Globalisation & Diversity: Corporate Social Responsibility - Essay Example

? GLOBALIZATION AND CORPORATE SOCIAL RESPONSIBILITY Executive Summary In this report, the concept of CSR especially under globalization and its impact on current businesses are discussed. The key questions examined here are whether CSR is advantageous or disadvantageous to businesses and the challenges faced under globalization to CSR. The report shows that CSR as a means for profit maximization alone need not be beneficial and can have several adverse consequences affecting the wellbeing of the stakeholders. This focuses only on the shareholders and not the broader category of stakeholders. On the other hand the CSR focusing on the interests of stakeholders can be beneficial to the society. With the emergence of globalization, the report shows that CSR has gained increased relevance due to the growing awareness of sustainable development, human rights etc. The study also shows CSR has additional challenges associated with it under increased globalization. These include the weakening power of the state and the rapid rise of MNEs and NGOs. In spite of all these, various ethical issues associated with the firms in the international settings show the need for business ethics in the decision making processes of current businesses. This can be very beneficial to the society if the CSR activities are implemented in a proper manner. Table of Contents Content Page Number Introduction 4 Discussion of Question Set 5 Conclusion and Recommendations 13 References 15 Globalization and Corporate Social Responsibility 1. Introduction According to Freedman(1999 ,p 156), globalization means “various quantitative and qualitative developments ranging from a dramatic increase in international transactions, to the international and spatial reorganization of production, the global harmonization of tastes and standards, liberalization, deregulation, privatization, the arrival of new information technologies etc”. There are many participants in the globalization process like IGOs, NGOs, MNEs and the state. The rise in liberalization and deregulation and the rapidly declining transportation and communication costs as well as the reduction in barriers to good and services have resulted in a high rise in the trade, FDI and transfer of technical knowledge (Frankel, 2000). As a result of globalization and the consequent rise in the trade and investment as well as technology, the quality of life is argued to have been improved on the one hand. On the other hand, the significant rise in cross border investments and the international trade has resulted in ethical issues involved in the decision-making in the cross-country settings. This has resulted in the growing focus on corporate social responsibility (CSR), its advantages and disadvantages and its impact on businesses all over the world. In this context, this report examines the impact of globalization on current businesses with focus on CSR. The key questions examined here are whether CSR is advantageous or disadvantageous to businesses and the challenges faced under globalization to CSR. This report has three sections. Section two analyzes and interprets the key issues and section three concludes the report and makes recommendations. 2.Discussion of Question Set 2.1. Concept of CSR and its Significance The main actors involved in the globalization process include states, Inter Governmental Organizations(IGOs),Non Governmental Organizations(NGOs), experts ,global policy networks, Multinational Enterprises(MNEs) and private authorities(Karns and Mingst,2004,p16). As a consequence of the development of the IGOs especially WTO, there has been significant increase in the flow of trade and capital flows through the integration of nations. Moreover, the immediate expansion of MNEs and the consequent rise in Foreign Direct Investment have been two major consequences of these developments. Three main arguments have been put forward regarding the MNEs in relation to global governance (Moon and Lado, 2000). One is the significant rise in the power of MNEs to shape outcomes compared to the governments and other actors called the decline of the Westphalian hypothesis. According to the Westphalian hypothesis, states need to have a protected autonomy and independence, have a gate keeping power and there should be no outside interference in the domestic constitutional arrangements of the state (Jervis, 2002).Based on this hypothesis, states are something which needs to be sovereign and supreme. Other is the shift in the regulatory authority from the national governments towards the supranational institutions called the decline of the regulatory state hypothesis. The third argument is the lowering of regulatory regimes facilitated by the supranational regimes across different jurisdictions called the race to bottom hypothesis. Though these developments are argued to improve the quality of life, these have also created a growing awareness of the ethical issues involved in the cross-cultural settings of the global businesses include bribery, unfair pricing, illegal activities, tax evasion practices, cultural differences, political influences etc (Yiicel et al, 2009). They have also risks associated like environmental problems including emission of green house gases, increased pollution, climatic change problems etc, due to these the quality of life can be reduced also (Crafts, 2002).This resulted in the relevance of practices like human rights, health, safety, environmental concerns, anticorruption etc which need to be incorporated in the decision making settings of businesses rather than profit maximization as their only target. Different theoretical approaches define CSR in different ways. Based on the neoliberal approach, the definition given for CSR includes the “management of the economic, social and environmental impact of a company’s activities” (Broomhill, 2007, p6). Based on the neoliberal definition, however, the main social responsibility of business is shareholder wealth maximization utilizing its resources, giving importance to the shareholders in a business. Many real examples can be shown for practising CSR based on the shareholder wealth maximisation as its main aim. For example, KFC Corporation, based in Louisville, Kentucky is one among the most popular chicken restaurant chains in the world with very high financial performance. Though one of the main aims of KFC is to promote animal welfare, there have been lot of criticisms on KFC’s treatment of animals for their products by organizations like People for the Ethical Treatment of Animals (PETA). Though KFC has responded to it by arguing that their suppliers meet all legal requirements, PETA still criticizes their cruel treatment to animals (Kentucky fried cruel.com, 2009).Further the customers complain about the cleanliness in KFC also. Another example is the manipulation of electricity by Enron for profit maximisation purpose at the expense of citizens of California. All these give importance to shareholder wealth maximization as the main aim of their businesses. Another example is the negative effects on small businesses by Wal-Mart and the resulting adverse effects on communities in the rural areas (Vedder and Cox, 2006). Moreover, the treatment of the workers here has been subject to heavy criticism according to many reports (Wittman, 2006).These include overtime work without pay that is enforced illegally, discrimination against disabled and non privileged people, very bad pay scale, very expensive insurance packages which are not affordable to even full time workers, lack of recognition etc(Wittman, 2006). On the other hand, neo Keynesian approach defines CSR as “a company’s commitment to operate in an economically, socially and environmentally sustainable manner recognizing the interests of stakeholders” (Broomhill, 2007, p7).Thus this approach gives importance to stakeholders in contrast to the shareholders as emphasized by the neoliberal approach. The stakeholders include investors, clients, staff, government, local communities and environment. This is based on the stakeholder theory developed by Freeman (1984).Based on this approach, the interests of stakeholders need to be considered in the decision making setting of an organization. For example, rather than simply concentrating on financial performance, Natura, Brazil’s leading cosmetics company focused on personal, business and public relationships, which has been one main contributing factor for its success. Hence, the company has been in the social service field also including educating poor children, training school teachers in Brazil and in other parts of the world. The company has been following sustainable business development model, which gave it a self-identified image (Smith, 2009). The environmental friendly policies of the company include stopping testing on animals, becoming carbon neutral in 2007 through Carbon Neutral Programme as a result of the Climate Change Project etc. the environmental friendly principles of the company have been a main factor behind the success of the company. The main values of the company include humanism which includes establishing and maintaining relationships between human beings, balance which promotes harmony and the natural dynamics of men, transparency which means conducting all the business processes in a clear manner and creativity based on innovation (Smith, 2009). The main problems associated with this approach include accounting for the conflicting interests of various stakeholders, the relative importance to be given to different stakeholders etc. Another approach called radical political economy approach takes a very critical stand on CSR. This approach criticizes voluntary CSR and see CSR as a method to escape from regulation by outsiders and corporate control so that destructive socially and environmental activities are focused in the name of CSR (Broomhill, 2007).Rather than CSR, this approach suggests an alternative strategy called corporate accountability to be practised by firms. Thus different theories give different definitions to CSR and there is no widely accepted definition to CSR. The sustainable development approach has become an essential part of environmental policy in businesses and the policies of national governments. In this regard, the main initiatives by corporate managers include inclusion of environmental vision along with other managerial issues into corporate culture, integration of environmental policy and environmental management system, continuous monitoring of the environment management system and careful decision on strategic issues by considering environmental impacts also (Liu,2002).Thus CSR based on stakeholder approach has gained increased importance in the recent years. The companies are also entitled to emit the greenhouse gases especially CO2 up to a certain ceiling by the national governments of many developed nations. Those companies which exceed their quotas can buy their excess credits form the carbon market and those below the credits can sell in the carbon markets. Thus a nation can reach the Kyoto Protocol quota if all companies and individuals balance their quota. Thus these carbon credits are meant to reduce the emissions through providing a monetary value to the cost of pollution (Ratnatunga, 2007). 2.2.. Advantages and Disadvantages of CSR Based on the neo Keynesian approach, it is argued that adopting CSR practices protecting the interests of stakeholders is advantageous to the company and society as a whole while CSR based on neoliberal approach can be harmful to a company’s performance (Lantos, 2001).Based on the different scandals that arose in the recent years like Enron scandal, it is argued that business ethics is essential which plays a major role in the functioning of companies (Broomhill, 2007).Studies show the beneficial effects of CSR depend on the expectations of stakeholders and the constraints placed by the restrictive legislations produced by the states(Broomhill, 2007).Moreover, CSR is reported as a kind of risk management strategy by some authors(Porritt,2005). Other advantages include innovation promotion, risk mitigation, promoting business ethics and promoting social sustainability (Broomhill, 2007). Thus the main benefits of adopting CSR practices include assistance in recruitment processes, risk management, differentiating between brands, diversion of attention from the negative externalities of bigger corporations (Broomhill, 2007). The critics of CSR argue it as preventing competition and economic freedom (Henderson, 2001). In addition to these studies show the need for regular monitoring of the voluntary CSR activities for becoming successful. These do not happen in many cases as shown in many studies (Christian Aid, 2004). Based on the entity theory, the business entity and the owners of an entity have separate identities and existence. Hence, all the stakeholders have the right to have equal access to information. All the stakeholders are considered to be the providers of capital for the business and hence are supposed to get equal access to information according to this perspective .This is based on the argument of information asymmetry being one of the main causes of market inefficiency, which in turn can lead to the failure of an entity (Kabalski, 2009). Based on the new framework, though the needs of investors will be given priority, equal importance will be given to other providers of capital namely lenders and other creditors (ICAEW, 2003; Kabalski, 2009). The new framework is also supposed to meet the needs of all stakeholders to the same degree. This raises criticisms from the shareholders point of view claiming that the entities need to be socially responsible rather than meeting the financial needs of stakeholders (Kabalski, 2009).Moreover, even among the stakeholders themselves some stakeholders concerned about environmental protection and stakeholders who are main information providers of an entity’s human resource and management may claim to be included as the main users of financial information(ICAEW,2003;Kabalski,2009).Based on these it can be argued that though it can be argued that the new framework can act to the interests of multiple stakeholders ,it cannot satisfy the needs of all stakeholders to the same degree. For example, Natura, the Brazil’s leading cosmetics company has many stakeholders including both domestic and foreign stakeholders. This has created many challenges including lack of organized production chains, logistics constraints, difficulty accessing the communities due to their remote location and low technical training (Smith, 2009). Thus studies show that prioritizing certain stakeholders as main users of financial information need not conflict with the other groups’ interests (Kabalski, 2009). 2.3. Challenges to CSR under Globalization The significant rise in cross border investments and the international trade has resulted in ethical issues involved in the decision-making in the cross-country settings. Hence, all standardized products have established global markets and the firms have to adopt for main business entry strategies, which are different from the domestic business entry strategies (Yiicel etal, 2009). These are an international strategy, a multi-domestic strategy, a global strategy, and a transnational strategy (Bartlett and Ghoshal, 1989; Yiicel etal, 2009). The ethical issues involved in the cross-cultural settings of the global businesses include bribery, unfair pricing, illegal activities, tax evasion practices, cultural differences, political influences etc (Yiicel et al, 2009). Hence, studies demand the need for international norms and business ethics to be created by the IGOs like the WTO, IMF, World Bank etc in this regard to solve the ethical problems (Yiicel et al, 2009).. Another major issue involved in the multilateral diplomacy is to incorporate NGOs in the global governance process (Naidoo, 2005,p1). This is because for the better performance of the IGOS like the WTO, permission from both government and non-government organization are needed. Due to the involvement of many players with multiple interests, rules, issues and hierarchies, which have been quite unstable, it is argued to have been very difficult to obtain a common agreements for collective actions or goals. In addition to these, globalization has resulted in the decline of the power of state and also in the rise in the power of MNEs. Three main arguments have been put forward regarding the MNEs in relation to global governance (Moon and Lado, 2000). One is the significant rise in the power of MNEs to shape outcomes compared to the governments and other actors called the decline of the Westphalian hypothesis. According to the Westphalian hypothesis, states need to have a protected autonomy and independence, have a gate keeping power and there should be no outside interference in the domestic constitutional arrangements of the state (Jervis, 2002).Based on this hypothesis, states are something which needs to be sovereign and supreme. Other is the shift in the regulatory authority from the national governments towards the supranational institutions called the decline of the regulatory state hypothesis. The third argument is the lowering of regulatory regimes facilitated by the supranational regimes across different jurisdictions called the race to bottom hypothesis. In contrast to the state, there is no legal responsibility for the MNEs to involve in CSR activities and there are instances of MNEs exploiting their workers in the name of CSR activities. For example, in the case of Good Electronics, a Dutch company reported exploitation of workers since there were no adequate regulations and the CSR activities were not up to the standards (iphoneproj, 2011). One main global regulation now controlling the MNES includes transfer pricing. Transfer pricing means the profit allocation for taxes and other purposes between different segments of an MNC (ICC, 2008). Through this the different parts of MNEs in various nations are under a common control. At the same time it exposes the MNEs to double taxation also. Studies have shown that the different investment treaties contain many variations in their clauses regarding the non-discriminatory treatment, dispute settlement procedures etc and in their legal contents (OECD, 2004; Brunner and Folly, 2007). Studies show that at present nearly 2300 bilateral investment treaties, 150 international agreements and 60 under negotiation process are there with significant variations in the clauses and contents regarding all important international investment matters (Brunner and Folly, 2007). This fragmented nature of these treaties has resulted in a rise in transaction costs of MNEs, which in turn reduce the total amount of FDI, create distortions like concentrations of power, and rent seeking activities, which reflect the interests of vested groups as shown by studies (Brunner and Folly, 2007). Moreover, the study obtained the goals and interests of MNEs varying across different sectors and hence found a uniform treatment for all the sectors as inadequate. 3. Conclusion and Recommendations The report above discusses the concept of CSR especially under globalization and its impact on current businesses. The report shows that CSR as a means for profit maximization alone need not be beneficial and can have several adverse consequences affecting the wellbeing of the stakeholders. This focuses only on the shareholders and not the broader category of stakeholders. On the other hand the CSR focusing on the interests of stakeholders can be beneficial to the society as shown from the report. A main limitation associated with this is to account for the conflicting interests of various stakeholders. Moreover, the relative importance to be given to various stakeholders also is a matter of concern as discussed in the report. However, the voluntary CSR activities need frequent monitoring in some cases, which otherwise can affect the interests of many stakeholders. The different approaches for CSR are discussed with the help of real life examples of many renowned firms in this report. The arguments in favour of CSR and opposing CSR are discussed in this report. The discussion shows the need for CSR to be based on business ethics for becoming beneficial to the society. These are particularly shown by the various scandals that emerged all over the world in the recent years. With the emergence of globalization, the report shows that CSR has gained increased relevance due to the growing awareness of sustainable development, human rights etc. The study also shows CSR has additional challenges associated with it under increased globalization. These include the weakening power of the state and the rapid rise of MNEs and NGOs. The diverse nature of both MNEs and NGOs again create matter of serious concern among the corporate decision makers. Moreover, MNEs do not have any legal responsibility for implementing CSR activities which is again problematic. The report also shows evidence of worker exploitation in many MNEs with inadequate CSR activities and lack of sufficient regulations. However, in spite of all these, various ethical issues associated with the firms in the international settings show the need for business ethics in the decision making processes of current businesses. This can be very beneficial to the society if the CSR activities are implemented in a proper manner. It can be recommended that the benefits of CSR depend on how they are implemented and proper implementation of CSR is therefore needed for the improved performance of the company. Stakeholder interests need to be considered in the decision making processes. 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