Corporate Social Responsibility - Firms Effort to Appear Ethical - Essay Example

Corporate Social Responsibility (CSR) is nothing but the effort of organizations to appear ethical and align their strategies with the stakeholders’ pressure Introduction The agenda of engaging in corporate social responsibility for companies is being gaining increasing importance in the recent years. It is believed that most companies engage in socially responsible behaviour as a part of their strategic goals of the business. In fact, the attempts of companies towards achieving the social responsibility goals are being shown in their annual reports as well. A lot of governing bodies have made companies responsible towards emission norms and set standards for declaration of their environmental compliances. Importance of corporate social responsibility is also reflected in the gaining momentum of mergers and acquisition dealings considering investments in socially responsible activities. Despite such rise in the value of CSR, the question remains as to why the companies find it important to engage and socially responsible behaviour when it actually does not add any financially visible value to the firm. Also, it is questionable whether these firms actually believe in acting socially or is it simply a means to gaining stakeholder support and shareholder (Font et al., 2012). The business world is plagued with multitude of problems ranging from accounting frauds, environmental issues and social concerns to corporate irregularities. In this scenario, importance of CSR reporting cannot be eliminated. This paper aims to examine whether the issuing such CSR reports actually engage in socially responsible behaviour or merely try to convince stakeholders and gain investor support. It therefore highlights the role of business ethics and highlights the importance of CSR reporting. CSR for Increased profitability It is undoubted that companies operate in an environment where existence is subject to free play of competition between major players within any industry. In such unregulated attempt towards achieving greater market share, it is essential that government and media become aware of their role to act as controllers of social consequence of these activities. Their role has become significant and influential in today’s times. These groups of people have high power to put extreme pressure of major companies to adhere to environmental and social standards. This has resulted in the fact that CSR has emerged to be one of the inescapable priorities of businesses. Research has also shown that when managers and directors take concern for employees and consumer welfare, they gain better support of their work staff in terms of productivity and loyalty than firms who have no consideration apart from earning profits. CSR in contemporary organizations There has been a sharp rise in CSR reporting in the recent decade. KPMG international has reported that about 95% of the largest 250 companies in the world issue standalone CSR reports as of 2011 data (Mahoney, 2012). This calls for a need to assess as to why companies have started reporting for CSR activities in such large numbers over their issues and sustainability efforts. The prime reason observed behind such rise in voluntary CSR reporting is the increasing pressure from various internal as well as external stakeholders on companies to emerge as good corporate citizens. It is known that engagement in CSR initiative has costs associated with it which might tax its competitive market position. Alternatively, the firm can benefit from the profits that accrue to companies for being responsible corporate citizens like retention of employees, positive consumer behaviour and investments and higher profits. CSR reports are issued with a view that such information apart from other information that is available to stakeholders, shall act towards the benefit of the company. The major benefit arising out of this is believed to be good company reputation. KPMG reported that the major reason behind CSR reporting is brand building and reputation enhancement. It is also likely that firms engage in practices of publishing asymmetric information to take advantage of projections of commitments of a company towards social obligations. Companies issue voluntary CSR reports with a view to differentiate them from other companies who do not engage in such activity. As per the signalling theory, it is true that firms actually do so in order to establish themselves as superior to others. Firms may also engage in issuing CSR reports with a view to establish their image as one of an environmental friendly and socially responsible citizens and such is consistent with the legitimacy theory of CSR reporting which believes that companies ‘greenwash’ so as to promote their legitimate and concerned impression among stakeholders. What is common between both these theories is that CSR reporting, in the neoclassical terms, has risen from the imperfections present in the market. Companies want to take advantage of market imperfections in terms of information asymmetry and lack of transparency and gain investor and stakeholder support by reporting CSR initiatives. It is because of the fact that stakeholders cannot see the CSR initiatives that one cannot properly estimate the truth of the matter. This also helps firms gain shareholder support and benefit from such reporting. It is explained by the legitimacy theory that firms engage in CSR reporting because they want to paint a favourable picture of their company and its efforts towards responsibility towards the society and their commitment towards the environment. It can be put as, firms engage increasingly in CSR reporting to engage them in corporate political activity in such a manner that the ‘greenwashing’ effect has a positive impact on shareholders view on company’s performance. Here ‘greenwashing’ can be explained as falsifying information and issuing misleading reports on environment and social issues. An example of such ‘greenwashing’ is that of Nike which issues false and misleading reports about its labour practices in developing nations. The costs associated with such false reporting can be estimated by what Nike had to suffer. The leading shoe company was sued and the resolution of the case cost them about $1.5 million which as paid to a labour standards organization. After the event, Nike did not produce CSR disclosures for 3 years. Today, Nike’s CSR reports are of one of the highest levels and transparent ones. Corporate governance makes it mandatory for companies to disclose in a more transparent and countable manner in all activities concerning their social responsibility. It is being argued in this relation that companies who engage in socially responsible behaviour and comply with business ethics do so merely to attain stakeholder support and legitimacy and acceptance in operations. Managers hardly care about the probable impacts it could have on company’s profits or financial stability. Also, they strongly believe that there is no direct bearing between competitive position and corporate social responsibility. In the view of Milton Friedman, businesses realise that social obligations and pressures are important for the survival of any business and it is because of such pressures, managers of businesses feel pressured to act socially responsible corporate citizens. Here it is logical to derive that such social pressures of compliance with environmental norms and engaging in social activities for the people around bring unwanted costs with themselves. Such costs do not have any monetary return associated with investments made in such activities. In case of mergers, where CSR activities help in gaining stakeholder support, if a company has been engaged in social activities, shareholders of the acquiring firm look at it as additional costs of takeover rather than good public image of the company. It is also argued that companies who want to gain competitive advantage through business social behaviour do so by maintaining even higher standards than those required by government mandate. Such high maintenance of environment and social behaviour standard earns them reputation and a competitive standing that can be viewed profitable. Such activity associates high maintenance and compliance costs at the cost of shareholder wealth creation over a long period of time before one can reap benefits of it (Healy and Palepu, 2001). CSR as Stakeholders pressure Stakeholders can be defined as a group of people who have a common set of goals in the organizational perspective and those who can potentially influence the ability of an organization to meet its goals. Based on the assumption that a firm caters to various needs of individual groups of stakeholders with a view to enhance their legitimacy, it becomes all the more important to understand the interaction between stakeholder pressures and resultant firm reaction. It is argued that firms try to show their good behaviour through CSR activities by the use of public disclosure mechanisms. It is also argued that such disclosures requirements mandated by various regulatory bodies can encourage firms to perform better and in the absence of any such pressures, if firms try to practice self regulatory standards, the result would be information asymmetry, free riding, ‘greenwashing’ and tragedy of commons. One can clearly identify four types of stakeholder groups that create pressure on organizations to engage in CSR activities and reporting. These groups are organizational stakeholders, regulatory stakeholders, media and community stakeholders. It is observed that firms which get higher vigilance from stakeholder have greater pressure to align themselves to socially responsible behaviour. On the other hand, organizational stakeholders and community stakeholders tend to have more influence on firms over acceding to regulatory norms of social behaviour than other shareholder groups. It is further argued that the presence of social rankings based on CSR initiatives in various journals, organizations and institutions from third parties has brought in a sense of competition among firms owing to comparisons that bring in reputation. This fact also derives that firms who enjoy high rankings on CSR initiatives shall enjoy greater support from investors, customers and employees. In other words, third part assessment of firm’s social performance shall potentially influence a firm’s decision to accede to legalised norms and standard set by government bodies (Perez-Batres et al., 2012). Do companies report truthfully? CSR reports are intended to reflect the goals challenges, public relation programs, commitments and corporate progress. The primary people who view these reports are shareholders, investment funds, customers, nongovernmental organizations and employees. It also acts as an important means of communication where companies reach out to employees and customers to establish a sound brand image by way of socially responsible behaviour. The CSR report is also a reflection of what the company looks for in the future and highlights its future commitments and actions (Hooghiemstra, 2000). It is important that all of these statements and within the CSR report are correct and truthful because they paint the picture of the company’s brand image. Any overstatement shall invite obligations which, if unfulfilled, shall be responsible for deterrent company reputation. Studies conducted in this regard state that authentic reporting of CSR is essential because readers want to know rationality and truth of company efforts as it helps them to measure sustainability of such initiatives and thereby create a brand image. The question that arises at this point is whether or not these companies report truthfully. It is mandated that companies report their environmental disclosures by legal bodies. Such declarations require that companies report truthfully about their energy consumptions, emissions, pollution and levels at which compliance standards are met. Apart from this companies also have to report about all other activities in relation to them and the environment that need revelation. It is believed that such reporting is important to gain community acceptance. It is to be noted that such disclosures have also invited a lot of protests in the form of strikes that has worked detrimental to company image. The mining industry falls into the category of one of the largest non compliers of CSR reporting (Cho, Lee and Pfeiffer Jr, 2013). However, in the case of Australia, it has been observed that companies only made disclosures that acted in favour of its brand name and reputation. It is believed that such case of reporting is similar for most companies across the globe. As for Australian case, all the information that pertained to nonconformity with legislative standards and norms were kept under covers. It was also disclosed that only companies which were large in size and had greater ability to undertake systematic risks associated with CSR reporting were the ones who actually spent on making CSR disclosures. Smaller firms with little ability to undertake risks associated with such disclosures did not engage in reporting activities at all. This makes it clear that firms hardly engage themselves reporting CSR initiatives that are authentic. Also, disparities in reporting are also observed in firm size where small firms are less inclined towards making such declarations when compared to larger ones. Falsifying statements within the CSR report might just act as a good tool for brand building, however, companies loose out significantly in terms of shareholder confidence when long run consequences emerge (Moir, 2001). Role of Business Ethics and Reporting Reporting for CSR activities has been mandatory by various global as well as regional controlling bodies. There have been mandates that set standards and compliance norms for environmental pollution, emission and such other activities. It has been argued that companies which engage is sound CSR practices posit strong competitive advantage and brand image over those who do not practice any CSR initiatives. Contrarily, it is also argued that firms have to incur huge additional costs in discoursing CSR activities and such investments do not bear any direct relation with revenue generation or profits. However, companies who have established their social responsibilities incur less recurring costs in meeting such behaviour than companies who have no such social activity (Mahoney et al., 2013). The case of melamine contamination in China put the world in a shock. It brought to light, the need of investors to consider a company’s social responsibility towards its consumers and other stakeholders. A worldwide need for rulings for corporate social responsibility was being increasingly felt. This was reflected in the Chinese melamine contamination case where governing bodies and local authorities immediately charted out a set of guidelines that were to be followed by firms as per mandate in an attempt towards engaging corporate in a socially responsible behaviour (Kong, 2012). For any firm, a socially responsible behaviour has a direct relationship with its financial performance as per few studies. The case of Coca Cola can be cited as a good example of such a situation. The company was alleged of causing groundwater depletion, contamination of product sold and causing pollution in India. Oddly enough the company had won awards for four consecutive years from the World Environment Foundation. Soon enough many plants of the company were shut down in the region cause huge losses in sales and revenue. The company falsified its quality standard reports in India which also tarnished brand name and reputation. The importance of conducting CSR activities can also be felt in some of company’s most important financial decisions like an acquisition. It has been observed that any merger or acquisition has a strong impact on the wealth of shareholders. In such an event, shareholders have high concern for all kinds of takeover activities. This is why it becomes important for firms to behave socially responsible because in the event of lack of CSR initiatives, stakeholders and shareholders fail to provide enough support towards the merger process. It is a general belief that if a company engages in CSR initiatives, it is imperative that the company has a sound financial track record which gives it time to concentrate on its social end (Deng, Kang and Low, 2013). The role of CSR building is also observed as a one of trust building between the corporate and the shareholders. A merger associates a lot many contracts with itself that include job securities, wage contracts, benefits and product warranties. When it is seen that the company performs its CSR well, it automatically ensures stakeholders that it shall abide by its merger terms as well and thereby smoothens the takeover process by gaining stakeholder support (Jo and Harjoto, 2011). Therefore we see how engagement of firms in socially responsible behaviour acts as a catalyst to mergers and acquisition and also contributes towards brand name sustenance and long run profitability of the concern largely in contrast with those who do not engage in any such obligatory behaviour (Jensen, 2001). Conclusion It is an evident fact that companies have been engaged in CSR reporting primarily to impress shareholders and gain stakeholder support. It is evident that companies voluntarily engage in CSR reporting with a view of signalling ethically responsible company values. A study by Toms, 2002, revealed that there tends to be a positive relation between the levels of CSR reporting and measure of firm reputation. It is one the important tasks of business owners that they provide favourable returns to their stakeholders. Such group comprises of customers, employees, investors and shareholders. It is agreed that CSR reporting may have cost bearings and other such limitations in relation the reporting activity, it is important that firms realise the benefits that accrue with correct CSR initiatives and reporting. It is also important to note that cost bearings associated with misleading and false reports drawing lessons from the Nike case. The evidence of benefits of CSR reports can also be drawn from its importance in gaining shareholder and stakeholder support in financial dealings concerning mergers and acquisitions. It is also not possible to sustain long in business by disregarding environment and safety compliances that has become the highlight of CSR initiative today (Jiraporn and Chintrakarn, 2013). Start up companies have today realised the importance of engaging in a socially responsible behaviour. They base strategies based on ethical compliances and social responsibilities. Companies who do not engage in socially responsible behaviour bear costs of non compliance in the form of competitive disadvantage. In order to be socially responsible, they need to place a sound source of data and manage a clear set of guidelines that shall communicate the aims of the company and thereby help in achieving a socially responsible status through a comprehensive approach (Taysir and Pazarcik, 2013). Reference List Cho, S. Y., Lee, C., and Pfeiffer Jr., R. J., 2013. Corporate Social Responsibility Performance and Information Asymmetry. Journal of Accounting and Public Policy, 32(1), pp. 71-83. 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