Strategic implications of Corporate Social Responsibilities - Essay Example

 Strategic implications of Corporate Social Responsibilities Introduction The United Nations Industrial Development Organisation (UNIDO) defines corporate social responsibility (CSR) as a management concept whereby organisations incorporate environmental and social components in their business activities and stakeholder interactions. The true manifestation of an organisation to practice CSR activities can take several forms, such as, urban development, women empowerment, education, environment management, social equity, gender balance, anti-corruption measures, stakeholder engagement, responsibility sourcing, work life balance and improvement in health sector (UNIDO, 2014). According to Forbes (2012), involvement in CSR results in creative development and cost reduction within the organisation. An organisation, that is focusing upon sustainability will innovate and undertake methods to achieve the purpose. Such steps often result in creation of a new product that is eco-friendly and cost efficient. Forbes (2012) highlighted at least six reasons for organisations to incorporate CSR in their business activities: innovation, cost advantage, brand differentiation, long term strategic importance, customer engagement and employee engagement. Innovation, in context of CSR, can result in identification of multiple of sustainable business opportunities emerging ahead of an organisation. For instance, Unilever, as a part of its CSR towards environment, was able to develop a new hair conditioner that unlike other substitutes required less water. Once sustainability is incorporated in activities, it is obvious to witness effective utilisation of resources, efficient consumption of energy and other non-renewable resources and increased usage of eco-friendly materials. It has been observed so far that brand differentiation has become one of the primary reasons for organisations to embrace CSR. Prominent companies such as Coca-Cola and Pepsi have incorporated brand differentiation in their products such as water bottles that are recyclable in nature, to enhance their brand image as sustainable organisations. In addition to brand differentiation, CSR is considered important from long term growth perspective. CSR activities such as environmental efforts also result in customer and employee engagement as it delivers a message to consumers that the company is engaged in societal development. CSR improves brand image and reputation of an organisation (Forbes, 2012). CSR not only improve brand value of an organisation but also its economic position. Keeping in view the changing environment, a number of authors and top executives support the fact that CSR, otherwise known as corporate citizenship does contribute in profit making for an organisation. The report, ‘Corporate citizenship: profiting from a sustainable business’ by Economist Intelligence Unit indicates that it is a strategic decision that result in identification of new business opportunities that can be capitalised with minimum cost investment. Corporate citizenship is important for earning profit because generally an organisation undertakes major risks to achieve profit, however, with sustainable approach the same organisation can earn the expected return while encountering minimum risks (Economist Intelligence Unit, 2008). Keeping in view the importance of corporate citizenship, the paper aims at analysing and understanding the critical role of CSR in building profit and its overall strategic implications on the performance of an organisation. The paper will critically assess and measure the impact of CSR on financial performance of an organisation using various frameworks. In the following sections, literary work of various authors in context of CSR has been discussed along with its emergence and measures undertaken so far to integrate CSR with profit creation. In this paper, various frameworks will be discussed for assessment purpose and their relevance will be highlighted in context of an organisation that is actively involved in CSR activities. In the last section, validity of the framework will be critically analysed while mentioning its advantages and disadvantages. Alongside, suggestions will be recommended so that improvements can be incorporated. Theoretical perspective of CSR A number of academic discussions have taken place for decades on the need of undertaking activities that can be regarded as social responsibilities of an organisation. Cannon identified that the primary goal of any business is to generate goods and services that serve the needs of a society. However, he also mentioned that society and business are inter-dependent and a balance is necessary in this interactive environment which can be achieved through an educated workforce (Moir, 2001). Wood (1991) stated that the aim of corporate social responsibility is to build and strengthen an interwoven relationship between business and society. Between late 1970s and 1980s, Davis (1973) contributed significantly towards definition of CSR. He defined that CSR is decisions and actions of an organisation that are taken for a reason which is partially beyond direct interests (economic or technical) of the firm. He argued that scope of CSR is beyond specific limits from managerial perspective. Davis (1973) asserted that business decisions that exhibit social responsibilities can be justified with a complex reasoning that in long run, it generates economic profit to the firm, thereby paying back for the firm’s CSR outlook. During this period, CSR was more familiar as social responsibility. Apart from Davis, the other major contributors in this regard were Frederick and McGuire. Frederick (1994) defined social responsibilities as responsibilities of a business to serve expectations of consumers through better utilisation of economic and operational systems. In other words, a firm’s means of production required to be employed in such a manner that it enhances the overall socio-economic welfare. Alongside, McGuire (1963) added another definition which is considered more precise than that of Frederick. The definition states that an organisation not only has economic and legal obligations but certain social responsibilities that are extended beyond the formal obligations (McGuire, Sundgren and Schneeweis, 1988). In addition to these definitions, there are some more explanations by certain contemporary authors as given below: According to Business for Social Responsibility (BSR), CSR is a method of gaining commercial success while implementing and honouring ethical values with respect to communities and environmental factors (cited in Carroll, 1999). McWilliams and Siegel (2000; 2001) identified CSR as semi-legal activity that serves social good beyond the basic interests of a firm. It is basically viewed as a comprehensive set of programs, practices and policies that is integrated in business activities, operations and decision making for enhancing social well-being as well as value of the organisation. Johnson (1971) particularly hinted that a socially responsible organisation ensure that its managerial structure balances multiple interests of organisation as well as that of social stakeholders. He suggested that along with earning major share of profit for stakeholders, firm should take in consideration overall interest of employees, suppliers, local communities, consumers and nation as a whole. In a second view, he proposed that organisations carry out social activities to enhance their profit. Thus, CSR can be considered as a long-run profit maximisation technique. Johnson revised and presented a third view where he related social responsibility with utility maximisation. He asserted that the prime motive of any firm is to maximise utilities through multiple goals that indirectly indicate towards profit maximisation. Therefore, in socially responsible organisations managers are not only interested in maximising their self-interest but also that of other members and fellow citizens. Johnson further proposed the lexicographic view of social responsibility. According to it, organisations that are strongly motivated by profit exhibit greater degree of social responsibility (Johnson, 1971). Friedman was one of the few authors in 1970s who straightforwardly presented that primary social responsibility of a firm is to make as much as profit for its stakeholders as possible. In a broader sense, Friedman suggested that the only responsibility of a business is to use its resources and involve in activities that are designed to increase firm’s profit without violating certain rules such as competing in an open and free environment without engaging in fraud or deception. In a generalised sense, the statement of Friedman may occur as uncivil and potentially cruel in nature, but when evaluated from an economist’s point of view, it can be observed that there lies no contradiction between a firm pursuing civil duties and profit (Friedman, 2009; Campbell, 2007). Friedman (2009) argued that if a social responsibility exists beyond profit maximisation for an organisation, it is rarely possible for a firm to recognise the same and take measures in that context. The author supported viewpoints of Levitt that ambiguously described social responsibilities may result in more harm compared to social good. Integration of CSR in business that emerged with financial capitalists was initially criticised by Ghent around 1902 suggesting that it was being used as a preventive measure towards public criticism and regulations rather than a measure to resolve social issues (Lee, 2008). Levitt (1958) argued that CSR is more like a fashion accessory to self-interested businessmen who are more concerned about achieving personal objectives than the society or the business that they are suppose to manage. Levitt presented favourable argument that CSR can be a profitable strategy despite highlighting personal agendas and motives of executives behind CSR. He added that no strategy is pursued by businessmen unless it is profitable; therefore, the most ethical measure to practice CSR is to pursue the same in a profitable manner. The prime aspects of CSR or Corporate Citizenship Carroll in his paper ‘The pyramid of corporate social responsibility’ suggested that to represent a comprehensive of picture of corporate social responsibility, the framework should embrace the entire range of responsibilities associated with a business. He represented these responsibilities as a pyramid that comprises economic, legal, ethical and philanthropic aspects. He proposed that economic responsibilities are of highest importance as in absence of the same, the other responsibilities hold little significance. In a way, Carroll also supported that profit motives exist in relation to CSR activities (Carroll, 1991). In another paper, Carroll identified four major sides of the corporate citizenship. Even in this paper, he supported profitability from CSR perspective. Under the economic aspect, he proposed ‘good corporate citizens are profitable’. The author explained that the foremost requisite of any good citizen is that individual’s ability to afford and fulfil various personal expenses. When extended to organisational perspective, it can be translated that an organisation cannot fulfil its other responsibilities without meeting its primary requirement, which is to earn profit. As a part of corporate citizenship, it is expected from organisation that they will earn sufficient income to meet their liabilities and maximise the interest of their stakeholders in an ethical manner. Carroll in his paper highlighted and favoured the definition of CSR as presented by Friedman. He explained that when every part of Friedman’s definition is clearly understood, it can be pointed out that Friedman did indicated responsibilities beyond mere profit making as he mentioned about maintaining social regulations (Carroll, 1998). Different motives associated with CSR According to Bergo (cited in Smith and Nystad, 2006), the main motive for every organisation is to earn economic profit. Profit is the main source of survival for organisations and unless there is profitable returns, businessmen will not continue the particular venture. The approach towards profit differs from organisation to organisation as different organisations have different goals. In addition, in long term profit planning, stakeholders play an invariable role. To have a better understanding of the role of CSR in profit, proper classification of the activities is important. CSR activities can be classified under the purview of economics, ethics, politics and social integration. Various researchers have classified CSR as economic and ethical based on motive and these two motives are mutually exclusive in nature. In other words, CSR can either have economic outlook with profit motive or it can have ethical outlook with a motive for social betterment. Under the purview of ethical CSR, businesses are highly involved in creating value for societal and environmental development. The organisations present an ethical argument in this regard that they are contributing back to the society where they exist. Altruism and moral reflection are some of the principles that influence ethical CSR activities. According to Kant, ethical approach to CSR is highly influence by various social obligations, and is bound by expectation and duty (Chih, Shen and Kang, 2008). Economic CSR focuses on organisational activities from economic perspective. It is initiated with organisations performing all their duties towards shareholders. An organisation will not be considered responsible if it fails to make sufficient contribution towards economic profit. Economic CSR is considered as a strategic tool which is implemented by firms to achieve increased profit and maximisation of shareholders’ wealth. The activities of a company are considered equivalent to assets which are capitalised to earn economic development (Smith and Nystad, 2006). In economic CSR, every activity of the organisation is consistent with creation of wealth and the viewpoint proposes that under economic CSR an organisation cannot take voluntary action which may prove costly in future. The aim of economic perspective of CSR is to maximise value of shareholders without any kind of fraud and deception. Thus, it maintains a balance between social demand and profit maximisation (Smith and Nystad, 2006). Henderson (2001) presented argument that economic profit result in competitive advantage as integration of CSR for higher profit result in organisation identifying new avenues for opportunities. In the above discussion, it was observed that CSR has been polarized by most authors in economic and ethical approach. Such a tendency results in distraction from the area where both ethical and economical aspect of CSR converge and from where a comprehensive and potential solution can be developed. Bansal (2005) argued that the space where these two polarised aspects overlap is not a compromising situation but a scenario that will give rise to decisions that are socially and economically feasible. Metrics for evaluating CSR Evaluation of CSR is very important so as to determine the exact nature of the purpose it serves within an organisation. Different authors have so far implemented different measures of evaluating CSR using a variety of frameworks. However, when compared on same platform, it was observed that almost all of these frameworks are based on three aspects or metrics: financial, operational and strategic. The primary question, which is also the purpose of evaluating CSR, is whether it creates value. According to a report by Network for business sustainability (2011), after multiple researches it was observed that about 63% of management studies support positive relationship between sustainability and financial performance while 22% found neutral or mixed relationship and 15% studies exhibited negative relationship. The report identified three key metrics that establish relationship between CSR activities and financial performance. The report suggests that it is important to explain CSR activities in terms of their ultimate impact on the organisation so that the financial decision makers can compare and evaluate the efficiency of CSR related investments and other organisational priorities. Defining CSR in financial terms present a common stage for appraising investment decisions and access the returns. For instance, unless an organisation calculates the cost it is saving through energy conservation program, it will not be able to understand its importance. Similar to earlier researchers, the Report by Network for business sustainability (NBS) also relies upon the three metrics that has already been mentioned. However, the NBS report presents a detailed overview of these metrics with respect to CSR: Financial metrics: the financial metrics comprise return on asset, return on equity, return on sales and share performance. It represents the efficiency of a firm to utilise its resources for creating value on internal from while at external front, it compares firm’s past and present performance to determine the effectiveness of sustainability investment for improving shareholders’ returns. The financial metrics reflect benefits of CSR initiatives on overall performance of the firm. Operational metrics: the operational metrics measure impact of a particular CSR initiative on firm’s performance. For instance, CSR activities such as waste management and energy consumption can be measured in terms of waste disposal fee, energy input cost and revenue earned from sale of by-products. Another example can be if a firm undertake online awareness campaign regarding energy saving, the effectiveness of the campaign can be easily measured through reduced electricity bill. Operational metrics are easily measured as they can be converted to financial value. Strategic metrics: Strategic metrics are considered to be most complicated measure of CSR as these are non-financial measures such as job satisfaction level, innovative and risk culture development, brand loyalty and enhancing brand reputation. In the internal front, strategic metrics focuses on employees and internal environment of the organisation; while at the external front, it focuses on general consumers, citizens and external stakeholders. These metrics are most difficult to measure but have highest strategic value as business initiatives (Network for Business Sustainability, 2011). Implementation of CSR framework from organisational perspectives There are several CSR frameworks that are presently being adopted and implemented by various multinational organisations, such as, United Nations Global Compact (UNGC), OECD guidelines and Global Reporting initiatives (GRI). Each of these standards has its respective merits. For instance, the GRI framework serves as guidelines for reporting a firm’s economic, social and environmental performance in terms of human rights, labour practices, society and product responsibility and environmental impacts (CBSR, 2009). Tata Consultancy Services (TCS) is one of the largest software companies in India that has global presence and has been awarded with Asian CSR award for its various corporate citizenship initiatives. The organisation follow GRI framework in its reporting and has made major contribution towards literacy and health programs in the country (Tata Consultancy Services, 2013). Apart from TCS, there are other major Asian companies in various sectors that have adopted Triple Bottom Line approach as a part of their CSR initiative. These companies have implemented better process control, optimised production activities, recycle and waste management and other initiatives, which has resulted in cost saving, better productivity, reduced environmental foot print and improved work condition (UNIDO, 2003; Sharma and Kiran, 2012). Coca-Cola multinational is presently one of the largest bottlers by volume and operating in several countries. The company ensures that its activities comply with environmental constraints; for instance, in Coca-Cola products are created while keeping a check on water and energy consumption and solid wastes produced by the company. For maintaining quality standards, Coca-Cola has obtained ISO 9000 certification, ISO 14001 for environmental activities, ISO 22000 for food quality and OHSAS 18001 for quality of occupational life (Coca-Cola, 2009). In context of CSR, South Korean company LG Electronics has also undertaken various measures. The company has established four major strategic directions for achieving its responsibilities as a corporate citizen. These directions include CSR change management, CSR risk management, stakeholder engagement and strategic social contribution. LG ensures that it maintain environmental protection initiatives throughout manufacturing process of its all product life cycles. Furthermore, the company has adopted eco-friendly practices in procurement, production and waste disposal activities. Every year CSR risk assessment is undertaken by the company to evaluate its own performance in ethical and economic CSR. LG follows a win-win growth approach where its growth policies are framed while abiding by the global ethical code of conduct (LG Electronics, 2014). It can be suggested from these organisational examples that CSR initiatives are being implemented by organisations in retail, food and beverage and every other sector of business industry. A very important fact that was noticed in these examples was that the organisations are not implementing CSR as a plain selfless activity but through CSR they are actually improving their performance and brand reputation. These companies have realised that consumers are becoming highly aware of global footprint and exhibiting preference towards green products. Furthermore, CSR not only has positive impact on society and environment but also on cost incurred by organisations. Overall, it can be suggested that even if not directly, CSR does contribute to profit building for an organisation. Conclusion With increasing awareness, the expectations from business organisations in terms of their core activities and its impact on society have heightened considerably in recent years. As a result, contribution or CSR investments by enterprises have also increased significantly. In this context, it is noteworthy that the primary purpose of any business is earning profit. Many authors have questioned whether corporate citizenship is profit driven, that is, if organisations undertake CSR activities only because it has an impact on profit margin. Different authors exhibited different opinion in this regard. Theories that were proposed prior 1970s by prominent authors, namely, McWilliams, Siegel, McGuire and Frederick, mostly explained CSR or social responsibility as an act of selflessness and necessity on the part of organisation to perform activities for the society it is operating within. However, these theories were strongly opposed by Levitt and Friedman. Levitt proposed that all businessmen are driven by profit and personal achievement and will contribute little towards societal development unless they achieve something in return. Thus, CSR framework should be designed in such a manner that it result in profit creation in an ethical manner. Friedman supported this proposition and suggested that in free environment a firm can perform its social responsibilities in best possible manner by earning profit in an ethical manner. In addition, certain authors such as Carroll, Bergo and Bansal, CSR is mainly defined from ethical and economic perspectives and an organisation can achieve best potential solution regarding CSR issues from the overlapping area of these two polarised definitions. Alongside the theoretical perspective, the paper highlights various practical frameworks of CSR that has been adopted by various global organisations, such as, TCS, Coca-Cola and LG and impact of these frameworks on overall organisational performance of these companies. It was observed that the impact of CSR on the mentioned companies complies with the theoretical perspective presented by Levitt and Friedman and other authors, that is, these organisations implement economic CSR along with the ethical component so as to serve personal and societal interests in a comprehensive manner. Reference list Bansal, P., 2005. Building sustainable value through fiscal and social responsibility. Ivey Business Journal, 8, pp. 11-25. 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