Corporate Social Responsibility as Financial Cost & Its Effects on Financial Performance - Coursework Example

Table of Contents Particulars Page No 1.0 Introduction 2 2.0 Understanding Consumer Social Responsibility 3 3.0 CSR As Financial Cost & Its Affects on Financial Performance 4 4.0 Necessity for a Trade-off 5 5.0 Conclusion 7 6.0 References 8 1.0 Introduction This report has been drafted in a comprehensive manner to discuss on the critical element of Consumer Social Responsibility acting as a financial cost to the organization and contributing to its financial performance or profitability and hence, how a trade-off is necessary for the same. To ensure a proper understanding of the topic, firstly Consumer Social Responsibility has been explained in detail and how the same acts as a “financial cost” to the organization in today’s modern era of business. The report also throws light on how CSR affects the financial performance or profitability of any organization and hence how important it is for figuring a balanced trade-off for ensuring long term sustainable development of the business. Finally a conclusion is drafted to ensure that the readers are equipped with proper practical and theoretical knowledge and understanding of the entire topic under study. 2.0 Understanding Corporate Social Responsibility Corporate Social Responsibility (CSR) has certainly emerged as a global trend in international scenario of business which focuses on continuously increasing the social responsibility of business in context to its social, economic and environmental aspects. CSR is a broader sense refers to the voluntary activity of organisations which combines both social and environmental concerns of business operations by continuously involving an interaction with its stakeholder’s. It aims towards improving the awareness of business towards its society. In a nutshell Corporate Social Responsibility (CSR) comprises of four basic components which are crucial and critical for the success of any organization namely: Economic Responsibility: This refers that organizations are economic and nature and hence have an obligation to be productive and profitable to satisfy the emerging needs and wants of consumers and society at large. Legal Responsibility: This involves completion of economic responsibility with correct legal laws and regulations of society. Ethical Responsibility: This ensures that organizations need not just follow the laws but ensure to behave ethically towards societal norms and values and Discretionary Responsibility: This is a voluntary choice decided upon by organizations top management however with CSR becoming more upfront they no longer are discretionary and mandate by law. Thus we see how modern era business is highly dependent and attached on CSR and no firm tend to eliminate its Corporate Social Responsibility as the same shall not just ensure lower profitability and lower customer retention but shall equally bring legal consequences. Now let us have a look how CSR is a financial cost to the company and how it affects the financial performance or profitability of the business. 3.0 CSR As Financial Cost & Its Affects on Financial Performance Implementation of CSR attracts different types of financial cost with it namely sunk cost, recurrent cost and opportunity cost. These costs may be short term in nature or may involve continuous outflows. Examples of such cost can be outflows in terms of purchase of environment friendly products and equipments, change in management structures or even implementation of strict quality control measures to ensure high quality products and services to society at large. Environment related implementation of CSR mainly incurs financial cost in terms of capital (Example: New equipments and new energy saving devices) and minor recurrent cost such as up gradation and maintenance of plants and equipments. In contrast it is to be highly noted that recurrent cost for implementation of CSR which is aimed towards improvement of social aspects of business activities, often exceeds its capital costs (Orlitzky, 2001). Further in addition to the actual cost incurred for implementation of CSR, there is yet another cost of certification which is based on international code of conduct and voluntary sustainability standards. Since organizations being socially responsible attracts costs (As discussed above), it should generate benefits as well in terms of better financial performance so as to establish a sustainable business practice. There are direct benefits to the organizations from CSR activities in terms of improvement in the commitment level of employees and their learning processes which standardize and increase the skill level and effectiveness of its employees. CSR helps in building upon the brand equity for companies and make them more lucrative and appealing thereby attracting larger number of highly qualified applicants. These direct benefits provide organizations with improved financial performance in terms of lowering the cost of recruitment, reducing workforce turnover, avoiding penalty provisions for non compliance of strict environmental laws and regulations, lowering labour disputes, better output which meet quality and environmental standards and fit for the society to be accepted at international scale. Furthermore, value is created in terms of innovation by releasing the innovative potential of employee’s trough continuous development, learning and commitment towards their assigned tasks and implementing environmental practices and incorporating globalised societal challenges (Margolis, Joshua , and Walsh 2001). Furthermore apart from such internal benefits, implementation of CSR activities provides external benefits such as improved public perception and increased publicity of the company and its products or services. Improved reputation, publicity and good stakeholder relationships bring overall positive company image and increased brand equity which directly contributes to enhanced financial performance. With international voluntary standards being met in terms of CSR practices and being certified globally it helps organizations to gain price premium and higher customer base with satisfied customers (Martin, 2002). Thus we see, that implementation of CSR activities certainly results in financial cost and is equally traded off by financial benefits and enhancement of financial performance. Now let us have a detailed look of why a trade off is necessary in such a case. 4.0 Necessity For A Trade-Off We had already seen in the above discussion that how CSR activities act as financial cost to the company and in return enhance financial performance. However, the real argument lies in the fact that, “Does increasing social and environmental responsibility always enhances shareholders value in terms of financial requirements”. CSR initiatives are in real sense more clearly and viably visible in firms which operate in dealing with individual consumers or selling services directly to the purchasers. It is arguably more important to actual consumers of goods than to industries selling products to each other where the financial cost of CSR activities are not being traded-off by financial benefits. Implementation of CSR related activities certainly provides organization with both direct and indirect benefits such as lower recruitment cost, better and standardized products or services, low employee turnover, successful environmental laws being met, satisfied customers etc, however in a broader sense these internal and external benefits which enhances the financial performance are more viable and visible in consumer related industries and not in industries which sell their products to other industries who in the long-run experiences more financial costs than benefits derived from it. Thus, pointing towards a necessity of trade-off between the financial cost of CSR and its related financial benefits. Furthermore, recent studies in the past highlights that socially responsible investors are less profitable than the conventional investors hence its lacks a balanced trade-off. Investors are more pruned to invest their funds in companies which have higher profitability than more engaged in socially acceptable initiatives. Small or medium sized firms are more keen towards building profits than looking towards CSR implementation which gives than additional advantage to compete with larger giants in the similar industry with little or no financial obligations being incurred in the successful implementation of CSR related activities (Waddock and Graves 1997). An additional cost of meeting the mandate audit of CSR related activities to ensure that international standards are met. Further add to the financial cost which in turn provide transparency in its dealings, however adds more to the cost than to the benefits derived from it. Thus attracting a necessity of trade-off between Corporate Social Responsibility and financial performance derived from the same. Milton Friedman famously in his research concluded that “The social responsibility of business operations is to maximize profits” and everything else will fall into place. Keeping the same view point increasing financial cost on CSR related activities must in strict sense should ensure higher of similar returns to the business organizations. However, we already saw in the above discus that this theory holds goods in consumer based industries where a trade-off has been reached however the same does not holds good for industries selling goods to sellers other than the ultimate consumers where financial cost on CSR implementation is higher than the financial benefits derived from it. Hence, trade-off between financial cost of CSR and its benefits is a necessity in the longer run to achieve sustainable business development. 5.0 Conclusion The report looks towards explaining the basic meaning of CSR and its related advantages like lower employee turnover, better brand equity, higher customer satisfaction etc which provides financial profitability to the organizations along with a discussion on the financial cost incurred for implementation of CSR related activities (Sunk cost, recurrent cost and opportunity cost). The report further highlights that there is still a necessity of balanced trade-off between the financial cost on CSR activities and benefits derived from it as it is more prominent in consumer related industries however lags such benefits in other industries selling goods or services to other industries. 6.0 References Margolis, Joshua D., and James P. Walsh (2001) "Social Enterprise Series No. 19 -- Misery Loves Companies: Whither Social Initiatives by Business?" Harvard Business School Working Paper Series, No. 01-058. Martin, R. (2002) “The virtue matrix: Calculating the return on corporate responsibility.”Harvard Business Review, March 2002. Orlitzky, M. (2001) ―Does Firm Size Confound the Relationship Between Corporate Social Performance and Firm Financial Performance?‖, Journal of Business Ethics, 33, pp.167-180 Waddock, S. A., and Samuel B. Graves (1997) “The corporate social performance financial performance link.” Strategic Management Journal, 18 (4): 303-319. Read More