Corporate Social Responsibility in Banks - Essay Example

?Introduction In order to be responsible, businesses must do right by their environment and community. That said, businesses are often too focused upon the bottom line to consider the impact that their business practices might have upon the world around them. Geoffrey Lantos, espousing the views of Milton Friedman, actually states that corporate social responsibility is immoral. The reason for this is that the shareholders, who have a close relationship with the corporation, experiencing detriment when the corporation takes its focus off of the profit motive. Therefore, when a corporation engages in corporate social responsibility, it is acting in the best interest of forces which are not in a close relationship with the corporation, to the detriment of forces which are (Lantos, 2001, p. 1). This theory is based upon classical economic theory which is underscored by Milton Friedman’s analysis (Bronn&Vrioni, 2001, p 208), and this theory does not leave room for behaving ethically or responsibly (Paine, 2003, p. 1) However, in today’s socially conscious world, the traditional view is short-sighted. In this world of Occupy protests, where corporations are portrayed as soulless entities, and the extreme profit motive is seen as inherently evil, corporations now will benefit tremendously from being more socially responsible. Therefore, if corporations can show society that they are not just interested in profits, but are also interested in better the world and the environment, they will be once again more attractive to consumers. Therefore, corporate social responsibility in this environment would be advantageous to the bottom line (Innes, 2006, p. 355). This is particularly true regarding the banking industry, which is widely perceived, not inaccurately, as being the catalyst to the worldwide recession that has occurred, as their shoddy practices effectively brought down economies worldwide. Corporate Social Responsibility Corporate responsibility may be ethical, legal, economic or philanthropic (Mohr, 2001, p. 47). There are many reasons why corporations are compelled to act responsibly. One of the reasons why a corporation might act responsibly is its image, and, as stated above, corporate responsibility helps a corporation’s image, which, in turn, helps the corporation’s bottom line – people are more likely to patronize a corporation who is seen as being concerned about the environment and other social causes that the public holds dear (Paine, 2003, p. 110). A corporation who has socially friendly practices may be the target of a “buycott.” Friedman (1996) advocates “buycotts,” which is the flip side of a boycott. In a boycott, companies are punished for misdeeds. On the other hand, a boycott rewards the corporation for its policies when their policies are in line with activists of a certain cause. These activists are organized and induce other shoppers to patronize the store who shares their beliefs (Friedman, 1996, p. 440). A good example of this are “Green” purchasers, who look at the ethics of a certain purchase, look at whether the purchase enhances sustainability, and decides to make the purchase based upon these factors (Young, et al., 2010, p. 20). Social investing is another way that a corporation may benefit. Social investing is where people invest their money in corporations which are in line with their personal beliefs or forward causes that the individual believes in (Entine, 2003, p. 1). Alternatively, corporations who do not act socially responsibility may be punished for indiscretions. For instance, a corporation who is targeted for socially unfriendly policies may find themselves the target of a boycott and other problems. When corporations do not do the right thing, then they may face boycotts, PR nightmares and fewer customers buying their products (Sassatelli, 2006, p. 218). An example of this is Bank of America. When it announced plans to charge its customers a $5 monthly debit card fee, the backlash was immediate and intense. Customers were outraged at this bank, and activists organized a day on November 5 when customers of Bank of America were to transfer their funds out of this bank and into locally owned banks and credit unions. The public reaction was so intense that the bank had to retreat on its threat to implement the fee, announcing on November 1 that they would not be implementing this fee after all (Block, 2011). This shows the power of the marketplace, and the power that activists have to punish entities who are not socially responsible. Targeted boycotts that are well-organized, well-conceived, adequately funded and robust have shown to be effective in attaining objectives, such as ending the seal hunt in Canada by boycotting Canadian seafood (Best, 2004, p. 3). Actions is one area in which corporations must show social responsibility. That said, it is also one of the more difficult ways for a corporation to be responsible, as it inevitably makes the corporation’s costs increase (Walker and Brammer, 2009, p. 130). Because socially responsible actions increases the operating costs, corporations must be encouraged to procure in a socially responsible manner, and this encouragement may either be internal or external. Examples of external factors are legislation, boycotts, pressure from socially responsible investors, and negative media attention (Mont &Leire at 13-14). The internal factors may be the corporation’s desire to maintain its organizational values and good reputation. It may also have sheerly altruistic motives, in that it desires ethical social outcomes, and this would be another example of an internal corporate motivation to procure responsibly (Mont &Leire at 15-16). That said, socially responsible actions also presents barriers. One of these barriers is that its Board of Directors may not approve of the corporation’s socially responsible activities if it interferes with the bottom line in any way, and the benefits of acting socially responsible are not immediately apparent. Another barrier is the possible learning curve – the top executives are used to doing business in a certain way, and acting socially responsible may be something of which these executives may not be aware. Because of this, top management may not be committed to social responsibility, and if top management is not committed, then responsible actions will not happen. Another barrier is the lack of legislation, in that corporations may not want to act unless they are forced to, for all the reasons mentioned above (Mont &Leire at 16-17). Because of the enormous barriers regarding social responsibility, corporations may not want to act responsibly. Therefore, they need encouragement, and this sometimes comes in the form of voluntary codes. One example of this kind of incentive are product labels which show that the product meets social and environmental standards. Another incentive are shareholder initiatives which ensure that the corporation upholds these standards. (McCrudden at 3). The way that these corporations achieve the standards set by these voluntary codes is by putting into their actions contracts their individual social responsibility requirements (McCrudden at 3). While these codes are voluntary, corporations may benefit by adhering to these codes, and the way that they can make the public aware of their compliance is by featuring their compliance in marketing campaigns. A good example of this is the organic food industry. As more people become aware of the suffering of factory farm animals, and quantity of pesticides on their fruits and vegetables, more people are buying organic fruits and vegetables, and meat which is raised in a more humane manner than are factory farm animals. Thus, companies benefit from advertising their compliance with laws regarding the safety of animals, or their compliance with codes which govern the use of pesticides on their produce (Catlaw at 3). For example, if a voluntary code states that farms are not to use antibiotics or hormones on their farm animals, then companies will benefit from avoiding antibiotics and hormones, and advertising this fact prominently on the meat that they sell. Another prong of the corporate social responsibility analysis is that of corporate charity. While Milton Friedman states that corporate charities are not responsible, because they are short-changing their shareholders (Reder, 1994, p. 174), Kenneth Macke, CEO of Dayton-Hudson demurs from this analysis. To Macke, corporations benefit when the community is healthy, because a healthy community means healthy retail profits (Reder, 1994, p. 174). This is a benefit for corporate charity, because a healthy community has more dollars to spend than an unhealthy one. That said, corporate charity is also important because, like other aspects of corporate social responsibility, it gives the corporation an important image boost (Makower, 1994, p. 104). Such is the case for companies like Pfizer, which is one of the corporations examined below. Pfizer has had an image problem, due to its practice of pressuring doctors to prescribe drugs for ailments for which these drugs are not approved. This has resulted in massive fines to the company, not to mention a public relations nightmare. For instance, in 2004, they were forced to pay a $430 million fine for pressuring doctors to prescribe a drug meant for epilepsy, Neurontin, for uses not approved by the FDA. In 2009, the drug in question was the drug Bextra, which was developed to treat arthritis and menstrual issues, yet they pressured doctors to prescribe this drug for other purposes. For this, they had to pay the largest fine in US history - $1.1 billion. Civil verdicts also came from this practice, as they had to pay plaintiffs a total of $1 billion for this same practice (McCabe, 2009). Another potential bad corporate actor is McDonald’s. While this company is beloved by many, they are reviled by many as well, due to the accusation that they promote childhood obesity by their use of toys in Happy Meals (Class Action Lawsuit Targets McDonald’s Use of Toys to Market to Children). Documentary maker Morgan Spurlock did not do McDonald’s image any favor, either. His documentary Super Size Me showed the effects of eating nothing but McDonalds for breakfast, lunch and dinner for 30 days. During this period of time, he gained 24 pounds, and suffered such maladies as increased cholesterol, mood swings, depression, sexual dysfunction and fat accumulation in his liver (Supersize Me). Because McDonald’s has an image problem, they, like Pfizer, would also benefit from participating in corporate charity. Thus, the benefits of corporate charity become immediately apparent in companies which have an image problem. With Pfizer, they have a poor image because of their illegal and dangerous practices of off-label pressuring. McDonald’s is widely seen as being irresponsible in their marketing to children, and its overall promotion of obesity in the populace. Both of these products may change the subject of their illegal practices by showing a spotlight on their charitable endeavors, which are described below. This is a cynical view on why they are charitable, but may not be entirely inaccurate. To this end, Pfizer has become known for its charitable good works. They received an award in 2004 for their charity efforts (Jones, 2004), and was number one on Forbes’ list of most generous companies, giving away $2.3 billion in cash and products, which represented 24.2% of its total profits (Smith, 2010). Pfizer has also focused upon sending human capital, including doctors and health educators, to developing countries such as countries in Africa, Asia, Eastern Europe and Latin America. (Corporations Sending Human Capital, Not Just Money, to Charities Overseas). The list of charitable contributions that Pfizer makes is long and diverse, which includes many charities focused upon HIV and cancer, as well as lesser known diseases such as scleroderma and Raynaud’s Syndrome. While the cynic may say that Pfizer only makes these charitable contributions because it is trying to change the subject of its misdeeds, there is another view of this charitable work. This view is that the company is using its status as a giant pharmaceutical corporation as a force for good in the world. Moreover, the charitable activity helps Pfizer’s bottom line in that it raises awareness of its pharmaceuticals in underserved populations of the world, which also increases drug sales. Meanwhile, more people who need these drugs, but cannot afford them, are able to receive them. Thus, it is a win-win – Pfizer demonstrates concern for the world and the community, which helps its image and marketing, and people get sorely-needed drugs . McDonald’s has an image problem, as well, as indicated above. McDonald’s, like Pfizer, also has a way to rehabilitate their image through their charity, the Ronald McDonald House, and other related charities (Ronald McDonald House Charities). The charities include the Ronald McDonald House, which provides a place near the hospital for parents of sick children to stay. The Ronald McDonald family room is another charity, and this provides parents a place in the hospital to rest and reflect. The Ronald McDonald Care Mobile program is another charity, and this provides dental, educational and medical services for children in poor and underserved areas (Ronald McDonald House Charities). Like Pfizer and McDonald’s, the entire banking industry has an image problem right now. People around the world either know or suspect that the banking industry’s irresponsible actions in 2008 caused the worldwide recession, and, yet, nobody seems to be going to prison for what occurred. Meanwhile, reports about bonuses being paid to banking executives are incurring further outrage (Asthana, 2010). All of this has led to a perfect storm of outrage in which the banks are increasingly perceived in a negative fashion by the general public. In short, just like with Pfizer and McDonald’s, the banks would do well to investigate charitable opportunities which would help to rehabilitate their image and make people believe that they are not soulless corporate entities who are out for profit at any cost. UK Corporate Scandals and CSR in Banks There is no doubt that UK has suffered major corporate scandals, even before the current scandals regarding the 2007 banking collapse. One of these involved Baring Bank, which was brought down by the actions of Nick Leeson, a rogue trader. Leeson made fraudulent transactions, and was able to do this because he was both the Chief Trader and Head of Settlements for the bank. This essentially means that Leeson was able to make fraudulent transactions that would be undetected, as the Head of Settlements is supposed to oversee the trades made by the Chief Trader. Since Leeson was in both roles, he was able to cover up his transactions (Brown, 2005, p. 13). It was determined that the scandal was not just brought about by Leeson’s actions, but by a lack of corporate governance, as the bank did not supervise Leeson properly and allowed him the kind of power that made this scandal possible. (Drennan, 2004, p. 261). Robert Maxwell, the CEO of the Maxwell Group was responsible for another scandal, as were his lack of ethics. Maxwell had control of the finances of several companies, and he borrowed money from the pensions in these companies. This led to the Maxwell Group collapsing and the loss of pension funds for thousands (Drennan, 2004, p. 259). The UK took a number of actions after these scandals, including stepping up enforcement of existing rules and reworking the regulatory framework (Fearnley& Beattie, 2004, p. 118). Moreover, the UK also changed the procedures in auditing, corporate governance, financial reporting and accounting oversight (CGAA). Additional regulations brought about by the scandals included auditor independence (Fearnley& Beattie, 2004, p. 127). Therefore, the fact that new regulations were put into place after the last wave of scandals, yet the current scandal still occurred, shows the limits of government intervention, and highlights the need for increased corporate social responsibility for the banking industry. Gibbons (2011) has quantified corporate social responsibility for bankers in a recent study of initiatives taken by major players in the UK banking industry to address social concerns. For instance, Gibbons states that the banking collapse has been detrimental for lower-income individuals, as it has restricted access to credit, which is important to secure loans for housing and for higher education. This particular problem has been identified by Gibbons as one of restricted access to financial services. Another issue regarding corporate social responsibility identified by Gibbons is that of supporting financial education programmes, which is important because it helps the low-income individuals understand financial instruments, which, in turn, helps them in that they are less likely to be taken advantage of by unscrupulous financial practices. A third area of corporate social responsibility is that of financial assistance to those who are hard-hit by the financial crisis. The fourth area identified by Gibbons is the need to focus upon responsible lending practices, as the current banking crisis, which has caused so much misery, was caused by irresponsible lending practices. Thus, Gibbons analysis focuses upon both aspects of corporate social responsibility - charity, in that banks should be expected to financially assist the individuals who were hurt by their behavior; and actions, in that banks are called upon to be more socially responsible in their lending practices. To this end, Gibbons selected 12 banks to study regarding their corporate social responsibility practices. He chose the largest banks, as they have the largest global footprints, as well as mutual funds, savings banks and cooperatives. Among these banks were HSBC, Santander, Credit Agricole, Barclays, Royal Bank of Scotland, Lloyd’s, BNP Paribas, Commerzbank, Nationwide Building Society, La Caixa, and Co-Operative Financial Services. These banks are headquartered in the UK, Germany, and Spain. Gibbons selected these banks and assessed them using criteria to measure their degree of corporate social responsibility. Among the criteria is each bank’s engagement with the public, and the degree to which they use public feedback in designing their policies and procedures; their external assurance mechanisms; how well they adhered to the principles put forth by the European Commission for Responsible Credit (ECRC); and their use of CSR reporting frameworks. What Gibbons found is that the banks who were actively involved in responsible lending practices, which means that they have instituted programmes which address this concern, and use clear indicators to monitor this aspect of their business, are Barclays plc; The Royal Bank of Scotland; BNP Paribas; Lloyd’s Banking Group; and Nationwide Building Society. He also found that the UK firms tended to not report on consumer complaints, nor did they provide an assessment of cases reported to the Financial Ombudsman, despite the requirement of this reportage required by the Global Reporting Initiative. This is in contrast to its European counterparts, who do tend to comply with the Global Reporting Initiative and do report on consumer complaints. They also found that the firms made ethics in lending a priority, according to their annual reports, placing a greater value on corporate ethics and corporate values, using their ethics and values to ensure responsible lending practices for each individual firm. Each firm also stated that they were more engaged with stakeholders. The notable, and rather glaring, exception is HSBC. This bank failed to identify responsibility in lending as an issue in their annual report. The next aspect of corporate responsibility looked at by Gibbons is that of financial inclusion, which would include practices which make access to credit easier for those who really need it. Gibbons found that the firms who are leading in this regard are Barclays, BBVA, BNP Paribas, Cooperative Financial Services, Credit Agricole, La Caixa, Lloyd’s Banking Group and the Royal Bank of Scotland. These firms are making moves towards financial inclusion, such as supporting credit union developments and microfinance programmes. He found that, once again, HSBC failed to mention financial inclusion as a priority. He found the same with Nationwide Building Society and Santander. The other prong of the corporate social responsibility cited by Gibbons is that of financial education programmes. He found that the BBVA, Royal Bank of Scotland, Nationwide Building Society and Lloyd’s Banking Group were the leaders in this regard, as each of these entities had a programme in place for financial education, and had partnerships with entities the provided this type of education. Each of these entities also had significant investments in these programmes, and BBVA went one step further, and provided ethical guidelines for this type of work. These are the only firms who were leaders in this type of initiative. All the other firms did not have concrete programmes in place to address this concern. The next concern is with regards to helping individuals who are in financial need. He found that every firm had changed their practices and procedures to address this concern, but that the majority of these firms did not engage in charity in this regard. Rather, they addressed the concern by training their customer service workers to handle enquiries by those who are financially in need, and by modifying payments, such as abating mortgage payments for individuals who had lost their jobs. These mortgage payments were abated for up to 12 months in some instances. Other efforts include avoiding mortgage repossessions and helping to restructure consumer debts. This is not to say that none of the firms actively engaged in charity in this regard. One possible charitable contribution in this area was contributed by Credit Agricole, which created a special organization geared towards helping consumers who are overly indebted. Lloyd’s Banking Group is another firm which has actively engaged in charity in this area, donating ?11.4 million to money advice charities. Likewise, the Royal Bank of Scotland has also donated to money advice charities, giving ?1.5 million to the Money Advice Trust. Meanwhile, the Cooperative Financial Services group has donated just under ?287,000 to the Consumer Credit Counseling Services, which is an organization that helps financially strapped individuals to restructure credit obligations. It also gives out financial advice. Thus, Gibbons points out the overall failure of voluntary corporate social responsibility regarding the banking industry. The major failure is that the largest firms, particularly HSBC, do not see the need to change their practices to become more responsible. They do not have a program in place that would indicate that they are more responsible with their lending practices, nor do they have any programs in place which address financial inclusion. They do not support charities which help financially strapped individuals, nor have they implemented any programmes to help those in need. They also failed to implement any programmes which help with financial education, and they apparently do not support such programmes. This is outrageous, considering the behavior of large banks, such as HSBC, was a major reason for the recession, which, in turn, is the reason why so many are financially in need today. This highlights the need for a more stringent code, or, even better, for a mandatory code by which banks must abide. Major banking giants such as HSBC should be leading the way in corporate social responsibility, and the fact that HSBC is failing in this regard shows that it is not only failing to lead, it is failing to follow. Smaller banks like The Royal Bank of Scotland, on the other hand, are leading in corporate social responsibility. However, their global footprint will not be as large as HSBC, as they are not as large and global as HSBC, therefore their global influence will be substantially less than HSBC. In short, either banking behemoths must get on board with being more responsible, or the entire banking industry must be forced to do so. Therefore, it seems that the guidelines provided by the European Commission on Responsible Credit is not being followed by major banks. Another mode of encouraging corporate social responsibility in banks has been the been the Chartered Banker Code of Professional Conduct. This code of conduct has been underwritten by the major players in the banking industry, including HSBC, Santanders and Barclay’s, among others. This Code states that the bankers who agree to abide by the Code agree to treat customers, colleagues and counterparts with respect; consider the risks of the advice given, and holding oneself accountable for their impact; comply with all regulations and legal requirements; treat information with appropriate confidentiality; become more aware about conflicts of interest; develop and maintain professional knowledge; and act fair, honest and trustworthy (Chartered Bankers Professional Standards Board). This Code is laughable because of its vagueness and lack of enforcement provisions. For instance, this Code states that the bankers who abide by the code agree to abide by regulatory and legal requirements. The banks should not have to have a Code to tell them to do this, as this is something that they should already be doing. Moreover, the Code states that the bankers must become aware of conflicts of interest, yet it does not state that they must do anything about the conflict of interest when they arise. All the other provisions are vague – the bankers agree to treat everybody with respect, and they agree to fair, honest and trustworthy. There are no specifics as to exactly how bankers should act, and there are no specifics about particular ethical conduct which may or may not run afoul of the Code. Barristers have a strict ethical code by which they must abide (Code of Ethics) – why shouldn’t bankers, after they caused the collapse of the financial industry and the worldwide recession which followed? Notably lacking in the Code of Ethics is any specifics which would address the issues put forth by Gibbons. Gibbons believes that banks should be more socially responsible, particularly because they are the cause of so much financial misery with their shoddy practices which caused the current recession. Moreover, there is a major need for financial education, as shown by the recent scandals regarding payment protection insurance, which is insurance that allegedly covers the payments for people who have lost their job. These insurance protection packages have been sold to individuals who are self-employed, who would not be covered by the protection; sold as essential to individuals; or sold without the customer’s knowledge. Moreover, these instruments are expensive, adding from 20% to 50% to the overall cost of the loan. They are also inefficient, as the claims procedures are complicated and the amount of time to be compensated is lengthy. The Office for Fair Trading states that these instruments are a “poor deal” for consumers (Wearden, 2011). As another example for the need for financial education, HSBC was fined ?10.5 million over charges that their subsidiary, NHFA, gave poor advice to elderly clients regarding investments which were unsuitable, mainly because the investments exceeded the individuals’ life expectancy. This meant that the elderly clients who took these investments were required to withdraw funds prematurely, incurring penalties for doing so. An investigation into these investments showed that 9 out of 10 were considered unsuitable for this reason. The average age of the individuals who were caught up in this scheme were 83 years old, and considered “extremely vulnerable” (HSBC Hit With ?10.5 Million Fine Over Mis-Selling Scandal). While these scandals point to the need for better financial education, and banks should be taking the lead on this, the other prongs of analysis in Gibbons’ reports are important as well. For instance, it is crucial that all firms have ethical standards regarding fairness in lending, yet many of the firms studied by Gibbons, including HSBC, do not have these internal standards. Access to financial services is vital for the underprivileged, so that they may afford university and housing. Financial assistance to those who are underprivileged or have lost their job is also important so that individuals do not end up displaced from their homes. Firms should be focused on these aspects of corporate social responsibility, if not for altruistic reasons, but for their bottom line. As what happened with Bank of America, the firms may soon find themselves on the wrong end of a boycott and negative public relations campaign, particularly in light of the Occupy movement, which has focused laser beam attention of banking ethical missteps. It seems that the largest firms are still resistant to voluntary ethical calls for reform, therefore there should be a mandatory code of ethics by which banks must abide. As other industries have adopted socially responsible practices, the time has come for the banking industry to do the same. Conclusion Corporations in today’s world need to be focused upon something other than the bottom line. They must realize that they are citizens of the world, and, as such, they owe a debt to their fellow man. As corporations who plunder the earth and strip away precious commodities from future generations should pay some heed to being more responsible in their actions, banks which have plundered the financial system and caused so much misery should do the same. As large entities such as Pfizer and McDonald’s have recognized that they have received so much from the public that they decided to give back, so should banks. More than ever there is a need for banks to not only be more responsible in their lending practices, but also give back to the community in the form of charitable contributions to organizations that focus upon financial literacy. The irony of this scenario is that the banks will be giving to organizations that are teaching people to recognize scams when they see them, which will hurt the bottom line of the banks who perpetrate these scams. Yet they may also find that this kind of financial literacy is helpful for them, especially if they encourage it through charity, as it will give them a better image while helping to rein them in when they are tempted to perpetrate these unethical schemes. One thing is sure, however – the new Chartered Banker Code of Professional Conduct, with its vague provisions regarding conduct and no method of enforcement, is unlikely to address the concerns that the public rightfully have regarding the unethical conduct of banks. References Asthana, A. 2010. “New Poll Reveals Depths of Outrage Over Banker’s Bonuses,” The Guardian. Available at: http://www.guardian.co.uk/business/2010/feb/21/bank-bonuses-outrage-opinion-poll Best, S. (2004) “Influencing Canadian Seal Hunt Policy With a Consumer Boycott of Canadian Seafood” Available at: http://www.stephenbest.ca/Seafood_Boycott.pdf Block, S. 2011. “Bank of America Drops Debit Card Fees,” USA Today. 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