16.3: Corporate Social Responsibility

16.3.1: The Financial Value of Social Responsibility

Learning Objective

Discuss the argument that the short-term costs of social responsibility generate long-term revenues exceeding those costs

Key Points

• Evidence links socially responsible business practices to improved financial performance.
• Socially focused investors also see a financial return in socially responsible business practices, pointing to competitive returns for socially responsible indices and to the belief in returns from investing in a company’s long-term potential to compete and succeed.
• The shared value model takes a long-term view on financial return of corporate social responsibility (CSR), maintaining that the competitiveness of a company and the health of the communities around it are mutually dependent.

Key Terms

externalities

Something that indirectly affects something else. In economics, a cost or benefit that is not captured in the price mechanism.

triple bottom line

A means of measuring a company’s success based on its economic returns, its effect on its environment, and its impact on the community.

shared value model

Idea that corporate success and social welfare relate; that a company succeeds and competes in a better society because it needs a healthy, educated workforce and sustainable resources.

Evidence links socially responsible business practices to improved financial performance. This is attributable to lower costs or increased revenue from customers who want to support business that reflects their personal values. An organization’s CSR practices might also increase employee loyalty, which lowers the cost of turnover; it also helps attract potential employees willing to work for less for a company whose values they share. Some CSR actions, such as investing in renewable energy, can provide tax benefits or lead to technology innovations that create competitive advantage.

Harvard professors Michael Porter and Mark Kramer introduced the notion of “creating shared value” (CSV) as a way of thinking about the benefits of corporate social responsibility. CSV is based on an idea that the competitiveness of a company and the health of the communities around it are mutually dependent. By focusing on creating shared value, an organization helps to shape the context in which it competes to its advantage. In this way, the shared value model takes a long-term perspective on the financial benefits of corporate social responsibility.

Other financial benefits from CSR accrue directly to shareholders. Socially conscious investors may prefer to own shares of a company that demonstrates good CSR, which can lead to higher share prices. Some mutual funds have portfolios exclusively made up of companies that rate highly on independent CSR measures. Proponents of these funds point to competitive returns for socially responsible indices, such as the Domini 400 (now the MSCI KLD 400). Similarly, academic studies have shown that excluding stocks from companies with poor CSR records does not adversely effect financial returns of a fund.

16.3.2: Types of Social Responsibility: Sustainability

Key Points

• Sustainability generally refers to a company’s capacity to endure over the long term through renewal, maintenance, and sustenance. From an organizational perspective, it includes stewardship for sustaining not just the organization but also its various stakeholders.
• While a universally accepted definition of sustainability remains elusive, according to a common definition, sustainability has three key dimensions: environmental, social, and economic.
• Tracking sustainability measures can be performed through sustainability accounting, in which a corporation discloses its performance with respect to activities directly affect the social, environmental, and economic performance of an organization.
• Environmental aspects can relate to water, land, and atmospheric impact, including energy and chemical use. Social sustainability can include human and worker rights and community issues. Economic aspects can include financial transparency and accountability and corporate governance.

Key Terms

impact

A significant or strong influence; an effect.

stewardship

The act of caring for or improving with time.

Many efforts to show corporate social responsibility, or CSR, focus on environmental, social, and economic sustainability. Sustainability is the capacity to endure over the long term through renewal, maintenance, and sustenance. From an organizational perspective, sustainability is a criteria used to make decisions about business conduct and to evaluate outcomes.

Environmental sustainability involves efforts to protect air, water, and land from any harmful effects. It also encompasses stewardship for natural resources, such as trees and wildlife. Sustainable business practices consider not only the use of resources in production, but also the assurance that those resources can be replenished for future use. Energy is another area of interest in environmental sustainability. Reducing greenhouse gasses harmful to the atmosphere and embracing alternative, renewable fuel sources such as wind and energy are examples of business practices in this area.

The social dimension of sustainability addresses concerns such as peace and social justice. Efforts to improve education, to expand worker rights, to minimize the use of child labor, and to increase the political empowerment of women, especially in developing countries, are examples of social sustainability practices. Reducing poverty by helping people develop the skills to earn their own livelihoods is another example of social sustainability. Projects that provide access to clean water and sanitation are also aimed at improving social sustainability by reducing illness and mortality rates.

Economic sustainability refers to business practices that do not diminish the prospects of future persons to enjoy levels of consumption, wealth, utility, or welfare comparable to those enjoyed in the present. This means companies’ operational practices reduce environmental damage and resource depletion. Efforts to influence business practices toward economic sustainability include pricing mechanisms, such as carbon taxes, that pass on the cost of environmental impact to the users of those resources.

Tracking sustainability measures can be performed using sustainability accounting, in which a corporation discloses its performance with respect to activities that have a direct impact on the societal, environmental, and economic performance of an organization. According to common definitions, sustainability has three key dimensions: environmental, social, and economic. The three pillars—also known as the “triple bottom line”—have served as a common ground for numerous sustainability standards and certification systems in recent years, though a universally accepted definition of sustainability remains elusive.

16.3.3: Types of Social Responsibility: Ecocentric Management

Learning Objective

Explain the concept of ecocentric corporate social responsibility and how it relates to other forms of CSR

Key Points

• Ecocentric CSR seeks to protect and improve the quality of the natural environment, regardless of the economic benefits to an organization.
• Ecocentric CSR reflects an organization’s commitment to the environment as the primary core value for conducting business.
• As a core business activity, ecocentric management may also incorporate life-cycle assessment, a technique aimed at assessing the environmental impacts associated with all stages of a product’s life, from raw material extraction to disposal or recycling.

Key Term

ecology

The branch of biology dealing with the relationships of organisms with their environment and with each other.

Corporate social responsibility, also referred to as CSR, can be described as a business’s efforts to assume responsibility for its actions and to encourage a positive impact through its activities on the environment, consumers, employees, communities, and other stakeholders. Ecocentric management is one type of CSR that adopts a deeply ecological view of business.

The ecocentric model differs from more human-centered interpretations of sustainability or responsibility. “Deep” ecology is a form of environmentalism that seeks to protect and improve the quality of the natural environment. It values environmental good above economic or even social benefits. For this reason, ecocentric CSR activities, more than any other type of CSR efforts, are not expected to provide business benefits. Instead, they reflect an organization’s commitment to the environment as the primary core value for conducting business.

Ecocentric supporters believe that low-impact technology and self-reliance are more desirable than technological control over nature. As a result, the ecocentric manager may argue against using ecologically damaging products, such as pesticides and nuclear power, even if these products benefit people. In this way, the ecocentric approach contrasts with that of a more traditional CSR environmental sustainability, which seeks to maintain economic performance while reducing the impact of those products or making parallel investments in alternatives.

Ecocentric CSR activities are typically integrated with business operations. For example, they may incorporate life-cycle assessment, a technique aimed at assessing the environmental impacts associated with all the stages of a product’s life, from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance, and disposal or recycling. The more environmentally harmful stages can be identified and targeted for improvement so that every part of the value chain demonstrates the paramount importance of ecocentric CSR.

16.3.4: Arguments for and against Corporate Social Responsibility

Learning Objective

Contrast the views in favor of and opposing corporate social responsibility

Key Points

• Proponents of corporate social responsibility (CSR) argue that socially responsible practices can have a positive impact on the bottom line.
• While some evidence links CSR to financial performance, its proponents also point to non-financial rewards as well as to benefits to the environment and social welfare.
• Some critics see CSR as unrelated to the primary aim of the business: making a profit for its shareholders.
• Critics may also see some CSR efforts as attempts at public manipulation or greenwashing.

Key Terms

shareholder

One who owns shares of stock in a business.

bottom line

The final balance; the amount of money or profit left after everything has been tallied.

Corporate social responsibility, also referred to as CSR, can be described as embracing responsibility for a company’s actions and encouraging a positive impact through its activities on the environment, consumers, employees, communities, and other stakeholders.

While some evidence links CSR practices to business performance, most organizations point to the non-financial benefits of their efforts. Proponents of CSR argue that socially responsible practices can have a positive impact on the organization by improving employee recruitment and retention, managing environmental risks by reducing harmful accidents, and differentiating brand to achieve greater consumer loyalty. CSR proponents may also argue for the recognition of a “triple bottom line” performance that includes not only financial returns for owners but also social and environmental benefits for the greater society.

Milton Friedman and other conservative critics have argued against CSR, stating that a corporation’s purpose is to maximize returns to its shareholders (or shareholder value) and that it does not have responsibilities to society as a whole. Part of the critics’ argument is that managers should not select social causes on behalf of a diverse set of owners. Rather, CSR opponents believe that corporations benefit society best by distributing profits to owners, who can then make charitable donations or take other socially responsible actions as they see fit.

Other critics, rather than targeting the concept of CSR, point to examples of weak CSR programs. For example, the term greenwashing refers to instances where businesses have spent significantly more resources advertising being “green“ (that is, operating with consideration for the environment) than investing in the environmentally sound practices themselves. Critics view these as misleading, even cynical, attempts to shape public perception about a company without its actually having to benefit the environment.

16.3.5: Introduction to Corporate Social Responsibility

Learning Objective

Explain the purpose and types of corporate social responsibility

Key Points

• Corporate social responsibility (CSR) can be described as embracing responsibility and encouraging a positive impact through the company’s activities related to the environment, consumers, employees, communities, and other stakeholders.
• Corporate social responsibility may include philanthropic efforts, employee volunteering, and core strategies. Companies may benchmark their CSR performance relative to peers and may also report on CSR policies or undergo social audits.
• Proponents of CSR argue that socially responsible practices can have a positive impact on the bottom line and may also argue for the recognition of a “triple bottom line” that rewards social, environmental, and financial returns.
• Critics argue that CSR competes with shareholder value maximization and may be prone to “greenwashing”.

Key Terms

benchmark

A standard by which something is evaluated or measured.

shareholder

One who owns shares of stock in a business.

stakeholder

A person or organization with a legitimate interest in a given situation, action, or enterprise.

Corporate Social Responsibility (CSR), also referred to as corporate citizenship or socially responsible business, is a form of corporate self-regulation integrated into a business model. The interest in CSR has grown with the spread of socially responsible investing, the attention of nongovernmental organizations (NGOs), and ethics training within organizations. Recent incidents of ethics-based corporate scandals have also increased awareness of CSR. Organizations that embrace CSR hold themselves accountable to others for their actions and seek to make a positive impact on the environment, their communities, and the larger society.

Corporate social responsibility may include philanthropic efforts such as charitable donations or programs that encourage employee volunteerism by providing paid time off for such activities. Many organizations seek to have an even greater impact through CSR initiatives that integrate social values into operational and business strategies. For example, to protect scarce natural resources, a firm may make a commitment to use only recycled materials in its packaging of consumer goods.

Many organizations promote their CSR efforts as a way of shaping public perceptions, attracting customers, and building good will with stakeholders. Public companies often report CSR policies and activities in their annual reports; some create separate documents or use their websites to describe and publicize their CSR-related efforts. Organizations and interested external third parties assess CSR performance by comparing, or benchmarking, the activities and their results with competitors or other sets of organizations. Measures include amount of expenditures or investment, degree of executive engagement, impact of implementation, and CSR outcomes relative to objectives.

The scale and nature of the benefits of CSR to an organization can be difficult to quantify. Those driven by strategic and operational choices may result in higher or lower costs, but directly linking CSR initiatives to revenue increases is not always possible. Many organization use non-financial measures to assess the benefits of CSR. For example, socially responsible practices can improve employee recruitment and retention efforts, be a means of managing risk, and provide brand differentiation. Some business critics of CSR, however, argue that too often it competes with a duty to maximize shareholder value. Others cast the CSR efforts of companies as “greenwashing” efforts to draw attention away from unpopular practices such as polluting the environment or outsourcing jobs overseas.

16.3.6: Types of Social Responsibility: Philanthropy

Learning Objective

Describe philanthropy through the lens of corporate social responsibility

Key Points

• Philanthropic corporate social responsibility involves donating funds, goods, or services to another organization or cause. For example, the local branch of a bank might donate money to fund the purchase of uniforms for a school sports team, or a health care company might donate to the city opera.
• Some critique organizational philanthropy for not being incorporated directly into an organization’s core business plan. Philanthropic activity is not always tracked as part of social accounting, making it difficult for these efforts to be audited or held accountable to external benchmarks.
• Corporations increasingly hold charities accountable for the use of donations and for measuring performance relative to their mission.

Key Terms

core

The most important part of a thing; the essence.

impact

A significant or strong influence; an effect.

A company that practices corporate social responsibility (CSR) embraces responsibility for its actions and, through its activities, positively affects the environment, society, consumers, employees, communities, and other stakeholders. One type of CSR is philanthropic giving. The roots of corporate philanthropy in the United States date back to the rise of industry in the 19th and early 20th century, when pioneering businessmen like Henry Ford and John D. Rockefeller established a number of philanthropic foundations. Today, corporate philanthropy can involve donating funds, goods, or services to another organization or cause. For example, the local branch of a bank might donate money to fund the purchase of uniforms for a school sports team, or a health care company might donate to the city opera.

While individual philanthropists use their own resources to change the world for the better according to their interests, corporate philanthropy directs organizational resources to support a worthy cause or address a societal need. The practice is not without its critics; some complain that philanthropic CSR is not directly related to an organization’s core business. For instance, many large arts organizations receive funding from corporations in completely different industries simply because their executives happen to love music and wish to support a local symphony. Although philanthropic CSR may provide public relations or branding advantages to a business, these benefits are difficult to measure and track.

A business’s philanthropic activity does not occur without oversight. Since the early 2000’s, corporations have sought to hold charities accountable for how they use donations. As a result, many nonprofit groups have adopted business practices for measuring their own performance. In this way, these beneficiaries of philanthropy demonstrate both a responsible use of the funds they have received and evidence of their performance relative to their mission. Companies engaging in philanthropic CSR can then use those results to measure the impact of their own efforts to support social causes.

16.3.7: Social Responsibility Audits

Learning Objective

Apply the general concept of auditing to the larger framework of social responsibility within organizations

Key Points

• Social responsibility audits rely on a process of accounting known by various names, including social accounting, sustainability accounting, corporate social responsibility (CSR) reporting, environmental and social governance (ESG) reporting, and triple-bottom-line accounting.
• Most social, environmental, and sustainability reports are produced voluntarily by corporations themselves and are not held to the same external standards as financial reporting. The practice of hiring independent social responsibility audit firms, however, is growing.
• Little consensus exists about how to define and use metrics of social performance, making social audits different from financial audits, for which there are generally accepted standards.

Key Terms

responsibility

A duty, obligation, or liability for which someone is held accountable.

audit

An independent review of records and activities to assess system controls, to ensure compliance with established policies and procedures, and to recommend changes in controls, policies, or procedures.

An audit is a systematic independent examination of data, statements, records, operations, and performance (financial or otherwise) of a process or enterprise for a stated purpose. The purpose of an audit is to provide third-party assurance to various stakeholders that the subject matter is free from material misstatement and represents a true and accurate depiction of actions and events. Areas of business that are commonly audited include financial performance, internal controls, quality management, project management, water management, and energy conservation.

Social responsibility audits are a process of reviewing and evaluating a corporation’s social responsibility (CSR) performance. As with financial audits, social responsibility audits involve accounting processes. This type of accounting originated in the early 1990s and is known by various names, including social accounting, sustainability accounting, CSR reporting, environmental and social governance (ESG) reporting, and triple-bottom-line accounting (encompassing social and environmental as well as financial reporting). Social accounting is the process of communicating the social and environmental effects of an organization’s economic actions to particular interest groups within society—including investors, customers, and NGOs—as well as to society at large.

In most countries, existing legislation regulates only a fraction of accounting for socially relevant corporate activity. In consequence, most social, environmental, and sustainability reports are produced voluntarily by corporations themselves and are not held to the same legal standards as financial reporting, for example. Organizations may also hire external firms to conduct CSR audits; these often have more credibility than an internally generated report. Having third-party groups conduct social audits is one way that corporations are held accountable for their CSR performance.

Little consensus exists about the definition and use of metrics to evaluate social impact. The lack of clearly defined standards makes social audits different from financial audits, for which there are generally accepted standards. Environmental-related accounting might address pollution emissions, resources used, or wildlife habitats damaged or re-established. Social aspects considered might include worker conditions or community investment. An audit for economic and governance responsibilities might look at transparency and the use of practices such as independent board members and separation of the roles of CEO and board chairman.