History and Evolution of Corporate Social Responsibility - Essay Example

?Corporate Social Responsibility Introduction Corporate social responsibility, also known as the social policy process, social issues in management, business and public policy, and corporate social performance, is a modern-day phenomenon that gained significance with the growth and proliferation of large multinational corporations. It is one of the earliest and most important concepts in the academic study of business and social relations that finds direct application in the practice of business (Windsor 2001). Until recently, debates raged about the propriety, even morality, of corporate social responsibility, with those opposing it displaying as much intensity as those espousing it. In this brief treatise, the history and evolution of CSR will be described and followed by a discussion on the concept and drivers of CSR. Focus is put on the role of CSR in the financial crisis, the implications of CSR for both business and communities, and the prospects of CSR for the future. History and Evolution of CSR While the concept of business corporations possessing some type of social accountability or obligation may have surfaced in the past, the serious study of corporate social responsibility as a facet of management commenced in the 1950s and was called by a host of other names (see Table 1). In 1953, Bowen posed the following question: ‘To what extent do the interests of business in the long run with the interests of society?’ (Bowen 1953, p. 5) The corporate responsibility core concept emerged as an economic concern. Andrew Carnegie, the founder of US Steel, articulated two principles supportive of CSR: (1) the ‘charity principle’ requiring individuals who have more to assist those who have less; and (2) the ‘stewardship principle’ stating that the rich and wealthy hold their wealth ‘in trust’ for the rest of society; while they hold it, they are required to multiply the wealth through making sound and prudent investments (Freeman & Liedtka 1991). Carnegie’s position was termed ‘richesse oblige’ by Windsor (2001), which is a parody of ‘noblesse oblige’. On the other side of the debate is the argument of Milton Friedman that corporations should pursue their economic self-interest and that CSR activities amount to a moral wrong against the shareholders. Activities directed at the social welfare should be properly left to the government (Freeman & Liedtka 1991). Friedman’s position resounded among many businesspeople and practitioners, understandably more than academicians, and the concept of wealth creation as the priority (some say only) goal for business constituted a recurring theme of many policy makers. At one point the argument entered the realm of academic discussion, and the debate eventually led to the conciliation of the two sides: ‘wealth creation is the best path to social welfare improvement’ (Windsor 2001, p. 226). This approach has been accepted by most businesspeople and managers because it resolves the duality imposed by Bowen’s premise that separates wealth and social responsibility. What it does not resolve is the direction management should take if a decision should be required between what may emerge to be irreconcilable alternatives (i.e. in favour of wealth creation or in favour of social responsibility). Currently, the main promoter of the ideas and principles of corporate social responsibility is the United Nations (Madrakhimova 2013, p. 115). Through the UN Guiding Principles on Business and Human Rights, the UN sought to advance global standards for business firms, particularly the large multinational corporations, to abide by in order to preserve and protect human rights that these businesses may be violating in the interest of earning a profit. Table 1: The genesis of the concept of corporate social responsibility (Madrakhimova 2013, p. 116) Concept of CSR CSR is a ‘concept whereby companies integrate social and environmental concerns in their business operations and their interaction with their stakeholders on a voluntary basis’ (European Commission 2001). The CSR framework itself has undergone a reconstruction through the years. Wood (1991) argued that there is a tripartite link among three elements, namely (1) responsibility principles and motivators of action and choice; (2) inter-organisational responsiveness processes in the determination of action and choice; and (3) the resulting outcomes of actions and choice. Carroll (1991; 1995), on the other hand, conceived of a pyramidical multiple corporate social responsibility model, the components of which are premised on the fulfilment of the firm’s economic responsibilities, i.e. economic and legal responsibilities are socially mandated, ethical responsibilities are socially expected, and philanthropy is socially desired. These are shown in the diagram following. All four dimensions are seen to coexist, although economic and legal responsibilities should precede the others because ‘a bankrupt firm will cease to operate’ (Windsor 2001, p. 233). Morality is an important element in Carroll’s framework. Diagram 1: Carroll’s pyramid of responsibilities While earlier concepts of CSR emphasised the philanthropic or civic duty aspect, recent developments have shown perceptions of CSR to have evolved in the sense that a ‘change of paradigm structure’ has taken place, and attention has shifted from development of business for shareholders, to a ‘broad coalition of stakeholders. CSR is treated as a kind of self-regulation of business’ (Madrakhimova 2013, p. 116). The demarcation between what is business and what is social responsibility has been obscured and instead, a symbiotic relationship between the two concerns is conceived. Thus, a business, by serving the interests of its broad stakeholder pool inclusive of the community and society in general, also pursues the wealth-generating goals of its shareholders. CSR today has come to encompass a number of elements that were not formerly contemplated as social responsibilities. These include four core components which are accountability, transparency, competitiveness and responsibility (Chen 2011). These would include corporate governance, environmental conservation and sustainability, energy efficiency, business ethical practices, transparency and disclosure, social and community development, poverty alleviation, labour relations, customer expectations, product design and production processes etc. Drivers of CSR There are a variety of factors that drive the manner in which CSR programmes are undertaken, and the level of success with which they are pursued. Regulatory pressures comprise one type of driver for CSR, although generally CSR principles rely more on voluntary compliance with ethical and moral principles rather than mandatory compliance with laws and regulations. One study examined the linkage between the degree to which investors are predisposed towards CSR, and the demographic (income, gender, age and education) factors by which they are qualified. Cheah, et al. (2011) found that younger and female socially responsible investors (SRIs) are more likely to believe that the firm’s social and environmental performance is as important its financial performance. Female SRIs with high incomes will most likely tend to believe that companies should be just as responsible to society in general as they are to their shareholders. Furthermore, younger SRIs , those with high incomes, and those with higher educational levels perceive socially responsible companies to be as profitable as other companies (Eng-Tuck, 2011). Galbreath (2010) focused examination of CSR drivers on the endogenous organizational factors. One such driver is the existence of formal strategic planning among the practices of the company. Firm culture has also been identified as exerting a positive influence over the firm’s orientation towards responsible stakeholder treatment. An element of firm culture, specifically humanistic culture, was likewise determined to have a positive effect on CSR. The study was conducted among the heterogeneous Australian firms. Arevalo and Aravind (2011) determined that the CSR approach has an impact on programme execution and the ultimate success of the CSR effort. The CSR approach most favoured among companies is the stakeholder approach, and the caring or the moral motive, followed by the strategic or profit motive, are major drivers in the pursuit of CSR. On the other hand, the most significant obstacles to the successful implementation of CSR are the lack of resources, and the complexity and difficulty of the CSR programme. Melo & Garrido-Morgado (2012) make use of a five-dimensional construct to determine whether social responsibility, in turn, drives corporate reputation. The five dimensions by which corporate responsibility is defined include employee relations, diversity issues, product issues, community relations, and environmental issues. These five dimensions were determined to significantly impact on corporate reputation, but the level of impact is moderated by the industry of the firm. The diversity of the work force is the most significant dimension, impacting positively in eight of the nine industries; on the other hand, product issues impacted positively in five industries but negatively in three others. The role of CSR in the financial crisis CSR, or more accurately the lack of corporate behaviour consistent with CSR, had contributed significantly to the recent financial crisis. Social responsibility includes the commitment to engage only in ethical practices in business, which requires that no action be taken where such action (or omission) will likely result in injury to others. It also requires full disclosure and transparency in all negotiations to those who shall be affected. This was the case with the lending and trading practices in the financial industry during the crisis. The creation and trading of little-understood collateralized debt obligations, credit default swaps and other derivatives the bases of which are obscure. Financial institutions pushed the trading and accumulation of these toxic assets among businesses and investors, knowing full well their risky nature and the possibility of grave harm to those who traded in them. Probably the more notorious of the many practices that transgressed CSR principles during the financial crisis was the payment of unconscionable sums as executive compensation even in those institutions which had gone bankrupt, borrowed bailout money the interest of which is paid by shareholders and depositors, and wherein depositors and investors suffered huge losses and failed to recover their deposits or investments. This is patently unethical, and therefore contrary not only to CSR principles but also to the principles of management. Executives are responsible for the manner in which their company was run, and when it was run badly and stakeholders suffered tremendously for actions taken by management, then their executives should not be benefitted with golden parachutes, bonuses, or otherwise large pay checks though these may be legal according to the letter of their contract. The moral hazard involved has a direct bearing on the lack of CSR in such executive compensation packages, and therefore these contracts should be reviewed and revised to enhance accountability, transparency, and fairness. Implications of CSR for both business and communities CSR plays a vital role in assuring that corporations, particularly large multinational enterprises, are limited in their activities in a manner that is not feasible through regulation or legislation. It is well-known that multinational companies, because their operations expand beyond the jurisdictions of nations where they have a presence, are capable of circumventing local regulations and national laws (Burgenmeier & Mucchielli, 2013). Some specialized functions of corporations that have to do with CSR require mandatory compliance with regulations such as financial disclosure of firm performance. The greater bulk of CSR activities, however, defy mandatory regulation for (1) lack of a generally recognized standard of ethical behaviour against which all multinational companies may be measured; (2) lack of a credible regulatory threat from state agencies; and (3) wide disparities in the expectations of stakeholders in different settings which the corporation may not meet without incurring huge costs (Borzel, et al., 2012; Wallace, 2002). While firms, through stakeholder pressure, may be compelled to abide by the generally accepted procedures of disclosure and conducting business under CSR covenants and agreements, there is still the chance that “corporate hypocrisy” may take place (Wagner, et al., 2009). Oftentimes, reports of the behaviours of firms regarding CSR are contrary to their stated standards of social responsibility. These cause inconsistencies in consumer perceptions regarding corporate hypocrisy that eventually tend to damaged consumers’ attitudes to the firm and, ultimately, affect its bottom line. At times the perceived hypocrisy is little more than just perception; this occurs when statements issued by the firm concerning their CSR intentions create abstract expectations that exceed the results that the firm may realistically target (Wagner, et al., 2009). Notwithstanding the inadvertent lapse in communication, the mere perception of hypocrisy or intentional deception will have repercussions that transcend the CSR aspect and translate into the actual performance of the business. Overall, while communities and society in general may benefit from CSR activities, there is likely a greater chance that most of the CSR pronouncements and reports pay more lip service than actual good to the intended beneficiaries. Prospects of CSR for the future There are two possible futures for CSR – one where CSR is embraced as standard practice, and one where it is evolved or replaced with a construct more acceptable and practicable to all industries or businesses. If CSR is to be adopted for all, then there is a need for definition and standardisation of the elements and components that go into CSR. There is a good chance that CSR shall remain generally accepted practice, because CSR strategies are perceived to be opportunities to align the social responsibilities with the business goals. Because well-conceived and well-planned corporate social responsibility objectives are integrated with the business strategy, pursuit of CSR (or perception of pursuing CSR) will actually be beneficial to the company in achieving their business goals (Ganescu, 2012). There are still existing opponents to CSR and to its implementation as mandatory practice (Flammer, 2013). This is because of the vagueness of the “responsibility” construct as pointed out by Friedman when it is applied to the broad society. It should be recalled that Friedman viewed the concept of richesse oblige (i.e., wealth obliges) as bereft of moral basis where business is concerned, and that the only goal of the business is to create value for the customer and wealth for the shareholder. However, an approach that tempers Friedman’s views with social responsibility is the stakeholder benefit theory, where stakeholder management practices becomes the basis for assessing corporate social performance. This pertains to stakeholder citizenship with respect to employees, their families, and the local communities. The advantage of stakeholder theory is that it addresses concrete interests and practices, instead of the society in general as CSR is presently conceived (Windsor, 2001). Conclusion The concept of corporate social responsibility is ultimately in answer to the question by Bowen: “To what extent do the interests of business in the long run with the interests of society?” The question is based on the premise that the interest of business and the interest of society are contradictory, or at least likely to conflict with each other. It also assumes that business has an implicit moral duty to serve to some extent the interest of society. This is the crux of the debate, according to Friedman and those who oppose CSR as a requisite for businesses. The charity and stewardship principles, in so far as they absolutely impose an obligation for the wealth creators to distribute the benefits of this wealth to those who do not contribute to its creation, are anathema to the nature of business; in this aspect Friedman is right to point to government as the agent of social development. However, when the stakeholder theory is applied as CSR, then corporate responsibility begins to make sense. Businesses would tend to operate in a way that affects and maybe disadvantages certain groups of people, particularly employees, customers, suppliers, and the community. By concentrating efforts at CSR to those persons whose interests may be compromised by the workings of corporations, then businesses and their shareholders have a responsibility to ascertain that injury is avoided as a result of operations. 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