Corporate Social Responsibility - Essay Example

Corporate Social Responsibility In the business world, different organizations strive to achieve different objectives. Regardless of the variance in purpose for these organizational objectives, they all require a strategy to achieve them. Today, majority of organizations are continuously embracing the concept of strategic management in achieving their objectives and purposes. Consequently, there are different definitions of strategy and strategic management. According to Meyer and De Wit, strategy is the course of action that an organization partakes to achieve its purpose (Barney and Hesterley, 2006:137). Scholes and Johnson define strategy as an organization’s scope and direction over the long term, essentially, which matches its changing environment to its resources, especially its market, clients, and customers in order to meet the expectations of the stakeholders. Other definitions imply that a strategy is a business policy that studies the process of choice and nature of individuals responsible for decision-making and their implementation of future independent businesses. Stakeholders often have a significant influence on the objective of an organization. Nonetheless, the universal objective of organizations is to maximize profits. However, complex profit-maximizing perspectives often affect the organization negatively as firms may engage in unethical business practices to maximize their profits aggressively (Werther and Chandler, 2010:415). This paper provides empirical literature that indeed simple profit-maximization perspectives may affect a firm positively. The paper also analyzes corporate social responsibility as an example of a simple profit-maximization perspective to reflect the positive effects of the perspective on a firm. Strategic management encompasses decisions concerning the scope of activities in an organization, aligning the organization’s activities to the environment and resources, organizational changes, and the expectations and values of stakeholders. Strategic management involves an array of processes, including identification of objectives and mission, audit of internal business, implementation of strategy, business environment analysis, and comparison of strategic options. The task of identifying the mission of an organization is the most fundamental purpose or strategic management, as the mission is the generalized statement highlighting the purpose of an organization (Haberberg and Rieple, 2008:720). Conventional perceptions (like Friedman) identify the general purpose of organizations as making as much profit as possible for the proprietors. Therefore, the manner in which some strategic management teams relate their mission statements with profit maximization is misguidance. Profit maximization is a result of the activities of the company as well as an objective. Because the mission emphasizes the purpose of an organization, all the stakeholders need to identify with it. These stakeholders include the suppliers, the customers, the employees, and the community in general. In essence, stakeholders are the individual groups, both external and internal, who have a significant influence over the organization or business. Alternatively, stakeholders may be viewed as those individuals who are dependent on the organization for the achievement of their goals, and whom the organization depends on to attain its goals. In the business world today, the stakeholders’ society is slowly replacing the shareholders’ society (Freeman, 2010:37). This consequently raises the question of whether the objectives of an organization pursue the interests of the stakeholders or the shareholders (which may be profit maximization). The perception of many people is that business organizations pursue profit maximization, a behavior evident from drug companies and supermarkets. However, the complex nature of stakeholders of an organization tends to pressurize the organizations to spread the benefits of the organization to a wide variety of stakeholders, such as the case with banks. Such sharing and spreading of benefits include concepts like the corporate social responsibility (CSR), environmental concern, and health and safety legislation (Caroll and Buchholtz, 2011:128). These are instances of stakeholders’ pressure, and they all defy the objectives of profit maximization. Consequently, there are several other theories apart from profit maximization that seek to explain objectives of organization, including Baumol’s sales maximization, Williamson’s managerial utility, and Simon’s “satisficing”. These theories try to expound on the ideas of the behavioral theory of the firm, stipulating that the objectives of an organizations are likely to be the wishes or interests or the dominant coalition in the organization, which is the stakeholders’ society. Corporate social responsibility (CSR) has several definitions. CSR is an organizations’ obligation to minimize its negative effects and maximize its positive impacts to the society, with emphasis on the society’s long-term wants and needs. In essence, CSR implores being a good steward of human and economic resources of the society (Urip, 2010:155). Other definitions stipulate that CSR is the obligation that a firm has to its stakeholders, the people who influence of who are influenced by the firm’s practices and policies. Moreover, these obligations transpose beyond the firms’ duties to its shareholders and the legal requirements. The fulfillment of these obligations serves to maximize long-term benefits and minimize harm of the firm on the society. Summarily, CSR reflects the obligations arising from the “social contract” between the society and the firm, requiring the firm to respond to the long-run wants and needs of the society, minimizing the negative effects of the firm’s actions and maximizing the positive impacts in the society. There are four perspectives of CSR, two in the classical view and the other in the stakeholders view. The classical view bases its arguments on the neoclassical economic theory, stating that CSR is based on pure economic profit-maximization, emphasizing on the profits of shareholders (Henry, 2008:218). Contrary to the classical view, the stakeholders view bases its argument on the stakeholder theory, stipulating that firms are socially responsible and need to consider the interests of the parties prone to their actions. According to Lantos, there are two perspectives in the classical view: the pure profit making, and the constrained profit making. In the pure profit-making view, business people are allowed to posses some certain degree of dishonesty because they are presumed to have lower moral standards than the rest of the community. In fact, Carr compares the ethics of business people to those of individuals in a poker game. Because they have a lower set of moral standards, business people may apply the concept of “business bluffing”, including exaggeration, concealment of relevant facts, and conscious misstatements. Neoclassical economic theories view deception as a necessary strategy for the success of a business, thus business people cannot follow ethics as conceived in private life at all cost (Husted and Allen, 2011:38). Carr therefore argues that a firm has the legal right to structure its strategy concerning nothing but its profits, as long as it confines to the legal rules of the game. Friedman presented the constrained profit-making view, arguing that companies should practice honestly, that is; disengage in fraudulent and deceptive acts. His argument relies on the fact that the purpose of a firm is to make profit for its shareholders. Consequently, the firm is responsible for utilizing the resources to engage in activities that will ultimately increase the profit of the firm, as long as it stays within the confines of the rule of the game. The fact that managers are the agents of shareholders implies that they must conduct business with emphasis on the interests of the shareholders. Because the shareholders are the owners of the firm (and the profits), this view perceives it as unethical to engage the managers in socially responsible objectives, as the managers may be required to spend money belonging to other individuals (Stead and Starik, 2004:116). Therefore, this view implies that holding companies socially responsible harm the foundation of private property system, free society, and free enterprise system. Friedman’s view has contemporary followers. Contemporary proponent authors of the view argue that shareholder value maximization is the universal objective of all firms, but not necessarily against social responsibilities actions. They base their arguments on the perception that having more than objective may create confusion and difficulties for the managers during decision-making. Alternatively, having a primary objective of shareholder value maximization leads to decision that satisfy the interests of multiple stakeholders. According to Jensen, the social welfare is at a maximum when all firms maximize total firm value in an economy. In essence, these authors seek to highlight that value maximization should be the sole objective of firms, and that managers should not pursue moral goals at the expense of a firm’s profitability (Pearce and Robinson, 2005:132). Despite their conclusion, the authors are not against the social responsibility actions of a firm. Actually, majority argue that firms cannot afford to ignore the concerns of stakeholders who have the capability to affect its long-term value generation. They argue that social responsibility might be used a strategy to gain a competitive edge in the market as well as seeking value maximization. Justifications for the classical view emerge from arguments of the neoclassical economic theory, using concepts such as economic efficiency, profit maximization, and free market. This may be on three grounds. First, the owners of the firm are shareholders, and the manager has absolutely no right to act on their own preferences, use the resources of the firm to achieve social responsible goals, or make discretionary decisions that do not relate directly to value maximization (Kazmi, 2008:422). Secondly, the primary objective of a firm is to maximize value and produce profits, thus pursuing social responsibility goals may interfere with effective allocation of resources and impair the performance of the firm. Lastly, there are other organizations in existence that deal with socially responsible functions such as governments, and managers and firms are not well equipped to perform these functions. Nonetheless, a portion of these authors argues that CSR may generate long-term value to the owner, though CSR it must be treated like any other investment decision. Examples of appropriate CSR strategies include those of Molson Coors, Tyson Foods, and Greenopolis. According to financial statistics from the company, Molson Coors spends more in education the society on responsible drinking than on alcohol-centered programs. Some of its most significant programs include the Taxi Guy project for overly drunk people and New Year’s Eve free transportation initiative. The company uses these forms of CSR to attract its customer, and their revenues support their efforts. In 2009, the Pacific Sustainability Index (PSI) ranked Molson Coors number eight overall, coming second in the alcohol beverages sector among the companies in the Fortune Global 500 and Fortune 500 Consumer Food, Beverages and Food Production. Moreover, Risk Metrics ranked the company AA in May 2009, a rise from former A ranking. This highlights the objective of the company to capitalize on CSR as the integral factor that drives the value of their business. Their investment in CSR is a management strategy to gain a competitive edge in their market niche, an objective they seem to achieve over time. Tyson Foods began an initiative to donate chicken to Capital Area Food Bank, Texas corresponding to the comments on their social media club connection. After two hours, they had more than 600 comments, prompting them to send two trucks to Texas. The company still organizes such successful CSR activities around states in the US. Consequently, these CSR activities contribute greatly to the economic bottom line of the company, particularly through enhancement of public image and boosting the morale of employees. Tyson Foods is among the leading marketers and processors of beef, chicken, and pork in the world. Actually, it is the second largest company in Fortune 500 in the food production sector. Greenopolis made around 4million dollars with their Think Green Reward program (Urip, 2010:134). The Reward program, Oceanopolis, primarily focuses on educating the community of recycling as well as sustainable living. The company is a subsidy of Waste Management Company. It has established interactive recycling kiosks in high-traffic location to collect materials. These four companies currently enjoy enormous benefits from their CSR initiatives. The stakeholder theory is founded on the notion that there several other agents interested in the decisions and actions of the firm beyond shareholders. The stakeholders comprise of individuals and groups that are harmed by or benefit from, and whose rights are respected or violated by, corporate actions. Stakeholders also include customer, suppliers, creditors, employees, and the larger community. The stakeholder theory holds firms socially responsible to the interest of all parties affected by their actions (Pearce and Robinson, 2005:53). Therefore, managers should consider all parties affected as well as shareholders when making decisions. Contrary to the classical view, the stakeholders view emphasizes on the flourishing of the company as well as all its stakeholders. From this perception, there are different typologies of stakeholders. A common classification of stakeholders is that of Clarkson. According to Clarkson, there are two types of stakeholders: primary and secondary. Primary stakeholders are those that are vital for the continuity of the firm, such as employees, customers, investors, shareholders, communities, and governments (Stead and Starik, 2004:132). Secondary stakeholders are influence, or are affected or influenced by the firm, but they are not actively involved in the transactions of the business nor are they vital for its survival. However, stakeholder theory suffers for its consideration of absent stakeholders (potential victims or future generation) and mute stakeholders (natural environment). The application of stakeholder theory takes three forms. First, it may be used to empirical or descriptive explanation for certain corporate behaviors and responsibilities. Second, it may be used instrumentally to identify connections or lack of connections between traditional corporate objectives and stakeholder management. Lastly, it may be used normatively in interpreting functions of the organization and identify philosophical or moral guidelines regarding management and operation. According to Carroll, CSR has four categories of social corporate responsibilities, with the economic foundation as the foundation with which the other responsibilities are defined and without which none of the other responsibilities can be achieved (Caroll and Buchholtz, 2011:128). Nonetheless, companies are expected to perform all the responsibilities simultaneously. Essentially, this perspective disregards the conventional belief that economic responsibilities relate to activities done for the benefit of a company, and other responsibilities relate to others. Rather, it suggests that economic viability is the activities that a firm does for its society. The four categories of economic responsibilities are economic, legal, ethical, and philanthropic. Economic responsibilities require the firm to carry out actions that will produce profits (Hitt, Ireland, and Hoskisson, 2011:156). Legal responsibilities stipulate that firms must operate within the confines of the law, which is the codification of society of wrong and right. Ethical responsibilities oblige the firm to do what is morally fair and right, and avoid harm to stakeholders. Lastly, philanthropic responsibilities require firms to be good corporate citizens by contributing resources to the community and improving the quality of life. Therefore, a simple profit-maximization perspective such as incorporating strategic CSR in the objectives of the firm may have profound positive impacts on a firm. Most customers, shareholders, suppliers, and creditors prefer to work with companies that have good reputation, and which they can entrust with their investment. CSR and other simple profit-maximization models build good reputation for a firm (Harrison and John, 2010:110). Moreover, simple profit-maximization models promote the reduction of emissions, waste, and resources use. This not only saves the environment but the expenses too. Thus, these models also enhance cutting of waste disposal costs and utility bills, bringing immediate cash benefits. Other benefits of this model include easy recruitment of employees, regulation compliant, generation of company value through positive press coverage, motivation, and enhanced productivity of employees, longer stay of employees thus reducing retraining and recruiting costs. In general, simple profit-maximization perspectives create a long-term generation of the value to a firm, enabling it to stay competitive and significantly reduce the sudden damage of sales and reputation that may have profound effects to investors and financiers. Bibliography Barney, J. B, and Hesterley,H. S., 2006, Strategic Management and Competitive Advantage. New Jersey: Pearson Prentice Hall. Carroll, A. and Buchholtz, A., 2011, Business and Society: Ethics and Stakeholder Management. Sudbury, MA: Cengage Learning. Freeman, R., 2010, Strategic Management: A Stakeholders Approach. Cambridge: Cambridge UP. Haberberg, A. and Rieple, A., 2008, Strategic Management: Theory and Application. New York: Oxford UP. Harrison, J. and John, C., 2010, Foundations in Strategic Management. Mason, OH: South-Western Cengage Learning. Henry, A., 2008, Understanding Strategic Management. New York: Oxford UP. 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