The Role of Stakeholders within Corporate Social Responsibility - Essay Example

The Role of Stakeholders within Corporate Social Responsibility Introduction Contemporary organisations operate in an increasingly global and interconnected world hence cannot risk ignoring its key constituents. For-profit organisations especially have to interact with different multi-stakeholders in their operating environment such as the government, trade unions, employees, customers, suppliers, NGOs and the surrounding communities in both positive and negative ways and cannot risk ignoring them as the firm’s strategy would risk a lack of support or legitimacy, or even resistance with dire consequences for the firm performance and eventually its survival. Such firms also become exploitative, antisocial and corrupt thus risking the ability to pursue owner’s economic goals over long-term. Corporate Social Responsibility (CSR) is thus a corporate philosophy that goes beyond legal obligations to manage the impact on environment and society. It is defined by Carroll (1979, 42) as “the economic, legal, ethical and discretionary expectations that society has on organisation at a given point in time.” The economic dimension involves the returns on investments for owners; legal is the laws and regulations that guide its conduct; ethical is concerned with not harming the stakeholders while discretionary are the behaviours that can benefit firm and society. Just like an organism, the organisation can survive or perish depending on how it interacts with the environment (Werther, 2011, 8) and as such, the stakeholders are key elements in the organisation’s environment. Stakeholders in this case are defined by Freeman (1984, 46) as “any group or individuals who can affect or is affected by achievement of organisation’s objectives.” These stakeholders have different interests which often conflict thus it is the role of management to balance these competing demands for its success. There are three different viewpoints of CSR: economic, rational and moral. The economic argument is the profit maximisation motive of firms (Friedman, 1962). The moral argument is based on the fact that organisations do not operate in a vacuum but in a wider society hence it should not just aim at profit maximisation but go beyond by fulfilling societal expectations. The rational argument is based on the iron law of social responsibility that states that “in a free society, discretionary abuse of societal responsibility leads, eventually, to mandated solutions” (Davis, 1973; Werther, 2011, 17). As such, businesses should seek to maximise profits by minimising restrictions on its operations. This essay will analyse the stakeholder perspective to CSR by utilising a contemporary organisation: Wal-Mart. The essay will be divided into several sections. The first section will define CSR and its evolution. Second section will discuss the stakeholder theory and management followed by the business case for CSR and finally, conclusion. Organisation Background Wal-Mart Stores, Inc is the world’s largest retailer with $473 Billion sales in the financial year 2014. It was founded in 1962 with a commitment to make a difference in the lives of its customers. It has 11,000 stores with 71 banners in 27 countries and e-commerce in 10 countries and employs over 2 million associates worldwide including more than 1.4 million in the United States. Its mission is to help customers “to save money so that they can live better” (Walmart.com, 2014). To ensure a sustainable CSR, the organization operates a global compliance program headed by the global chief compliance officer. The compliance objectives are set by the Audit Committee of Board of Directors and senior management and apply to all levels of organization. It was named number 1 firm on Fortune 500 in 2002 and has remained number 1 or 2 ever since and also the Fortune’s Most Admired company in America in 2003 and 2004 (Werther, 2011, 71). Its success derives from its business strategy of minimising costs and formulation of policies and decisions that affect stakeholders in different ways. Corporate Social Responsibility CSR is not a new phenomenon as it dates back to ancient Chinese, Egyptians and Sumerian writings. These writings indicated rules of commerce in order to facilitate trade and ensure wider public interest was considered (Werther, 2011). As early as the seventeenth century, public concerns about the functioning of organisations were apparent as evidenced by complaints about the excesses of East India Company. In the 1790s, the first large-scale consumer boycotts were also experienced in England to protest against slave-harvested sugar. The mercantilists then responded to social activism by use of corporate philanthropy hence social responsiveness was apparent. However, real CSR began with leaders and managers who began realising the importance of safeguarding resources owned by others hence effecting tradeoffs between owners, society and environment in eighteenth century England. This was a period of industrialisation and consequently management evolution with the likes of Henry Ford and Frederick Taylor. Firms then used the dominant economic logic propagated by Friedman that the only purpose of firms was to maximise profits (Friedman, 1962). Managers began using rational and moral arguments to advance CSR in realisation that firms had other important purposes beyond maximising profits. At first, they began with offering public goods by the government through taxes collected by firms or the welfare state (Carroll, 1979). As such, it was more about legal compliance before social forces forced the firms to be more responsive to needs of interested parties such as consumers and general public. Globalisation and increased interconnectedness then became a force to reckon with and to compete effectively, firms began developing CSR strategies and those who did not risked being left out. It thus became a voluntary activity as opposed to compliance (Carroll, 1979; Werther, 2011). Other researchers (Frederick, 1994) argue that it was a development involving three phases. The first phase was corporate social responsibility (CSR1), second phase corporate social responsiveness (CSR2) and third phase was rectitude (CSR3). CSR1 involved charity and philanthropy and CSR as an obligation requiring compliance. CSR2 was the phase associated with social demands hence fulfilling these demands was a way of ensuring business legitimacy (Davis, 1973). CSR3 phase was marked by the introduction of ethical considerations in corporate behaviour and more focus on stakeholders or actors. CSR also began being associated with financial performance of the firm with hence the development of concept corporate social performance (CSP) (Wood, 1991). Contemporary organisations are increasingly embracing this concept in realisation that they risk losing legitimacy if they do not shape up and more over, there is a business case for using CSR. Stakeholder management is thus a critical part of corporate strategy for success. Stakeholder Management Johnson-Cramer and Berman (N.d, 3) define stakeholder management as “the processes and behaviours by which a firm influences its relationships with its multiple stakeholders.” It is concerned with evaluating the effects of different strategies of dealing with stakeholders on the financial performance of the firm since CSR is often positively linked with corporate performance (Wood 1991). However, before we delve into the details of stakeholder management it is only proper to discuss the theory upon which this management is based. The stakeholder theory was developed by Freeman in 1984 to analyse the role of actors in the firm’s environment. He defined stakeholders as “any group or individual who can affect or is affected by achievement of an organisation’s objective (Freeman, 1984, 46). He later divided these stakeholders into direct and indirect stakeholders and they were later (Carroll, 1979) referred as primary and secondary stakeholders. The implication of this definition is the extension of management responsibility to entire society and also suggests that any social actor has a legitimate concern with organisation decisions and actions (Antonacopoulou, 2005). These stakeholders depend on the firm for provision of goods and services but also are also important to the firm as suppliers, customers, employees, shareholders and the community as a whole. These he further divided into three levels: the inner core comprises the stakeholders within the firm such as stockholders and employees; the middle circle comprises the economic stakeholders such as customers, competitors, creditors, suppliers and distributors while the outer core represents societal stakeholders such as government and regulators, communities, and NGOs (Key, 1999, 320; Werther, 2011, 35). However, this Freeman map is often criticised (Donaldson & Preston, 1995; Rowley, 1997) for not connecting internal and external stakeholders adequately. Some stakeholders such as the employees can also be external stakeholders as they are customers and also members of the society. Some like consumers are also members of the society hence should be a network (Rowley 1997) instead of layers. These layers can also be compared to Wood (1991) levels of CSP model which include institutional, organisational and individual levels. The organisation must balance the competing interests of these multi-stakeholders to gain legitimacy and succeed. Though Freeman’s stakeholder theory was aimed at criticising and reforming the dominant economic theory which is based on contract theory and agency theory in explaining and predicting firm behaviour, it has been criticized (Brenner & Cochran 1991; Donaldson & Preston 1995; Jones 1995; Rowley 1997; Wood 1991) for not meeting the requirements of a scientific theory. Key (1999, 318) argues that theory “should understand what is observable in the world.” As such, it should be able to offer an explanatory and predictive value and also show causal relationships between various variables. Scientific theories entail developing hypotheses and then carrying out empirical research to determine causal relationships and confirm or disagree with such hypotheses and are also meant to simply issues. In this sense, stakeholder theory cannot be regarded as a scientific theory as it does not offer any causal relationships nor does it confirm anything. The list of stakeholders who are supposed to affect and be affected by the firm is given hence there is nothing to confirm hence it is descriptive in nature. It is instrumental or moral in nature and also an ideological theory of control based on feminist philosophy of ‘caring’ as cause and consequence of relationships (Antonacopoulou, 2005, 22-33). It is instrumental in that it analyses decision processes, disclosure of information and stakeholder attractiveness. Others (Jones & Wicks, 1999) classify the theory as moral as it shows relationships between managers and stakeholders based on ethical considerations. The stakeholder theory is also criticised for inadequate explanation of the process, incomplete linkage on internal and external variables, insufficient attention to system within which business operates and level of analysis and inadequate environmental analysis (Key, 1999, 321). Researchers (Donaldson and Preston, 1995) suggest that instead of listing stakeholders according to levels, they should be identified by their interests instead. A new model for Key (1999, 324) would entail incorporation of reciprocal contractual rights and duties and also incorporation of CSR1, CSR2 and CSR3. Despite this shortcoming, the theory has become self-evident and used as foundation by most management theorists. Stieb (2008, 405) argues that the stakeholder theory entails redistribution of benefits and power to stakeholders hence the change of name from stockholders to stakeholders. Since these stakeholders have power, their influence in the organisation is significant warranting proper management. This involves studying characteristics of stakeholder groups to understand the external forces that shape a firm’s approach to stakeholder management (Johnson-Cramer & Berman, N.d). One of the dimensions of stakeholder management is to study individual stakeholder groups and manage them separately hence success is determined by how well firm manages each group. However, this method does not show how various stakeholder behaviours can be managed and also ignores those aspects that affect multiple stakeholder relationships simultaneously. An alternative dimension (Johnson-Cramer & Berman, N.d) is thus is to manage behaviour. In this respect, four dimensions were identified: engagement, contest, specify and breadth. Engagement is the degree to which firms communicate with stakeholders resulting in openness and transparency and flow of information (Rowly, 1997). This can be in form of newsletters, work councils, customer focus groups, town meetings and active public affairs officers. Most organisations engage in corporate social reporting to communicate to internal and external stakeholders. Wal-Mart is no exception and publishes a Global Responsibility Report every year outlining its commitments to environmental sustenance and dealing with stakeholders (Wal-Mart, Global Responsibility Report, 2014). However, its engagement with stakeholders is low as it engages with narrow set of stakeholders mostly customers and shareholders although in recent years it is engaging the communities and other agencies. Another dimension is contest which refers to the degree to which the firm considers stakeholders in decision making (Johnson-Cramer & Berman, Ned, 8). Whilst engagement ensures quality, contest is about interactions with stakeholders. Various stakeholders have different claims on the firm which often compete and can lead to conflicts if not well balanced. A company with high contest is one which represents most of these interests while low contest indicates decisions of stakeholders are not taken into account. Wal-Mart is known for imposing its wishes on stakeholders due to its dominance in the market. Werther (2011, 69) notes that Wal-Mart sometimes forces suppliers to redesign their packaging and computer systems to its specifications and also dictates costs to suppliers by threatening to source elsewhere given its broad market. As such, it has low content. Specifity is about the company policies and commitments. The company must set clear standards, rules and measures that satisfy the claims they make to stakeholders. For example, Wal-Mart slogan is “Save money, live better” (Walmart.com, 2014). This then entails developing specific policies aimed at reducing prices to show commitment. Since it has well developed policies aimed at reducing prices such as sustainable sourcing, use of solar energy, recycling waste materials and reducing packaging, it can be said to have high specificity. By the end of 2013, it had started 335 renewable energy projects globally and it cuts greenhouse gas emissions by more than 8% annually (Walmart.com). Reduction of energy bills as a result of using renewable energy and solar makes its goods cheaper for customers. Breadth on the other hand, indicates the range of stakeholder demands satisfied through its policies. Broad approach involves more policies that allocate value evenly across stakeholder groups and is determined by ownership structures (Johnson-Cramer & Berman, N.d). Some companies privilege different stakeholder groups and let other groups to suffer. For example, Wal-Mart privileges customers over suppliers, employees and other stakeholders (Wal-Mart, 2014). Its policy of helping customers “save money for better lives” affects all its function and relations with other stakeholders. For example, it is accused of offering low-paying jobs but people still apply for them due to lack of an alternative; it is the largest employer in town (Werther, 2011, 69). It also focuses almost exclusively to environmental sustainability of reducing costs and passing savings to customers. In the industry, it imposes the lowest prices due to its dominance that hurt other competitors and also engages in innovations aimed at reducing prices such as information technology as well as outsourcing. Overall therefore, Wal-Mart applies a paternalistic model of stakeholder management which entails low engagement, high contest, high specifity and low breadth. However, as Johnson-Cramer and Berman (N.d, 23) note, such profiles do not remain stable due to information, representation and satisfaction effects. If a group is dissatisfied, it resists and crammers for change thus making the company reconsider its distribution of value. Business Case for CSR Companies that adopt stakeholder perspective gain a lot in terms of business performance and avoidance of legal litigations. CSR is thus a way of maintaining company’s competitiveness (Weber, 2008). The business benefits of CSR are numerous. First, the business is able to save on costs by operating efficiently and reducing risks associated with non-compliance (Kurucz, Colbert, & Wheeler, 2008). The company also does not spend much on recruitment and selection of workers s it gains reputation of being a good employer and also due to reduced turnover. For example, by use of energy saving methods, Wal-Mart is able to save on costs of energy bills. A company also gains reputation as well as brand and image value thus giving it a licence to operate. Though Wal-Mart has issues with paying employees low wages and getting competitors out of business, it is still regarded as number one firm by fortune 500 (Werther, 2011). Conclusion Corporate social responsibility is based on the idea that the society has some expectations on the business and hence the business needs to be socially responsible. It indicates the interrelationships between the firm and its environment who are the stakeholders. Stakeholders are those that affect and are affected by the firm and place varied and competing demands on the firm. A firm that manages these stakeholders well is able to gain in terms of reduced costs, improved reputation and brand value, risk reduction, increased employee motivation and low turnover. Stakeholder management is based on stakeholder theory developed by Freeman in 1984 and advanced by others such as wood later. In this respect, an organisation is engages with stakeholders, reconciles their competing demands, sets policies to serve these demands and distributes value to the different stakeholders. These dimensions determine the company profile in regards to CSR but they change with time due to information, representation and satisfaction effects. How well the organisation manages multi-stakeholders determines its success. References Brenner, S and Cochran, P (1991). The stakeholder theory of the firm: implication for business and society theory and research. ABS Proceedings, pp. 449-462. Carroll, A. B. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review. 4: 497-505. Carroll, A. B. (1989). Business and society: ethics and stakeholder management. Cincinatti, OH: South-Western. Davis, K. (1973). The case for and against business assumption of social responsibilities. Academy of Management Journal. June: 312-322. 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