Implications of Corporate Social Responsibility for Businesses - Assignment Example

? Implications of Corporate Social Responsibility (CSR) for Businesses, Communities, and Drivers of Introduction The concept of corporate social responsibility (CSR) is not new or revolutionary. The basic principle is that businesses have inherent responsibilities to various stakeholders (e.g. employees, communities) beyond the maximization of profit. Leading companies have the power to manipulate, influence, and control customers, employees, and local communities. But power unavoidably involves responsibility. Businesses, in fulfilling their duty to shareholder value maximisation, have social responsibilities. J. Maurice Clark argued in 1916 that “if men are responsible for the known results of their actions, business responsibilities must include the known results of business dealings, whether these have been recognized by law or not” (Clark, Abramovitz, & Ginzberg, 2009, p. 83). This paper critically examines the concept of CSR, its implications for both business and communities and the drivers for CSR. Analysing and understanding the concept of CSR is crucial because it focuses on the development of a sustainable future. CSR is important because it affects all facets of businesses and, in turn, businesses are vital because they generate much of the welfare and wealth in society. By itself, CSR is ever more critical to firm value and societal stability. Hence, fundamental to the notion of CSR is determining where businesses belong in the society. By dealing with environmental issues, corporate ethics and governance, and other concerns, society builds a progressive framework wherein companies operate (Nakajima, 2011). Framework is progressive because the perfect combination of business objectives and societal demands is continuously changing. Although businesses are mainly in charge of generating wealth and motivating growth in society, they do not operate single-handedly. Governments are important because they develop and establish the policies and limits through which businesses and society function. Furthermore, nongovernmental or non-profit organisations are tasked to generate social goods without satisfying the obligations of a government agency or pursuing profit. However, in the absence of innovation free enterprise demands, economic and social growth deteriorates (Alexander, 2010). In the absence of the powerful wealth-generating mechanisms of business, the resources necessary to activate non-profit organisations and government agencies wither, eventually diminishing people’s quality of life. Businesses generate numerous societal goods. Yet, they also bring about serious harm, as economic crunches, industrial mishaps, increasing unemployment rate, and environmental problems reveal. The governments then respond with regulatory policies to limit the worst unethical practices of businesses (Pedamon, 2010). Between the severe damage and general good businesses generate, consequently, resides interest in the legitimate role of businesses in society, particularly as technological advancement and globalisation widen the influence and power of major corporations. Economist Milton Friedman claims that “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible” (Aras & Crowther, 2010, p. 327). Yet, in contrast, companies are more and more pressured to operate with a multiple-stakeholder perspective (Alexander, 2010)—recognising the needs and demands of various stakeholders, such as customers, shareholders, and employees while fulfilling responsibility for communities and the broader environment wherein they conduct their business. Implication of CSR for Business Although there are various ways to view the advantages of CSR because they are interconnected, they mostly involve the following: first, enhanced reputation; second, more positive and stronger ties with communities; third, improved employee relations that lead to positive outcomes such as higher productivity and motivation; fourth, more stable profitability or financial status by means of operational productivity improvements (Idowu & Filho, 2008). Companies can adopt CSR to generate direct advantages for corporate performance. For instance, operational productivity can be attained by curbing dependence on raw materials and energy as major ingredients for production. Recycling can also lessen wastes. These environmental-friendly measures can generate economic and environmental gains for the business and thus further strengthen profitability and financial outcome (Pedamon, 2010). Operational productivity can be attained in other aspects of CSR like restructuring the manner information is disseminated to stakeholders that call for greater transparency. Dealing with possible risks and problems more successfully through the principles and instruments of CSR can also cut down costs. Exercising CSR principles in corporate decision-making can lead not merely to decreased costs but also to identification of new market prospects (Nakajima, 2011). There are several studies that have investigated the correlation between business financial performance and corporate social responsibility, and almost all empirical findings confirm that the correlation is positive. Throughout the recent decades, many features of CSR have been studied and scrutinized in business and academic communities, and as shown in the model of Schwartz and Carroll (2003), ethical, legal, and economic aspects can be represented as the general features of CSR. A particular feature of CSR that has been the focus of numerous economists is the economic aspect—financial implication of CSR for profit-based businesses. A group of scholars, influenced by the perspective of Friedman (1970), has reported a negative correlation between financial outcome and CSR measures as determined by, for instance, surplus return, or stock price fluctuations (Aras & Crowther, 2010). Friedman (1970) claimed that managers are chosen by the stockholders as representatives and their only duty is working towards the fulfilment of the shareholders’ interests. From the point of view Friedman (1970), businesses’ unique social responsibility is to utilise its resources and take part in operations intended to boost profits and shareholders’ wealth. All other tasks interrupting the best distribution of limited resources to other functions bring about unfavourable impact on firm value. The other group of researchers, on the contrary, supports the favourable effect of CSR measures on companies’ financial outcome. The argument of these researchers, influenced by stakeholder theory, claims that companies broaden the range of concerns in their operations and decision-making process to other stakeholders (e.g. employees, customers, communities), besides shareholders (Alexander, 2010). These researchers claim that CSR activities can enhance financial performance through discouragement of possible regulatory pressures which could incur huge costs for the company; boost in company reputation; and direct cost reduction. Another group of scholars has embraced no specific correlation between financial outcome and CSR, but somewhat insists on the presence of numerous complicating variables for researchers to determine a specific effect from CSR on financial outcome (Idowu & Filho, 2008). Apparently conflicting arguments between stakeholder theory and Friedman’s perspective emerge from the idea that CSR, which takes into consideration the interests of a wide range of stakeholders, is actually damaging to value maximisation efforts of the company. Nevertheless, Jensen (2001) tried to resolve this clash between these two perspectives by introducing liberal stakeholder theory, which claims that a company will fail to capitalise on its long-term value if it takes for granted the interests of various stakeholders. Moreover, as argued by several scholars, the capability of a company that produces maintainable value and wealth over time is formed by the relationship with various stakeholders, both external and internal (Pedamon, 2010). Corporate social responsibility, if it further reinforces financial performance and firm value, can be an effective business policy as argued by the stakeholder theory, not a taking advantage of shareholders’ wealth to satisfy the interests of other entities, as feared by Friedman. Implication of CSR for Communities Claims about the pros and cons of social responsibility have continued over time. It is rooted in whether business is viewed mainly as an economic unit which is duty-bound only to its shareholders, or a socioeconomic unit which has responsibility to different stakeholders. Some argue that a socially responsible environment has positive implications, not only for businesses, but for communities too. Communities benefit through greater employment prospects and healthier neighbourhoods; business gains from an improved community because this is where its consumers and labour force come from. The great implication of CSR for communities is manifested in its numerous names, such as community development, community relations, and corporate community involvement. It is broadly believed that the business philosophy has begun to abide by the rule of transparency (Nakajima, 2011). Hence, CSR is viewed as a major tool for involving the broader community as a major stakeholder in business operations. A major aspect of CSR comprises the manner that a business engages and cooperates with its stakeholders. To the point that stakeholder involvement and cooperation require keeping an open and effective communication, being able to build strong relationships, and showing transparency by means of reporting and accounting procedures, the ties between the community and the business is expected to be stronger, more dependable, and truthful (Aras & Crowther, 2010). Although there are numerous uncertainties about how much a corporate responsibility spread into communities in relation to the functions of citizens and governments, there is a sound claim that CSR can successfully enhance a firm’s relationship with communities and thus generate several major components that will enhance business opportunities. It is without a doubt that corporate social responsibility has implications, not only on community, but on community development as well. The impact of CSR on community development is the benefits gained by the community as an outcome of companies’ social commitment to the larger community. The usual roles of CSR in community development are the following. First is to assume responsibility for the detrimental outcomes of industrialisation. This is associated with growing morality-based industries demanding more ethical corporate activities. Second is stronger relationship between communities and companies (Jensen, 2001). Via CSR the presence of businesses in the community is viewed beyond a belief that companies are a site to acquire jobs and manufacturers of products and providers of services. Thus, community and businesses would remain in peaceful coexistence. This eventually turns into a social resource that is fundamental in community development (Clark et al., 2009). Third, CSR aids in the protection of the environment. Several of the major corporations across the globe have expressed high commitment to corporate social responsibility, for instance, with programs intended to decrease their environmental impact. These firms adopt the perspective that environmental and financial performance can team up to enhance firm value and reputation (Schwartz & Carroll, 2003). For instance, ‘We green the earth’ motto created by several multinational corporations in Malaysia that possess massive golf lands in housing communities is an example of a CSR program that safeguard the environment (Glasbergen, Biermann, & Mol, 2007, p. 167). ‘Green Peace mission’ is also a CSR program that benefits the community in that it reinforces its right to exist in a healthy environment (Idowu & Filho, 2008, p. 20). Fourth is the interdependence between a community and business. The close relationship between a community and business is another feature of the role of CSR in community development for eventually it builds sustainable development. The CSR initiatives provide assistance to indigent communities and local agencies. This definitely results in sustainable community development (Glasbergen et al., 2007). Lastly is for corporate sustainability objectives. In European countries, for instance, corporations have been satisfactorily fulfilling their social function for decades, usually under the goal of corporate sustainability. The European Union (EU) has created a model of corporate sustainability, which recognises a dynamic set of environmental, social, and economic goals that businesses are inspired to attain (Bichta, 2003). Such efforts signify an ongoing commitment by some companies to operate ethically and help boost economic progress while enhancing the standard of living of their employees and other stakeholders, especially the local communities. Implication of CSR for Drivers It has been claimed that existing practices in the regulated businesses comply with best practice instead of corporate social responsibility. Businesses also experience difficulties implementing best practice and pay for latest technologies. For example, by being in the energy industry, the electricity firms view the government objective of renewable energy and environmental protection an actual problem (Bichta, 2003, p. 88). Major corporations in the industry have only lately started to try wind cultivation whose potentials will rely on consumer acceptance. In the water industry, there is an evident split between ‘followers’ of environmental regulatory policies and ‘pioneers’ in environment regulation with ongoing projects in wastewater management and energy sustainability processes (Alexander, 2010). For that reason, government could have a part to fulfil to encourage best practice among businesses and assist them in moving towards socially responsible conduct. In order to guide businesses in understanding the advantages of CSR, government has to facilitate its measurability. With this in mind, social and enviromental reporting rules have to be complemented by quantifiable performance markers. These markers could have been the joint effort between trade unions, industries, and government. Businesses will be more encouraged to advance towards socially responsible behaviour, if there is sufficient evidence to confirm greater value return arising from environmental and social regulations (Pedamon, 2010). Hence, the government can encourage businesses to support socially responsible behaviour. In view of the impact of economic regulation, the government perspective in the UK is that “the economic regulator should make an appropriate contribution towards achieving sustainable development… and economic regulation should be conducted in a way that is alert and consistent with the government’s wider and social and environmental goals” (Bichta, 2003, p. 89). And so, it becomes apparent that economic regulation must broaden its function in helping the government develop and implement environmental and social policies by encouraging stakeholder involvement in the creation and enforcement of environmental and social regulations. CSR revolves around stakeholder engagement in the decision-making process and the economic regulation can fulfil a vital part in strengthening and expanding stakeholder involvement through community inspections, open forums, and consultation sessions, and helping with the representation of the interests of various stakeholders in businesses (Bichta, 2003, pp. 89-90). To the mission of assisting government in improving regulated businesses’ social responsibility, the economic regulation can help primarily by taking part in beneficial stakeholder discussion and through appropriate price regulation. This second perspective claims that if businesses in regulated industries are to enforce social policies, the economic regulation will have to be involved in establishing price regulation properly, in order for businesses to cover afford the costs of CSR initiatives and distribute resources among consumers (Glasbergen et al., 2007; Bichta, 2003). There is, obviously, a part to fulfil for the businesses themselves. A more positive corporate standpoint in CSR transparency should be implemented and the followers of the regulated markets should take into consideration learning from the pioneers and collaborate towards efficent reporting of environmental and social conduct. The current indicators created by trade organisations may be applied as the stage for the creation of CSR standards hence facilitating the measuring and benchmarking of social and environmental performance of businesses in regulated industries. This will facilitate greater transparency and enhance the opportunity for bettering performance by means of the knowledge obtained from benchmarking performance at the industrial level (Nakajima, 2011). Generally, the ‘facilitating’ function of government can be viewed as being dual: first is to build the environment for companies to implement CSR initiatives; and, second is to guide companies in understanding the advantages of pursuing approval from their stakeholders and shareholders alike. Conclusions Corporate social responsibility is truly one of the most important concerns of businesses nowadays. It has implications for businesses, communities, and regulatory drivers. For businesses, CSR has an impact on their financial performance, profitability, and firm value. Although researchers and scholars are still disagreeing about the nature of the relationship between CSR initiatives and financial performance, it remains clear that the socially responsible behaviour of businesses has an impact on their bottom line. With regard to communities, CSR helps in its development by means of encouraging businesses to commit to environmentally and socially friendly practices. And lastly, in relation to the drivers, especially the government and economic regulators, CSR initiatives influence their ties with businesses and the extent of regulatory policy they enforce. References Alexander, R. (2010) “Protection of the Environment is Now to be Taken Seriously in Company Law”, Company Law, 31(9), 271-273. Aras, G. & Crowther, D. (2010) A Handbook of Corporate Governance and Social Responsibility. England: Gower Publishing, Ltd. Bichta, C. (2003) “Corporate Social Responsibility: A Role in Government Policy and Regulation”, Centre for the Study of Regulated Industries, 16, 1-90. Clark, J., Abramovitz, M., & Ginzberg, E. (2009) Preface to Social Economics: Economic Theory and Social Problems. UK: Transaction Publishers. Friedman, M. (1970) “The Social Responsibility of Business is to Increase its Profits”, New York Times Magazine, para 1-32. Glasbergen, P., Biermann, F., & Mol, A. (2007) Partnerships, Governance and Sustainable Development: Reflections on Theory and Practice. UK: Edward Elgar Publishing. Idowu, S. & Filho, W. (2008) Global Practices of Corporate Social Responsibility. London: Springer. Jensen, M. (2001) “Value Maximisation, Stakeholder Theory, and the Corporate Objective Function”, European Financial Management, 7(3), 297-317. Nakajima, C. (2011) “The importance of legally embedding corporate social responsibility”, Company Lawyer, 32(9), 257-2. Pedamon, C. (2010) “CSR: A New Approach to Promoting Integrity and Responsibility”, Company Lawyer, 31(6), 172-180. Schwartz, M. & Carroll, A. (2003) “Corporate Social Responsibility: A Three-Domain Approach”, Business Ethic Quarterly, 13(4), 503-530. Read More