Defining Corporate Social Responsibility and understanding its effects

The corporate world is encountering the concept of corporate social responsibility (CSR) wherever it turns these days. Businesses and academics researchers have been showing great interests in Corporate Social responsibility (CSR) during the recent years (Maignan 2002), such that CSR has emerged like a mini industry both in the business and academic world. As till today, there has not been a single definition for the term CSR. “We have looked for a definition and basically there isn’t one.” (Jackson and Hawker, 2001). However, according to Van Marrewijk (2003), this is not completely true because the actual problem is that there is an abundance of definition for the term CSR, which are mostly based on particular interests, thus preventing the development and implementation of the concept.

Basically, the definition of CSR can be classified into two general schools of thought. Firstly, there are those who claim that the obligation of an organization is to maximize profits by abiding by the corporate rules that prevails, with minimum ethical constraints (Friedman 1970, Levitt 1958) and secondly, those who place greater emphasis on the organisation’s obligations towards the society. (Andrews 1973, Davis and Blomstrom 1975, Epstein 1987, mc Guire 1963)

The discussion on the issue of social responsibility, that is, should companies take responsibility for social issues? And are companies able to take such responsibilities? was started by Friedman (1962, p.133). His point of view was to let business people do what they have to do. That is, business. According to him, the only social responsibility that exists is the use of resources and strategies in order to increase profits while at the same time, respecting the set of rules that have been defined. As a result, this means that the use of organizational resources to do social good such as donating to charities, contributing to NGOs, is unfavourable for the firm since it may lead to a fall in profitability of the entity or it may also lead to an increase in the price of products. (Pinkson and Carroll 1996)

However, this view was criticized by the second school of thoughts which believes that companies exist to serve the society as well as those actors that have a direct link with the organisation. Thus, with this view, CSR can be defined as “the obligation of the firm to use its resources in ways to benefit the society, through committed participation as a member of the society, taking into account the society at a large and improving the welfare of the society at large, independent of the direct gains of the company.” (Kok et al, 2001, pg 288).This view is consistent with the fact that businesses must consider the social costs of their activities together with the aim of increasing profits (Shaw and Berry, 1992, p. 213). In other words, organizations should be accountable for their actions, to the society in which they operate.

In line with this observation, Caroll (1999) identified four main components of CSR namely, economic, legal, ethical and discretionary or philanthropic. The economic component of CSR refers to the organisation’s main objective to maximize profitability and growth, the legal component is to abide by the defined corporate rules, the ethical component is the duty of respecting others rights and meeting their responsibilities towards the society and lastly, discretionary component meaning their engagement in benevolent activities. Hence, this gave rise to the Caroll’s CSR pyramid.

According to ford (2003), a good company is one that provides good quality products and services, and a great company is one that does all that and also struggle to work towards making the world a better place. Pearce and Doh (2005) portray CSR as a firm’s activities which are well beyond the legal requirements, to benefit the society as well as safeguard the interests of its shareholders. Similarly, Frederick (1986, 1994) describes CSR that were practiced in the 1970’s, as the organisations responsibilities to contribute towards the society’s interest.

Even though there is no universal meaning of the term CSR (Godfrey and Hatch, 2007), most authors have defined CSR as a theory whereby entities integrate social and environmental issues in their day to day business operations and in their interaction with their stakeholders on a voluntary basis.

Historical Developments and theories of CSR

The literature on CSR has gain much ground by the developments that have helped to improve people’s understanding of the subject in terms of the nature, concept and business practice. The concept of social responsibility is a developing concept (Mays Report, 2003, p.12) and means different things to different stakeholders (Arlow & Gannon, 1982). However, according to Anderson (1989), the concept of social responsibility exists since the very beginning of mankind.

There are several theories that have not only contributed towards the growth of the CSR subject but have also, attempted to explain the importance of the term CSR. These theories ranges from the Agency view, the corporate social performance (CSP) view, the resource based view (RBV), the demand and supply view, the stakeholder theory, the concept of Accountability, Media agency setting, and the Legitimacy theory.

The Agency View

The agency view of the firm and its responsibility toward the society was accredited by Freidman (1962, 1970). He proposed that engaging in CSR is indicative of an agency problem, that is, a conflict between the interests of managers and shareholders. According to him, managers use CSR as a way of promoting their own political, social, or career benefit at the shareholders costs (Mc Willams & Siegel, 2001, p.118). Freidman’s agency view argues that a firm is accountable only to its shareholders and thus, its sole responsibility should be to maximize the value of the firm. (Gelb & Stawser, 2001, p.3).

Hence, this view postulates that a firm’s efficiency could be improved, if the resources invested in CSR activities were devoted towards maximizing the firm’s profitability. Furthermore, this theory has been empirically tested by Wright and Ferris (1997), who concluded that stock prices were negatively related to the notice of divestment of securities in South Africa, which was thus interpreted as being steady with the agency theory.

The Corporate Social Performance (CSP) view

The CSP framework was introduced from the research carried out by Preston (1978) and Carroll (1979). The framework is made up of 3 main components as described by Wood (1991a). In the first place, is the idea of social and economic responsibilities which is based on the legality within the society, public responsibility within the firm and administrative discretion by each person within the organisation. Second is the process of social responsiveness which consist of environmental issues, and stakeholder management and the third component is the effect of corporate behaviour.

The CSP model was tested by Waddcock and Graves (1997) and a positive relationship between CSP and financial performance was observed (McWillams & Siegel, 2001, p.1118). Pava and Krausz (1996) assumed that, according to the agency view, higher engagement in CSR would lead to reduced financial performance. However, their findings illustrated the contrary. That is, firms that were seen as being socially responsible as well as or better than their counterparts that did not engage in such activities.

The Resource-based View (RBV)

The Resource based View (RBV) was built upon the CSP framework. The RBV framework was developed by Russo and Fouts (1997). They studied CSR from a ‘resource based view” of the organization and concluded that CSP can be a competitive advantage, particularly in industries with high growth.

The Stakeholder theory

The central proposition behind the stakeholder theory, developed by Freeman (1984), is the idea that a firm’s success depends on the success of the relationship between the management and the firm’s stakeholders. Stakeholders, as defined by Freeman (1983, p.33), refer to “those groups without whose support the organization would cease to exist”. These groups can act formally or informally, individually or collectively, and they are a vital factor in the organisations external environment that can affect the firm favourably or unfavourably (Murray and Vogel 1997: 142).

Moreover, Freeman (1984) also argued that sufficient attention towards stakeholders’ interests is vital for the success of the firm and management must take decisions that will benefit the larger class of stakeholder rather than taking those decisions which will be beneficial to the shareholders only (Gelb & Stawser, 2001, p.3).

This theory is very much in contrast with the agency theory which looks at CSR in an angle of profit maximization. The agency theory suggests that engaging in CSR reduce the profitability or bring out no change to a firm, while the stakeholder theory put forward that CSR activities are important because the stakeholders play a crucial role in the existence of an organisation.

The Theory of Accountability

The Legitimacy Theory

Suchman (1995, p. 574), defines legitimacy as follows ; ” Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions”.

The Legitimacy theory has turned to be one of the most important and cited theories in the context of social and environmental accounting. The theory focuses on the reactions of firms managements towards societal expectations (Tilt 1994, Patten 1992, Guthrie and Parker 1989). In other words, the legitimacy theory affirms that companies will take those measures that are supposed to be legitimate from the point of view of the society within which the company is operating. Thus, organisations will carry out their activities by respecting the norms of the society, in which they form part and hence this leads to a social contract between the firm and the society. The social contract is used to explain the countless expectations the society has about oraganisations should carry out their activities ( Deegan 2000; Mathew 1993)

Considering the adoption of the legitimacy theory, a firm will voluntarily report on those activities that management considers being expectations of the society. (Deegan 2002; Deegan, Rankin and Voght 2000; Cormier and Gordon 2001).

CSR in Mauritius

The

firm’s cash flows, and thus firm value, are

determined by the prices at which these

claims can be sold at the present time by the

firm. Firms, anticipating large future payouts

on these implicit claims, will seek methods to

bond themselves in order to receive the highest

possible present price for the claims. Any

information which negatively affects the

price of these claims can lead to a decline in

firm value.

Bond ratings can serve as one of these information

releases. Cornell et al. (1987) present a

possible scenario concerning the stock price

reaction to a bond-rating change utilizing

corporate stakeholder theory. Stakeholders

re-evaluate the potential future returns on

the implicit claims of a firm when that firm’s

bonds are rerated. A bond downgrade results

in a more sceptical outlook by stakeholders

concerning the future returns; thus the price

which they are willing to pay for implicitclaims is reduced. Rational investors, recognizing

that the firm’s cash flows are affected

by these stakeholders’ actions, revalue the

firm based on this information. This action

results in a change in the firm’s stock price at

the time of the rating announcement.

Because investors cannot be certain about the

timing of the announcement, the impact of

the rating change is not fully incorporated

into the stock price in advance. Stakeholder

theory can also be used to explain the asymmetric

reactions of stock prices to bond rating

upgrades vs. downgrades (see Cornell et

al. (1987); Holthausen and Leftwich (1986)).

Cornell and Shapiro conclude that the stock

price reaction to bond-rating changes will

depend on three factors: the firm’s stock of

net organizational capital, the nature of the

firm’s stakeholders, and the extent to which

the change is publicized in the financial

press. To test the theory, surrogates must be

established for these factors. The purpose of

this study is to continue the research of Cornell

et al. (1987) in the empirical research of

stakeholder theory by focusing on the first of

these three factors – the firm’s stock of net

organizational capital (NOC).

The Stakeholder Theory

The basic proposition of the stakeholder theory is that the firm’s success is dependent

upon the successful management of all the relationships that a firm has with its

stakeholders – a term originally introduced by Stanford Research Institute (SRI) to refer

to “those groups without whose support the organization would cease to exist” (Freeman,

1983, p.33). When viewed as such, the conventional view that the success of the firm is

dependent solely upon maximizing shareholders’ wealth is not sufficient because the

entity is perceived to be a nexus of explicit and implicit contracts (Jensen and Meckling,

1976) between the firm and its various stakeholders. Furthermore, in contrast with the

institutional theory where norms are imposed to the firms, the stakeholder theory assumes

that firms have the ability to influence not just society in general but its various

stakeholders in particular.

In developing the stakeholder theory, Freeman (1983) incorporates the stakeholder

concept into categories: (1) a business planning and policy model; and (2) a corporate

5

social responsibility model of stakeholder management. In the first model, the

stakeholder analysis focus on developing and evaluating the approval of corporate

strategic decision by groups whose support is required for the firm’s continued existence.

The stakeholders identified in this model include the owners, customers, public groups

and suppliers. Although these groups are not adversarial in nature, their possibly

conflicting behaviour is considered a constraint on the strategy developed by

management to best match the firm’s resources with the environment. In the second

model, the corporate planning and analysis extends to include external influences which

may be adversarial to the firm. These adversarial groups may include the regulatory,

environmentalist and/or special interest groups concerned with social issues. The second

model enables managers to consider a strategic plan that is adaptable to changes in the

social demands of nontraditional stakeholder groups.

As noted earlier, corporate environmental practices and reporting is one area in which

much community awareness had developed. A manifestation of this is shown by the

emergence of lobby groups like Greenpeace and Wilderness Society, Australian

Conservation Foundation and World Wide Fund for Nature just to name a few. Even the

global community came together at the 1992 Earth Summit in Rio de Janeiro to state its

commitment to ecological sustainability. This creates public pressure for the government

to intervene (Deegan and Gordon, 1996). As a result, regulations such as the

Environmental Offences and Penalties Act 1989 in Australia and the Clean Air Act 1977,

in the U.S. were enacted.

The third component refers to the outcome of

corporate behavior and includes social impacts,

social programs, and social policies. As a result,

CSP is a critical factor to consider for all

organizations since CSP components such as:

“(s)ocial issues, environmental pressures, stakeholder

concerns are sure to affect corporate

decision making and behavior far into the future”

(Wood, 1991b, p. 400).

A research paradigm that parallels this perspective

is stakeholder theory, whereby business

is deemed responsible on such dimensions to

specific stakeholder groupings (Maignan and

Ralston, 2002). Stakeholders are identified and

categorized by their “interest, right, claim or

ownership in an organization” (Coombs, 1998,

p. 289). While there is some variance in the

designation of appropriate clusters, customers,

employees, suppliers, and the community are

nearly always considered pertinent. Research

with U.S. corporations and U.K. firms reveals

that companies often report socially responsible

behaviors in terms of such specific stakeholder

groups (see Robertson and Nicholsom, 1996).

Hence, stakeholder theory provides a useful

framework to evaluate corporate social responsibility

through social reporting activities.

On a wide range of issues corporations are encouraged to behave

socially responsibly (Welford and Frost, 2006; Engle, 2006).

However, this is just one interpretation of CSR. Numerous definitions of CSR have been proposed and often no clear definition is given, making theoretical development and measurement difficult. CSR activities have been posited to include incorporating social characteristics or features into products and manufacturing processes (e.g. aerosol products with no fluorocarbons or using environmentally-friendly technologies), adopting progressive human resource management practices (e.g. promoting employee empowerment), achieving higher levels of environmental performance through recycling and pollution abatement (e.g. adopting an aggressive stance towards reducing emissions), and advancing the goals of community organizations (e.g. working closely with groups such as United Way).[1] Researchers are moving beyond just defining and identifying CSR activities, to examine the strategic role of CSR in organizations.

McWilliams and Siegel (2001) describe CSR as actions that appear to further some social

good beyond the interest of the firmand which are required by law.

The proper role of CSR has generated a century’s worth of philosophically and economically

intriguing debates (McWilliams and Siegel, 2001). The argument that businesses are the

trustees of societal property that should be managed for the public good has been seen as

one end of a continuum, while at the other end is the belief that profit maximisation is

management’s only legitimate goal. The CSR debate has been largely confined to the

background for most of the 20th century, making the news after a major event such as an oil

spill, when a consumer product caused harm or when an ethics scandal reopened the

question of business’ fundamental purpose.

Forstater et al. (2002) define corporate social responsibility as a company’s actions that

contribute to sustainable development through the company’s core business activities,

social investment and public policy debate. The underlying cause of expanded social

responsibility is the historical force of economic growth, which has spawned in its wake,

increased impacts of corporate activity on society.

Increasing pressure for social responsibility was ranked second in a Financial Times/Price Waterhouse Coopers survey of the views of 750 Chief Executive Officers on the most important business challenges for companies in 2000. Companies, especially those operating in global markets, are increasingly required to balance the social, economic and environmental compo nents of their business, while building shareholder value.

Explaining corporate social responsibility

Frederick’s CSR1, 2 and 3

Frederick (1986, 1994) describes CSR as practiced up to 1970 as an examination of

corporations’ obligation to work for social betterment. From about 1970 he indicates that

there was a move towards corporate social responsiveness, which he describes as ”the

capacity of a corporation to respond to social pressures. This change in focus highlights a

move from a philosophical (CSR1) to a more managerial approach (CSR2) that concentrates

on whether corporations will respond to social pressures and how they would handle such

pressures. In 1986, Frederick posits that there is a need to impose an ethical anchor on the

study of business and society to ”permit a systematic critique of business’s impact upon

human consciousness, human community and human continuity”. This new stand was

termed CSR3.

Theaker (2001, p. 107) supports the view that an organisation that is socially responsible

recognizes its duties and responsibilities towards the wider community, and contributes to

the common good that benefits both the company and its society. Chung (1987, p. 125)

suggests that: ”Business firms operate in a society that offers them the opportunity to make

profits. In return, they have the obligation to serve societal needs. This obligation is called

social responsibility”. Peach (1987, pp. 191-3) claims that corporations are an integral part

of society and they therefore need to consider their corporate behaviour as part of their role

in society. The impact that corporations have on society has been likened to the effect of a

stone dropping into a pond (Harrison, 1997) that goes through three levels during the drop

process. The first two levels refer to what respectable firms believe their responsibilities to

society are and level three refers to a more rare type of organisation, one that accepts a

responsibility for a healthy society and contributes to removing problems in the society (as

below):

Actions taken by corporate entities to demonstrate responsibility

All modern corporations are aware that they owe some sort of responsibility to all their

stakeholders, albeit in varying degrees and accept that unless they demonstrate this

awareness by some quantifiable actions they are likely to receive ”a bad press”. In the UK

80 per cent of FTSE 100 companies now voluntarily issue annual CSR reports, either on a

VOL. 7 NO. 2 2007 jCORPORATE GOVERNANCEj PAGE 139

stand-alone basis or embedded in the annual reports Idowu and Towler (2004). A typical

CSR report of a UK company provides information on the positive contributions it has made

during the year which has just ended under four main headings; namely Environment,

Community, Marketplace and Workplace.

Furthermore it has been proposed that CSR can be seen to be a construct

that is individual to the stakeholder that defines it, and has been referred to as the social

contract organisations have with their stakeholders (Bowd et al., 2005). Tullberg (2005)

suggested two approaches to CSR; one the ”responsive” and the second the ”autonomous”

approach. The autonomous approach is described as more independent and involves the

company ignoring other stakeholders’ opinions to formulate strategy. The responsive approach

suggests organisations should aim at being as responsive as possible to the demands

emanating from society for them to act responsibly. This approach allows managers to think

about the hypothetical public reaction to situations and to consider strategies to deal with them.

In carrying out an analysis of CSR definitions in academic and professional literature Bowd

et al. (2006, p. 150) captured a variety of points and attributes that are believed to make up

CSR and suggest it involves:

. . . proactive community involvement, philanthropy, corporate governance, corporate citizenship,

addressing of social issues, a commitment to the quality of its products and services, human

rights, health, safety and the environment. . .

Carroll (1979, 1991) and Wood (1991) have contributed to building definitions of the different

levels at which organisations respond to their corporate social responsibilities. These levels

of responsibility are defined as follows:

B Economic level. Organisation produces products and services that society wants and

sells them at a profit.

B Legal level. Organisation obeys all the laws and rules applied by the state. (E.g. tax,

regulation, etc.)

B Ethical level. Organisation views it as its responsibility to satisfy society’s expectations of

business to go beyond basic legal requirements and do what is just and fair, and their

practice is reflective of this.

B Discretionary level. Organisation goes beyond stakeholder views of what is just and fair,

and is an exemplary corporate citizen (adapted from Carroll (1979, 1991)).

Although some firms have committed to investments in CSR through the allocation of more

resources, other companies have resisted. This could, at least in part, be because of the

debate on whether a corporation should go beyond maximizing the profit of its owners as the

only social responsibility of business, to being accountable for any of its actions that affect

the people, communities and environments in which they operate (Clutterbuck et al., 1992).

This is a topical issue in today’s business world involving interests from various

organizations, NGO’s, Human rights activists and governments alike. Furthermore, several

arguments have arisen on whether there really is an association between CSR and financial

performance, e.g. several studies undertaken in the 1970s and 1990s revealed

contradictory findings as to whether there is an association or causal relationship

(Belkaoui, 1976; Anderson and Frankle, 1980). The results from a study of 56 large British

companies showed a weak correlation and lacked overall consistencies in the findings

(Balabanis et al., 1998).

Fredrick (1986, 1994) identified

corporate social responsibility as an examination of corporations’ obligation to work for

social betterment and refers this to as CSR1. According to Frederick (1994), the move to

”corporate social responsiveness” started from 1970, which he now calls CSR2. He defines

corporate social responsiveness as the capacity of a corporation to respond to social

pressures. He argues that the effect of the move from CSR1 to CSR2 is reflected from a

philosophical approach to one that focuses on managerial action that is, will the organization

respond and how.

Frederick (1994) developed this analysis to include a more ethical base to managerial

decision taking in the formof corporate social rectitude and termed this CSR3. He stated that

the study of business and society needs an ethical anchor to permit a systematic critique of

business’s impact upon human consciousness, human community and human continuity. He

went further to assert that CSR1 was normative and that CSR2 led to non-normative enquiry.

Thus, the requirement for a moral basis provided a normative foundation for managers to

take and make decisions in the area of CSR. Cannon (1992) discussed the development of

corporate social responsibility via the historical development of business involvement

leading to a post-war re-examination of the nature of the relationship between business,

society and government. This traditional contract between business and society has

changed over the years because of the addition of new social value responsibilities placed

upon business. Some of these new social value responsibilities include: stricter compliance

with local, state, federal, and international laws; social problems; human values; health care;

pollution; quality of life; equal employment opportunities; sexual harassment; elimination of

poverty; child care and elderly care; support of the arts and universities; and many others.

Basically, each of these areas of social value responsibility can be placed in one or more of

three broader categories or headings of social responsiveness, namely legal, moral ethical,

and philanthropic.

Another perspective of corporate social responsibility is corporate social reporting. It can be

argued that corporations have an ethical duty to disclose the impact their actions have on

society. With the demise of state enterprises and the growing dominance of business in our

everyday lives, there is a focus on management philosophy as there is a consensus that

business thrives best under certain strategic and structural conditions (McIntosh et al.,

1998). This gave rise to the concept of corporate governance, which is the system of laws,

rules, and factors that control the operations of a company (Fisher and Lovell, 2006).

Business advisors see it as a process of high-level control of an organization. Corporate

governance is however not an abstract goal but exists to serve corporate purposes by

providing a structure within which stockholders, directors and management can pursue

most effectively and responsibly the objectives of the corporation.

Whether or not business should undertake CSR, and the forms the responsibility should

take, depends upon the economic perspective that is adopted by the firm (Cozens, 1996).

According to Moir (2001) those firms or organizations that adopt the neo-classical view of the firm believe that the social responsibility of any firm or organization to be adopted is the

provision of employment and payment of taxes. This view is reinforced by Friedman (1970,

p. 13):

Few trends would so thoroughly undermine the very foundations of our free society as the

acceptance by corporate officials of a social responsibility other than to make as much money for

their shareholders as they possibly can.