sustainability approach along with the impacts on profitability. Hart’s framework is a Cartesian coordinate framework that focuses on four corporate strategies that can be adopted by companies to improve the level of its profitability and sustainability. The four coordinates can be explained as (Hart, 1997): Pollution Prevention (Cost and Risk Reduction) Product Stewardship (Reputation and Legitimacy) Clean Technology (Repositioning and Innovation) Sustainability Vision (Growth Trajectory) (Hart, 2011) This research is essentially a qualitative work that evaluates the practices adopted by Toyota to manage its stakeholders. The research is based on the case study of Toyota to show the type of sustainable practices that has been adopted by the company which have surely transformed into profitability. A number of researchers have focused on the stakeholder’s approach to highlight the impact of business on society. Stakeholders can be described as people who depend on the organization to fulfil their own goals and the organization in turn depends on them (Donaldson and Dunfee, 1994). Researchers have focused on the types of stakeholders and categorised them into internal and external stakeholders, primary and secondary stakeholders, voluntary or involuntary stakeholders and social or non-social stakeholders. Stakeholder’s approach has been used by organizations to improve its business practices by engaging with various constituencies at various levels. Managers have the responsibility to manage the stakeholders to improve the relationship with the stakeholders and reduce the risk that is posed by them (Henderson, 2001). A number of researches have proposed a number of approaches that has been adopted by companies to interact with its stakeholders to make them aware about the decision making process. Communication strategy like dialogue with the stakeholders has been identified as one of the major approaches that have been adopted by organizations to reach out to its stakeholders. Organizations not only manage relationships with stakeholders but also manage the relationship among the stakeholders. Case Study Toyota is a Japanese multinational automobile manufacturing company that has went on to become one of the leading names in the automobile industry in the contemporary world. The company has widespread geographical presence in both sides of the Atlantic and has its headquarters in Toyota, Aichi. The company began its journey in 1937 and was incorporated in 28th August 1937 and has already been incorporated in London and New York Stock exchanges. It has been estimated that in 2012 the total workforce of the company is 333498 and the total operating income of the company was 320 trillion. Toyota motors have been classified as the 14th largest company in terms of revenue it generates. The company has recently expanded its line of business to leasing, banking and financial services in the market (Toyota, 2014). The CSR practices introduced by Toyota can be grouped into corporate sustainable practices that were added to improve both profitability of the organization and improve the overall level of sustainability. The case of Toyota is also a classic example showing that adopting CSR activities have facilitated organisational growth. A number of researches has indicated that Toyota have acted as a global legislator in terms of framing laws related to CSR. The social and environmental considerations made in the sustainable marketing practices shows that the company has accepted its role as a social entity and is trying to improve brand image (Butje, 2005). The company is playing the dual role of maximizing the shareholders’ value, along with improving that of the society as a whole. This action can be considered as one of the attempts made by the company towards reducing the level of socio-political risks and improving organizational competitiveness. The company had modified its CSR strategies by providing fair chances to the female employees and severing business practices with suppliers that used child labour in factories. These measures were undertaken specifically to improve brand value of the retail giant. These practices can be treated as a direct challenge to the views of Friedman who had stated that a company should solely concentrate on maximizing revenue. The actions of Toyota’s CSR practices can be explained with the help of Hart’s sustainability framework. The stakeholders of Toyota can be classified as customers, communities, partners, employees, suppliers and the government. Pollution Prevention (lowering risk and cost): Product recycling of Toyota done with the help of the Recycling Working Group which is directly under the control of TMME Environmental Committee. The issues of waste control and environmental emission of the company are directly controlled through the process of general meetings held in the European Environmental Meetings. This can be considered as a direct approach taken by the company to clear a transparent image about itself in front of its stakeholders. The situation for the company had deteriorated since according to the view of End of Life Vehicle (ELV) regulations in Europe. This shows that the company has directly engaged with its investors to improve its credentials. This also improves the conditions of employees and communities by minimizing impacts on them (Toyota, 2014). Product Stewardship (increasing legitimacy and reputation): The product stewardship programs introduced by Toyota have greatly added value to the business. Product stewardship programs introduced by Toyota include designing products that can be recycled in an easier manner, using of low toxic production process that has a minimal environmental impact and using of recycled products in packaging and product design. Toyota has involved the government, one of its stakeholder groups to reduce carbon emissions into the environment. This is a joint effort taken by the Federal Government and Toyota to reduce the level of carbon emissions (Toyota Motors, 2011). Clean Technology (improving repositioning and innovation): Toyota claims that it uses one of the most efficient technologies in the business. Toyota uses hybrid technology to make its business practices sustainable. The use of technologies like Fleet of Plug-In Prius vehicles that operates on batteries have greatly reduced the level of negative impacts on the environment. These practices have a positive spillover effect on the community stakeholders as well. The impact on suppliers is also profound as the suppliers are bound to use cleaner technologies in production (Toyota Motors, 2011). Base of the Pyramid (crystallizing growth): This aspect directly relates to the aspect of social responsibility performed by the company to fulfil the responsibility of its corporate citizenship. Company is engaged in donating for education of underprivileged children, providing clean and safe drinking water to the poorest section of the society, supporting activities of NGO’s and afforestation programs. The triumph of Toyota not only relies on the type of practices it has introduced but also the ways in which the company have involved its stakeholders in implementing the sustainable practices of CSR. The company have introduced special eco-driving educational programs in collaboration with the government and local communities. Reforestation programs have also been adopted by the companies in collaboration with its suppliers and government to create a low carbon society. Toyota provides assistance to its suppliers from time to time to improve the overall level of its production techniques by allowing the suppliers to comply with the production process (Toyota Motors, 2011). Though it can be argued that adaptation of sustainable practiced by a company have direct impact on the long-term health of the company yet the existing literature points that the correlation between CSR and CFR is rather weak. There has been no study in the past which directly relates the aspect of profitability of Toyota to the aspect of profit motive. Any interpretation that can be made is dependent on the interpretive skills of the researcher. Based on the existing literature and lack of data by Toyota it can be said that profitability is not negatively related to the aspect of CSR yet there is little evidence to prove that there is a positive relationship between the two. Therefore, improving innovation and sustainable practices are the main reasons that could be attributed to the adaptation of CSR by Toyota. Profitability is secondary benefit that accrues from adaptation of CSR. Discussion Hart’s Sustainability framework is one of the most appropriate framework’s that captures whether an organization has adopted correct set of corporate practices to remain sustainable in the long-run. This framework can provide a comprehensive approach to establish the type of practices that has been adopted by a company to remain sustainable in the long-run. This approach takes into account both the environmental and economical impact of an organization. This framework can act as a great management tool that shows the process in which an organization builds trust among its stakeholders and positively impact them (Buysse and Verbeke, 2003). The four coordinates of Hart’s sustainability framework can act as dimensions in which a company have acted to improve its relationship with stakeholders. One of the biggest advantages of using Hart’s sustainability framework is that it is one of the most comprehensive approaches that focus on the perspective of stakeholder’s management through incorporating the environmental perspective. Researchers have already established the link between the environmental aspects and CSR. Therefore it can be argued that the use of Hart’s sustainability framework to analyse the case study of Toyota is a justified one. The limitation of this framework is that it does not provide a direct link that an organization can obtain by following its mentioned paths. A direct link to the financial performance of the firm could have provided a greater degree of reliability to this framework. In the present case Hart’s sustainability framework has only been successful in pointing the ways in which Toyota have incorporated sustainable practices as an integral part of its CSR. Moreover the dimensions described by Hart are unable to capture the direct financial impact on stakeholder. The researcher had to use his own discretion to obtain the results. CSR in other organizations CSR has become one of the most common practices adopted by multinational firms functioning in almost all domains. Ethical practices promoted in the CSR activities are a very important aspect for organizational success. The rising instance of corporate scandals and bribery are forcing organizations to adopt stricter measures pertaining to CSR. This requirement has made most global multinational enterprises report their legal, financial and risk factors as well as sustainability practices in the annual corporate sustainability report. These reports clearly mention the code of conduct expected from suppliers, the rules for protection and promotion of employees and business practices followed by a company, thereby allowing stakeholders to be fully informed about the policies that are to be adopted and restores their confidence to invest. The theoretical framework for these practices can be interpreted in the corporate social performance approach of CSR, which deals with the management of stakeholders. Most of these practices have two notions embedded in them. One is to improve accountability to the stakeholders and the other is to improve the social accountability. For instance, companies like, British Petroleum and Halliburton, have rendered their corporate practices more transparent in order to reduce cases of corruption. Companies have realized that these practices are necessary for them to maintain market position. Halliburton had faced a number of corporate scandals in the past that have significantly impacted the profits earned and maligned its market reputation. These adverse effects have reduced the stakeholders’ confidence in the company as well. Apple is also a company that has high regards for sustainable practices. Apple had come under the radar of criticism after failing to account for environmental factors and safety of its employees in the sustainability reports. This error was soon rectified. The company had banned the use of hexane in its products and also abolished child labour from multiple locations. Other examples of best practices adopted related to CSR are by Cannon, PepsiCo and Glaxo Smith Kline, to name a few (Torres, et al., 2012). One particular trend witnessed in most companies worldwide operating in various sectors is that they consider the aspect of sustainability, rather than the term CSR. The lack of common definition can be cited as one of the primary reasons, which lead companies to implement the commonly accepted CSR. This notion is supplemented by other perceptions such as, corporate citizenship, sustainable development and corporate reputation. One of the most important reasons for firms to incorporate CSR in their business practices is to reduce costs. The actions of General Mills bear testimony to this fact as the company has been able to reduce its operational costs by $600,000 through installation of energy saving meters (Epstein-Reeves, 2012). The savings gained can be used for the purpose of research and development and future expansion. In the era of globalization, consumers have become more knowledgeable and aware about environmental impacts of the companies. They have become aware of the societal and environmental impact that companies have on the community as a whole. Customers have realized their right to information, which requires companies to make their business practices more transparent. Such requirement implies that adaptation of non-sustainable practices may result in significant losses. The global financial crisis happens to be a major example, where breach of CSR and ethical standards had led to the failure of largest investment banks in the global financial circle. The downfall of Lehman Brothers, Bear Sterns and Goldman Sachhs are examples, where breach in ethical conduct and blindly following profit objectives can lead to disastrous results. Other examples where breach of ethical practices and corruption has led to business failure includes Enron and WorldCom (Smith, 2011). The increasing incidents of corporate scandals have made companies alert so as to prevent themselves from bad reputation arising from these scandals. Corporations have presently realized that their stakeholders are not limited to the internal shareholders and their interest must be considered for gaining competitive advantage over the rivals. Social responsiveness has become one of the most important considerations pursued by businesses in order to maintain market position. This fact is evident in the actions taken by companies. Conclusion Corporate Social Responsibility is an evolving concept in the contemporary times. A number of researchers have presented different views regarding the concept of CSR. Some have focused on the environmental aspects, while others have incorporated the social and economic dimension in their definitions. Certain experts have stressed on the issue of stakeholder’s management. Hence, it is almost impossible to locate one universally accepted definition of CSR. There are four main groups of theories namely political, integrative, instrumental and ethical, which guide CSR activities. The multiple authors and their views create a conflict regarding the proper treatment of CSR. Owing to this complexity, there are a large number of debates regarding the effectiveness of CSR. The basic question that the research question had set to answer is the reasons organizations engage in CSR practices. Based on the analyses that has been conducted it can be concluded that companies does not engage in CSR solely for profit margins. The main reason for incorporating CSR is to improve its environmental and social accountability and gain the trust of its shareholders. It has been observed that if companies engage in CSR activities there is a weak but fair chance that they can improve their profitability in the long-run and this may be one of the important factors that drive organizations to adopt CSR. Social and environmental concerns are common agenda pursued by companies as a part of their long-term objectives. 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