Reasons Why Companies Engage in Corporate Social Responsibility - Assignment Example

Corporate Social Responsibility: Good for Profit Margin Introduction It is a known fact that any business organization has the principle goal of profit maximization. However, corporate social responsibility (CSR) is an equally important aspect of any business. With proper CSR, a company can establish good relationship with its customers, shareholders, suppliers, and other stakeholder parties. In spite of its apparent perception, CSR is not all about social work and providing charitable services to the community. To confine the term only within charitable framework will not do any good for the company since it will only indicate an artificial reflection of CSR. For instance, employees may hold sarcastic approach towards the fact that their organization is externally engaged in social work while management is not doing the needful to improve their working conditions. Therefore, the exact definition of CSR can be explained by the overall approach of an organization. A firm that engages in sharing information with its employees regarding probable downsizing, and then helps the displaced employees with new job opportunities is essentially involved in CSR. Likewise, another firm that emphasizes on customer interest by providing them safe, reliable and innovative products is also engaged in a strategic CSR (Waldman et al., 1). The concept of CSR emerged in the aftermath of World War II, and it gained actual foothold in the business world from 1960 onwards (Carroll & Shabana, 85). CSR essentially means that a company performs its certain activities for a larger purpose of social, economic and environmental benefits over its economic and legal goals. Traditionally a business is known for its profit making strategies and its product or service innovations. In this modern age, CRS activities add brand value to an organization. In fact, many organizations promote their CSR activities so as to gain the confidence of more number of people across the globe. The essence of CSR lies in thinking above profit maximization objectives, and striving towards the goal of performing in a viable social and environmental setup. In truth, a company does not legally have any social responsibilities that are not integral part of its business objectives. The need is to put in best efforts to minimize adverse impact on society and environment; nevertheless the trick lies in balancing such efforts with the core financial objectives. This paper has attempted to critically discuss the following statement: “Companies engage in CSR because, for a number of reasons, they think it will be good for their profit margins”. Reasons why companies engage in CSR With companies becoming more global oriented there is constant pressure for organizations to design CSRs. The pressure comes from everyone from stakeholders to the employees of a company. Each interest group has its own purpose and for such conflicting goals, there is no definite definition of CSR. McWilliams and Siegel (2001, p.117) define CSR as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law”. However, this definition lacks the indication that CSR goes beyond the law, for instance, a company that curbs gender and class discrimination among employees is merely obeying the law rather than doing any social good. CSR is essentially designed according to many factors attached to the company like the size, consumers’ earning capacity, research and development, advertising, conditions of labour market etc. The authors have established that a cost-benefit analysis can decide the CSR activities and that CSR has neutral relationship with a company’s financial performance. Although managers of a firm try to satisfy the CSR interests of stakeholders, their priority is to maintain high performance level in terms of financial activities. The general public perspective is that companies with CSR provide quality goods and services. Therefore, it is becoming common that CSR is integrated into marketing strategies like promoting their support towards certain social issues. This makes consumers feel that by paying for products they are contributing towards the company’s expenditure on social matters. Therefore, companies use CSR for creating brand image which implies quality and reliability in the consumers’ perspective. Another factor that determines CSR is spending capacity of consumers. In case of normal goods, demand increases with increase in income of consumers. Accordingly, CSR is attached to normal goods since higher spending capacity of consumers leads to higher demand of CSR. Another factor determining CSR is the price of substitute goods in the market. In case of huge difference in price, lower price of substitute goods will induce consumers to shift their focus from CSR attributed goods (McWilliams & Siegel, 121). Thus, it is concluded here that firms determine level of CSR after assessing various factors in order to maximize firm performance since the latter always remains the principle goal. Necessity or choice Today, the focus is on considering social behavior as part of economic agenda of business. Although CSRs are generally accepted as legal regulations and social expectations, most of these responsibilities are debated to be voluntary activities of companies. For instance, Vogel (2006, p.2) describes CSR in terms of “practices that improve the workplace and benefit society in ways that go above and beyond what companies are legally required to do”. Over the past decade, the perspective of CSR as activities conducted solely for the purpose of increasing revenue has become controversial. Today, it seems not politically correct that social responsibilities are conducted by companies merely to enhance their economic performance. Companies now desire favorable responses from the society for which CSR activities have become more voluntary than legal requirements. The second point that favors the voluntary aspect of CSR activities is the difference of CSR in different countries. This difference fails to support the theory that CSR has only economic goals (Brammer et al., 5). Unlike traditional beliefs that CSR is secondary issue in companies, today CSR is becoming more and more integral in the business activities of a company. From a 2007 global survey of corporate managers it was found that almost 55.2 percent of the respondents regard CSR as important part of an organization and is becoming high priority for many companies (Illia et al., 16). With the growing involvement of company in CSR activities, Illia et al. (2013, p.16) argue that communication to stakeholders should become equally important. However the major concern regarding communication is public general disbelief on big companies leading to stakeholders believing company’s effort to communicate CSR strategies to the public as greenwashing. Friend (2009, p.78) defines greenwashing as the “act of misleading consumers regarding the environmental practices of a company or its environmental benefits of a product or service – even with the best of intentions”. It is essentially a false creation of brand image in order to garner consumer interests, and its prevalence can make stakeholders take a cynical view of even the genuine CSR activities of a company. Illia et al. argue that the risks attached with CRS communication are mostly exaggerated. Most managers fear the media since they think most media forms take negative view of a company’s CSR which is not true since overall media approach is positive towards CSR. Moreover, Illia et al. says that shying away from media will keep the public unaware of the philanthropic aspects of a company. Essentially, a company’s efforts to maintain positive relationship with the society raise moral problems regarding the motives of the company. The general problem lies in moral justification of the company’s CSR strategies. In most cases, CSR is more focused on environmental protection than broader benefit of the society. L Etang (1994) argues that this implies companies implement social responsibility programs in response to external pressures from environmentalist lobbyists. L Etang (p.121) suggests that in order to act out of a sense of social obligation, companies “should work towards setting up ethical decision making procedures to determine the nature of their obligations and responsibilities as well as those which evaluate the effects of their activities on the beneficiaries of their donations so that they can be sure that they achieve the good that they claim”. Various methodologies Carroll (1979) has defined four components of CSR. Firstly, there are economic responsibilities which mean production of quality goods at low costs to serve the demands of the consumers. Secondly, there are legal responsibilities which mean a company should perform its activities within the legal framework set by the government. Then there are ethical responsibilities which are essentially defined by law but are unwritten codes and norms that are expectations of the society from a company. Finally, there are discretionary responsibilities which are voluntary choice of companies like contribution to charitable organizations or supporting anti-drug policies or providing day care centers for working mothers. Discretionary responsibilities are not defined by law nor are companies considered unethical if not involved in such activities, and therefore these are nebulous and ambiguously stated (Carroll, 500). With rapid growth of globalization, and increased participation of both developed and developing countries in international trade, CSR is reflected in “increased business complexity and new demands for enhanced transparency and corporate citizenship” (Jamali & Mirshak, 243). CSR activities can be of various kinds. They can be charitable like donations to NGOs and other charitable organizations. Companies can also be long term sponsors of social events like literacy programs or environmental protection policies. Moreover, a company’s social activities may be strategic like investments in events that are part of the company’s business strategy. A company can also invest in a non-profit venture is order to get media attention and positive response from the public (Schwartz, 21). Generic strategies Since CSR is an integral part of a company’s performance profile, therefore it is important to assess the relationship between its social and ethical objectives with its financial performance. Carroll (1979) has integrated CSR, corporate social responsiveness and social issues to provide a valuable framework for overall analysis of business and society. From micro level perspective CSR defines relationship of the company with its environment and ignores the company’s responsiveness to the broader society. From macro level perspective, corporate social performance model “describes the totality of a firm’s efforts to meet changing societal conditions” (Wartick & Cochran, 758). McGuire et al. (1988) have discussed the various arguments both for and against a firm’s social responsibility and financial performance. One view is that companies spend substantial amount of money on social and ethical issues that put a pressure on the profit margin which means they are at economical disadvantages compared to those companies which are less socially responsible. Contrary to this view is that companies with social and ethical objectives are at an advantage since they boost the morale of their employees thereby increasing productivity and garner the trust of customers thereby increasing sales revenue. According to this view, banks and other financial institutions consider social responsibility as a positive factor which induces them to invest in these companies thereby increasing sources of capital. Moreover, strong CSR strategies prove the skills of the management which increases the trust level of stakeholders which means investment in CSR leads to strong reputation of the company. A company that lacks CSR strategies can lose the trust of investors since they may expect lower revenue due to lack of management skills. Moreover, investors may consider such companies as risky investment venture as firm’s costs may increase due to low social responsibilities like government many levy extra taxes or law suits for violation ethical norms which may put the very existence of the firm in danger. Finally, according to modern corporate stakeholder theory, a firm’s value is dependent both on explicit claims and implicit claims. A company which is less socially responsible can make stakeholders doubtful of the company’s ability to meet implicit claims like product quality. For instance, a company which fails to meet environment protection standards may be subject to more stringent measures by the government to act in a socially responsible manner. Therefore, companies with CSR have low-cost implicit claims resulting in higher financial performance than other firms with less social responsibilities (McGuire et al., 854-856). However Brammer et al. (2012, p.5) has stated that performing CSR activities solely for their effect on financial performances is not viable. Many successful corporations in Japan and Western Europe have engaged in CSR activities for the purpose of fulfilling their social and ethical objectives even without considering the financial benefits (or lack of them) of such activities. Hoteliers can contribute towards environmental protection without incurring extra cost by selecting proper sites and designing the structure of hotels in environment friendly manner (Punitha & Rasdi, 86). Key associated frameworks A major problem regarding CSR is that it is not defined by any specific concepts. Clarkson (1995) has presented a framework of CSR within the realms of corporate behavior. It has been derived from a 10 year research program that companies perform social responsibilities from the perspective of stakeholders than the society at large. For this, he has differentiated social issues and stakeholder issues. It has been seen that a company under normal circumstances does not perform its activities with the goal of fulfilling CSRs or tackling ethical issues. Public affair departments that are established are not because of looking after social and ethical affairs but to maintain more positive relationship with stakeholders ranging from employees to media and government. The core problem with defining CSR is dealing with questions like to whom a company is responsible and by what standards. Such questions are unavoidable and so very naturally business managers “resist attempts to make them responsible for social issues that they do not perceive as corporate or business issues” (Clarkson, 98). For business managers, responsibilities lie in supervising production, financing, human resources, marketing and other business related activities. They are also responsible to look after the interests of shareholders, employees and other concerned institutes. To this extent, managers can comprehend their accountability for their decision making processes. In the framework of the above mentioned accountabilities, managers can also understand stakeholder issues that can also be identified as social issues. For instance, workplace safety for employees and curbing gender and class discrimination among employees are issues that maintain goodwill between company and employee stakeholder groups. However, these same issues are also governed by legislation and regulation as a result of which company’s relationship is improved with government (Clarkson, 99). In case of broader social issues, a business enterprise cannot be made accountable for all kinds of social issues. Therefore, before holding a company responsible for their actions, it is necessary to define in clear terms what issues are social issues for a company. The management body of a company has the right to choose which obligations and responsibilities they should acknowledge, recognize and pursue. Although some social issues are legally defined, there are other social issues that are not legally bound. For instance, workplace safety or product safety may have legal regulations. However, issues like day care centers for working mothers or employee training programs are not legal matters but matters of choice by the management. From the perspective of a financial analyst, these may serve broader social issues, however these policies generally are implemented for work satisfaction in employees (Clarkson, 104). The primary interest of manager lies in results. Matten and Moon (2008) have addressed the differences of corporate social securities between countries like America and Europe and the reasons why the differences exist. The first most prominent difference lies in the number companies adopting CSR activities. While the US companies expressly claim their involvement in contributions and other social responsibilities in their websites, in Europe the number of companies doing the same is much lesser. According to a 2002 survey, while 53 percent of US companies claimed their CSR activities in their websites, only 29 percent of French and 25 percent of Dutch companies put up their CSR profiles in their websites (Matten & Moon, 404). The authors have explained that “historically grown institutional frameworks that shape national business systems” (Matten & Moon, 407) are responsible for differences in CSR strategies in different countries. These institutional frameworks have four distinct features which are responsible for CSR differences. The first one is the political systems which differ to a great extent in America and Europe. European governments are more involved in economic and social activities. They have nationalized insurance systems for health, pensions etc. and have also made it compulsory for companies to assume responsibilities in these areas. On the other hand, American government is less involved in economic activities resulting in companies being able to maintain discretion. The second feature of institutional frameworks is the financial systems. In America, the stock market is the principle source of capital for companies, and therefore there arises the need of greater transparency and accountability to the investors. In Europe, companies garner capital from scattered sources like broad network of large investors and financial institutions of which banks are the most prominent source of capital. Within this network of investors, the struggle lies in maintaining permanency of power and influence. In the European corporate world, the stakeholders can hold equal or even stronger position than shareholders. The third feature of institutional frameworks is education and labour systems. In the United States and Europe, there is a difference in the creation of human labor at the post secondary school level. In Europe there are external training facilities and active labor market policies, while in America the companies have integral strategies to create labor. Finally, there are cultural differences in Europe and America. In America, business people believe that any surplus revenues should be utilized for the greater benefit of the society. In contrast, in Europe cultural reliance is on representative organizations like political parties, employers’ associations, churches etc (Matten & Moon, 408). Garriga and Mele (2004, p.51) have explored the four theories of CSR and their approaches – instrumental theory, political theory, integrative theory and ethical theory. Under instrumental theory, CSR activities are considered as economic activities conducted for the purpose of creating wealth. This theory considers companies only as instruments for making profits and any social activities are economy based. Here, CSR activities serve the purpose of satisfying shareholders, achieving competitive advantages and are related to cause-related marketing. To satisfy shareholders, social responsibilities need to be conducted so that their interests are maximized, for instance, investments for community welfare can attract desirable employees and reduce pilferage and sabotage. By investing in social commitments, a company can garner greater social value in the context of competitive advantage. The goal of cause-related marketing is to enhance brand value by becoming engaged in social activities. Under the second theory which is the political theory, the social power of companies is emphasized. The companies perform social duties as its responsibility in the political arena. Then there is the integrative theory, where companies consider social duties as part of their agenda since their success depends on social approval. Finally, there is the ethical theory under which companies feel that social duties are part of their ethical agenda. Under this theory, companies perform their social duties and responsibilities more because of ethical concerns than any other reason (Garriga & Mele, 53-61). CSR examples IBM has this “Smarter Cities” project whose goal is to provide consultancy services to cities for the purpose of solving any problems that the cities are facing. For instance, in 2011 a three week consultancy was held in Glasgow with respect to fuel poverty. As conclusion, 60 recommendations were given including that people should get best tariff depending on circumstances (Musafer). CSR policies can become effective if a company can efficiently balance development and environment protection. This issue is even more prominent in the hotel industry since it essentially caters common people and as such is more directly accountable to the public than any other industry. Punitha and Rasdi (2013) have explored CSR mechanism in the Malaysian hotel industry. Since hotel industry is constantly under pressure to maintain various forms of social responsibilities, therefore the Malaysian government has launched several tax benefit schemes to encourage hotels to adopt green technology for sustainability. With the growing concern for environmental protection, the concept of green marketing is becoming even more in demand from the corporate world especially the hotel industry. The purpose is to achieve sustainability which is “depicted as a development that includes formulating a social and economic system which must be incorporated within environmental concerns” (Punitha & Rasdi, 79). Hotel industry is one sector which has immense effect on environment since hotels consume huge amounts of water and energy in the form of electricity. For the Malaysian government, hotel industry is a huge source of revenue since the country is considered as the ninth most traveled destination in the world. The myriad environment policies implemented by the Malaysian government although are complex nevertheless encourage hoteliers to abide by the laws and regulations thus ensuring sustainability in the long run. Since governments also have social responsibilities towards the citizens, therefore adopting more government policies will ensure responsible business. In order to manage and conserve the nation’s energy, power and water utilities, the focus is on Malaysian hotel industry’s “power generation, energy supply, energy utilization and management programmes” (Punitha & Rasdi, 82). Waste disposal is an important activity in hotel industry, and hoteliers spend bulk amounts of money on energy and water disposals. In this case, by adopting sustainable practices, consumption level of water and energy can be reduced to a large extent. This will reduce pressure on annual costs incurred by hoteliers, and will also serve the purpose of environmental protection. As for example, Grand Hyatt Singapore initiated “Green Energy Management Project” with the purpose of reducing annual consumption of energy. Through this project, the hotel has been successful in lowering annual energy consumption by 8.0 million kWh, and this in turn has caused “annual savings of more than $1 million on utility bills” (Punitha & Rasdi, 85). Conclusion In recent years, social responsibility acts are becoming more necessity for companies than legal obligations. CSR can essentially be defined as “the ways in which a business seeks to align its values and behavior with those of its various stakeholders” (Mallin, 1). The need is to balance the interests of all groups so that not any groups’ interests are overlooked or undermined. While some companies struggle to maintain this balance, there are others who are successful in this respect. Investors today take special interest in companies that are socially responsible as this means such companies have a positive image in the public perspective. However, prevalence of greenwashing raises cynicism in the eyes of stakeholders and the public whenever a corporate body genuinely participates in social responsible acts. If conducted honestly and fairly, then CSR can have various positive impacts like creation of brand image, increased customer satisfaction and attracting desirable employees. Finally, the growing importance of CSR as part of business objectives is reflected in the fact that increasing number of companies are including their CSR profiles in their annual reports (Hopkins, 5). 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