Corporate Social Responsibility - from Classical to the Stakeholder Approach - Coursework Example

Corporate Social Responsibility: A Management Report 2009 Executive Summary In classical economic theory, corporations have only one motive, that of profit maximization, and their only responsibility is towards the shareholders. In stakeholder theories, on the other hand, companies have responsibilities towards all stakeholders, including employees, customers, government and the community. Hence, companies need to undertake periodic review of its activities that affect all these stakeholders and perform a continuous program of corporate social responsibility (CSR). In particular, companies need to address issues in environmental reporting and sustainability, transparent and ethical financial behavior and responsibilities towards employees. In Australia, despite the pressures of economic recession, many companies are continuing with CSR programs that enhance their credibility in the marketplace. Introduction Corporate social responsibility is perhaps the most crucial ethical issue in businesses of today. It has been defined variously, from legal obligations and responsibilities to social responsibility in the ethical sense. While some consider it simply in terms of charitable contributions to social causes, others relate it to being aware of social issues. As a consequence, while some scholars use it as an antonym to being irresponsible, others see it as a means of businesses setting a superior example to the common citizens (Votaw and Sethi, 1973, cited in Coelho et al, 2002). Even though such norms have always existed for companies, a series of events in the corporate sector has forced legislatures to enact laws to safeguard corporate governance. In an increasingly complex world of globalized business activities, CEOs and other executives, under the pressures of achieving winning strategies, are exposed to ethical dilemmas related to finances, products and other business practices. Particularly in the times of recession, there is increasing pressure on the top executives to save costs as a result of which many companies tend to give a go by to ethical practices. In this paper, I will discuss the theoretical developments in corporate social responsibility (CSR), from the classical to the socioeconomic approaches, and show that Australian organizations are recognizing it is necessary for survival and not merely considering it as a legal obligation. From the Classical to the Stakeholder Approach Classical economists found the principal, and perhaps the only, responsibility of firms to be that of maximization of profits and shareholders’ value. The classical economic theory, first proposed by Adam Smith, a business is socially responsible as long as it maximizes profits legally in such a manner that its activities are directed by the “invisible hand”. The market capitalism theory in western economies of the 19th century was based on this theory that markets essentially work towards social progress. However, this theory from the beginning drew its share of skeptics. Since the early 19th century, as American businesses grew, owners took to charitable contributions even though businesses in the colonial era were small in today’s comparisons. However, theories of social Darwinism proposed that the social hierarchies were inherently biased towards the rich and hence this category of the society, who amassed the fortunes, had little social responsibility towards the rest of the citizenry. By the late 19th and the early 20th centuries, however, there were protests from other social sections, primarily the labor, that forced businesses to relook at the social responsibilities. While the threat of socialism was becoming real, those within the businesses began to question social Darwinism and the unhindered laissez-faire economy. As a result, the Progressive Era of the United States brought about different versions of corporate social responsibility, even though the term had not yet developed. Managers were first considered as trustees of not just stockholders but also of customers, employees and communities. Hence, managers were expected to manage different interests that were essentially based on the service interest that believed that progressing businesses should be in the interest of the society (Steiner, 2005). CSR as known today, developed in the 1950s when the stand on charity within the laissez faire economy was being increasingly looked as biased. The new view was first proposed by Howard R Bowen in Social Responsibilities of the Businessman (1954), in which he argued that businesses, being the reservoir of skill and energy of the society, had an ethical responsibility towards the society hence corporations would lose legitimacy if they did not maintain the norms of social contracts voluntarily in order to negate the effects of unwanted regulations (cited in Steiner, 2005). This view, of course, drew criticism from economists like Milton Friedman who argued that managers, as employees of corporations, are essentially responsible to shareholders. Despite this, corporations engaged in voluntary social obligations to ward off critics. As a result, corporations engaged in three levels of actions – market actions, which were the principal motivation of the corporations, mandated actions that were essentially the legal obligations enforced by government regulations, and voluntary actions that went beyond the earlier two categories of actions in order to respond to public consensus (Steiner, 2005). In the 1970s, researchers developed a new approach in understanding and analyzing the businesses’ role in social behavior. This body of literature has come to be known as the stakeholder theories in which companies are expected to address not only the shareholders but a host of other agents with whom it interacts (Mikkelson, 2008). This approach was first suggested by Freeman (1984), who defined a stakeholder of an organization as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (quoted in Jonker, 2004) and later developed by many theorists. The company interacts with and so has responsibilities towards stakeholders like employees, customers, suppliers, communities, government and so on. In this situation, it becomes difficult to satisfy all the stakeholders simultaneously, resulting in paradoxes of the firm’s various aims (Heath and Norman, 2004). The organization then needs to first identify all the stakeholders and then juggle between various roles and satisfy all or most of them. To begin with, it needs to create the stakeholder map, which charts out the dynamic relationships dynamic between stakeholders that are not only determined by the financial relations but also by the political and social environment (Donaldson and Preston, 1995). The advocates of the stakeholder theory make the list of stakeholders of corporations highly extensive so that the corporation may need to categorize between primary and secondary stakeholders (Waddock, 2002). CSR and Corporate Governance Typically, CSR is related with corporate governance and ethical behavior of corporations. In the highly competitive and globalized business environment, managers of firms are driven by the profit motive, which often becomes so overpowering that ethical behavior is neglected. This has most particularly been seen in the case of financial companies. The subprime crisis erupted in 2007 because of excessive greed of financial companies. Earlier in the 1980s and 1990s, as was seen in high-profile financial scandals like Enron, WorldCom and Sarbanes-Oxley earlier, high-risk accounting transactions, excessive corporate lines of credit, executive salaries that were not justified by corporate profits and inadequacies in internal audit led to bankruptcies of once powerful companies. In most of these cases, there was a lack of existence or adherence to codes of conduct in matters of prior approval of financial transactions in a bid to achieve high profits (Marakkula Center). CSR is also crucially related to sustainability of businesses in the situation that many of the companies’ activities lead to environmental degradation and hence raise questions of survival of the earth itself. Therefore, environmental accounting has become an important aspect of corporate social responsibility as carbon emission from organizations keeps increasing. However, incorporating environmental accounting standards into the traditional accounting practices is less easily done than said. It required voluntary or mandatory disclosures of environmental costs and liabilities that may require government intervention. Most companies are usually hesitant to make these disclosures as there are direct costs in developing appropriate environment management systems, employing specialist staff, internal auditors and external verifiers, publication and distributions costs and so on besides the potential ‘reporting risk’ that may scare away customers. On the other hand, companies may reap benefits from environmental reporting by raising employee morale and assuring investors and lenders over commitment towards long term sustainability, voluntary action that would minimize the possibilities of regulatory intervention, positive publicity and so on (UNCTAD, 2000). Corporate governance also involves management-employee relationships. Classical theorists advocate layoffs and downsizing on the argument of efficiency of firms but the stakeholder theorists strongly argue against this view (Karake-Shalhoub). Layoffs, salary and perk cuts have become the norm in times of recession, often forcing organizations ignoring their role in the principal-agent relationship in which they have some responsibility towards employees (Heath and Norman, 2004). While downsizing is often seen as inevitable, such decisions also affect the morale of the employees who remain with the company, which in turn affect the organizations’ performance. CSR in Australian companies In Australia, almost half of the large companies have been found to have policies regarding CSR (Anderson and Landau, 2006). Among these companies, nearly half have developed such policies since the 1990s. Hence, the focus on corporate involvement with the society has influence companies to develop voluntary policies directed towards the society. Individual industries face issues of corporate governance that may call for voluntary codes of conduct. For example, the pharmaceutical industry globally has grown to be extremely competitive and high investment. Healthcare professionals and the pharmaceutical industry have different stakeholders – while doctors are primarily concerned with patient care, the industry has commercial motives in creating shareholder value. Hence, despite the obvious similarity of interests, there are huge conflicts between the two sets of interests. These concerns have been voiced in the medical fraternity in almost all countries, resulting in voluntary self-control as in Australia or codes of conduct for doctors and the pharmaceutical industry developed by the World Health Organization and the Association of British Pharmaceutical Industry (Kerridge et al, 2005). Many companies in Australia have developed CSR policies regarding the environment. Organizations like ANZ Bank, BHP Billiton, Bovis Lend Lease, Stockland and Westpac have laid out environmental practices policies to make businesses sustainable (Austrade). Conclusion Thus, corporate social responsibility is not a hindrance but assistance for the survival of companies in times of recession. Even though many companies tend to adopt strategies that bypass governance policies in terms of addressing its various stakeholders that include the community, environment, customers and employees, it is often more beneficial to adopt strategies that support these stakes. Especially in globally competitive and high-cost industries, organizations should undertake stakeholder analyses and adopt policies towards corporate social responsibility for its own survival. Works Cited Heath, Joseph and Wayne Norman (2004). Stakeholder Theory, Corporate Governance and Public Management: What can the History of State-run Enterprises Teach Us in post-Enron Era, Journal of Business Ethics, 53, http://www.creum.umontreal.ca/IMG/pdf/Heath_Norman_final_preproof.pdf Jonker, J A (2004). Destination Strategic Direction and Positioning, PhD Thesis, University of Pretoria, upetd.up.ac.za/thesis/available/etd-07022004-130908/unrestricted/00front.pdf Freeman (1984). Strategic Management: A Stakeholder Approach, Boston, Pitman, 1984 Donaldson, T and L Preston (1995). The Stakeholder Theory of Corporations: Concepts, evidence and implications, Academy of Management Review Steiner, John F (2005). Business, Government and Society: A Managerial Perspective, Text and Cases, McGraw Hill Professional Coelho, Philip R P (2002). The Social Responsibility of Corporate Management: A Classical Critique. http://web.bsu.edu/cob/econ/research/papers/bsuecwp200201coelho.pdf Friedman, Milton (1970). The Social Responsibility of Businesses to Increase Profits, The New York Times Magazine. September 13 Waddock, Sandra (2002). Leading Corporate Citizens. New York: McGraw Hill Votaw D and Sethi, S P (1973). The Corporate Dilemma, Englewood Cliff, N J Prentice Hall UNCTAD (2000) Accounting and Financial Reporting for Environmental Costs and Liabilities, Workshop Manual, http://ecolu-info.unige.ch/recherche/supprem/content/unctad/reference_material/CAET-UNCTAD-MANUAL.pdf Black, William K. (n.d) How Trust is Abused in Free Markets: Enron’s “Crooked E”, http://www.scu.edu/ethics/publications/submitted/black/freemarket.html Marakkula Center for Corporate Governance (n.d). Annual Business Ethics Conference, http://www.scu.edu/ethics/practicing/focusareas/business/conference/presentations/corporate-governance-panel.html Kerridge, Ian Michael Lowe, John McPhee (2007) Ethics and law for the health professions. 2nd Edition. Anderson, Helen L. and Landau, Ingrid (2006),Corporate Social Responsibility in Australia: A Review, October. Monash U. Department of Business Law & Taxation Research Paper No. 5; U of Melbourne Legal Studies Research Paper No. 279. Available at SSRN: http://ssrn.com/abstract=1027845 Mikkelson, Aslaug (2008). Arctic Oil and Gas: Sustainability of Risk? Taylor and Francis Karake-Shalhaub (1999). Organizational Behavior, Downsizing, Discrimination and Corporate Social Responsibility, Greenwood Publishing Group Austrade, Corporate Social Responsibility: What does it mean and What can I do? www.austrade.gov.au/.../Green-Matters-Corporate-Social-Responsibility.pdf.aspx Read More