Benefits and Challenges of CSR in Oil and Gas Companies - Coursework Example

CHAPTER TWO Literature Review 2. Overview This chapter discusses the different views and opinions of varied authors regarding corporate social responsibility. The chapter equally discusses the input of theories related to CSR in the theoretical literature and expounds on them from literature studies carried out but several authors. 2.1 Theoretical Literature The concept of Corporate Social Responsibility (CSR) emerged in the 1950s and is seen as a practice that is relatively uncoordinated (Klonoski, 1991). Various different definitions have been put across to suggest the meaning of corporate social responsibility. Several decades later the definitions of CSR are still variant and are based on the individuals and the responsibility that accompanies the practice (Turker, 2009). Earlier authors such as Milton Friedman (1970) defined CSR as a mere commitment to follow the regulations of the government and abide by rules related to the society. Freeman (1984) on the other hands used the stakeholder theory to suggest that the needs of stakeholders; who include everyone affecting or being affected by the organization should be put before the beginning of any operation. The stakeholder theory is presently used as an important structure for CSR in certifications and global reporting initiatives. Blowfield and Murray (2014) suggest that companies do not see the need to practice CSR as they pay taxes to the government which has the duty to see to the welfare of the society. This translates to undermining the importance of CSR in companies that do not see the need of practicing social welfare. A different school of thought identifies CSR as the commitment to the improvement of social welfare as opposed to a commitment to follow government regulations. Spicer (1978) defines CSR as business engagements to improve the social wellbeing of groups while the World Business Council for Sustainable Development (WBCSD) in 1999 stated that CSR is an obligation of companies and their stakeholders to attain sustainable social and economic progress through the enhancement of the living circumstances of those who work for the corporation and those who are directly affected by the works of the corporation (Turker, 2009). These two schools of thoughts; CSR as a commitment to government regulation and CSR as social welfare are extensively used in companies today making them among the most important definitions of CSR (Aigner, 2016). The first thought suggests that CSR is secondary to make profit (Friedman, 1970) while the subsequent thought purports that CSR should come before profit (Spicer, 1978). A third argument on CSR exists stating that CSR should be an equal balance between the interests of a company and obligations to its stakeholders; between the company and social responsibility and between shareholders and social obligations (Turker, 2009). Further studies in CSR reveal that it is an act of doing more social good that goes beyond the interests of the firm or any other legal requirements (McWilliams and Siegel, 2001). From the definitions above, the first group believes that the only purpose for a company to exist is to make money for stakeholders and that their responsibility ends at paying taxes and following the laws (Friedman, 1970). A second group idealizes companies as a charitable organization; a group whose primary goal is to improve the social welfare for all. Unfortunately, by prioritizing social responsibility, the group puts the financial responsibility of the company to its shareholders on the back burner, seemingly not realizing that companies must make a profit, and cannot operate or exist without it (Spicer, 1978). A third group has a more comprehensive meaning of social responsibility. They consider it as the commitment to reduce adverse impacts of a company’s operating, while still pursuing profits and owners’ interests (Turker, 2009). Given the current environmental surge in the globe, CSR is accompanied by benefits including company recognition which leads to an increase of the corporate value of the institution (Aldosari and Atkins, 2015). Oil and gas industries possibly have the greatest environmental impacts including depletion of natural resources and emissions of harmful gases (Kraft, 2015). The oil and gas industry has brought about major conflicts due to its production which provides most of the globe’s energy but equally causes environmental harm. The major uses of energy contribute to the positive impacts of the oil and gas industry which cause conflict when the matter of sustainability is raised. The toxicity of oil and gas products is lethal to both human and animal life as they can lead to cancer, birth defects and death. Burning oil, gas and their products causes air pollution as well. Furthermore, the industry has contributed to massive climate change as huge amounts of oil are produced and used as well thus affecting the gaseous composition of layers that protect the earth. Due to these effects the CSR strategies of oil and gas companies need to be rigorous and accompanied with regular evaluation (Stimpson et al, 2015). Despite CSR being regarded as a moral deed, increased interest in the concept as well as pressures from the related industries have seen companies comply for reasons that are not related to moral obligations (Thomsen, 2012). The execution of CSR practices therefore lose their meaning as they are practiced without the initial decency expected from the deeds. The belief that CSR is a western concept has moreover derailed its progress in developing countries. Furthermore, developing countries are still affected by political vices that hinder genuine implementation of CSR (Perks, et al., 2013). Among the most important theories in CSR is the legitimacy theory which suggests that the actions of an entity are appropriate within some socially construed system of values and beliefs (Suchman, 1995). The legitimacy theory emphasizes that companies need to establish legitimacy in the internal operations and how these operations affect the society as an initial phase of being legitimate. Furthermore, legitimacy needs to be maintained in order to prove its worth to a company. The extension of legitimacy moreover proves that a company is committed to the system of values and beliefs that are important to the society. The relevance of legitimacy among companies particularly during social and environmental accounting is tested during the defense of their legitimacy. This is where transparency is introduced. Legitimacy in oil and gas industries is challenging given the amount of environmental imprint that is caused by production of oil and gas. The companies therefore face a dilemma in accounting for their environmental effects as it is detrimental to business. Transparency involves revealing all the positive and negative effects to the society and the environment in CSR. The concept is a major challenge to most corporations as it threatens the reputation of the organization particularly when negative information is disclosed (Dubbink et al., 2008). The ultimate legitimacy test is observed in the transparency policies of companies during the accounting of their social and environmental impacts. Legitimacy and transparency is seen in the disclosure of the environmental information of the company. Environmental disclosure involves a report that details the environmental impact of the activities of the company. The disclosure is supposed to truthfully expose the positive and negative environmental impacts caused by the organization’s operations and as well as the level of the impacts in detailed form. The following section therefore discusses CSR studies as carried out by different authors highlighting their opinions and evidence on the CSR strategies, the benefits and the challenges that accompany adoption of the concept with particular interest on the oil and gas industries. 2.2 Empirical Literature 2.2.1 Oil Companies and CSR Corporate social responsibility in developing countries has been on a surge in the current decade due to environmental awareness, industrial pressure and a total effect of globalization (Matten et al, 2008). Du and Veira (2012) report that organizations keep seeking to communicate their legitimacy through corporate social responsibility. Furthermore, companies in developing countries have realized the need to adopt CSR strategies so that they can handle pressure from western countries and gain a competitive edge in their corporate ventures (Liu et al, 2014). CSR has therefore evolved from being a form of charity to a strategy for survival and prosperity especially in industries such as the oil and gas industries which massively affect the environment and in developing countries where innovations on creative sustainability are yet to be implemented (Govindarajan and Amilan, 2013). Based on the evidence of rewards seen by oil corporations in the developed countries from CSR implementation, companies in China, Middle East and other developing countries have followed suit with the adoption of CSR to improve their reputations (Liu, et al. 2014; Habbash and Habbash, 2016). The use of CSR is a protection against scandal and it builds reliability in companies. Inasmuch as oil and gas companies provided energy that is needed in the globe, the environmental impacts remain dire thus creating the need for companies to use CSR as a means to avoid scandal. Positive reputation garnered from CSR is thus a strategic tool for companies to attract good business and good talent. The reputation of oil and gas companies particularly on environment impacts is wanting given the level carbon imprint that is released by oil and gas production and its activities. The companies thus use CSR to protect themselves against possible scandal and lessen the impact of CSR. The use of CSR as a tool further affects transparency as the disclosure may easily be altered to suit the requirements of CSR and provide a deceitful image of the company’s CSR practices. Liu et al (2014), on the other hand emphasizes that the prominent objective behind CSR in Chinese oil companies is to maintain social development and ensure political stability. There are no solid rules around CSR but rather reactions to external pressures. In his study of the oil and gas industry in Kazakhstan in 2014, Buldybayeva the loss of image in an oil and gas industry is very fatal therefore companies use CSR as a strategy to protect and enhance their company reputation. This reason further undermines the legitimacy of the CSR actions as explained by the legitimacy theory. The legitimacy theory emphasizes that companies need to establish legitimacy in the internal operations and how these operations affect the society as an initial phase of being legitimate (Suchman, 1995). The fact that adoption of CSR among companies in countries such as China is first influenced by pressure greatly challenges the genuineness of the practices. 2.2.2 Benefits of CSR in Oil and Gas Companies CSR is seen as a business opportunity with oil and gas industries producing clean fuel on the basis of demand by customers who are environmentally conscious. Stakeholder reaction to corporations that invest in CSR determines improved business or decreased business thus affecting investment (Govindarajan and Amilan, 2013; Cordeiro and Tewari, 2015). Apart from corporate advantages, the long term benefits of CSR by organizations ensure that the future generation can still benefit from current responsible business. Sun and Stuebs in 2013 suggested that companies with CSR as part of their business strategy have improved productivity in their operations.The pair analyzed the data of 170 American chemical companies, who already had strict government regulation, and found that companies who conduct active CSR reporting were more likely to have increased productivity. The pair noted limitations to the study however, mainly being that the companies surveyed were already in good standing with the government and that one industry’s result should not be generalized. The main benefits of implementing CSR include improved relationships with the stakeholders of the companies most especially customers who feel that the corporation is not only reliant on profit but on helping the society (Bhattacharya et al, 2009). Companies are able to differentiate themselves from competitors but the policies need to be strategically practiced and placed as many companies have CSR approaches in their policy statements (Dubbink et al, 2008).Implementation of CSR is further affected by myriad factors including cultural traditions, regional differences, level of environmental exploitation and regulations that govern different bodies (Hamilton, et al., 2015).In Saudi Arabia for instance CSR is practically regarded as Zakat, an act of charity (Raimi et al, 2014). The nationalization scheme in the Middle East such as Saudization1 in Saudi Arabia is a major CSR initiative as well meant to benefit the locals of the regions (Alshanbri et al, 2015). 2.2.3 Challenges of the Adoption of CSR in Oil and Gas Companies Adoption of CSR in oil and gas industries is accompanied by challenges such as conflicts of interest, industrial pressure and failures in business (Kirat, 2015). Nationalization schemes such as Emiratization and Saudization are challenged by lack of adequate local skill for the job. This leads to companies giving out jobs to expatriates who are qualified for the job (Al Sheikh and Erbas, 2016). Nationalization is an adequate example of CSR in The UAE as the scheme is meant for the welfare of the local society. The cost of transparency is equally high in the oil and gas industry. CSR reporting is therefore bound to affect the image of oil and gas companies as some of the environmental degradation practices are difficult to avoid. The major objectives of businesses in the oil and gas industries include making profit and increasing their market share. The practices of CSR such as disclosure may be extremely challenging as they are bound to affect the view of different stakeholders about the company particularly if the disclosure is negative. Additionally, CSR programs in developing countries have been observed to raise conflicts between the host communities and the oil corporations due to varied interests (Idemudia, 2014). Most communities feel that CSR is a maneuver to blind the local community from the activities of Multinational oil corporations. Recent studies show that corporations practice environmental disclosure but the information provided is not legitimate (Eljayash, et al., 2013). This type of deception proves that the candid objectives of CSR to protect the environment are still a long way from being achieved most especially in developing countries. The challenges of CSR in the oil and gas industry reiterate Friedman’s (1970) arguments that companies have the responsibility of making profit and not taking care of the welfare of the society. Further studies show that the oil and gas industry is not equipped to make decisions that are socially oriented as this affects the proper aim of the organization (Michaelidas et al., 2014).Moreover there is the school of thought that argues against adding social responsibility to an industry that already has its own economic responsibility (Davis, 1973). These conflicts aggressively influence the CSR effects in companies as it creates a dilemma in embracing the concept. The low disclosures that take place as well as the mixed impacts are detrimental to both the development of the organization as well as the continuity of CSR. Transparency in the extractive industries in developing countries is grossly defective given the poor management exercised by the government over oil and gas industries (Assolo-Adeyeye, 2005). The fact that the industries want to make maximum profit overrides the decency of CSR compounded by corruption and conflict brought about by Multi National Enterprises which have the capital to mine in the countries. A study by Idemudia in 2014 shows the conflict brought about by CSR in Nigeria where the locals feel that multinational oil enterprises bribe them through CSR so that they can still profit from the business while exploiting the resources of the host country .In the Gulf countries CSR reporting is done but a study by Eljayash, et al. (2013) questions the legitimacy of the information provided by the companies. The levels of disclosure form oil and gas companies in the respective countries are low and are mostly affected by political and economic systems which incorporate corrupt practices in the reporting (Eljayash, et al, 2013). The effect makes CSR a farce as disclosure is low in quality and ultimately negative since the practice lacks moral and positive intention for the society. Transparency is a significant condition in the execution of CSR as it reveals the genuine nature of the intentions of the company to do well by the society (Dubbink et al., 2008). The central factor around the organization of CSR is how to execute a transparency policy that discloses their CSR information so as to develop the CSR culture and behavior of companies. Transparency policies are linked to environmental reporting and reveal the both the positive and negative impact of an organization to the entire environment. 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