The Corporate Social Responsibility Debate

Critically evaluate the arguments for Corporate Social Responsibility and isolate whether you think it is a sensible business strategy.

The debate over business’s role in society is based around two opposing arguments. On one side, it is argued that social issues are peripheral to corporate agenda. This perspective maintains that corporations and society pursue different goals, and that the objectives of one can only be achieved at the expense of the other. Companies are profit maximisers, and the sole purpose of business is to generate shareholder value. On the other hand, social responsibility proposes the contrary; companies which participate in activities that positively contribute to society will see the benefits to their reputation and subsequently their bottom line. In other words, there is an implicit social contract between business and society, with responsibilities, opportunities and mutual advantages. This essay will critically evaluate the supporting and opposing arguments surrounding the Corporate Social Responsibility (CSR) debate. I will define CSR and explore the positive aspects of adopting it in an organisation, as endorsed by CSR advocates such as Dick Hubbard and based on research from various sources and business case studies such as McDonalds and Timberland Co. I will cover the positive arguments for CSR such as its ability to enhance a company’s reputation and brand name, to expose market opportunities and to attract and maintain valuable staff. The second part of this essay shall voice the CSR-critic’s opinion, such as the views of economist Milton Friedman of America, David Henderson of Britain and Roger Kerr of the New Zealand Business Round Table. Arguments against are that CSR increases costs, mishandles shareholder’s money, is difficult to measure and account for and for most firms is merely a public relations ploy. Thirdly, I will evaluate the discussion and draw an informed opinion as to whether I think it is a sensible business strategy. The conclusion will summarize my observations.

The definition of Corporate Social Responsibility is described [Lockwood, 2004] by the World Business Council for sustainable Development as the “commitment of a business to contribute to sustainable economic development, working with employees and their families, the local community and society at large to improve quality of life” [article 1204R]. From a business point of view, it can be described as a means of establishing a good reputation and brand name, through positive social and environmental contribution. Examples of companies who adopt CSR are British Petroleum, IBM, Motorola, General Electric, Coca Cola and The Body Shop [Baker, 2001]. CSR requires organisations to broaden their profit-maximising focus, incorporating financial, ecological and societal responsibility into their core business strategies, thus applying the concept of ‘the triple bottom line’ [Holliday, Schmidheiny &Watts, 2002].

Good reputation and positive brand image are important assets to a business. Credibility with stakeholders is a determinant of a company’s viability and eventually leads to increased profits [Davis, 2005]. CEO of Hubbard’s Foods Ltd, Dick Hubbard, has been a representative on the executive of New Zealand Businesses for Social Responsibility and the New Zealand Business Council for Sustainable Development [Hubbard Foods, 2001]. Among the company’s CSR activities is the support for outward bound and the inspirational “clipboard” found inside Hubbard’s cereal boxes [Hubbard, 2005]. Hubbard believes CSR has huge commercial benefits because customers make purchasing choices based on the ethics behind the brand [Hubbard Foods, 2001]. It is in the profit-seeking organisation’s interests to accommodate to society’s idea of social responsibility. For example, resource companies engaged in community-minded projects may find it easier to obtain their social licence to operate and expand because the public are more willing to grant them consent. Lacking support from the community can increase costs by way of consent hold ups in extensive public hearings, delays and wasted labour expenses [Tunzelmann, 1997]. Among investors, bond agencies and banks, CSR advocates argue that environmental and social performance is an important indicator to evaluate a company’s suitability for investment [Holliday, et al. 2002]. These factors help determine risks and liabilities of an organisation, who by adopting CSR may benefit from increased credit worthiness and lower premiums [Holliday, et al. 2002]. If CSR enhances a positive reputation among a company’s stakeholders, it is a sensible business strategy, and one that increases profitability and success long-term.

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External pressure to be socially responsible is said to create market opportunities for firms. It often indicates the existence of an unmet consumer preference or social need that hasn’t yet been tapped into [Vachani, 2004]. For example, the pharmaceutical industry has recently faced an eruption of social pressure regarding the perception that drugs for diseases such as HIV/AIDS are excessively priced and therefore unobtainable in developing countries. Drug manufacturing companies responded to the pressure by acting ‘socially responsible’, producing more generic and affordable drugs to meet demand [Vachani, 2004]. Responding to the exposed opportunities in the growing market for generic drugs benefited their reputation as well as their profit. Similarly, the energy industry is meeting the rapidly mounting demand for cleaner fuel by producing for example natural gas [Bowie, 1987]. The fast food sector is another example of an un-tapped market being exposed due to social pressures. The increasing social concern of obesity is causing fast food restaurants to accommodate to social pressure, providing more healthy meal options as consumers become more health conscious. Chains such as McDonald’s and Wendy’s are capitalising on their new healthy meal options and positively adjusting their corporate image [Lecky, 2004]. McDonald’s, stung by obesity lawsuits and criticism from books like ‘Fast Food Nation,’ seemed poised for decline. But that did not happen. Today McDonald’s business is growing. In the USA, the chain gets approximately one million more visitors a day than it did just a year ago. McDonald’s profits increased 25 percent since the introduction of the healthier menu [Lecky, 2004]. This success illustrates the powerful influence of CSR. When McDonald’s started the Ronald McDonald house for children suffering from cancer, began contributing to charitable organisations and providing healthier meals, they became stronger and more successful despite their previous bad publicity. CSR is a sensible business strategy because companies who respond to social pressure in strategic way may end up benefiting even more so than society does by their actions [Bowie, 2004].

Adopting CSR into a company’s human resource management strategy contributes to creating a good workplace atmosphere, increasing employee morale and productivity [Lockwood, 2004]. Dick Hubbard applies CSR practices within the workplace. He wants his employees to feel part of a team. Hubbard believes this kind of workplace cultivates innovation and loyalty [Hubbard, 2005]. Employee volunteer projects reinforces a culture of teamwork and gives staff the opportunity to demonstrate skills such as leadership, that they may not have been able to utilize in their usual job [Holliday, et al. 2002]. For example, in the 1990’s Jeffery Swartz transformed Timberland Co. by establishing a values-based ethos within both the company’s workplace environment and its reputation externally [Daft & Samson, 2003]. The company spent millions in philanthropic ventures, offering paid sabbaticals for employees to work six months full time in charitable organisations and sponsoring projects such as building homeless shelters and violence-protection schemes. This is an example of discretionary responsibility [Carroll, 1979; Swanson, 1995], whereby Timberland co. took it upon themselves to enhance the quality of life of the community around them. Although critics may argue that Timberland Co. are neglecting their economic responsibilities to stakeholders by channelling large amounts of money into philanthropic activity, 50 percent of Timberland’s employees claim the main reason they work there is because of the company’s charitable values. Employee turnover is low and Timberland constantly ranks in Fortune Magazine’s top 100 best companies to work for [Fortune, 2006]. This publicity positively impacts the company financially. Therefore adopting CSR is a sensible business strategy, because the practice of discretionary responsibility contributes to outstanding employee loyalty.

Milton Friedman is an outspoken critic of CSR. In a New York Times article [Friedman, 1970] he states CSR advocates are “preaching pure and unadulterated socialism” [p.1]. Friedman claims only people, not organisations, can have social responsibilities, and as such, should accomplish philanthropic activity with their own time and money, and not by drawing resources from their enterprise or from the shareholder’s pocket [Friedman, 1970]. David Henderson and Roger Kerr [Henderson, 2001; Kerr, 2004], members of the NZ Business Round Table, believe the responsibility of organisations is to produce goods and services for consumers. The justification is in doing so, businesses create employment, generate returns on shares and investment. This increases the affluence of the economy as a whole, subsequently benefiting the welfare of society. This argument suggests social responsibility is not a sensible business strategy, as it causes the profit-maximisation goal to be financially compromised [Kerr, 2004].

Furthermore, there is the question of how to measure CSR. A survey of 539 executives in 40 countries investigated the level of communication regarding corporate citizenship from companies to their investors [Chestnut Hill, 2004]. The survey revealed a lack of reporting and measurable performance indicators that could be benchmarked. Only 30 percent companies increased funding into corporate citizenship in the previous year. Not all organizations have the means (funds, time and staff) to support CSR initiatives [Henderson, 2001]. However, CSR programs may not be expensive or require extensive time commitment. Joining with other organisations to co-sponsor a community event can half costs, build positive reputation and allows the company to network with other firms [Holliday, et al. 2002]. Additionally, regular accountability reporting of a company’s CSR performance is becoming standard practice. Companies such as Hubbard’s Foods [2000-2001] and Vodafone [2004-2005] publish annual reports which concisely evaluate their expenditure.

Henderson believes the actions of CSR-driven corporations are not always in the public’s best interest [Henderson, 2001]. For example, CSR may prompt companies to pay workers beyond the opportunity cost of their labour. As a result companies may employ fewer people than they usually would, thus increasing unemployment rates [Freeman & Edward, 1991]. Similarly, CSR promoters might urge companies in developing countries not to employ children. However, what good is this if the alternatives for these children are prostitution or starvation? Friedman [1970] argues that although stakeholder needs cannot be ignored, one cannot maximise in more than one direction, and a firm is ultimately accountable to shareholders rather than stakeholders. For example, in the 1990’s CEO of Levi Strauss Bob Haas attempted to mould the company into a values-based organisation placing importance on all stakeholder needs while neglecting the profit-maximising focus [Sarkar 2005]. Haas was reluctant to use overseas labour, keeping costly American-based factories running whilst his competitors capitalised on cheaper resources found in the developing world. He donated millions to AIDS prevention and funded the development of the Haas Business School at Berkeley University, among many other charitable activities. However, due to the company’s excessive ‘socially responsible’ tactics, market value dived from US$14 billion to US$8 billion. 16,000 workers were laid off [Sarkar 2005], paradoxal to the ideal of social responsibility. This example supports Friedman’s argument [1970] that CSR neglects the rights of the shareholder and affects the economic welfare of society at large by diminishing the market value of enterprises.

In his commentary Kerr contests the notion of corporate philanthropy, unless sponsorship or donation to charity is a profitable marketing strategy. He defends this viewpoint by emphasising business responsibility to its shareholders and the obligation to act with integrity regarding the stewardship of their money. He considers activities of a purely benevolent nature cost-increasing and illegitimate, and in some cases embezzlement [Kerr, 2004]. Charitable organisations have little reason to limit their demand and can utilize a company’s benevolence to the point that shareholder value decreases. Costs of CSR include accountability reporting, CSR strategists and manager training and the opportunity cost of not using a firm’s resources to produce a directly profitable good or service [Wolf, 2004]. Henderson [2001] adds that a competitive company cannot afford expenses that are not also borne by its competitors, thus CSR approach to pursue expensive social objectives is not congruent with the advancement of competitive economy.

I conclude that a company’s sustainability and strength is very much dependant on the well-being of the society it operates in. Globalisation has shifted more power from governments to corporations, and as such they provide critical contributions to society, including productivity gains, innovations and research, employment and human-capital development. In light of this, I believe moral and ethical conduct of organisations is imperative. Furthermore, pushing business practice from ethical responsibility into the higher realm of discretionary responsibility is proven not only beneficial for society, but profitable for business as well. This is shown in the example of Timberland, Co. Friedman’s motto “the business of business is business” can become counterproductive as it may cause managers to focus excessively on short-term performance, thus neglecting the broader issues and opportunities, such as societal trends, trust of customers, investments into innovation and other growth prospects that will solidify company success long-term. However, I support the opposing notion that when CSR increases cost and reduces profit, it is not a viable business strategy. For Levi Strauss, the consequences of the excessive and costly actions of Bob Haas show the dangers of taking CSR too far. Companies also have ethical obligation to be wise stewards of money invested by shareholders, and to be accountable for financial decisions. I agree with Friedman and Kerr that social goals which compromise a company’s profitability are indeed disadvantageous and detrimental to social welfare in the long run.

In conclusion, there are valid arguments supporting and opposing Corporate Social Responsibility. CSR can enhance a company’s reputation and brand name, promote transparency and integrity, evoke employee loyalty and expose market opportunities while simultaneously benefiting society. On the other hand, its disadvantages include increased costs, ethical issues regarding the use of shareholder capital, variation in the interests of the public in different contexts and the fact that environmental and social contribution is difficult to measure and account for. The concerns of critics such as Milton Freidman and Roger Kerr can be partnered with those contrasting ideas of advocates such as Dick Hubbard to create a Corporate Social Responsibility Strategy that is sensible and justifiable. I believe businesses should balance their principle objectives with the broader interests of the societies of which they are a part. I support the sensible and careful execution of CSR whereby accountability and wise stewardship are an integral part. Incorporating these values make CSR a sensible corporate strategy, beneficial for both business and society.

REFERENCES

Articles:

Bowie, N., (1987 February 01). Corporate Management: Doing Good and Doing Well. Hastings Center Report, p. 17-18.

Carroll A., (1979). A Three-Dimensional Conceptual Model of Corporate Performance. Academy of Management Review (4) 4. p. 497-505

Davis, I., (2005, May 26). The Business of Doing Business. The McKinsey Quarterly, Issue 3 p. 105 – 113

Freeman, R., & Edward, L., (1991, July 01). Corporate Social Responsibility: A Critical Approach. Business Horizons, Vol. 34, Issue 4

Friedman, M., (1970, September 13). The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine, p. 122-126

Lecky, A., (2004, August 29). McDonald’s has Healthier Profit Menu [Electronic Version]. Chicago Tribune News, p. 57

Sarkar, P., (2005, July 24). Haas to keep hand on Levi's: Last of family to Run Jeansmaker to Stay Active in S.F. Firm [Electronic Version]. San Francisco Chronicle, p. E1.

Swanson, D., (1995). Addressing a Theoretical Problem by Reorienting the Corporate Social Performance Model. Academy of Management Review. 20 (1), 43-64.

Vachani, S. (2004, September 01). Socially Responsible Pricing: Lessons From the Pricing of AIDS Drugs in Developing Countries. California Management Review, Vol. 47, p. 117. California. Berkley Ltd

Books:

Daft, R., & Samson, D. (2003). Management. (2nd. Ed.). Melbourne, VIC, Australia: Thompson. Nelson Australia Pty Ltd

Henderson, D. (2001). Misguided Virtue: False Notions of Corporate Social Responsibility. Westminster, London: Institute of Economic Affairs

, C,. , S., & , P. (2002). Walking the Talk: The Business Case for Sustainable Development. Sheffield, United Kingdom: Greenleaf Publishing Ltd

Wolf, M. (2004). Corporate Social Responsibility. Wellington, NZ: New Zealand Business Round Table

Reports:

Hubbard Foods., (2000-2001). Hubbards Triple Bottom Line Report. Retrieved May 01, 2006, from

Sustainable Development Reporting Case Study: Hubbard Foods (2001). Retrieved April 20, 2006, from

The state of corporate citizenship in the U.S.: A view from inside. (2004) Chestnut Hill: The Centre for Corporate Citizenship at Boston College.

Vodafone., (2004 – 2005). Vodafone Corporate Responsibility Report. Retrieved May 01, 2006, from

Speeches:

Hubbard, D., (1996). The Business of Business is not just Business. Retrieved May 8, 2006, from University of Auckland, Cecil Website:

Kerr, R., (1996). Making Sense of Corporate Citizenship. Retrieved April 15, 2006, from

Websites:

Baker, M., (2001, April 2). Arguments Against Corporate Social Responsibility. Retrieved April 19, 2006, from

Fortune, (2006). Fortune 100: Best Companies to Work For. Retrieved May 02, 2006, from

Lockwood, N., (2004, December 01). Corporate Social Responsibility: HR’s Leadership Role. Society for Human Resource Management. Retrieved April 21, 2006, from

Tunzelmann, A., (1997, January 24). Social Responsibility a Matter of Corporate Strategic Management. Retrieved April 19, 2006, from

The state of corporate citizenship in the U.S.: A view from inside. [2004] Chestnut Hill: The Centre for Corporate Citizenship at Boston College.