Consideration of Corporate Social Responsibility in the Rating of Firms and Companies on Wall Street - Research Paper Example

? Research Question: Should ‘corporate social responsibility’ be considered in the rating of firms or companies on Wall Street? Executive Summary Corporate social responsibility (CSR) is not only an attempt to complement a positive company image but a self-regulatory mechanism to respond to societal norms. It is today a well-accepted notion that besides making profits and increasing shareholders’ worth, a company is also responsible to all stakeholders or the society at large. Recently, we have seen Wall Street companies such as Goldman Sacks and British Petroleum receiving high credit ratings despite their unethical, destructive behaviors that have brought economic catastrophe and anguish not only to many people but countries. This poses the question whether CSR should be considered in rating of Wall Street companies. In this paper, CSR is discussed in cases for and against inclusion in Wall Street company ratings. Approaches to CSR, research and trends are also examined. The author argues that CSR is important and should be considered side by side the companies’ ratings so that stakeholders get a clearer picture about the companies’ operations in the society they work with. The author proposes a simple, qualitative rating scale as a starting point for something as universal as CSR for inclusion in rating Wall Street Companies. Corporate Social Responsibility (CSR) Corporate Social Responsibility (CSR) is an ethical belief and practice that companies, just like individuals, are responsibilities as good stewards of the society in which they do business with (Wood, 1991). Corporations have an obligation to act in ways that will benefit or sustain society and that their responsibility is not limited to their profit. In the last decade, we have seen movements gather momentum requesting for more corporate social responsibilities in ethical practices, for the environment, the working conditions of employees, for the local communities, and towards all stakeholders from suppliers to post-consumption of products. CSR is soon to be integrated with the human resources, business development, operations, and relations (Barnea and Rubin, 2010). This paper will examine the two companies rated by Wall Street: Goldman Sachs and British Petroleum (BP), which very recently have been involved in practices that did not do well to the society in which they do business with. An attempt will be made to see if CSR should be considered in their ratings. In the year 2010, each of the three major credit rating agencies - Moody’s Investor Services, Standard & Poor's and Fitch Ratings - rated both of these companies mainly on their credit worthiness. In the same year, Fortune Magazine also named them as two of the world’s most admired companies. The question then is whether these companies should be rated solely on scales that show their credit-worthiness or should these ratings also include a dimension that will show how well a company performing in the society in general. British Petroleum (BP) In April 2010, an explosion occurred on BP's oil rig in the Gulf of Mexico. The Coast Guard reported that 11 people were killed, 17 other others injured and about 4.9 million barrels of oil released to the Gulf of Mexico affecting Louisiana, Alabama, Mississippi and Florida. The oil spill caused extensive environmental damage to the sea and wildlife creatures in the Gulf of Mexico. It also damaged the fishing and tourism industries. The US Government held BP accountable for the damages. BP officials committed to shoulder all cleanup costs and other damages. In addition, the company is also being investigated for alleged unsafe practices which caused the occurrence on the rig leading to the explosion. An internal probe made BP admit to mistakes that led to the oil spill in the Gulf of Mexico. In 2010, Moody’s rated BP’s senior unsecured ratings as an Aa2 from Aa1. Fitch Ratings rated BP’s long-term issuer default rating and senior unsecured rating as an AA from AA+. Reuters also reported in June 2010 that Standard and Poor’s cut BP two notches to A, the sixth-highest investment grade, from AA minus. Goldman Sachs Michael Lewis’ 2010 book The Big Short described how the “smart people” on Wall Street from Goldman Sachs invented phony bond and real estate derivative markets, including subprime mortgages and impenetrable securities targeted towards lower and middle income Americans who will not be able to sustain their mortgage payments. Some of these Americans later defaulted on their mortgages and Lewis said this brought about a spiral leading to the recent recession causing the suffering of many Americans. The U.S. Securities and Exchange Commission succeeded in getting approval from the court to penalize Goldman Sachs Group Inc. Goldman Sachs was ordered to pay $550 million for its role in causing the recession. In the same year, Fortune ranked Goldman Sachs in the top 8 of the World’s most admired companies based for the most part on the high credit ratings this company received from Moody’s, Fitch, and Standard and Poor’s. With this type of acknowledgement for these globally irresponsible corporations that put so many Americans and others into dire situations, the question whether these corporations should be competing for anything in our society, let alone being admired is posed. A Case for CSR: There are several reasons why it is good companies on Wall Street to practice CSR (Fialka, 2006). First is the need to discourage the nuisance of government regulations. Second is to balance corporate power with responsibility, third is to help correct negative reputations, many of which are created by corporations; and finally to contribute to the welfare and survival of the society where business is conducted (Branco and Rodrigues, 2007). It was reported that 51 out of the 100 largest economies in the world are corporations (Fialka, 2006). Corporations on Wall Street could also take on some of the responsibilities that are similar to those of governments, recognizing the importance of the environment and the peoples around them. The CSR program of a company can aid in recruitment and retention of graduate employees. Today, potential recruits from the competitive graduate market often ask to know a company’s CSR policy prior to accepting an interview. Companies with a comprehensive policy often seem to be the most attractive. CSR can help with brand differentiation for companies as venture in CSR promotes product delineation among consumers. Some companies will produce commodities or services with attributes or distinctiveness that communicates to the consumer how the company is concerned and committed about certain social issues such as work ethics. Companies continuously endeavor for a sole selling proposal to take apart them from the contest in the minds of customers. CSR can play a role in constructing client trust based on individual moral values such as environmental concern through product packaging and disposal. Many companies remain today as competitive despite their commitment to CSR programs. Some of these have joined campaigns such as RED and includes Emporio Armani, Hallmark, Motorola, American Express, Apple, and Converse. A goal of “triple bottom line” was proposed to be achieved in the CSR implementation: financial, social and environmental objectives achieved through cause-related marketing (Ponte, Richey and Baab, 2009). CSR impacts on the normal functioning of the business from supply relations that goes beyond the immediate supplier, how labor force is treated, the environment impact of operations, and the post-consumer impact of which even customers are engaged in providing for or working to help achieve CSR goals (Ponte et al, 2009). The case against CSR Critics of CSR point at Milton Friedman as proponent for corporations to focus on profits, when in fact, he had been promoting for responsible work and business ethics (Friedman, 1970). This, however, may have stemmed from the neoclassical side of money matters as critics point out that CSR cannot determine profits. It was also suggested that CSR aspirations derail one firm from pursuing the immediate goal of increasing revenue and profits because instead of basic operational and promotional activities, the companies are forced to institute activities that are seen to be outside their specialty or expertise and business. It should be highlighted that Freidman expressed the responsibility of a corporation to society as maximizing its profits based on the legal structure of that society which meant beyond the firm itself (Freeman and Liedtka, 93). How others came to point out and focus on profit as Friedman’s advocacy was question and this should be reconsidered by now. Many companies today understand the negative impact that bad publicity brings especially when the company is not prepared to answer societal questions such as the BP oil spill and the fall of the real estate market. Many companies engage the services of public relations firm in order to sustain a positive image or return one that has been stained by negative publicity. In doing so, other companies found a short cut: CSR. Research on CSR Boesso, and Michelon, (2010) studied the effect of stakeholder prioritization on company monetary performance that examined the connection linking CSR and the monetary success of a company. They assumed that companies together with their stakeholders act strategically in the ways that advance the company’s policy. It examined 188 companies to see how they performed in terms of CSR that advances their policies versus CSR that benefits society. It proposed that stakeholders’ priority is to control the monetary success and therefore the growth of the company. CSR data are examined in seven areas including employee relations, product safety and diversity while monetary performance was collected from the DataStream database. The study concluded that when the stakeholders of a company act a way that advances the company’s strategic policies, there is a different effect on monetary performance of the company as compared to when CSR is geared more towards meeting society’s needs. It meant that companies that ranked high on CSR, ranked less in their monetary performance. Chatterji, Levine, and Toffel, (2009) that studied social ratings and actual measurement of corporate social responsibility suggested that rating of corporations’ ecological behavior and their capabilities help put billions of dollars into socially responsible funds. These in turn affect various people including consumers, activists, and even potential employees. It found out through the Kinder, Lydenberg, and Domini Research & Analytics (KLD) ratings that summaries of past ecological performance were recorded and not projection about future performance. It was also concluded that companies with more KLD concerns had a statistically significant contamination and regulatory conformity violations in later years. The KLD rating, however, did not accurately predict pollution levels or compliance violations and that KLD’s ratings were not optimally utilizing widely accessible data. Earlier research on CSR points out that at present, CSR programs need to conform to company goals and mission. In addition, there is no specific set of strategies to sustain (Chaterji e al, 2009) a CSR program that will fit a wide array of company identities. The relationship between CSR and financial performance is still doubted although it has been suggested that positive image lead to higher customer trust and higher income (Ponte, Richley and Baab, 2009). It should be noted, however, that firms with positive CSR programs already established a good image among investors and their target customers, and therefore perform better financially (Ponte, Richley, and Baab, 2009). Should CSR Be considered in the rating of Wall Street companies? Personal Evaluation It can be concluded that CSR is a form of self regulation by companies and should be encouraged. Firms act like governments, thereby, must be able to regulate itself to conduct operations and community relations responsibly. Often, it takes a crisis to consider CSR such as the case of the BP oil spill in Gulf of Mexico or the Goldman Sachs’ unethical practices on Wall Street. These are major contributions to economic problems, but more so on social and environmental disasters. These cause regulatory bodies and governments as well as advocates to look closer into regulating oil companies and for Wall Street to be more responsible in their actions. Basically, it is the government’s role to make sure that companies are prevented from harming not only the public and its investors but also sustain if not develop social good, and the environment. While the government cannot regulate every detail of a company’s operations, it can prescribe means to be followed to minimize harms. On their own, firms can be encouraged to adopt certain CSR programs as strategy through the incorporation of CSR rating in economic evaluators such as Standard & Poor's, Moody’s Investor Service and Fitch Ratings. This way, there is a better reason to connect CSR rather than meeting short-term profitability but also as a long-term solution for businesses. Traditional accounting methods of studying the performance of firms calculated in financial terms lead to less profit or loss accounts. These apparatus are used to make the most of shareholder riches within the company. Nevertheless, new streams of thinking have emphasized the call for for a more holistic move toward to the study of firms’ worth and their role in society. This author suggests four categories to determine performance of a company as: CSR Neutrality, CSR Responsible, CSR Highly Responsible and CSR Negative. CSR Neutrality: For Wall Street Companies that are reactive, proscriptive to CSR issues, adhere to the legal requirements, adhere to economic considerations. Most companies will fall into this category. CSR Responsible: For those Wall Street Companies that are prescriptive, does a little more than compulsory by law, does a little more than obligatory by economic considerations, and avoids public stands on issues. Many companies will also fall into this category as well. CSR Highly Responsible: For those Wall Street Companies that are hands-on, anticipates and prevents troubles, search for and implement socially responsible acts, takes community stand on issues. Examples will be Starbucks, the Gates Foundation and Microsoft Body Shop, Sara Lee. CSR Negative: For companies that have brought a negative impact to society. BP will remain in this category until the Gulf of Mexico recovers from the oils spill and Goldman Sacks will also be in this category until the nation recovers from the recession. While the author respects the separation of CSR rating with credit rating of Wall Street companies, the author believes that their CSR rating should be made available side by side their credit rating for stakeholders in order to present a more complete picture of the companies’ standing in the society. Companies do not exist in a vacuum, they operate in societies. If the society falls, the company will as well. References Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, (97) 71-86, doi: 10.1007/s10551-010-0496-z Boesso, G., & Michelon, G. (2010). 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