Corporate Social Responsibility Performance of Saudi Arabia and the UK - Research Paper Example

A Comparative Study of the Corporate Social Responsibility (CSR) Performance of Saudi Arabia and the United Kingdom Table of Contents Section Title Page Number I. Introduction 3 II. Literature Review 4 A. Definition of CSR 5 B. The Nature and Implication of Corporate Social Responsibility to the Banking Sector 6 C. Corporate Social Responsibility in the Banking Sector of the Kingdom of Saudi Arabia D. Corporate Social Responsibility in the Banking Sector of the United Kingdom 10 13 E. Literature Review Summary 15 III. Research Objectives and Questions 15 IV. Research Design and Methodology 17 A. Secondary Data Collection 17 B. Scope and Limitation 18 V. Proposed Time Table 18 References 19 I. Introduction The Kingdom of Saudi Arabia is a haven of economic and political strength in a region that is ravaged by political disorder and wars. This strength, alongside other factors, has helped the Kingdom establish its place as one of the major business hubs in the world, with giant multinational corporations basing their operations in the country. These multinational corporations, such as the banking sector, will continue to proliferate and dominate if present trends in the country continue (Shoult 2006). With local and global companies manoeuvring simultaneously in a fast moving economy, one of the major business concerns in Saudi Arabia in the recent decade is corporate social responsibility (CSR) as well as its function and direction in the business environment of the Kingdom. The opposite is true for the United Kingdom. The introduction of corporate social responsibility in the UK’s banking industry does not present entirely good opportunities. There are constraints in the voluntary programmes to deal with the unfavourable environmental and social effects produced by the banking industry in developing and developed nations (Solomon 2007). The political system of the UK have failed to challenge the influence of the banking sector beyond advocating gradual voluntary attempts to advance CSR, all of which have fell short of resolving successfully the major problems of sustainable development, poverty, climate change, and human rights (Ward & Smith 2006). Despite of the vast evidence, the programme of ‘Investing in the Future: a European conference on CSR and the finance sector, (ibid, p. 93)’ disproves the fact that the UK banking sector has yet failed to progress outside mainly unsuccessful efforts at self-regulation. The banking industry has a corporate social responsibility to adequately cater to the intricate groups of customers; a bank operates to maximize shareholders’ profit. It should sustain the most favourable liquidity to satisfy the demands of depositors. It is mandated to meet the official ‘deficit sector demand for credits’ (The National Commercial Bank 2009, p. 3). The banking sector should satisfy the provisions established by supervisory bodies to continue operations. Most of all, for the bank to be viewed as a responsible corporate entity, it has to provide substantial input to the economy’s highest development and meet the demands of its immediate vicinity (The National Commercial Bank 2009). Hence, the aim of this study is to comparatively study the challenges of CSR that the banking sector in Saudi Arabia and the United Kingdom confront nowadays. Two major banks for each country are studied and compared, namely Aljazeera and the National Commercial Bank in Saudi Arabia, and HSBC Bank and Barclays Bank in the UK. II. Literature Review A. Definition of CSR There appears to be countless definitions of corporate social responsibility, running the gamut of the basic to the complex, and an array of related concepts and assumptions, such as ‘corporate sustainability, corporate citizenship, corporate social investment, the triple bottom line, socially responsible investment, business sustainability and corporate governance’ (Thomas 2006, 3). Singh and colleagues (2009) defines CSR as “open and transparent business practices that are based on ethical values and respect for the community, employees, the environment, shareholders and other stakeholders.” The European Commission (2001) similarly defines CSR as “a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment” (ibid, p. 5). It has been argued by Orlitzky (2005) that a number of researchers misrepresent CSR’s definition to the point of making the concept morally empty, theoretically hollow, and totally indiscernible; or, as stated by Van Marrewijk (2003), CSR may be considered the “panacea which will solve the global poverty gap, social exclusion and environmental degradation” (ibid, p. 95). In spite of more than seven decades of serious academic discourse concerning the notion of corporate social responsibility, there remains an absence of a generally established definition of the concept. In the meantime, a large number of giant firms seem to have discovered a general foundation upon which they have developed detailed practices and guidelines of CSR (Mallin 2010). As remarked by Hester (1973), although, “... there has been no general agreement as to the meaning of corporate social responsibility or how it should be implemented... businessmen enthusiastically have adopted the concept... (ibid, p. 33)” The growing popularity and vitality of CSR as a component of business practice and strategy during the recent decade is apparent by a thorough literature review of CSR in the Kingdom of Saudi Arabia, specifically in relation to the banking sector. B. The Nature and Implication of Corporate Social Responsibility to the Banking Sector The discipline of business corporate social responsibility and ethics has expanded globally into an interdisciplinary field of study and is restructuring business activities (Mallin 2010). Although the discipline has been the target of comprehensive research all over the world, it has gained inadequate interest in the Middle East (The National Commercial Bank 2009). However, several state of affairs show Saudi Arabia’s increasing interest in CSR. The World Bank (2008) has named corporate social responsibility as a primary component needed for economic development in the Middle East. Hence, as stated by Aras & Crowther (2010), the mission is to study the optimal processes of responsible corporate conduct in the region and to endorse them as learning instruments for students and corporate specialists in the Middle East. The major social responsibilities for banks will be identified by its social function and the environment where in it functions. Banks’ primary function, as a financial institution, is to carry out intermediary tasks which translate savings to investments (Singh et al. 2009). Savers’ risk is lessened by this service. But do banks operating in a country have accountability to the people, the community, and the environment? This is a very challenging issue. However, banks’ major role is to protect their customers’ and shareholders’ interests. Moreover, preserve the balance on savings, payments, and investments with other financial institutions (Mallin 2010). All financial institutions have the responsibility to offer financial services (Schreck 2009), which is fundamentally the flow of monies, with an assured rate of return. However, in actual fact, this cash flow is frequently offered to those who are financially beneficial or advantageous to the organisation. The banking sector serves a vital function in the economic growth and development and hence also may impact sustainable development (Singh et al. 2009). This is due to the fact that the notion of sustainable development can be described as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Singh et al. 2009, 25). Because of this banks influence the sustainable development by the operations performed by them. The products of banks should be in agreement with society’s needs. Consumers’ needs are ‘security, access, liquidity, interest and social responsibility’ (Singh et al. 2009, 25). The banking sector has an intrinsic social responsibility to understand the notion of Know Your Customer paradigm (KYC) (ibid, p. 25). This is to have knowledge of the financial activities of the clients to avoid any problems in relation to the other investments and regulations (Mallin 2010). CSR fulfils an important function for the banking sector with regard to socially responsible investment. In the meantime, one of the major issues relating to CSR, which is studied here, is its relationship with corporate financial performance. As stated by Drucker (1993), “Organisations have to take ‘social responsibility.’ There is no one else around in the society of organisations to take care of society itself. Yet they must do so responsibly, within the limits of their competence, and without endangering their performance capacity” (ibid, p. 97). The effects of CSR on financial performance remain one of the major focuses in the literature. Theories of CSR range from an entirely stockholder point of view, like that pioneered by Friedman (1962), in which the exclusive emphasis is on the responsibility of the business to its stockholders, to a point of view that indicates that businesses have a responsibility to harmonise stakeholders’ interests. Munilla and Miles (2005) argue that the dedication of a firm may pursue a CSR scale that ranges from a conformity standpoint (e.g. companies satisfy ethical and legal provisions but do not use the funds of stockholders for noneconomic activities), to a planned standpoint (e.g. companies modify their business frameworks to add CSR activities that generate equities for stockholders), to a mandated standpoint (e.g. companies are forced by a variety of bodies to transcend tactical or conformity interests and use assets that may not be in the stockholders’ best interest in the long run) (ibid, pp. 374-375). Still, wherever businesses fall on the scale of CSR, majority would concur that a combined attempt should be initiated to harmonise strategies to make the most of the business advantages that CSR could bring while also involving stakeholders in the process of strategy development (Idowu & Louche 2011). In any case, a company that is completely socially responsible, yet sustains poor financial performance, will stop being socially responsible when it collapses because of financial failures Traditionally, the responsibility of businesses was identified entirely in terms of the economy (Idowu & Filho 2008). Friedman (1990), for instance, regarded shareholders’ profit maximisation as the only responsibility and goal of a high performing company. This assumption usually regards business operations as a ‘zero-sum game’ (as cited in Idowu & Louche 2010, 124). All assets that were used up on behalf of social responsibility are at the cost of stakeholders. Shareholders’ interests were identified clearly as mutually independent and contradicting (Idowu & Louche 2010). Numerous disapprovals have been thrown at this assumption and it appears sensible to generalise that firms are not perceived anymore, even in theory, as entirely economic entities. There seems to be an agreement that corporations work for different publics and groups of stakeholders whose interests are mutually dependent and whose membership are coinciding (Schreck 2009). Knowledge of this relationships and an accompanying interest on stakeholders’ wellbeing may compel companies to operate in a socially responsible way irrespective of their intention. Different hypotheses concerning the connection between corporate financial performance and social responsibility emerged from the abovementioned assumptions. When firms are perceived as economic entities, negative correlation between corporate financial performance and social responsibility is expected (Mallin 2010). The contrasting hypothesis indicates a positive correlation between profitability and social responsibility. Advocates of this theory claim that socially responsible organisations are likely to acquire the competencies needed to attain optimal profitability (Schreck 2009). Orlitzky (2005) reports that his study finds a positive correlation between corporate financial performance and CSR, or what he also refers to as corporate social performance (CSP), that CSP in fact diversifies or lessens financial risk and that all forms of organisations may gain financial advantage from CSR-oriented operations. Hopkins (2003) proposes that although it is hard to substantiate a causal connection between financial performance and CSR initiatives, Cooperative Bank of the UK’s thorough benefit-cost examination of CSR “declared that between 15 and 18% of its pre-tax profits could be directly attributed to its ethical stance” (ibid, p. 11129). Hopkins (2003) reported that “the public’s purchasing of shares was still not greatly affected by the companies’ level of social responsibility [but]... that CSR standing does not necessarily badly affect a company’s share price” (ibid, p. 133). McWilliams and Siegel (2001), with regard to CSR’s corporate financial investment, hypothesised that “there is some level of CSR that will maximise profits while satisfying the demand for CSR from multiple stakeholders. The ideal level of CSR can be determined by cost-benefit analysis” (ibid, p. 125). Another assumption theorises an ‘inverted U-shaped’ (Schreck 2009, 93) relationship between profitability and social responsibility. According to Ullmann (1985 as cited in Idowu & Filho 2008, 373), to the highest extent, financial and social performance is positively correlated. Nevertheless, outside the highest level, social performance and the matching allocations of resources detrimentally influence financial performance (Idowu & Filho 2008). Given the substantiated relationship between financial performance and social responsibility, it is hence important to examine this phenomenon in the banking sector of Saudi Arabia and the United Kingdom. C. Corporate Social Responsibility in the Banking Sector of the Kingdom of Saudi Arabia Saudi Arabia is a country abundant with business prospects that are socially responsible, with several stable financial indicators, and a religious and cultural development that is in line with the objectives of the CSR activities of its private sector (Mallin 2010). Islamic banking is a developing type of venture that is ruled by the Islamic law, or the Shari’ah (Shoult 2006). It disallows ventures in operation that are forbidden, like alcohol and gambling, or interest charging for any operation (ibid, p. 88). Examples of banks that have Islamic banking components are JP Morgan, Deutsche Bank, HSBC, and Citibank (Idowu & Louche 2011). Islamic banking has been present within the international finance sector for approximately three decades now, but the premises forming such types of ventures can be traced centuries back (Shoult 2006). Specifically, in the face of present market disorder, a lot of people think that Islamic banking entities or banks could function as ‘ports in a storm, (Mallin 2010, 92)’ that are not capable of total immunity from economic turmoil, but may provide more secured investment tools, because of their prevention of numerous unstable market mechanisms (ibid, p. 92). However, the exceptional position of Saudi Arabia in Islamic economy may enable a leadership function for companies to demonstrate how Islamic philosophies could be exercised for socially responsible business activities and investment. Possibly most positively, as emphasised in Doing Business research for the World Bank in 2008 by Jamal Ibrahim Haidar and Karim Ouled Belayachi (World Bank 2008, 16), the government of Saudi Arabia has demonstrated itself to be an eager collaborator in the changes required for the nation to advance its reputation as an ideal market for strategic ventures. This kind of support is needed for inclusive implementation of CSR agendas since governments serve an important function in forming a country’s framework for CSR (World Bank 2008). They establish limitations through law enforcement, regulation and legislation; they dampen or promote involvement by different sectors of society; and can provide significant economic and institutional assistance (Aras & Crowther 2010). To perform well-organised, tactical reforms promoting corporate social responsibility, the private and public sectors should collaborate to realise reforms that benefit all participants. As stated by the World Bank (2008), Saudi members from the nonprofit, private, public sectors showed great enthusiasm to witness expanded implementation of CSR processes in the country. As stated by Tamkeen (2007), “Contrary to early expectations that most business leaders associate CSR with just charity, there is evident recognition within the private sector of the notion that business and society are interdependent and that CSR should contribute to the development of the society in which it operates... the challenges are in the implementations” (ibid, para 1). The framework of Saudi Arabia, the widespread principles of support and charity and the viewpoint of local business elites on social involvement (Tamkeen 2007), present vast opportunities to promote CSR in order for it to serve an efficient function in the progress of local economy and the society as a whole. Therefore, the persistent interfaces of the banks with their immediate environment and the interactions between them bestow some kind of accountability on their corporate exchanges with the larger society, and vice versa (Schreck 2009). The theory of social contract, or also referred to as stakeholders’ theory, states that businesses have social responsibility to stakeholders for facilitating their formation and survival, founded on social contract (Aras & Crowther 2010). This demands firms to develop employees’ and consumers’ economic fulfilment without draining natural resources, damaging the environment, nor exposing their workers to inhumane working conditions (Idowu & Filho 2008). These weaknesses deeply aggravate the condition of several stakeholders. With the strengthening of globalisation, the banking public’s composition may be more intricate than can be easily envisioned. Furthermore, the mechanism of contemporary society keeps on changing the complexities and structure of CSR provisions of the banking sector (Tamkeen 2007). The importance and intricacies of these interdependencies have made banks’ corporate survival and CSR indivisible. The banking industry is the hinge of economic and social growth of any country (Shoult 2006). Banks have to be socially responsible in order for them to build their social capital and brand equity which allows them to attract competent personnel and investors, negotiate more favourable transactions, allow them to charge more, enlarge customer base, and gain the trust of the public. D. Corporate Social Responsibility in the Banking Sector of the UK One of the most challenging issues that CSR in UK’s banking sector is facing at present is financial exclusion. It has been claimed that the growing competition among banks in the UK, with regard to products, services, and costs, is compelling banks to look for new and more effectual means to compete (Solomon 2007). Per se, banks exert efforts to reduce expenditures and downsize. These tactical alternatives always leave a number of individuals out of the banking sector. Financial exclusion implies mechanisms that function to block specific individuals and social groups from access to financial services (Solomon 2007). Even though the standards for exclusion may differ temporally, the banking sector has an innate inclination to discriminate against marginalised and impoverished groups (Corr 2006). For instance, in the UK, previous studies of financial exclusion concentrated mostly on subjects of access to financial systems and to the banking sector specifically. However, financial exclusion is not merely about access to financial services (Corr 2006). In the recent decade, the discussion has widened to examine more thoroughly the types of individuals and social groups who infrequently or never use financial services and the financial exclusion dynamics (Ward & Smith 2006). Nevertheless, in the UK generally, numerous households are not excluded from financial products and/or services, nor have they initiated an unrestrained decision to avoid (Solomon 2007). Rather, most confront difficulties which hamper their access to financial services. Generally, the possible factors that hamper access to financial services are (1) living in illiteracy and marginalized and poor communities, (2) cultural and religious background, (3) having relatives who infrequently or do not access financial services, (4) not having a secure employment, and (5) unemployment (Corr 2006). There are also proofs that a number of government regulations may strengthen or promote financial exclusion. Kempson and colleagues (2004 as cited in Corr 2006, 13), at the same time, found out several roots of financial exclusion in the UK which are cultural and psychological difficulties/barriers, bank charges, identity requirements, and bank refusal. Due to the prevalence of financial exclusion in the UK, this study focuses on this issue. E. Literature Review Summary Social function, such as the processes of financial exclusion, embodies a major component in the operations of the banking sector in Saudi Arabia and the United Kingdom. The issue of CSR on community-oriented and charitable organisations have documented a notable growth in significance. This has been substantiated by several studies, as discussed above, although thus far, the causes behind this phenomenon remain inadequately evaluated. With regard to the implication of CSR to corporate financial performance, this study intends to evaluate the level of this relationship within the banking sector of Saudi Arabia and the United Kingdom. III. Research Objectives and Questions This study examines corporate social responsibility in the banking sector of Saudi Arabia and the United Kingdom. This study tries to contribute more knowledge and understanding on this vital issue by studying the banking industry in the two countries. Three major CSR components are examined here: (1) consumer satisfaction and protection, (2) community relations, and (3) financial exclusion. The following research questions are formulated to achieve the abovementioned objectives: (1) Does Aljazeera and the National Commercial Bank of Saudi Arabia, and HSBC Bank and Barclays Bank of the UK, embark on Corporate Social Responsibility in terms of: a. consumer satisfaction and protection; b. community relations; and c. equality in access to financial services (2) What impact does Corporate Social Responsibility have on the corporate financial performance of Aljazeera and the National Commercial Bank of Saudi Arabia, and HSBC Bank and Barclays Bank of the UK? (3) Which country, Saudi Arabia or the UK, has a better CSR performance in terms of: a. consumer satisfaction and protection; b. community relations; and c. equality in access to financial services A form of understanding of CSR dominates among the corporate community in Saudi Arabia (Shoult 2006). The reality that a large number of business organisations show a strong dedication to CSR represents the value affixed to this notion by local businesses. There are proofs of some connection between financial performance and CSR, as have been discussed in the literature review. Earlier studies refer to a number of important motivators of CSR, like the implication of CSR operations on business profitability, besides the realisation of regulatory and legal responsibilities. IV. Research Design and Methodology To achieve the abovementioned objectives, the researcher carries out a comprehensive comparative study of the banking sector in Saudi Arabia and the UK. Secondary Data Collection First, the researcher conducts a comprehensive review of current literature and news regarding the bank’s CSR practices and main corporate operations. This library research includes thorough reviews of the (1) company’s press releases, (2) public documents, (3) websites, and an (4) examination of current studies on the banking sector of Saudi Arabia and the United Kingdom by the World Bank, International Monetary Fund (IMF), and an array of development agencies, private agencies, and other international financial organisations. Gathered information during this stage of the research is employed to draft a ‘company profile’ for each of the bank in Saudi Arabia and the UK. This profile is expanded based on the secondary data collected. This methodology aims to present the contextual background to each of the banks (1) Aljazeera, (2) The National Commercial Bank, (3) HSBC Banks, and (4) Barclays Bank in the form of a checklist of variables studied here: (1) consumer satisfaction and protection, (2) community relations, and (3) equality in access to financial services. The ‘company profiles’ mentioned earlier will enable comparative analysis of the abovementioned variables for Saudi Arabia and the UK. B. Scope and Limitation This study focuses only on two of the banks in each target country, Aljazeera and The National Commercial Bank of Saudi Arabia and, HSBC Bank and Barclays Bank of the UK. The findings are based on secondary data. The research chooses the largest banks in each of the country to somehow acquire representativeness of the sample. However, future studies should try to conduct a comparative study that uses a more reliable and valid mixed qualitative and quantitative methodology. V. Proposed Time Table Activity Start Date Completion Date Topic selection Library Research Writing of Literature Review Formulation of research questions Accomplished research proposal Formulate research methodology and design Revision of research proposal Approval of proposal Sampling Formulation of research questions and drafting of the company profile Data Collection (administer the developed survey instrument) Data analysis and interpretation Completion of first draft of the research paper Submission of the first draft Revision for the final paper Submission of the final research paper References Aras, G. & Crowther, D. (2010) A Handbook of Corporate Governance and Social Responsibility. England: Gower. Corr, C. (2006) Financial exclusion in Ireland: an exploratory study and policy review. UK: Wiley. Drucker, P. (1993) Post-capitalist society. New York: Harper Business. 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