How Companies Demonstrate Social Responsibility - Essay Example

CORPORATE SOCIAL RESPONSIBILITY Introduction Corporate social responsibility is an important but "evolving" concept and thus while it may be easier to define it; it is certainly difficult to explain the motives of a company behind adoption of this strategy. It is believed that firms are not always interested in long term image enhancement that results from CSR but some are simply looking for immediate financial gains accruing from spending on community projects. CSR, regardless of a company's primary objectives, is an important subject of debate in business ethics study since it is commonly believed that if a firm earns from the community, it must return the favor by giving back to the community. The idea makes sense and the argument can be backed by various ethical and moral theories. Barnard (1938) had similar argument in mind when he said: "It seems to me inevitable that the struggle to maintain co-operation among men should as surely destroy some men morally as battle destroys them physically." (p.278) Such moral beliefs and values gave birth to the organized concept of CSR. Interestingly not everyone feels the same way. While many support the concept of CSR, there are some thinkers including the well-known economist, Milton Friedman who did not agree with the idea of investing in community work. We shall discuss Friedman later in the paper with greater detail. Ethics has always been an integral part of the way human beings are expected to think and behave. For this reason, it has entered the field of business and commerce as well. Many philosophers have posed the question: "why does a person behave ethically". In the same vein, we can ask, why must a firm behave ethically The answer can come from religious, moral as well as purely capitalist sources. It is believed that man is expected to behave ethically because it is the "divine command", one's duty, or in the words of Kant, an action is considered right only when it is based on a sense of duty. Hence there can be many reasons for explaining the expectation of ethical approach. People like Benjamin Franklin who were more morally inclined felt that "business is the pursuit of virtue". That is however a very simplistic way of explaining the expectation of ethics and may not be easily accepted by capitalistic circles. Jackall (1988) on the other hand feels that there is no real morality existing in the firm. The morality we find in a modern firm is based on "that right thing" which people above you want from you. Corporate social responsibility, while it may be immensely critical, doesn't always come with a serious concern for better image in the country. It is usually connected with a desire to perform better in the financial area. In other words, financial gains are an important concern when CSR is being adopted. In many cases, it has been expected to lead to higher market share. We must make it clear here that these are expectations and actual effects may differ from firm to firm. Some studies have some that in many firms, managers are more likely to adopt and integrate CSR in company's motto and policies if this investment is likely to result in monetary benefits. Managers are willing to invest in CSR related projects because it is expected to result in better financial health and greater monetary situation for the firm. Lydenberg et al. (1986) maintain that "Companies fight hard for even a small percentage gain in market share for their products. If and when corporate managers become convinced that their company's social record affects market share, they will be forced to take social initiatives seriously." Social responsibility has also become a buzzword because of the availability of large variety of similar goods. When a product comes into the market, it has to fight very hard for consumer's attention because there are several other rival goods competing for the same. A marketing and design consultant (Neuborne, 1991) states: "There was a time when you bought a product just for its price or performance...but with the number of products available, it is increasingly difficult to differentiate one product from another." In this situation, a consumer may base his buying decision on company's image and its commitment to public good. This is clearly indicated by a book, 'Shopping for a Better World' that has been selling millions of copies since it first came out in the market. The book rates and ranks companies according to their social responsibility performance. As a result of this in 1989 alone, 78% buyers switched brands. (Davids1990). World Bank defines CSR as: "Corporate Social Responsibility is a term describing a company's obligations to be accountable to all of its stakeholders in all its operations and activities." While it is now true that corporate social responsibility is highly desired, it has not always been the accepted practice for corporations. In 2004 for example Henry Miller in The Miami Herald, Henry Miller wrote, "Businesses do not have social responsibilities; only people do." (Miller, 2004). Similarly 'The Economist' failed to see why corporations must be forced to adopt a socially responsible framework. Thus in its 2005, issue The Economist skeptically reviewed the firms that were contributing to tsunami relief effort: "All things considered, there is much to be said for leaving social and economic policy to governments."(The Economist) Milton Friedman was probably the first theorist and economic expert to reject the theory of "social conscience of business" when in 1970 essay, he declared: "There is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits." The most important framework in which this issue must be studied is the traditional model. Milton Friedman was a good representative of this traditional conflict as he argued that money spent on social ventures was most likely coming from employees or stakeholders. This neoclassical model states that when social responsibility becomes one of the concerns, profits suffer. As the result of which any dollar spent on community projects is stolen from stakeholders' money. This is also consistent with the views expressed by The Economist in its Jan, 2005 issue. it was argued that money that corporations were spending on relief effort had indeed been coming from equity owners. The supporters of this model maintain that social responsibility and profits must be viewed as exclusive goals. McDonough and Braungart (2002) further clarify the conflict in Cradle to Cradle: "We are accustomed to thinking of industry and the environment as being at odds with each other, because conventional methods of extraction, manufacture, and disposal are destructive to the natural world. Environmentalists often characterize business as bad and industry itself (and the growth it demands) as inevitably destructive. On the other hand, industrialists often view environmentalism as an obstacle to production and growth.... It appears these two systems cannot thrive in the same world." While firms have become conscious of their roles as socially responsible units, there still exists a deeper conflict between this desire to achieve this image and maximize profits. Many firms would still prefer to invest in projects that are profitable even if at the cost of environmental safety or community good. Susan Ariel Aaronson and James T. Reeves (2002) explain in Corporate Responsibility in the Global Village: The Role of Public Policy: "Although market forces are increasingly pressing companies to act responsibly, markets have not succeeded in prodding corporations to 'do the right thing' everywhere they operate. To some degree, public policies to promote CSR arise from market failures." This traditional mindset argues that tax breaks and such other incentives would help a firm become more socially responsible. There must be some awards or other forms of recognition extended to companies with a socially responsible behavior in order to encourage other firms to follow suit. This kind of competition can prove to be more effective than governmental regulations since firms are reluctant to follow government mandates. Social responsibility is closely connected with concern for financial growth. According to this belief, firms seek to maximize their profits by investing in a healthy environment and other public good projects. The firms that have successfully attained the prestigious image of being socially responsible follow this ideology. These firms choose to be more socially conscious not because of any real intention of creating a healthier society but because their actions seem to influence buyer behavior in a positive manner. Companies are thus rapidly developing serious CSR policies with exclusive departments dealing with this. New and better corporate mission statements have emerged that incorporate ethical code of conduct. By the end of 2003, more than 2000 firms had presented their CSR reports. These firms have successfully found a way to turn social responsibility into financial boom. CSR is now seen as the main strategy to attract customers since it seems to have a positive impact on customers' buying preferences. Companies are vying for increased customer attention by developing a reputation for good corporate citizenship. Microsoft similarly believes in CSR that is "all about the bottom line" and tries to connect it with economic success. It seeks to maximize its market share by investing in public projects. CSR is thus all about developing connections and sustaining the same. When a company makes a conscious effort to listen to their customers and their concerns, it helps them build a deeper connection with them and that results in increased profitability. For example when Microsoft realized that most of its Xbox customers were concerned about labor and environmental problems, it started paying greater attention to environmental issues of areas where their production houses were located. CSR doesn't only help attract more customers- it also increases business-to-business relations. Levi's developed a code of conduct for vendors, which has earned the status of certification among purchasers all over the world. If the firm doesn't follow a proper ethical code, the community would certainly come to know about it as Wiley (1995, p. 25) puts it: "When unethical actions are not dealt with, word spreads that the organization is not really interested in ethics. In some cases, a demotion, rather than firing, may be sufficient to make this point." Apart from that CSR strategy also brings a company closer to its community as Duncan Arthur D. Little further adds in "The Business Case for Corporate Citizenship,": "The perceptions that stakeholders have of a company's corporate citizenship performance can significantly affect the business's license to operate. Companies with a poor reputation in this area can find themselves continually responding to criticism of their approach to a whole range of environmental and social issues." (Little, 2002) CSR is also seen as an important strategy for attracting and retaining quality employees. In other words, employee turn over rate decreases significantly when a firm is actively involved with community. In a 2004 survey, it was found that more than three fourth of MBA graduates would prefer working for an organization that is considered socially responsibly even if it means lesser pay. (Roner, 2004) It has also been noticed that employee do not only view active involvement in community projects as CSR but excellent treatment of employees is another slid indicator of a firm with ethics. When the subject was discussed with Human Resources Director of fast-food chain, In-N-Out, he remarked: "Efficiency wages are self-serving. Our store managers may make 100 to 120 percent over industry norms, but the money spent on salaries is seen as an investment. Our wages not only broaden the applicant pool from which we can choose employees, but increase performance levels and retention rates.... Although you can never know for sure why people stay with a company, I certainly believe it may influence why people like their job here". (Iriart, 2003) A firm needs to reserve some compensation resources in case of emergencies. When a firm ensures that its employees are treated well and their medical and contingency expenses are adequately covered, it automatically increases productivity and efficiency of its employees. According to International Labor Organization (ILO): "on the job accidents and illnesses annually take some two million lives and cost the global economy an estimated 1.25 trillion, or four percent of annual global GDP." (ILO, 2003) Therefore safer working conditions along with sound compensation plans translate into greater productivity. In addition to that, firms also need a proper ethical code so that employees can report suspected behavior or violation. O'Dwyer (2006) explains: "If employees do not have channels through which they can report suspected violations and seek guidance on issues that concern them, then ethical codes are unlikely to be enforced." Studies also reveal that when firms invest in corporate community service programs, they increase their chances of facilitating valuable research and innovation by "developing a variety of competencies, including teamwork, planning and implementation, communication, project management, listening skills, and customer focus." (BSR.org) This may help further in risk management and avoidance. Simon Zadek explains: "Advocates advance two primary arguments for how CE [Corporate Engagement] can help a company manage its risks. The first claim is that engaging in CE can help avoid harms associated with socially irresponsible or illegal behavior perpetrated by employees, and to mitigate the harms to the corporation created by accidents or mistakes.... The second, more complex claim, is that engaging in increased CE will help companies better understand and manage risks that come from new and unfamiliar sources." (Zadek, 2000) Community service, environmental protection and closer connection with the people translate into better risk management and risk avoidance. This is especially in the case of more accident prone industries including Petroleum and construction. With a sound CSR strategy, a firm can avoid negative publicity when something goes wrong and it can also avoid lawsuits to a large extent. Vice President of Communications and Public Affairs at Occidental Petroleum, Lawrence Meriage explains: "In the indigenous communities where we operate in Ecuador, we have a long-standing relationship with the people. Having them look at us as friends, instead of enemies, means our operations will not be disrupted and we will be able to negotiate new agreements later on. Building these relationships helps us avoid protests, strikes, or other disruptions such as people blocking roads." (Meriage, 2003) Companies need to be aware of the political issues which are affecting the community. It helps in formulation correct policies as CSR strategy should incorporate company's stand of issues of importance. Political awareness also means that firm would be able to correctly anticipate future legislation. It is important to take a stand on issues before laws are formed because this shows a firm's commitment and courage of conviction. While most firms would either reject social responsibility or adopt it for financial gains only, we recommend a different approach. Firms must be concerned about environmental and other social issues without connecting them with financial gains. In such a firm CEOs and managers aim for the greater good because they believe in it and not because it serves any financial purposes. This is however an uncommon sight. We don't normally come across firms that would pursue public good without profits in mind but regardless of how uncommon this might be, there are still some firms who practice this belief. Philanthropists or environmentalists who feel strongly for the community most commonly head such firms and thus economic success is secondary to them. Many such firms even believe in not publicizing their charity work. If they are working for the greater good, why advertise it. Social and Environmental Affairs Manager at Adidas, Gregg Nebel explains: "Why market what you are doing if you are simply doing what is right The feeling here is that there is an expectation that a company will do the right thing, and there is no reason to advertise that we are fulfilling this obligation." Social responsibility is an important concern of corporations and community alike. It has been receiving increased attention with media focusing on ethical and moral obligations of large corporations and with the world chanting slogans against ever-spreading wings of these firms. However the definition of social responsibility or CSR varies from firm to firm and the model mentioned above are just three most common ways in which this is implemented. CSR is something each firm needs to define for it and it is something we must consistently aim for. CSR must be so integrated in the entire strategy that it should reflect a company's vision and its future plans. If a firm believes in providing customers with quality products and services, it only makes sense that they serve the community beyond their scope of service. This not only boosts their image as an ethical firm but also lends extra strength to their financial condition. The question that remains to be answered is do firms engage in CSR as a public relations exercise or a sincere commitment to the common good. From the discussion above, it is clear that some firms use CSR only to improve their relationship with the customers. While others exhibit a sincere commitment to serve the community and hence lend support to various projects. We have already explained which is the better option but we cannot tell decide by looking at the efforts of any organization whether they are doing it for the sake of PR or have some other sincere objective. It is up to the firm to decide for itself what it needs the CSR for. And most of the firms would never agree that their CSR is a part of PR strategy even if that is the case. But some firms would actually put social responsibility ahead of financial gains. Johnson & Johnson will always be remembered as the one firm that knew exactly what CSR meant when it encountered crisis. In 1982, when Johnson & Johnson's product Tylenol was at the top of its league, one individual tampered with the product and laced it with cyanide. The poison resulted in few deaths and the company lost $1bn worth of its value in the market. Even though J&J wasn't actually responsible, they knew that it was their drug and that more people could die as the result. In one of the best and the biggest move, the firm decided to recall all its Tylenol tablets from the market. That was a shocking move for those in the corporate world since the cost of this action was huge in terms of money but for the community, it was the most sincere effort any firm has ever made to protect public's health. Thus while the firm lost market share initially, it turned into an even bigger firm with this move and is going strong even today. Some other firm might have tried to play the blame game as we saw in the relatively recent case of Bridgestone. Firms like J&J do not have to explain to anyone that their CSR policy goes beyond PR. The firm that succeeds in maintaining its good image and strengthening its financial position is the one that does exactly what J&J did i.e. incorporating CSR in company's long term vision and making it an integral part of its other policies and strategies. References Miller, H. "Businesses don't have social responsibilities; people do." The Miami Herald 21 July 2004. "The Good Company." The Economist. 22-28 Jan. 2005: 11. Braungart, M; McDonough, W. Cradle to Cradle. New York: North Point Press, 2002. Aaronson, S; Reeves, J. Corporate Responsibility in the Global Village: The Role of Public Policy. Washington, DC: National Policy Association, 2002. Little, A. "The Business Case for Corporate Citizenship." Distributed at the World Economic Forum Annual Meeting. 31 Jan.- 4 Feb. 2002 Roner, L. "MBA graduates want jobs with ethical companies." Ethical Corporation Online. 2 Aug. 2004. International Labour Organization. "ILO: Work hazards kill millions, cost billions." World of Work Magazine. ILO Online, 23 May 2003. "Overview of Business and the Community." www.bsr.org Zadek, S. Conversations with Disbelievers. The Ford Foundation, 2000. Davids, M. "The Champion of Social Responsibility." Business and Society Review, Summer 1990, pp. 40-43. Donaldson, T., and Werhane, P. H. Ethical Issues in Business (2nd Ed.), Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1983. Friedman, M., and Friedman, R. Free to Choose. New York, Avon, 1981. Lydenberg, S. D., Marlin, A. T., Strub, S. O., and the Council on Economic Priorities. Rating America's Corporate Conscience. Reading, Massachusetts: Addison-Wesley Publishing Company, Inc., 1986. Neuborne, E. "Cause Packaging: Message is in the Bag." U.S.A. Today, July 1, 1991. Wiley, C.: 1995, "The ABC's of Business Ethics: Definitions, Philosophies and Implementation", Industrial Management 37(1), 22-27. O'Dwyer, B. (with Madden, G). (2006). "Ethical Codes of Conduct: A Survey of Code content and Enforcement among Irish Based Companies", The Journal of Business Ethics Vol. 63 No. 3, pp. 217-236. Chester Barnard (1938) qtd in. The Functions of the Executive, 1982 edition, Cambridge: HUP Read More