The Importance of Corporate Social Responsibility Reporting - Coursework Example

The importance of corporate social responsibility reporting Literature review Corporate social responsibility (CSR) refers to the voluntary activities of an organisation that aim at ensuring sustainable development through conserving the ecological environment, ensuring efficient use of natural resources, implementing ethical business policies, participating in charitable initiatives in the surrounding communities and addressing the welfare of all stakeholders (Idowu & Louche 2011). CSR reporting is essential since a reporting entity will demonstrate its true commitment to attainment of both economic and social goals. Historically, the sole economic obligation of business was to increase the shareholder wealth, but the 21st century business environment created new demands for businesses (Philips 2011). The sustainability disclosures are the best practices that are employed by multinational companies across the globe. The disclosures enables a company manage social and environmental impacts and attain efficiency in natural environment stewardship. About 95 percent of the leading global companies issue CSR reports and implement ways of protecting their reputational asset and sustaining stakeholder trust through the CSR initiatives (Idowu & Louche 2011). CSR improves business performance through monitoring the long-term and short-term risks to reputation, improved access to capital, better relationships with government and regulatory entities and enhanced consumer loyalty (Philips 2011). CSR reporting makes decision-making more efficient through enhanced efficiency and cost reduction. The companies can be able to demonstrate their reductions in waste and CSR reports includes data that enhances transparency on the firm’s performance (Idowu & Louche 2011). The CSR reporting will prepare the firms to mitigate any social and environmental risks such as oil spills in petroleum firms that may have adverse financial and reputational impact on the company (Philips 2011). According to Adam Smith economic model, business owners are wealth maximisers and the obligation of the management is to maximize the shareholders’ wealth through efficient allocation of resources. Cuvilceva (2012) outlined that businesses owe economic, legal, ethical and discretionary obligations to the society. According to stakeholder theory analysis, individuals and groups within the society are affected by the actions of an economic entity and such groups have certain rights and obligations to impose on the businesses (Gray 1996). The stakeholders include the shareholders, suppliers, customers, creditors, government, trade unions, government entities, professional associations and trade associations (Cuvilceva 2012). CSR reporting incentives that have been identified by accounting literature include the need to counter anticipated regulation, response to environmental interest groups, public relations, social ethics and restoration of corporate legitimacy (Blowfield & Murray 2014). Accounting theories on CSR reporting have concluded that that companies that emit large amounts of greenhouse gases to the environment or whose operations have substantial adverse impacts of natural resources will have higher frequency of CSR reporting (Idowu & Louche 2011). The size of the firm, the nature of the industry and duration the firm has been in existence will influence the amount of CSR disclosures provided by the firm. Large firms that operate in petroleum or extractive industries usually have higher adverse impact on the surrounding communities and thus will maintain good relationships through highlighting the CSR initiatives that aim at conserving the environment or improving the welfare of the society (Cuvilceva 2012). According to legitimacy theory, businesses try to attain legitimacy and approval from the society through issuing CSR reports that suggest that the business cares for the society and environment. Horrigan (2010) points out that legitimacy is the congruence of larger societal value system and the organisational goals and firms are expected to disclose information to the society on their efforts towards being a good corporate citizen. The social norms, values and perceptions of the society change with time and thus CSR reporting is one of the legitimisation strategies that are used by large corporations to deal with legitimacy threats such as oil spill scandals and financial scandals. The firms will issue CSR reports that aim at changing the perceptions of the stakeholders without changing their negative behaviour in order to distract the attention of the stakeholders from an issue of concern (Cuvilceva 2012). Bacher (2007) is of the idea that CSR reporting is to attain credibility with stakeholders since corporations will build credibility and corporate image with the public through demonstrating their actions of becoming a good corporate citizen. In this case, CSR reporting entails the employee volunteer opportunities in the communities is essential in attracting and retaining qualified staff that will adhere with the company values of enhancing the social welfare of the society. Prasnikar (2006) asserts that the sustainability reports will highlight the measures and policies that aim at reducing work-related accidents thus enabling corporations to attract talent to risky working sites such as oil exploration projects and mining sites. CSR reporting enables a reporting entity build positive workplace environment since employees feel more engaged and appreciated by management comments about their actions that will be undertaken by the organisation to improve their welfare and reduce work-related accidents (Prasnikar 2006). Hawkins (2006) points out that consumers have different avenues of accessing information on the company operations and thus environmental reporting is essential in maintaining consumer loyalty since the firms will be capable of outlining how their brands contribute to safe environment. Blowfield & Murray (2014) agrees with Hawkins (2006) that CSR reports and disclosures will identify the ethical marketing principles and policies of a company thus enabling the company to respond to allegations of unethical packaging or advertisements that are intended to deceive the consumers on the product quality (Prasnikar 2006). For instance, food manufacturing companies use CSR disclosures to highlight the measures the company undertakes to ensure quality and safety of the food products thus limit the media scrutiny or negative media reports on the health effects of the food products (Solomon 2007). Examples of companies that have used CSR reporting in dealing with health concerns on their food products include McDonalds food chain that has repeated pointed out the actions undertaken in improving the menu and ensuring health conscious salads. Global firms have embraced the global reporting initiative standard that aims at ensuring external assurance and reducing the monitoring costs. About 51 percent of the S & P firms follow global standard in CSR reporting since the rating agencies consider the sustainability information in their broader analysis of the risks attached to the firm (Idowu & Louche 2011). In this case, CSR reporting will reduce the agency costs such as audit costs since shareholders and other stakeholders have an assurance that the business is committed to enhancing the economic outcomes through sustainability initiatives (Idowu & Louche 2011). According to Horrigan (2010), business entities have a social obligation to satisfy the public demand for information. The increase in the level of consumer education and awareness has forced business entities to engage in social and ethical reporting. The public demand for information is satisfied with the management comments in the CSR reports such as the current trends in the external business environment (Prasnikar 2006). The management will set out public agenda in CSR disclosures through highlighting the impact of new regulations on their business operations, the need for the government to invest in renewable energy sources and the need to ensure political stability in the country (Gupta 1995). Corporate social responsibility reporting is important in stakeholder management. The management is expected to consider the needs of different stakeholders in their managerial actions and decisions (Prasnikar 2006). Accordingly, the different stakeholders have differing levels of influence in the organisation and CSR reporting is used by the management to manage the various expectations of stakeholders. In this case, CSR reporting facilitates stakeholder loyalty since various stakeholders can understand how the firm is committed in addressing their needs and expectations (Cuvilceva 2012). For instance, the business will be able to demonstrate the actions taken by the company to improve the quality of its products and this will assist in ensuring customer loyalty. The firm will engage the employees through CSR reports thus leading to higher job satisfaction, higher employee productivity and reduction in employee turnover that will also reduce the employee training costs (Wells 2013). CSR reporting is also important in dealing with the increasing investor pressure. Currently, investors consider the economic performance and corporate governance structures and policies of the firm before making an investment decision (Ruschak 2013). In this case, firms will make social and ethical disclosures such as measures undertaken to comply with ethical accounting practices and curb fraud in order to attract investors and increase the share value of the firm in the stock market (Prasnikar 2006). In addition, institutional investors have been demanding companies to provide increased environmental sustainability data in order to systematically determine the sustainability practices and evaluate the potential long-term return of their portfolios in the company (Ruschak 2013). CSR reporting is useful in supplier management since large corporations take measures to ensure the business partners and suppliers follow a certain code of conduct for the suppliers. The disclosures aim at ensuring ethical and sustainable sourcing of raw materials and ensuring that business partners do not tarnish the good reputation of the firm (Schwartz 2007, p 48). For instance, the suppliers and business partners are required to adhere to human rights principles and refrain from fraudulent business practices that may damage the reputation of the firm. According to the proponents of game theory, CSR reporting enables a firm to strategically minimise the expected political costs which might be imposed by the government regulatory agencies such as increased regulation or taxes (Blowfield & Murray 2014). The firms that attain greater public visibility for their efforts in enhancing the welfare of the society are capable of sustaining positive relations with the government regulatory agencies thus minimising a possibility for more scrutiny of their operations and tightened regulation. Crowther and Aras (2008) outlines that companies that demonstrate good governance and ethical practices in their CSR reporting will attain competitive edge in the market since consumers are willing to trust ethical brands. Proponents of CSR reporting outline that firms are capable of creating long-term shareholder value through improving the environmental impact of their operations (Simpson and Taylor 2013). For instance, investing in renewable energy sources and eco-friendly innovations will minimise the inputs to the production process and costs of manufacturing thus leading to reduction in the overall organisational costs and improvement in both economic and social performance (Innes & Norris 2005). Another importance of corporate social responsibility reporting is to enhance relationships with the public. Corporations that publicise their CSR activities attain public relations benefits and thus reporting acts as a powerful branding tool (Idowu & Louche 2011). Critics of CSR reporting assert that the voluntary nature of reporting leads to ‘positive news bias’ since the content, format and reporting periods are not regulated by law (Porwal 2001). In this case, CSR disclosures will contain positive statements that may not be factual since the management is interested in building and sustaining the reputation of the firm (Blowfield & Murray 2014). Accordingly, various studies have reported disparities between the environmental and social performance of manufacturing firms and their environmental and social disclosures (Crane and Matten 2007). There are various barriers to CSR reporting such as the challenges associated with developing a reporting framework and standards that will reflect the company (Crowther and Aras 2008) CSR programs. Although the 21st century has witnessed development of various standards and policies for CSR reporting, the multiplication of guidelines and frameworks hinders comparability across the industry. The various frameworks have led to misstatement and omission of data that is critical thus posing high risks to the reputation and credibility of the CSR reports (Ruschak 2013). The preparation of CSR reports is costly, time consuming and requires skilled experts to measure the social impacts of the CSR initiatives in the community (Ruschak 2013). In this case, the data collecting is costly and information provided in CSR reports may be subjective in nature thus hindering the understanding of the real benefits of CSR programs to the communities (Simpson and Taylor 2013). Another challenge associated with CSR reporting is lack of managerial commitment since managers may fear losing reputation and credibility when stakeholders such as the society discover misrepresentations in the CSR reports (Crane and Matten 2007). Bibliography: Bacher, C. 2007. Corporate social responsibility. Munchen: GRIN Verlag. Blowfield, M & Murray, A. 2014. Corporate responsibility. Oxford: Oxford University Press. Crane, A and Matten, D. 2007. Corporate social responsibility: theories and concepts of corporate social responsibility. New York: Sage Publications. Crowther, D and Aras, G. 2008. Corporate social responsibility. London: Bookoon. Cuvilceva, M. 2012. The importance and significance of corporate social reporting. Munchen: GRIN Verlag. Gray, R. 1996. Accounting and Accountability: changes and challenges in corporate social and environmental reporting. London: Prentice Hall. Gupta, D. 1995. Corporate social accountability: disclosures and practices. New Delhi: Mittal Publications. Hawkins, D.E. 2006. Corporate social responsibility: balancing tomorrow’s sustainability and today’s profitability. London: Palgrave Macmillan. Horrigan, B. 2010. Corporate social responsibility in the 21st century: debates, models, and practices across government, law and business. London: Edward Elgar Publishing. Idowu, S.O & Louche, C. 2011. Theory and practice of corporate social responsibility. London: Innes, J & Norris, G. 2005. Corporate social responsibility: a case study guide for management accountants. New York: Butterworth-Heinemann. Philips, R.A. 2011. Stakeholder theory. London: Edward Elgar Publishing. Porwal, L.S. 2001. Accounting theory: an introduction. New Delhi: Tata McGraw-Hill. Prasnikar, J. 2006. Competitiveness, social responsibility and economic growth. New Delhi: Nova Science Publishers. Ruschak, K. 2013. Corporate social responsibility. Munchen: GRIN Verlag. Schwartz, M.S. 2007. ‘The business ethics of management theory’, Journal of management history, 13 (1), pp 43-54. Simpson, J and Taylor, J.R. 2013. Corporate governance ethics and CSR. New York: Kogan Page Publishers. Solomon, J. 2007. Corporate governance and accountability. New Jersey: John Wiley & Sons. Springer. Wells, G. 2013. Sustainable business: theory and practice of business and sustainability principles. London: Edward Elgar Publishing. Read More