Corporate Social Responsibility Advantages

In this paper we define the evolution of Corporate Social Responsibility (CSR) in business, from solely being triggered by philanthropic objectives to playing a critical role in strategy. Innovation is a major source of both differentiation and cost leadership in business; we show how organizations have gained competitive advantage using innovation for socially responsible. We review literature on CSR and cite various cases that describe how different firms approach CSR, the challenges faced by firms integrating it into strategy and reporting. We investigate the superior benefits of focusing innovation and CSR as part of the strategy of the organization. We raise some questions that are relevant for future research on whether CSR can play a role in improving the business and society’s perceived conflicts of interest and suggest ways to bridge some of the differences. We make recommendations to business managers on how to take full advantage of CSR and its implementation.

Introduction

Corporate social responsibility (CSR) can be a source of sustainable competitive advantage for a firm. It is commonly acknowledged that many companies’ do not reap the maximum benefit from their efforts to improve the social and environmental consequences of their activities because they fail to approach CSR activities as a source of the advantage in their strategy (Porter & Kramer, 2006; Collis & Rukstad, 2008). CSR, when thought of as part of strategy can lead to opportunities that benefit both society and the business (Grayson & Hodges, 2004). Today, business can not afford to ignore CSR, society through consumer activists should be the last thing to force a firm to behave in a socially responsible manner. Kentucky Fried Chicken (KFC) has been called Kentucky Fried Forests because of its non-environmentally friendly sourcing of packing material from unprotected forests (National Public Radio report, April 14, 2009), ExxonMobil has been embroiled in a costly legal battle to fend off fines for the Exxon-Valdez oil spill and Nike had a costly public relations disaster when reports surfaced of sweat shops in Asia. How far should a firm invest in CSR and be rewarded for doing so, is a question that must be answered with the strategic alignment of the firm’s resources and gaining advantage over its competition in mind. It is clear that no business can survive in a failing society and as such CSR should be considered as investment and not a cost (Porter and Kramer). The tremendous amount of resources, expertise and insights that businesses command can be used to meet shareholder expectations for profit and in a manner that yields social progress. The strategic position can range from CSR as cost of charitable donations or good works (Asongu, 2007) to the emerging concept of “For Benefit Corporation” as a type of business that integrates social and environmental aims with business approaches (Stephanie Strom, 2007 and International Finance Corporation, 2007).

Innovation can be a source of both CSR and competitive advantage for the firm. We find that organizations that actively scan their environment for ideas of innovation have found opportunities for business success. GE has made famous its ecomagination drive in which they state the two objectives as “helping to solve the world’s biggest environmental challenges while driving profitable growth for GE” (GE, 2010). On the other hand some organizations fail to use CSR to guide their innovation and continue to pursue costly and failing business approaches. The tobacco industry has tried to innovate itself out of cigarettes that are well known to cause cancers by introducing “light” tobacco, tic tac, smokeless tobacco, and dissolvable tobacco. These actions however have done little to remove the growing anti-tobacco stigma against their products and they continue to fight increasing regulation. They also have increased their presence in developing economies like China where regulation has not caught up. These efforts are likely to just delay the inevitable demise of these businesses. One would hope that alternative uses of tobacco may not be seen because of the industry’s failure to clearly scan the environment for risk, put a value to them and make proper decisions.

There is however significant challenges for firms to both achieve success in social and environmental objectives and also behave in a profitable manner for their shareholders. The classical agency theory of the firm and managers as stewards (Jensen and Meckling, 1976) pits it against society and managers also tend to think of CSR in generic terms and not in ways that most suit each firm’s strategy (Porter and Kramer). The traditional methods of accounting and reporting do not encourage investment in CSR and as such managers fail to scan for profitable CSR activities. A method of accounting should be considered and promoted that recognizes CSR as investment, promotes organizations to actively scan the environment for both risks, as contingency liabilities, and opportunities. Such a method will benefit shareholders and other stakeholders in evaluating businesses as true going concerns and thereby reward managers for long term and sustainable business decisions. We argue that the explosion of Collateralized Debt Obligations (CDOs) and unethical mortgage lending practices that are partly blamed for the most recent financial crisis may have been averted by a strong presence of CSR scanning in strategic management practices at the major banks. We also argue that the HIV/AIDS pandemic may have been mitigated at an early stage if pharmaceutical businesses had seen the social benefit of developing medication for the disease despite that the consumer market was mostly people in the most impoverished part of the society. It took the consortium of mostly Non Governmental Organizations (NGOs) including the World Bank, The Clinton Foundation, World Health Organization, and many others to mobilize the expertise, resources and drive research into affordable HIV/AIDS medications and eventually create a market for pharmaceutical businesses.

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Corporate Social Responsibility and the Firm

The classical aim of the firm, to make profit for its shareholders or the profit motive of the firm (Garrigues, 1971, Jensen, 1976), has evolved over several decades to include meeting expectation for its stakeholders. Stakeholder theory is a broad concept that combines economic, social and environmental objectives to meet expectations of society, environment, employees, customers, suppliers and other entities in affected by the corporation (Calafell et. al, Jensen, 1976, Blake, 2006 and Wilson, 2003). Companies are in fact corporate citizens that exist in society and must consider the effect of their activities on the broader society. Blake notes that “the private sector has a duty to contribute to the evolution of equitable and sustainable communities and societies” (2006). The debate is no longer whether corporate managers have an obligation to consider the needs of society, rather to what extent should these needs be relevant (Blake, 2006; Wilson, 2003).

Corporate Social Responsibility as strategy

Society is becoming less tolerant of companies that fail to address their social responsibilities (Asongu, 2007). Many academics agree that CSR should be viewed much more than a cost, a constraint or charitable deed and that it can be a source of opportunity, innovation and competitive advantage (Porter, Asongu). In defining strategy, Collis and Rustad (2008) identify the three parts to strategy as objective, scope and advantage. Companies tend to think of CSR in ways that are disconnected from the strategy of business and as a result miss out on opportunities that both benefit the society and the organization. CSR can become a source of competitive advantage through either differentiation or cost leadership (Porter). Du Pont’s corporate vision is “to be the world’s most dynamic science company, creating sustainable solutions essential to a better, safer and healthier life for people everywhere” (Asongu, 2008). According to Asongu, the company, through its CSR programs, has gained 67 percent reduction in green house emissions since 1990 while at the same time increased production efficiency by 35 percent, achieved $2 billion in energy savings and its home insulation product, Tyvek is the market leader in the construction industry. The company has successfully imbedded CSR into its strategic management. This case contrasts with observations where many companies’ green initiatives are framed in terms of risk reduction, reengineering or cost cutting and not in terms of strategy, revenue growth or technological developments (Hart, 1997). Jones and Mourrasse (2003) report that “companies that improve their environmental performance over their peers are likely to achieve superior financial returns and competitive positioning over the mid to long term”. Porter advises companies to integrate a social perspective into its frameworks used to understand its competition and manage its strategy.

CSR initiatives can be aligned with the corporate values system. Lenovo has effectively integrated its image with CSR activities in building awareness and value for a new global brand (Ladousse, 2009). The company took over the personal computer business from IBM and was faced with challenges of a name and brand little known elsewhere except in China and the need to seek growth in consumer markets which used not to be a focus for IBM. Ladousse writes that the company decided to sponsor two major global sports that rely computing for mission critical tasks; Formula1 racing and Olympic Games. Ladausse further notes that the focus on technology and innovation is aimed not only to achieve visibility but also to associate the brand with the values closest to the company; performance, engineering excellence, reliability and global reach.

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Corporate Social Responsibility and Innovation

Corporate leaders now see CSR as a part of strategic management program and a source of innovation (Allen & Husted, 2006). Strategic CSR programs can lead to innovation as illustrated by Asongu in the case of Du Pont (2007). Du Pont’s value chain analysis tackles the climate change problem in a way that has led to innovations that address global warming issues, and also making the business operate in safer environment and more profitable in the short and long term. Innovation can be a source of competitive advantage (Nohria, 2003) and Hart notes that managers must realize that in meeting our needs today (1997), we should not be destroying the ability of future generations to meet theirs. This can be restated to be the true value proposition of innovation, the test in major environmental, social, ecological and financial disasters may be linked to a model that eliminates the causes by innovation for CSR. One can question whether a coherent strategy that included CSR objectives within our financial industry may have averted the creation of CDOs and sub-prime lending practices that lead to the financial crisis in 2007.

Innovating for CSR in a strategic model can be a source of sustainable competitive advantage and opportunities. Major businesses have developed out of innovation for CSR initiatives like KIVA and Grameen Bank the two giant micro credit lending organizations (KIVA.org and Grameen Bank). Innovation for CSR initiatives may also seem contradictory to the profit motive of the firm (Hart, 1997) as seen in the case of Du Pont’s “A Growing Partnership with Nature”. The company developed herbicide that reduces the amount of chemicals used by farmers in their fields, their new product is effective in lower concentrations, biodegradable, nontoxic but it also requires less material input therefore highly profitable. Du Pont did not cower at cannibalizing its other products but considered the total gain to society and the company not only replaced its older products but gained market share for this product at higher margins. This dilemma is seen in the failure of pharmaceutical companies staying away from developing medication for curing HIV/AIDS because they could not meet the profit motive until a viable market was created by NGOs.

Overcoming the CSR challenges for managers

Despite the benefits of engaging CSR in corporate strategy and innovation, there still remain challenges for managers to implementing CSR in business. Managers must demonstrate to shareholders and other stakeholders, who remain skeptical of the managers’ motives as argued in the classical agency theory (Jensen, ) why they should undertake CSR activities. The CEO of Pepsi during the Davos meeting 2010 alluded to the challenge of reporting corporate social initiatives in a comparable, understandable format like the bottom line on Profit and Loss statements (NPR, 2010). Porter and Kramer find that measuring and ranking companies for CSR is at best inconsistent, unreliable and complicated (2006). They point out examples of both the Dow Jones Sustainability Index and the FTSE4Good Index use differing criteria and may not be reconcilable. Jackson and Parsa suggest a CSR and Financial Performance (CSRFINP) model that scores organizations performance based on predetermined CSR dimensions as well as financial criteria. Their model includes four quadrants as illustrated in the figure 1. Black represents pursuit of purely financial initiatives as compared to green pursuing purely CSR initiatives.

Non-Profit (Green)

Progressive (Blue)

Regressive (Yellow)

Aggressive (Black)

Figure 1: The Corporate Social Responsibility & Financial Performance (CSR-FP) Matrix (Jackson et. al., 2009, p.15).

Reporting and stockholder evaluations must consider both profit and benefit to society (Porter, 2006). IBM’s corporate report includes various financial and non financial metrics that define their progress towards CSR goals (IBM, 2009). The current state of reporting however still gives economic goals a clear priority over social and environmental goals (Ketola, ..). Calafell et. al. argue that it is important that accounting defines the way of calculating the results of a company that takes into account the social and economic approach. They point out that the matching principle on accounting should be applied consistently across industries to recognize potential risks on society and environment that are caused by the industry’s activities. The authors provide examples where in making efforts to reduce cost, Railtrack in UK experienced increased derailments and safety risks; tobacco companies moving their markets from developed economies to underdeveloped and developing countries like China where regulations are lagging and car manufacturers putting high safety measures in their high end models only. Managers should consider what Calafell et. al. have called “extra-ordinary profit” when performing business cases analysis for decision making. Extra-ordinary profit is not sustainable in the long term because of the potential costs to society and environment.

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Companies must actively scan their environment for CSR opportunities and risks/threats. It can be argued that the absence of such initiative can lead to failure of the company to report a true and fair view of its operations in socio-economic terms in its corporate reports (Calafell et. al.). Barnett and Salomon find that even though social screening may tends to narrow investment choices, and consequently reducing the variability and diversification of the optimal portfolio, the process can lead to increase in financial returns if implemented adequately (year). Social and environmental scanning can lead to the company identifying CSR initiatives as well as identification of efficient methods of doing business, new products and services that may not have arisen in the absence of CSR initiatives.

Conclusion

Businesses, as corporate citizens, have responsibility to society and not only their shareholders. Private industry commands a tremendous amount of resources and expertise that can be mobilized to advance both social and economic objectives without conflict. CSR is now considered as investment, part of corporate strategic management and a source of innovation rather than an expense. Many companies have successfully imbedded their CSR initiatives with strategy and reaped benefits both in economic and social terms. However, there are challenges for managers to account for CSR initiatives in a way that is both understandable and comparable to their stakeholders. Economic goals continue to have a clear priority both in reporting and evaluating businesses. Literature reviewed in this paper demonstrates the risks that companies take when they ignore CSR in their management frameworks. The failure to include CSR initiatives may result in missed business opportunities, serious long term threats like in the tobacco industry not unaccounted for, and reports that do not represent a true and fair view of the operations of the business in social-economic terms.

Considerations for future research

A standardized reporting framework that combines social and economic performance measures should be developed and included in annual corporate reports. The emergence of “for-benefit-corporations” is interesting, however, is it a just a fad or reality?

Recommendations for managers

In recent years there are more and more results showing the positive relationship of CSR and financial performance. A study by Morgan Stanley found that firms with the best CSR also have the highest returns. In their survey, 602 companies having the highest and lowest CSR rated from Germany’s Oekom Research independent rating agency were also included in the Morgan Stanley Capital International (MSCI) World Index. They calculated share performance during the period of December 31st, 1999 through October 27th, 2003 and found that “the best-in-class portfolio outperformed the CSR laggards by 23.4%” (as cited in McPeak & Tooley, 2008). Actually, CSR is not only a social aspect but also a sustainable strategy. Firms should connect CSR with their overall strategy to improve their long-term financial performance (McPeak & Tooley, 2008).

In addition to reaching a consistent strategy with CSR, corporate accountability does not need to be restricted to shareholders and managers should extend their contractual arrangements with other stakeholders (Wilson, 2003). Wilson also made the relationship between corporate management and stakeholders clearer from the following (2003). Companies need to get approvals from environmental regulators to operate facilities and the regulators require the companies accountable for the terms of the approval. This arrangement is related to social contract theory: “corporations are given a ‘license to operate’ by society in exchange for good behavior, and as such the corporations should be accountable to society for their performance” (Wilson, 2003).

The last but not the least, CSR as a strategy should be evaluated and firms should report on their CSR, not only a financial performance. The CSR report of IBM (IBM, 2009) is an evidence of this recommendation. IBM used financial and non financial metrics or Key Performance Indicators (KPI) to define progress towards their goal to CSR. The metrics such as employees learning investments, satisfaction, recycling, environment, energy conservation, etc…represent IBM’s accountability to society for their performance.

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