Corporate Social Responsibility in the German Banking Sector - Research Paper Example

1. Introduction Corporate responsibility of a company is reflected in its attitude, ethical behavior and its concern for the various stakeholders. It is the philosophy of the management, rather than the strategies the companies adopt to meet the objectives or goals purely in terms of financial or economic considerations. Fulfillment of the aspirations of the various stakeholders of the company is important in corporate governance, and disclosure of financial information needs to be viewed more from the point of responsibility than accountability. Baker, M. states “Different organizations have framed different definitions - although there is considerable common ground between them. My own definition is that CSR is about how companies manage the business processes to produce an overall positive impact on society”. This paradigm shift in the fundamentals envisages ‘ethics’ in corporate culture which encompasses not only the stakeholders’ interest, but also, integrity and transparency in operations. Also, the responsibilities of the modern company as a ‘corporate citizen’ are not necessarily restricted only to the business operations. The companies which rise to the occasion as warranted in emergencies and exigencies voluntarily, command great respect and honor among the customers and societies. A successful company integrates the economic factors such as GDP, interest rates, exchange rates and inflation, social and cultural factors such as fashions, consumerism and technological factors like mobile telephony, internet, social networks, etc. into its business model, and the mindset to embrace the developments in its stride is facilitated by corporate culture fostered by good CSR policies. This policy endears the company to the society which acts as catalyst in business promotion. According to Good Corporate Citizen (2007) “Corporate citizenship recognizes that businesses have a responsibility to respect the individuals, the community and the environment in a way that when devising or implementing any rightful business strategy they will abide by laws and regulations, and adhere to high ethical standards”. The banking industry plays a very crucial role in the economic development of a country. The balanced growth of various industries and the economic development as a whole in a country is linked to the banking industry. The recent subprime crisis has cast a shadow on the banking sector, and the collapse of Lehman et al has renewed the debate on CSR in banking industry. The ‘reform’ in banking industry is a continuous process, keeping in tune with the social and technological developments. It is in this backdrop, CSR in relation to the banking sector should be viewed to understand the implications in its proper perspective. 2. Corporate Social Responsibility There are multiple definitions for CSR with internal and external elements. But, CSR extends beyond the statutory obligations imposed on the company. The principles of sustainable development calls for long term approach taking into account not only the current social and environmental consequences but also the needs of the future generations. The policies, programs and practices of the company extend to the community level for positive effects on its operations and impact on the welfare of the society. The concern of the company in responding to the needs of the community is very important for its continuity, as it owes its existence and success to the people who are the constituents of the community. The company should aim, in meeting its legal, ethical, economic and voluntary or discretionary responsibilities placed on them, for sustainable development. Sustainable development is described by the Bruntland report as the “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. (Business Dictionary.com) Corporate governance scandals such as Enron and Daewoo and the recent environmental disaster in the case of BP have only strengthened the resolve of the corporate bodies to put effective CSR policies in place for sustainable development. These incidents in the corporate history paved way for the introduction of standards and guidelines by the various international bodies. For example, SA8000 is a global standard established for compliance in corporate social responsibility. There is focus on Return on CSR Investments in relation to business as well as society for ascertaining the benefits derived. In a market economy banks play a very dominant role in the international trade & commerce, industrial development, Foreign Exchange Markets and Stock Exchanges. The world economy would come to standstill without banking operations. Schwab, K. (2008) states “Global corporate citizenship means that companies must not only be engaged with stakeholders but be stakeholders themselves alongside governments and civil society. Since companies depend on global development, which in turn relies on stability and increased prosperity, it is in their direct interest to help improve the state of the world”. This definition seems to be a very pertinent one considering the international stature of the German banks like Deutsche Bank AG and Commerzbank AG with international network and investments. 3. Stakeholders Apart from the shareholders, the stakeholders of a company include other constituents which are affected by an organization in pursuit of its business. These constituents include employees, trade unions, customers, suppliers, governments and competitors. CSR has different meaning to the different people. It can mean fair wages and working conditions to employees, prudence and transparency to shareholders, payment on time to suppliers, reasonable service and delivery on time to customers, discharging the statutory obligations with good corporate spirit and sincerity to the government and for the local communities in help protecting the environment. For instance, in the case of employees, apart from the wages, benefits and working conditions of the employees which are more or less uniform in the industry with differences on account of size or type of the banks, there are labor issues in a larger perspective. The statement, “Freedom of capital movements cannot make it any easier to control money laundering. We know that this is a matter of great concern for FISAC and the entire labor movement in their fight against organized crime… Union and consumer groups should be working closer together in coalition to build in more social responsibility in banking practices in areas of mutual concern” of Jennings, P. J (1993) underlines the significance of labor participation in CSR. 4. Banking Industry in Germany Arndt. F., (2007) states that the banking industry in Germany is one of the most closely knit bank networks in the world. Banking sector in Germany is well developed, and the Deutsche Bank, one of the top 10 banks in the world with “$2.43 trillion in assets has a strong presence throughout Germany and Europe and continues to grow in North America and Asia. As of March 31, 2010, Deutsche Bank had approximately 2,000 branches in 72 countries”. (Writer, D. R., 2010) The banks in the country could be categorized as Private, Public and Cooperative banks, based on the structure. German Bankers Association functioning, in the interests of its members in the field of banking, in close coordination with the parliament and government, political parties, Deutsche Bundesbank, other industry/business associations and general public. Central Banks Guide states Deutsche Bundesbank acts as the Central Bank for the Federal Republic of Germany and was, in fact, the first Central Bank in the world to be given full independence. The efficiency in performance is the core aspect for the growth and development of the companies which enable them to discharge their corporate responsibilities effectively. For instance the German banks have been successful in cutting cost in their operations over the period of time as could be observed from the following statement. Banking in Germany: Progress in Cost Cutting: High cost-income-ratio 2001 2002 2003 2004 2005 Germany 71,4 67,2 66,5 65,8 61,0 France 66,3 66,3 65,5 64,4 63,9 Italy 55,3 59,8 61,0 60,6 59,8 Spain 57,2 57,2 58,6 58,8 54,7 UK 63,4 59,4 59,0 57,0e 56,0e Source: The Banking System in Germany Structure, Developments and Problems Arndt, F. (2007, p. 15) “Consolidation in the banking industry in Germany has brought down the number of banks from 10858 in 1967 to 2344 in 2005” (Arndt, F, 2007, p. 18) through mergers, and this factor contributed for reduction in costs in the industry and benefited the shareholders. Business Day reports “German regulators yesterday brushed off criticism that German banks’ failure to detail their sovereign risk exposures as part of European stress tests had raised concern over transparency in Europe’s largest economy”. Consumer protection is generally accorded top priority in the banking industry as it is one of the fundamental principles of banking which is built on trust. According to the Association of German banks, the Deposit Protection Fund of the Association of German Banks fully secures the deposits of each and every customer at the private commercial banks up to a ceiling of 30% of the relevant liable capital of each bank as at the date of the last published annual financial statements. Banking remains a heavily regulated business, and the banking regulations are intended to prevent bank failures and give protection to the bank depositors from losses arising out such failures. Therefore, maneuverability is very limited in the policy decisions, and this aspect should be taken into account while discussing the CSR in relation to banks. Steets, J. and Weihe, T. (2006) states “When German banks founded sports associations for their employees in the 1910s and 1920s – with huge compounds for thousands of people – they very actively reported on these good deeds and used them to present themselves as socially responsible employers offering possibilities to counter the negative effects of mechanization (MDB 1929, p. 61). By contrast, trade unions accused them of wanting to “breed a guard of strike breakers, because if they wanted to really improve public health, they could well introduce sensible working hours and salaries high enough to give employees occasion for physical training in their free time.” (DDB 17 1928, p. 44)” An important point for concern in the industry is the declining role of the banks in the corporate companies’ boardrooms. Damiani, M. (2010, p.177) states “…role of German banks has diminished dramatically and, as signaled by Beyer and Hassel (2002), ‘between 1992 and 1999 the share of bank representatives as chairmen of supervisory boards fell from 44 per cent to 23 per cent in 40 large companies in Germany”. Two important aspects emerge from this situation. The diminishing role can’t diminish the responsibility of the banks towards the stakeholders involved, in this case the depositors/customers of the bank and general investors in the society as a watchdog by reason of its role in the economic development of the country. Secondly, the absence of such control mechanism or diminishing role of the mechanism might pave way for deviating away from their corporate social responsibilities by the companies concerned. As a natural consequence, Damiani, M. (p.177) further states “Evidence shows that the relevance of two of the traditional cornerstones of the German system, the monitoring function of banks and of employees has been eroded in the last decades. As well known, bank monitoring may be a relevant element in relational financing”. When the objectives of CSR are primarily directed towards the welfare of the society, it is imperative that the predicament of the economically weaker sections of the society can’t be ignored, if the banking reform process is expected to percolate down to these people. Jennings, P. J (1993, p.58) states “We feel that more "red lining" is taking place, that the vulnerable members of the community, the elderly, the unemployed, the low paid, are being robbed of mainstream banking activities, of access to credit, leading them no alternative but to go to other sources - the underworld, the shadow financial sector”. On the other hand failure on the part of companies to fulfill the expectations of the society may lead to the risk of compulsory regulations being introduced. 5. Comparative analysis The three-pillar model in German banking sector provides for a strict separation of commercial banks, public banks, and cooperative banks. Therefore, comparison of the CSR policies of the banks based on this criterion with a leading bank from each category will be meaningful. In addition, the study of CSR policies adopted by one of the smaller Banks (Aareal Bank) compared to Deutsche Bank could portray the overall status of CSR in the industry. 5.1. Deutsche Bank AG (Private) During 2010 the bank received two Golden Peacock Global Awards for its CSR activities and for the sustainability program, Sustainable City Awards der City of London for the initiatives to reduce consumption of raw materials and Top Companies That Care Award of the "Jacksonville Magazine" for the regional engagement of the Bank and its employees. These awards reflect the achievements in CSR by the bank, on various fronts in relation to CSR. The bank’s website (2010) states “Deutsche Bank’s corporate social responsibility initiatives around the globe contribute to building social capital in all regions in which the Bank operates…The major areas of focus are in line with Deutsche Bank’s CSR strategy in the areas of corporate volunteering, social investments, art & music and education. Moreover, the bank actively advances the dialog with academia, politics and business… Most of the funding supplied by the Deutsche Bank Foundation goes to education, integration, and social projects.” The CSR programs of the bank are on global level and it contributed significantly to human rights, environmental and climate protection. The bank claims that “it places enormous value on effective corporate governance, which is an important part of our identity… Corporate volunteering is a key component of the corporate citizenship activities of Deutsche Bank.” The employees of the banks have been the active participants in the CSR programs of the bank and it is stated that the number of participating employees has been rising across all regions. In 2009, 14% of Deutsche Bank employees contributed 34,240 days of volunteer work. The bank’s social commitment is reflected in its programs in various countries which include health, educational, housing and disaster relief programs. 5.2 DZ Bank AG (Cooperative) ILO (2010) states “...  in Germany cooperative banks collectively have thirty million customers. One recent study gave cooperative banks 20% of the European retail market… A recent study by the German central bank (Bundesbank) found coop banks more financially stable and less likely to fail than shareholder-owned institutions”. The DZ bank’s website states that its equity analysts again took top places in many of the international analyst ranking categories from the three most important analyst performance measurement firms, namely "StarMine", "AQ" and "ISFA" and these firms already awarded the bank top places in 2003, 2004, 2005, 2006, 2007 and 2008. Though it is heartening to note the bank’s performance in equity research, the fifth largest bank in Germany which is acting as a central bank for approx. 1,000 cooperative banks, has nothing to say about its specific achievements on CSR front in its website. However ILO (2010) quotes:  “Cooperatives are close to a democratic, people-centred economy which cares for the environment whilst promoting economic growth, social justice and fair globalisation. Cooperatives play an increasingly important role in balancing economic, social and environmental concerns, as well as in contributing to poverty prevention and reduction - Hagen Henrÿ.” 5.3 KfW Group (Public) The group’s website states “KfW is a public law institution. Our official promotional mission is anchored in the Law concerning KfW. As a bank owned by the Federal Republic of Germany (80%) and the federal states (20%)” and speaks elaborately of sustainable development and environmental protection and it is stated that their actions include social commitment and combat combat corruption, money laundering and the financing of terrorism.. However, apart from participation in the funds like 2020 Euro Fund for Energy Climate Change and Infrastructure - Marguerite Fund and KfW Carbon Fund, direct involvement on the part of the bank in CSR programs may be on very small levels, as they have not been displayed. It is also mentioned that the Carbon Fund has been operating on behalf of the German federal government to support implementable programmatic approaches.   5.4. Comparison Though it is generally believed that the private companies are with profit motive, it could be observed that the private companies (or banks) have CSR ingrained in their corporate culture and adopt it as a strategy for sustainable development. For example, Deutsche Bank’s contribution and direct involvement in environmental and climate protection programs reflects their CSR policies in a broader spectrum. Coors and Winegarden (2005) argue “When a corporation voluntarily engages in socially responsible activity, it does so to advertise its behavior, differentiate its product, increase market share, and boost profits”. Therefore, CSR is not entirely out of context to the core objectives of the business. Whereas, the unique business models of public and cooperative banks might prevent this engagement as a strategy for business development. According to (ILO, 2010) “…in some countries, some ‘cooperatives’ were effectively little more than state-managed enterprises”. ILO (2010) states “Cooperative banks and insurers have, historically, tended to avoid the headlines. They can operate without concern about their share prices and therefore without the day-to-day attention from business media and analysts which businesses with share capital tend to attract”. The public banks consist of Savings banks and Landesbanken, and savings banks play an important role in lending to SMEs. Naturally, provision of banking services to remote areas and the extension of loans to SMEs and providing stability at the time of crisis could be considered as the important corporate responsibility effectively undertaken by the public banks in Germany. Carletti, E., Hakenes, H. and Schnabel, I. (2005) states “There is some indication that German public banks helped to buffer external shocks and contributed to the surprising stability of the German banking sector in the recent crisis”. Adler, R. (2010) states DB (Deutsche Bank) asked a team of experts at the Columbia Climate Center at Columbia University’s Earth Institute to weigh the major climate-change questions against the best available, peer-reviewed scientific evidence in order to prepare a balanced report for the bank and its investors based on climate change facts. Compared to DB a smaller private Aareal Bank states that it has focused on the following key areas for its social commitment: Education Research Culture The bank states that the strength of an enterprise ultimately lies in an economically and socially sustainable society based on innovation and cultural diversity. Fostering a socioeconomic environment that creates this basis is the objective of the commitment undertaken by Aareal Bank. It is also stated that since 2006, Aareal Bank has been one of the key supporters and sponsors of the university, in the shape of the Aareal Chair of Property Investment and Financing in the Real Estate Management Institute of the EBS (EBS-REMI). “Employees who wish to build up their skills by pursuing a further course of study alongside their job can generally rely on the bank supporting them.” (Aareal Bank Group – Annual Report 2009, p.19) 6. Conclusion The banks have started extensively using mobile phone technology to promote innovative products, especially in the financial services sector even in the developing countries. The reach of technologies such as mobile telephony and internet has paved the way for closer involvement of the banking sector with the communities. Therefore, appreciation and understanding of its needs casts a greater responsibility on the corporate community to integrate their operations in line with the changing social system to enhance their reputation in the society. Activities such as participation in community welfare programs and creating awareness among the public through social ads on health social and ecological issues are also viewed as the refined strategies of the progressive business community in the knowledge based new economies for business promotion. References Aareal Bang Group. Corporate Social Responsibility. Retrieved November 20, 2010, from http://www.aareal-bank.com/en/group/corporate-social-responsibility/ Aareal Bank Group – Annual Report 2009 | Human Resources – Creating Identity, Retrieved November 18, 2010, from http://aareal-bank-2009-en.corporate-publications.com/data/pdf/0019_en_aareal_gb09_en_page.pdf Adler, R. (2010). Major German Bank Studies Climate Change Risks. Suite101.com. Retrieved November 18, 2010, from http://www.suite101.com/content/major-german-bank-studies- climate-change-risks-a287446 Arndt, F. (2007). The Banking System in Germany Structure, Developments and Problems. Association of North Rhine-Westphalian Banks. Retrieved November 18, 2010, from http://www.bankenvereinigung-nrw.de/media/pdf/akt94.pdf Association of German banks. Deposit protection. Retrieved November 19, 2010 from, http://www.german-banks.org/html/19_consumers/consumers_07_0.asp Baker, M. Corporate Social Responsibility - What does it mean? Retrieved November 18, 2010, from http://www.mallenbaker.net/csr/definition.php Business dictionary.com. Sustainable Development. Retrieved November 18, 2010, from http://www.businessdictionary.com/definition/sustainable-development.html Business Day (2010). Analysts press German banks on transparency. 27 July 2010. Retrieved November, 18, 2010 from http://www.businessday.co.za/articles/Content.aspx?id=116061 Carletti, E., Hakenes, H. and Schnabel, I. (2005). The Privatization of Italian Savings Banks – A Role Model for Germany? Retrieved November 18, 2010, from http://www.eui.eu/Personal/Carletti/Carletti-Hakenes-Schnabel-published.pdf Central Banks Guide. Deutsche Bundesbank. Retrieved November 18, 2010, from http://www.centralbanksguide.com/deutsche+bundesbank/ Coores, A. C. and Winegarded, W (2005). Corporate Social Responsibility – Or good Advertising? Retrieved November 19, 2010, from http://www.cato.org/pubs/regulation/regv28n1/v28n1-noted.pdf Damiani, M. (2010). Shareholder Rights and Stakeholder Rights in Corporate Governance, Chapter 11. Handbook of Corporate Governance and Social Responsibility, Aras, G and Crowther, D., (Eds.), Surrey, GU9 7PT, Gower Publishing Limited. Deutsche Bank AG. Corporate Social Responsibility. Retrieved November 19, 2010, from http://www.db.com/csr/en/content/awards.html DZ Bank AG (2010). Retrieved November, 19, 2010, from http://www.dzbank.com/index.php Good Corporate Citizen (2007). The meaning of “Good Corporate Citizen”. Retrieved November 19, 2010, from http://www.goodcorporatecitizen.com/meaning.html International Labour Organization – ILO (2010). Cooperatives and the crisis: “Our customers are also our owners”. Retrieved November 19, 2010, from http://www.ilo.org/global/About_the_ILO/Media_and_public_information/Feature_stories/lang--en/WCMS_142558/index.htm Jennings, P. J. (1993). Social Responsibility of Banks, Bank safety and soundness - The Bergamo Report. Retrieved November 20, 2010, from http://www.money-advice.net/media.php?id=1512 KfW Groupengruppe. Retrieved November 20, 2010, from http://www.kfw.de/EN_Home/KfW_Bankengruppe/Our_Actions/index.jsp Schwab, K. (2008). Global Corporate Citizenship. Foreign Affairs. Retrieved November 20, 2010, from http://www.foreignaffairs.com/articles/63051/klaus-schwab/global-corporate-citizenship Steets, J. and Weihe, T. (2006). Corporate Social Responsibility – What We Could Learn from the Past. Retrieved November 20, 2010, from http://www.gppi.net/fileadmin/gppi/Weihe_Steets_lessonsfromthepast.pdf Witer, D.R. (2010). The 10 Largest Banks in the World. Doughroller. Retrieved November 20, 2010, from http://www.doughroller.net/banking/largest-banks-in-the-world/ Read More