Importance of CSR for companies in Mauritius

CSR has been subject to much analysis for different types of businesses who were controlled and managed by futurist and modern managers who were here to provide a new dimension in the business era. It is a concept where managers or leaders of certain firms decide to contribute voluntarily for a better social environment. Companies provide us with these because they have they need to contribute back for the land that they use. The other reason is that it is purely voluntary, and they provide us with such services without expecting anything in return.

May researches have come with various definitions of CSR, but however, they all posses the following characteristics in common:

Business commitment to try to add value and a better way of living for the whole society.

Making society benefit from it

Protecting nature and our environment

Vyarkarnam also found out during his study that CSR dealt with these following areas:

environmental problems,

charities and donation,

Investment in activities.

Corporate Social Responsibility is a process that companies apply to bring benefits to the society. The latter has legal, commercial, ethical and public expectations from business activity. CSR is implemented in a way such that it meets the needs and in some instances, exceeds the expectations.

The equivalent testimony gave some evidence of the diverse School of thoughts which interpret CSR differently worldwide. Definition of CSR from Ghana is “CSR is about capacity building for sustainable livelihoods. It respects cultural differences and finds the business opportunities in building the skills of employees, the community and the government”, however Philippians “CSR is about business giving back to society.” 

Theoretical Rationale behind Corporate Social Responsibility

2.1 The Social Contract Theory

The Social Contract Theory hypothesizes that “the cornerstone of morality are uniform social accords that best serve the interests of those who make the agreements.” (A.K.H. Khor)

This means that if the social contract between the business and the community is breached, there will be conflict leading to a revocation of the contract and the firm then risks sanctions imposed by the individuals of the society. For example demand may be reduced, legal restrictions may be imposed, and also denial of human and financial resources.

2.2 The Legitimacy Theory

It is said that the Legitimacy Theory and the Social Contract Theory are inter connected.

To be viewed as being socially responsible, investors do not hesitate to pay a premium for corporate behaviour (Pava and Krauze, 1996; Toms, 2000). This is so because it ensures the continual inflow of capital, labour and customers needed for viability. This proves the importance of CSR

The confidence of corporate stakeholders suffered a serious blow, undermining their faith in the accounting profession, following the revelation of the corporate scandals at WorldCom and Enron. Thus a call has been made for more transparent reporting and the Legitimacy theory arose and implied the above social contract.

2.3 The political Economy Theory

This theory is quite a recent one, and it gives us a good approach on how to explain CSR. That is, this theory states that economics and politics cannot be separated. The mission and long term objective of the firm should coincide with that of the government. Hence, it is obvious that firms engage in CSR by taking into consideration its employees, the society and other stakeholders affected by its activities. Thus, this approach gives us a good idea as to why firms engage in these activities.

2.4 The stakeholder theory

According to Milton Friedman, the main objective of an organisation in the past was profit making and maximization. That is, firms were established only in the view of making profit, ignoring the harmful effect that they might be doing to the society at large. At these times, there were no firms engaging in CSR activities.

The stakeholder theory is a theory of organizational management that tries to address different topics in business, such as, morals and values in management. This theory was originally put forward by Edward Freeman. According to him, a business does not only involve the owner, management and workers of the company. It involves the society at large, that is, the government, political groups, communities and even competitors. Freeman stated that when doing business, it was immoral just to reward the workers and owners of the business. Instead, it should be rewarding the whole society at large, and hence, coming forward with CSR activities.

The stakeholder Theory attempts to “justify the provision of social information in an attempt to gain stakeholder support and thus minimize the costs of dealing with complaints and actions that might otherwise affect them.” (Davis, 2003)

We can categorize the stakeholders of the company’s:

Shareholders;

Employees;

Suppliers;

Customers;

Government;

Trade unions;

Business associates;

local community and

Even competitors.

Ullmann (1985) suggested a model based on the stakeholder theory according to which, if stakeholders control the essential resources it is ultimate for business to responds positively to the demands of the former. As an empirical accountability, the organisations identify its stakeholders. This is supported by “by referring to the extent of which the organisation believes in the interplay with each group needs to be managed in order to further the interest of the organisation, the more important the stakeholder to the organisation, the more effort will be extended in managing the relationship.

The impact of CSR on the decision making of stakeholders of a business.

Shareholders.

RARE researches brought, “a company indulge in Corporate social Responsibility efforts can strengthen the voice of shareholders in sustainability matters. On a better information basis, they can assess their company’s sustainability performance and assert their rights to promote more corporate responsibility (Shareholder activisms).” Shareholders look for confidence and hope in a company. Therefore guided by their ethical principles, many investors choose firms taking into consideration the social and environment issues. In the study of Epstein and freedman, investors reduce the uncertainty about the value of their investment through reducing their environmental risks and the firm’s product safety and quality among others.

Employees

The literature of management science regard the relationship of management-employee as an essential one, “employees are one of the key stakeholders for any business and evidence is growing of the importance of employees attached to the companies demonstrating their CSR records through progressive employment practice as well as through their behavior as good corporate citizens” to know about the working conditions and sustainability job hunters make use of the annual report. Companies promoting the social responsibility provide such information through CSR disclosure. Crowther says that ” employees are search to work for companies that reflect and embody their values and who are as concerned about principles as they are with profits.” In search of job security, CSR disclosure is helpful to employees.

suppliers

” For suppliers, CSR such as fair trade practices hold the potential that the buying company grants preferential purchasing conditions, frequently to stabilize the exchange relation and gain legitimacy as well as customers” (RARE research project). Thus it can be deduce that suppliers also use CSR to some extent to establish good commercial relationship.

Customers

“Through CSR activities like reporting companies provide more (non-financial) information to customers who can then take better informed decisions on purchasing or rejecting the company’s product” (voice; cf. Rrubik et al. 2000) A fresh event marked by The oil spill in the gulf provoked a total chaos leading to BP customers rejecting BP’s products worldwide.

Local Community

According to Glautier and Underdown (1994), “local communities are very dependent on local industries, not only because they provide employment, but also because they directly affect the entire socio-economic structure of the environment.” Industrial activities have always both positive and negative impact on the community at large. CSR disclosure is useful to the community in the sense that they may identify the companies with the good companies-public relationship. As such, the local community has an interest in the activities of the local industries, and requires much more information on social benefits and cost than the public relations-type information.”

government

The government use CSR disclosure as a tool to set norms and assess a company’s environmental concern. “CSR may constitute a framework for cooperative governance where the traditional means of the state fail: public private (or trilateral) cooperation’s might make accessible information, innovation, and legitimacy potentials that allow the tackling of sustainability problems more effectively.” Wolff (2004).

4.0 Why do companies indulge in CSR activities?

It can be seen, especially after big international crisis, which businesses need to reflect on how to improve the image of their company.

Milton Friedman argued it is the head of firms, that is, executives that have the responsibility towards society and other stakeholders.

Friedman says that if actions that have been done result in a decrease in the return of shareholders, an increase in the price for consumers or result in a decrease in the wages of employees, customers and shareholders are spending money for the corporate social responsibility issues.

Like said by smith in The Wealth of the nations (1776), “It is not from the benevolence of the baker, the brewer and the butcher , that we get our meal, but from their regard to their own best interest” is in line with what Friedman says in his book , Capitalism and Freedom” where he refer to social responsibility in firms as a “fundamentally subversive doctrine” in society nowadays where businesses main aim is to make maximum profits by using recourses effectively”. Therefore as said by Friedman, a business’s duty is to make as much profits as it is legally possible.

In his paper, the author titled “Morality in the Marketplace”, Robert Almeder questions “whether corporate behavior should be restricted by moral or illegal considerations”.

In the paper, the author takes the example of general motors and firestone that knowingly made the promotion of a defective product even though they knew that it would reduce their market share. He also talk about the lack of morality of advertising companies that promote the consumption of cigarettes knowing that this is prone to attract more smokers and therefore will increase the number of people who might get lung cancer and many other disease.

According to him, to make businesses act more responsibly , authorities should come up with a laws such that corporate managers should effectively put CSR in practice , at their own expense rather than censured and fines a sum from corporate profits”.

(Almeder, R et al (1983) (eds) Business Ethics: Corporate values and society)

The form of corporate social responsibility most commonly found in businesses are them taking care of the environment around them.

“Environmental issues are an inescapable part of planning business strategies for the foreseeable future and boards of directors who ignore this, do so at their own peril”.

5.0 Is it relevant and worthwhile for companies to report on CSR issues?

It is important for a business to communicate properly its financial position and equally its plans and actions concerning the social responsibility so as to maintain the good relationship of existing stakeholders and attract potential investors. According to Roger Adams, ACCA’s executive director, it is becoming more and more pressing and urgent for companies to indulge in CSR if they want to enhance their corporate reputation, thus supporting the above statement. He also said that global investors increasingly regard good environmental management as an integral element of overall governance and accountability.

Moreover in an analysis on ‘Post-Eron: Post-Andersen’, Roger Adams proceeds to say that “Pressure is mounting foe companies to widen the scope of corporate public accountability and many are responding by including social data in their reports, preferably through a well managed process of stakeholder dialogue.” (Accounting & Business, July/August 2002)

Based on Roger Adams statements, it is clear that globally CSR has rooted its importance in the world of business and helps in corporate sustainability and success showing its relevance and worthiness.

Lack of ethical standards and social responsibility has lead to corporate collapse in various parts of the world recently leaving scar on the global economy. Howard Davies put forward that event in the US for the past years demonstrate that “a breakdown in of ethical standards within a firm can carry high reputational and financial penalties.” (Accounting & Business, February 2003)

Stakeholders are required to portray a good governance of an organisation, its transparency and proper accountability to access organization’s worthiness.

In Rachel Jackson’s (ACCA’s head of social and environmental issues) words: “the increased influence of non governmental organisations NGOs) and the demand by the stakeholders for greater transparency, organizational accountability and good governance were key drivers for CSR.” Accounting & Business, June 2004). Moreover she adds that some potential advantages that can be derived by business practicing transparency and accountability can be: enhancement of business reputation, improvement of investor relations and access to capital, increase in competitiveness and market positioning.” Other factors that push companies to be socially responsible are:

Economic rationality considerations,

To comply with borrowing requirements,

To benefit from lower resource use and operation cost,

And to improve competitive advantage and global exposure.

6.0 Empirical evidence of CSR.

6.1 The usefulness and relevance of CSR disclosure.

Empirical studies effected by Belkaoui (1980) and Milne (1999), and Hendricks (1976) proved that CSR disclosure is useful and relevant. However results obtained were in favor of both positive and negative impact on investment decision.

Hai Yap Teah and Godwin Y Shiu also carried out an empirical study which revealed that social responsibility disclosure in company annual reports may be more helpful in decision making if the data is presented numerically that focus on product improvement and fair business practices. Hence, we can deduce that for CSR disclosure to be deemed relevant and useful, it should speak the language of figures.

Formbrun and Shanky put forward some empirical evidence which suggest that the greater a company’s contribution to social welfare is; the better the goodwill becomes. Hereby they may benefit from premium prices, enhance their access to capital market and attract investors. Hence it supports the school of thought advanced earlier by other research work extending the impact of CSR on investment decision.

According to Mc Gaire et al (1988) “a firm that is perceived to be acting responsibly will face less labor unrest and will gain kudos in the eyes if it’s potential customers, increasing its sales base.” Nevertheless, the other side of the coin refers to the fact that it s not necessary that CSR disclosure directly improves the profitability for mixed results obtained.

6.2 CSR Framework as developed by ERNST&ERNST (1978)

Six areas have been found by Ernst and Ernst (1978), in which corporate social objectives may be set. They are:

Environment

Fair business practices

Human recourses

Community involvement

Energy

Products

6.3 Code of Corporate Governance

However in section 7 of “The Code of Corporate Governance” for Mauritius , that is , the “Integrated Sustainability Reporting” identifies four areas which should be subject to disclosure . They are:

Ethics

Environment

Health and Safety

Social issues

These information are considered important by “The Code” as it is considered as informative and will help stakeholders build a culture of social and environmental responsibility.

(Code of Corporate Governance – section 7)

6.3.1 Ethics

Ethics means being responsible , diligent and integer. A business disclosing ethical principles will make people trust in it as they will know that the company has a good code of conduct. It will be assumed that this company is aware and concerned about its duties towards society and stakeholders.

6.3.2 Environment

Firms should do their utmost best to reduce the negative effects of industrial production and adopt more effective and efficient methods to make least use of exhaustive recourses. The company should disclose any project that they do which have for effect to help in preserving the environment.

6.3.3 Health and Safety

Health and Safety practices and policies should be developed and implemented in the business. Also, safety and health risk identification has to be undertaken. This will lead to betterment in risk management strategies.

6.3.4 Social issues

Social issues include “community involvement”, “human recourse” and “fair business practices”. “The Code “requires that businesses adopt fair policies in promotion and recruitment of employees.