The rationale for CSR

The rationale for CSR

The rationale for CSR

Stakeholder theory, as first propounded by Freeman (1984), suggests that managers must satisfy a variety of constituents (eg workers, customers, suppliers, local community organizations) who can influence firm outcomes. According to this view, it is not sufficient for managers to focus exclusively on the needs of shareholders or the owners of the business. Stakeholder theory implies that it can be beneficial for the firm to engage in certain CSR activities that non-financial stakeholders perceive to be important.

The rationale for CSR, as defined by Hillman and Keim (2001), is based on two propositions. First, there is a moral imperative for businesses to ‘do the right thing’ without regard to how such decisions affect firm performance (the social issues argument); second, firms can achieve competitive advantage by tying CSR activities to primary stakeholders (the stakeholders argument). Their research in 500 firms implied that investing in stakeholder management may be complementary to shareholder value creation and could indeed provide a basis for competitive advantage as important resources and capabilities are created that differentiate a firm from its competitors. However, participating in social issues beyond the direct stakeholders may adversely affect a firm’s ability to create shareholder wealth. Strong arguments for CSR were made by Porter and Kramer (2006).

The opposing view

The opposing view is that businesses are there to make a profit, not to exercise social responsibility. The marketing expert Theodore Levitt (1958: 41), in an article in the Harvard Business Review on the dangers of social responsibility, posed the questions: ‘Are top executives being taken in by pretty words and soft ideas? Are they letting the country in for a nightmare return to feudalism by forgetting that they must be businessmen first, last and almost always?’ He did write that CSR can be used as ‘a way of maximizing the lifetime of capitalism by taking the wind out of its critics’ sails’ (ibid: 43). But, writing as an unrestructured capitalist, he suggested that: ‘The essence of free enterprise is to go after profit in any way that is consistent with its own survival as an economic system’ (ibid: 44).

The Chicago monetarist Milton Friedman (1962: 133–34) questioned the ability of business managers to pursue the social interest. He asked:

If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is? Can they decide how great a burden they are justified in placing on themselves or their stockholders to serve that social interest?

In 1970 Friedman argued that the social responsibility of business is to maximize profits within the bounds of the law. He maintained that the mere existence of CSR was an agency problem within the firm in that it was a misuse of the resources entrusted to managers by owners, which could be better used on value-added internal projects or returned to the shareholders.

These outspoken views may no longer be supported so openly but they still exist and are still acted on. There is much evidence that CSR is not on the agenda – for example, UK banks that made money by selling worthless investments or insurance policies and then failed to respond adequately to complaints. And, less egregiously, a glance at the ‘Your Problems’ column in the Observer reveals plenty of instances of businesses indulging in antisocial behaviour. It is necessary, therefore, to have a convincing case for the benefits of CSR.

Benefits of CSR

Benefits from CSR listed by the CIPD (2003: 4) include, ‘offering distinctive positioning in the market place, protecting reputation, building credibility and trust with customers and employees, redefining corporate purpose or mission and securing the company’s licence to operate’.

Much research has been conducted into the relationship between CSR and firm performance. For example, Russo and Fouts (1997) found that there was a positive relationship between environmental performance and financial performance. Hillman and Keim (2001) established that if the socially responsible activity were directly related to primary stakeholders, then investments may benefit not only stakeholders but also result in increased shareholder wealth. However, participation in social issues beyond the direct stakeholders may adversely affect a firm’s ability to create such wealth.

The basis for developing a CSR strategy

The basis for developing a CSR strategy is provided by the following competency framework of the CSR Academy (2006), which is made up of six characteristics:

  1. Understanding society– understanding how business operates in the broader context and knowing the social and environmental impact that the business has on society.
  2. Building capacity– building the capacity of others to help manage the business effectively. For example, suppliers understand the business’s approach to the environment and employees can apply social and environmental concerns in their day-to-day roles.
  3. Questioning business as usual– individuals continually questioning the business in relation to a more sustainable future and being open to improving the quality of life and the environment.
  4. Stakeholder relations– understanding who the key stakeholders are and the risks and opportunities they present. Working with them through consultation and taking their views into account.
  5. Strategic view– ensuring that social and environmental views are included in the business strategy so that they are integral to the way the business operates.
  6. Harnessing diversity– respecting that people are different, which is reflected in fair and transparent business practices.

Developing and implementing a CSR strategy

To develop and implement a CSR strategy based on these principles it is necessary to:

  • understand the business and social environment in which the firm operates;
  • understand the business and HR strategies and how the CSR strategy should be aligned to them;
  • know who the stakeholders are (including top management) and find out their views on and expectations of CSR;
  • produce and deliver persuasive arguments in favour of CSR: if all else fails suggest that there is room for enlightened self-interest that involves doing well by doing good;
  • identify the areas in which CSR activities might take place by reference to their relevance in the business context of the organization and an evaluation of their significance to stakeholders;
  • prioritize as necessary on the basis of an assessment of the relevance and significance of CSR to the organization and its stakeholders and the practicalities of introducing the activity or practice;
  • draw up the strategy and make the business case for it to top management and the stakeholders;
  • obtain approval for the CSR strategy from top management and key stakeholders;
  • communicate information on the whys and wherefores of the strategy, comprehensively and regularly;
  • provide training to employees on the skills they need in implementing the CSR strategy;
  • measure and evaluate the effectiveness of CSR.

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