Reasons Why Companies Use CSR - Case Study Example

Companies Engage in CSR Because They Think It Will Be Good for Profit Margin Total Number of Words: 4,089 Executive Summary The case of BP Company in United Kingdom clearly shows that large-scale companies can make use of CSR strategies as a way to counteract the adverse business consequences of having negative publicity. In the process of winning consumers’ trust through CSR initiatives, businesses such as BP Company were able to maintain a constantly increasing profit. In general, CSR strategies can be implemented either as adaptation or a defense. Assuming that BP Company chose to take advantage of its CSR strategies, the company could have saved a lot of unnecessary expenses which could have subsequently increased the company’s profit. Table of Contents Executive Summary ……………………………………………………………………….. 2 Table of Contents ………………………………………………………………………….. 3 1. Introduction ………………………………………………………………………… 4 2 Reasons Why Companies Use CSR ........................................................................... 6 3 Stakeholders Analysis ................................................................................................ 13 4 Implications to CSR Theories .................................................................................... 15 5 Implications to Practice ............................................................................................. 17 6 Conclusion and Recommendations ………………………………………………… 17 References ………………………………………………………………………………… 19 – 25 Chapter 1 – Introduction Corporate Social Responsibility (CSR) is defined as the obligations of business organisations towards the entire community or society (Horrigan, 2010, p. 34). Also known as ‘corporate accountability and sustainability’, the concept of CSR pertains to a type of business activity that is focused on creating a sustainable business development which aims to reinforce the need to be competitive by protecting the social welfare of the community and the environment (Habisch et al., 2005, p. vii). The scope of CSR strategies include not only the need to protect the interests or personal welfare of all stakeholders but also the need to protect the environment, improve the lives of each employee, respect the rights of each employee and the need to observe business ethics when managing the business (Mullerat, 2010, pp. 12–18; Horrigan, 2010, p. 34; Habisch et al., 2005, p. vii). With this in mind, CSR can be considered as an important and useful business-related strategy that can effectively reduce the unfavourable social, environmental and economic consequences on the business. The history of CSR started when Bowen and Johnson (1953) published a book entitled Social Responsibilities of the Businessman in the United States. Back then, Bowen contested businesspeople play a significant role in creating societal values more than their economic contribution to the society (Rungeler, 2009, p. 4). In the 1960s, Rungeler (2009, p. 4) mentioned that the concept of CSR was included in the study of business management. Specifically Eells and Walton (1961) created a new CSR concept that strongly suggested the need to apply business ethics when establishing a close relationship between the society and business institutions. It was in 1963 when McGuire linked the concept of CSR with the business organisations’ legal and economic obligations (McGuire, 1963). Among the first few companies that implemented the concept of CSR initiatives back in 1951 are the Board of Standard Oil, now known as Exxon (Banerjee, 2007, p. 5). Eventually, the need to implement CSR initiatives was given more importance in response to the case of World.com and Enron (Forte, 2013). Because of the long-term significant impact of banking failure on local and international businesses, most people worldwide acknowledged the importance of CSR initiatives. During the last couple of decades, a lot of people from the academic world started to educate more people about the long-term business benefits of creating and implementing effective CSR strategies (Tuodolo, 2009). For this reason, the consumers started to anticipate the idea that large-scale companies should meet their obligations not only to the entire society but also contribute to the preservation of the environment and maintain the economic stability of their countries (Tuodolo, 2009; Sen and Bhattacharya, 2001). As a result, a lot of large-scale companies are promoting their own list of CSR strategies (Swaen and Chumpitaz, 2008). Today, a lot of consumers throughout the Asia-Pacific region such as Australia, India and China (64%) including the consumers in Latin America (63%), Middle East / Africa (63%), North America (42%) and Europe (40%) prefer to buy products and services offered by companies that are strongly committed to their CSR initiatives (Adams, 2014). With this in mind, business today such as in the case of BP Company in the United Kingdom have successfully adopted the use of CSR strategies as part of their business solutions. Through the use of CSR strategies, BP Company was able to create competitive advantage within the national and international markets (Becker-Olsen, Cudmore and Hill, 2006). (See Table I – Summary of BP Company’s Strategy in Engaging in CSR Activities on page 6) Table I – Summary of BP Company’s Strategy in Engaging in CSR Activities Economic Social Environment Economic contribution to the governments amounting to $13.9 billion in 2013; Providing employment to 83,900 individuals worldwide; Contributed $178 million for the government-led tourism campaigns $78.8 million worth of social or community investment which mostly include health and safety services, education, access to energy and the development of infrastructure; Promote diversity, employee engagement and gender equality at work; Code of conduct; Human rights; Contributed $24 million for the government-led seafood testing. Environmental restoration (i.e. management in the control of climate change, clean-up drive for oil spills, promote the use of alternative energy such as biofuels, solar, wind and water energy resourcs, etc.); More than $1 billion for the funding of the damanged natural resources A signficant part of British Petroleum (BP) Company’s business activities include the exploration and production of oil and natural gas, refining oil, production of chemicals and the transportation of these products worldwide (BP, 2014b). In line with this, the case of BP Company was considered throughout this essay. As such, ways on how BP Company was able to take advantage of its CSR initiatives was tackled in details. Chapter 2 – Reasons Why Companies Use CSR BP Company invested a lot of money in the design and implementation of its CSR strategies in order to create competitive advantage within the global oil and gas industry. As a common knowledge, building a sustainable business is one of the best ways to win the trust and support of the consumers worldwide. To build and maintain a sustainable business, BP managed to come up with CSR strategies that aim to promote the need to observe safety within the workplace environment. Likewise, most of the BP’s CSR approaches are more focused on publishing the company’s economic contribution to the governments amounting to $13.9 billion in 2013, providing employment to 83,900 individuals worldwide and its $78.8 million worth of social or community investment which mostly include health and safety services, education, access to energy and the development of infrastructure (BP, 2013a, p. 43; BP, 2013b). In general, one of the main reasons why business organizations engage themselves in CSR is because of the benefits most companies get out of using CSR strategies. For instance, a signficant part of BP’s business activities include the exploration and production of oil and natural gas, refining oil, production of chemicals and the transportation of these products worldwide (BP, 2014b). In the process of transporting natural oil and gas worldwide, the risks wherein BP Company would be involved in offshore oil spill cases increases (i.e. along the cost of Louisiana, a total of 104 oil spills in the Arctic region and the Gulf of Mexico in 2010 among others) (Calkins and Feeley, 2014; Webb, 2011; EC Newsdesk, 2010). Immediately right after the BP Company was directly involved in the ‘2010 Deepwater Horizon oil spill’, the company’s public image was badly affected (Olenski, 2014). In fact, BP Company fell out of the ‘top 100 brands’ list because of the ‘2010 Deepwater Horizon oil spill’ incident (Sweney, 2010). In response to the most recent oil spill in the Gulf of Mexico, BP purposely publishes its CSR initiative such as spending more than $14 billion in the clean-up drive of oil spills, more than $1 billion to fund the damanged natural resources, $698 million for restoration projects, $24 million for the government-led seafood testing and $178 million for the government-led tourism campaigns (BP, 2013a, p. 10). Even though BP Company has been associated with multiple oil spill cases worldwide (Calkins and Feeley, 2014; Webb, 2011; EC Newsdesk, 2010), the use of its CSR program or initiative has been effective in terms of creating positive effects on the behaviour on the part of its employees and the consumers. Likewise, it also helped in creating a wide range of positive effects which include the consumers’ intention to patronize, purchase or buy the products and services offered by the company (Chen and Kong, 2009; Ellen, Webb and Mohr, 2006). Even before BP Company was involved in the ‘2010 Deepwater Horizon oil spill’ in Mexico, the company has already implemented quite a lot of CSR strategies that could help maintain the positive reputation of the brand. However, evidence shows that there was some serious technical negligence on the part of the company. For instance, one of the main reasons behind the ‘2010 Deepwater Horizon oil spill’ explosion was due to miscommunication or ignoring the advice of some BP engineers and other experts about the quality of metal casing used by the company. For instance, sometime in 2005, the American Bureau of Shipping already reported some technical problems in the oil rig’s blowout preventer (Hammer, 2010). During the first quarter of 2009, BP engineers have already warned the top management of the company about the risks wherein the metal casing used in well of deepwater horizon could collapse when subjected to excessively high gas pressure (Urbina, 2010). Sometime in March 2010, the personnel of BP Company who were assigned to work in the oil rig experienced serious technical problems when the oil rig’s blowout preventer was totally damaged (Fowler, 2010) and the drilled mud that fell out of the pour out of the damaged well into the sea started to form gases (Gillis and Broder, 2010; Urbina, 2010). Few hours before the massive explosion, the House Committee on Energy and Commerce reported that the company also had received some warning signs about the risks of explosion (Fountain and Zeller, 2010). Instead of immediately acting upon the problem, the top management of BP Company chose to ignore the warning signs of which could have made the company prevent such environmental disaster. Based on anonymous survey, Urbina (2010) reported that a lot of BP employees were already concerned about the company’s insufficient support on safety management. It is clear that the top management of BP Company was keen on completing the project on time. But, for some unknown reasons, BP Company’s CSR strategies are not one that focuses on the safety needs of its employees. Instead of protesting the company about the way they are handling environmental and safety concerns of the people, some of the oil rig survivors revealed that they fear the BP Company would fire them from work in case they trigger some operational delays out of raising their personal concerns on safety issues (Bronstein and Drash, 2010). Instead of taking much time to change the substandard metal casing used in well of deepwater horizon and the oil rig’s blowout preventer, some of the BP heads instructed to crew to just replace the drilling mud with seawater (Bronstein and Drash, 2010). In general, several past and current studies revealed that the use of CSR strategies is effective in terms of increasing the companies’ sales and profit (Desrochers, 2010; Ferriera, Avila and de Faria, 2010), consumer loyalty and trust (Stanaland and Murphy, 2011). Aside from improving employee engagement, the use of CSR initiatives is also effective in terms of increasing employees’ work motivation, satisfaction in their assigned tasks and responsibilities, boosting employees’ long-term morale and improving employees’ rate of retention (Rupp et al., 2006). Likewise, there are also cases wherein the use of CSR initiatives can be used to empower large-scale companies to sell their products and services at a premium price1 (Ferriera, Avila and de Faria, 2010; McWilliams, Siegel and Wright, 2006; Bronn and Vrioni, 2001). However, BP Company has failed to maximize its full profit potential. Given that the top management of BP Company was focused on preventing the risks of massive explosion by increasing its safety management standards, this company could have had prevented a long list of unnecessary expenses. In fact, BP Company could have saved $15.9 billion last year (i.e. $14 billion in the clean-up drive of oil spills, more than $1 billion on damanged natural resources funding, $698 million for restoration projects, $24 million for the government-led seafood testing and $178 million for the government-led tourism campaigns) (BP, 2013a, p. 10) Other benefits associated with the use of CSR initiative include: developing a pool of loyal customers, developing a strong positive brand reputation and helping the company create positive publicity (Ochoti et al., 2013; Desrochers, 2010; Tuodolo, 2009; Luo and Bhattacharya, 2006). Even though this company experienced negative publicity about being sustainable business, BP Company’s CSR strategies on environmental restoration is one of the main reasons why the company was able to experience a gradual increase in its annual sales and revenues (Market Watch, 2014a). A possible reason why the use of CSR strategies can increase corporate sales and profitability is due to the fact that becoming socially, economically and environmentally responsible increases the general public’s trust (Vlachos et al., 2009; Swaen and Chumpitz, 2008, p. 291) and intention to purchase (Swaen and Chumpitz, 2008, p. 291). In line with this, Swaen and Chumpitz (2008, p. 291) clearly explained that it is the public’s trust that makes the consumers more willing to purchase. Furthermore, CSR strategies can also help companies develop positive consumer behaviour (Marquina, 2010; Luo and Bhattacharya, 2006). On top of being able to build a good relationship with the general public (Tuodolo, 2009), CSR initiatives can also be use in establishing a strong brand image or create brand loyalty among the target consumers (Virvilaite and Daubaraite, 2011). This has been evident in the case of BP Company. The brand name BP which stands for ‘better people, better products, big picture and beyond petroleum’ (BP Company, 2014c). Specifically the company’s direct involvement in the ‘2010 Deepwater Horizon oil spill’ (Olenski, 2014; Sweney, 2010) as well as in other multiple oil spill cases worldwide (Calkins and Feeley, 2014; Webb, 2011; EC Newsdesk, 2010) exposes the company to a series of negative publicity. In general, negative publicity or information can spread through advertising, news report, or word-of-mouth (Williams, Buttle and Biggemann, 2012; Ahluwalia, Burnkrant and Unnava, 2000). Often times, the negative word-of-mouth or publicity can lead to a sudden decrease in sales and profit (Berger, Sorensen and Rasmussen, 2010), consumer preception about the company (Augusto de Matos and Teixeira Veiga, 2005), customer loyalty, corporate reputation (Williams, Buttle and Biggemann, 2012) and brand equity (Standop and Grunwald, 2009). After exploring the impact of negative publicity on sales, Berger, Sorensen and Rasussen (2010) revealed that increasing product awareness is important for companies to prevent sudden decrease in sales and profit due to negative publicity; and that companies with known brands are most likely to be affected by negative publicity as compared to unknown brands or products. Aside from increasing sales and profit, several studies explained that maintainng customer loyalty is important because this group of buyers are less price sensitive and more willing to support the company by not complaining too much about the way the business is being managed (Wang, 2010; Fiol et al., 2009). To serve the needs of its loyal customers, BP Company purposely established a total of ‘22,100 service stations’ in 80+ countries worldwide (Comarch, 2014). However, the presence of negative publicity can make the loyal customers develop a negative attitude about the brand or the company itself. Through CSR initiatives, companies like BP Company was able to restore their corporate reputation which is essential in terms of maintaining the loyalty of its customers (Walsh et al., 2009). Furthermore, because of the company’s environmetnal restoration initiatives, BP Company still managed to win the 81st ranking position in the ‘top 100 brands’2 with a brand value of $4 billion (Sweney, 2010). A strict government intervention can be use to stop BP’s daily operations. To avoid such cases, part of BP’s CSR strategy is to provide the government with million dollars worth of fund to support government projects such as tourism campaign and seafood testing (BP, 2013a, p. 10). Since the local government is receiving a large sum of money from this particular company, BP Company managed to continue having a license to explore, refine, and transport oil and gas products worldwide. In the process of retaining the loyalty of its valued customers and its ability to win the support of the local government, BP Company managed to continue running its daily business operations as the company develop and implement more useful and effective business strategies that can significantly increase the company’s annual sales and profit (i.e. marketing strategies, the use of lean distribution system, economies-of-scale, and proper management of human resources among others). Despite the unnecessary expenses associated with the ‘2010 Deepwater Horizon oil spill’, the success of BP Company’s CSR initiatives can still be noted by the significant increase in the company’s sales and revenue from $237.13 billion in 2012 up to $242.55 billion in 2013 (Market Watch, 2014a). In line with this, the significant increase in BP Company’s sales and revenues in 2013 clearly shows that the company’s CSR initiatives on environmental restoration have been effective in terms of preventing the public from boycotting their products due to the ‘2010 Deepwater Horizon oil spill’. Likewise, BP Company’s CSR initiatives also prevent the government from going against the company. (See Figure I – BP Company’s Annual Sales and Revenues between 2009 and 2013 below) Figure I – BP Company’s Annual Sales and Revenues between 2009 and 2013 Source: Market Watch, 2014a Chapter 3 – Stakeholder Analysis The stakeholders’ analysis aims to identify people who are positively or negatively affected by the company’s business objectives. Due to the fact that BP Company’s CSR initiatives does not focus much on safety precautions, internal stakeholders such as the employees, managers, and the business owners suffer from its long-term consequences. As such, the lives of BP employees who were assigned to work at the Deepwater Horizon oil rigs were endangered (i.e. killing 11 people and injuring other employees) whereas the business owners suffered from massive financial loses. External stakeholders include not only the accredited suppliers but also the government, the entire society, environmentalist groups, creditors, shareholders and the customers. BP Company is driven by its shareholders. Therefore, the top management’s negligence to ensure safety in its operations made the shareholders suffer because of the sudden decrease in its stock values. The customers were also affected since the company may need to increase the selling price of oil and gas to cover their financial losses. The creditors also suffered in the process since the company may need longer period to pay back their loans. Even though BP Company decided to spend millions of dollars for environmental restoration, the entire society and the environmentalist groups were also badly affected because of the serious air and water pollution caused by the massive explosion. BP’s stakeholders’ attributes and classes are as follows: Stakeholders Classes Attributes Legitimacy Power Urgency Businesses in Coastal Areas * - * Customers Latent / Discretionary * - - Employees Expectant / Dependent * - * Environmentalist Groups Expectant / Dangerous - * * People living in Coastal Areas Expectant / Dependent * - * Shareholders Expectant / Dominant * * - Chapter 4 – Implications of CSR Theory DeGeorge’s ‘Myth of the Amoral Firm’ strongly suggests that the companies’ preferences to earn more are not literally immoral because it is common for companies to operate within a ‘free market’ environment (Weiss, 2014, p. 24). However, a lot of people argued that business organizations have a responsibility not only to the entire society but also in environmental preservation, the social welfare of the community members, the personal interests of all stakeholders and the need to observe business ethics (Mullerat, 2010, pp. 12–18; Horrigan, 2010, p. 34; Habisch et al., 2005, p. vii). The stakeholder theory is defined as “a managerial theory of organizational ethics’ which strictly obliged the firms to respect the human rights of each person (Phillips, 2003, p. 37). Often times, the stakeholder theory is based on the theory of ‘social contract’ which strongly suggests that business decisions should be made for the benefit of everybody (Rendtorff, 2010, p. 55). With regards to the dichotomy in CSR-related theories, term ‘dichotomies’ may be referring to conflicting issues such as the need to earn profit, self-interests of the stakeholders, corporate responsibility to the shareholders, and the company’s obligations to the entire society (Mares, 2008, p. 89). Even though the neoclassical theorists view CSR as a strategy that will allow the company to earn more profit without harming other people, Friedman argued that it is wrong to call companies’ CSR initiatives as ‘social responsibility’ because most companies are making use of CSR initiatives to serve their own interests (Freeman et al., 2010, p. 10). In relation to the social responsibilities of the businesses, Carroll initially introduced the concept of ‘corporate social performance’. Based on Carroll’s CSR theory, the three-dimensional model of CSR today (i.e. economic, ethical, discretionary/philanthropic and legal) includes the following models: (1) pyramid; (2) intersecting circles; and (3) concentric circles (Geva, 2008). As such, the intersecting circles model is more appropriate than the pyramid or concentric circles because it reflects how each dimension would intersect with one another. (See Figure II – Three (3) Basic Models of CSR below) Figure II – Three (3) Basic Models of CSR Source: Geva, 2008 The pyramid model strongly suggest that the most important part of CSR strategies is the company’s economic responsibility followed by the company’s legal responsibility which is designed for the benefits of the stakeholders (Crane et al., 2008, p. 51). The company’s ethical responsibility is designed to meet the expectations of the stakeholders whereas the philanthropic responsibility is about satisfying the desire of the rest of the stakeholder worldwide (Crane et al., 2008, p. 51). Chapter 5 – Implications to Practice As a general rule, the design of the CSR initiatives should always be aligned with the companies’ goal and business objectives. By aligning the companies’ CSR initiatives with the kind of products and services they manufacture and sell in the market, there is a higher chance wherein BP Company could benefit or take advantages of its CSR strategies. To be able to gain benefit from CSR initiatives, business managers should be able to effectively communicate its CSR initiatives among the suppliers, community members and the rest of the stakeholders (Mahmood et al., 2013; Morsing, Schultz and Nielsen, 2008; Bendixe and Abratt, 2007). When implementing CSR strategies into practice, it is important for business managers to practice effective communication skills (Mahmood et al., 2013). In the process of announcing the implementation of CSR initiatives to the rest of the employees, the business managers should be able to find the right time to communicate or explain to each employee about the need to implement a list of CSR strategies. Through the use of effective leadership, communication skills, and employee engagement strategies, several studies have noted that there is a higher chance wherein the business managers would be able to convince all employees to support the implementation of CSR strategies (Mahmood et al., 2013; Morsing, Schultz and Nielsen, 2008). Chapter 6 – Conclusion and Recommendations CSR strategies can indirectly increase the company’s profit by counteracting the adverse business consequences of negative publicity. Often times, the choices on CSR initiatives made by most large-scale companies are dependent and highly related to the products and services offered by the company. In relation to the case of BP Company, there seem to be an indirect relationship between profitability and CSR. In the process of using CSR strategies as a way to counteract the harmful business effects of negative publicity, large scale businesses can easily reduce the risks of serious profit loss. According to Carroll, decisions made concerning the company’s CSR strategies should either be adaptation or defense (McInture, Ivanaj and Ivanah, 2009, p. 7). In the case of BP Company, its top management has been using CSR strategies as a defense. Because of the negative worldwide publicity caused by the ‘2010 Deepwater Horizon oil spill’, one can easily argue that the best way for BP Company to maximize its profit potential is to adapt with its existing CSR strategies. 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