A Clear Definition Corporate Social Responsibility

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From the time when the term 'corporate social responsibility' was first coined and in the following decades, a number of attempts have been made to provide a clear definition for this concept. Yet, it would appear that there is no universally accepted definition of the term. Votaw (1972) clearly expresses this standpoint, arguing that different people have different perceptions of CSR, ranging from legal responsibilities to ethics and morals to corporate philanthropy or charity.

However, it is possible to categorize definitions of CSR into two broad branches (Schwartz and Carroll 1991). There are those who argue that the sole purpose of business activity is to maximize profits within the legal framework. Proponents of this view assert that a firm should seek to augment the wealth of its owners. Milton Friedman, a famous advocate of this school of thought, contends that since corporate executives are agents of the owners, they should run the business according to the objectives of the owners, which is generally that of profit maximization Friedman 1970). This is supported by Levitt (1958) who states that it is the role of the government to look after the welfare of society. Businesses should concentrate on their activities and leave social responsibilities in the hand of the government.

In an ever competitive environment, businesses need to make profits to survive. Firms must first satisfy this criterion before trying to address any other responsibilities they might have. Neo-classicists argue in favour of profit maximization objective of firms.

At the other hand of the spectrum are those who believe that firms have responsibilities towards a wider range of constituents in society. This school of thought is the one that actually prevails, with corporations nowadays voluntarily engaging themselves in social activities that go beyond the scope of their normal business operations. Archie B. Carroll, a prolific writer on the subject proposed a definition of CSR that included economic as well as social dimensions.

Carroll (1979) described corporate social responsibility as encompassing the economic, legal, ethical as well as the discretionary duties that society expects from businesses at a given point in time. Later on, Carroll expounded on this definition of CSR and developed what is referred to as a "Pyramid of corporate social responsibility" (Carroll 1991).

Carroll's (1991) Pyramid of Corporate Social Responsibility

Figure 1: Carroll's Pyramid of CSR

Source: A. B. Carroll, "The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders," Business Horizons (July-August 1991): 39-48.

As depicted in the above diagram, the four levels of corporate social responsibility are:

Economic responsibilities - Businesses are basically economic entities, designed to produce goods and services for consumption by society. The profit motive has always been the incentive behind business ventures. Thus, businesses need to be profitable for their owners; otherwise, their very existence will be threatened.

Legal responsibilities - Profitability is not the only requirement that businesses should meet, society expect organizations to comply with the laws and regulations set out by the government or regulators. Failure to operate within the given legal framework will lead to the organization being forced out of business by virtue of the law.

Ethical responsibilities - For a business to be seen as ethical, it needs to embrace those activities and practices that are expected or proscribed by society even though there is no legal obligation to do so. Ethical responsibilities reflect what stakeholders or community members believe to be just and fair and they embody the values, norms and standards prevailing in society.

Philanthropic Responsibilities - these responsibilities are regarded as being at the discretion of companies and are not in any way required or expected by people. Philanthropic responsibilities include engaging in actions that will promote the welfare of society, for instance, contributions to education. The idea that businesses have such responsibilities has been the source of controversy in the CSR literature.

The first two levels of social responsibility recognized by Carroll (the economic and legal obligations) are a necessity for every firm. Profitability is the key to survival. Moreover, any firm which does not abide by the law will expose itself to litigations and most likely be driven out of business. As such, it can be argued that the ethical and philanthropic obligations are the duties that push a firm to go beyond the normal scope of its operations and act as socially responsible entities. Other definitions of corporate social responsibility which recognize a broader responsibility to society have emerged over time.

The World Business Council for Sustainable Development (WBSCD), at its stakeholder dialogue on social responsibility (1998) provided the following definition of CSR:

"Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large."

In its green paper 'Promoting a European Framework for Corporate Social Responsibility' the European Commission (2001) states that corporate social responsibility is a concept whereby firms voluntarily include social and environmental concerns in their ordinary business operations. Furthermore, being socially responsible is given to mean that companies should not only comply with regulations but also that they should go the extra mile; investing more in stakeholder relationships and the environment.

The concept of a broader responsibility of business to society is not new. In 1975, the Accounting Standards Steering Committee in the UK published the Corporate Report. According to them, businesses not only owe responsibilities to their owners but also to the community by virtue of financial as well as non-financial relationships that bind them. The report identifies the public as a user of corporate report among the more traditional users who are shareholders, loan providers, employees or the government. Public accountability is central to this argument; since the community allows businesses to use resources and operate, it has a say in the way firms are run.

This study examines corporate social responsibility from the second perspective. The recognition of social responsibilities by businessmen is motivated by several factors. Wood (1991) argues that business and society are linked to each other and cannot be seen as distinct entities. As such, since business uses the resources of society to further its goals, it has been suggested that there is a moral obligation for them to participate in solving social problems. In a study of the attitudes of the executive towards social responsibility, Holmes (1976) finds that the managers believe solving social evils is important even if business activity is not the cause of these problems and there is no profit potential in doing so.

The importance of ethics in business is underlined in an article appearing in The Economist (2005), asserting that while many businessmen seem to think that anything which is not illegal, no matter how unethical it might be, can be considered to be appropriate business practice, such behavior does not provide good foundations for trade to be carried on and that if a firm is to maximize long term value for its owners, then honesty in business is the only option.

Another argument for CSR is that it could lead to benefits in the long run. An article from The Economist (2008) points that by being socially responsible, a firm can manage risks better, improve its reputation and gain competitive advantage over its competitors. The firm will be better able to sustain profitability for its owners and hence attaining its chief objective. This perspective has been termed as the 'enlightened self interest', since the firm is deemed to gain from CSR initiatives.

Moreover, a number of authors have pointed out the need for businesses to adapt their practices to changing expectations; Reynard and Forstater (2002) observe that companies are slowly recognizing the need for business habits to be adjusted to include responsible practices the public's interests if they are to survive and gain strategic initiative. In the same vein, Gray (2001) argues that the effects of globalization have pushed firms to realize that, in order to remain competitive, they have to incorporate the concerns for the community in their practices.

Evidence of a wider responsibility for business can also be found in accounting theories, more precisely the Legitimacy theory and the Stakeholder theory. Gray et al (1996) suggests that both theories stem from the Political Economy Theory.

Political Economy Theory

According to the Political Economy Theory (PET), society politics and economics cannot be separated from each other and firms cannot operate as independent entities, regardless of their environment; instead, they should think about the different stakeholder groups and the environment in the course of business. The center of attention of PET is not the interest of individuals or corporations to maximize their wealth but rather the framework in which economic activity takes place (Gray et al 1995).

Guthrie and Parker (1989) suggest that, from PET's point of view, accounting reports can be used as tools by an organization to construct and maintain the legitimacy of its activities, hence serving the interests of the corporation. Furthermore, firms can manipulate the opinions of external stakeholders through the use of reports on their social and environmental performance (Guthrie and Parker 1990).

Political Economy theory is divided into two main classes, namely the Classical PET and the Bourgeois PET (Gray et al 1996).

Classical PET is closely related to issues of power and conflict within society. This theory recognizes the use of accounting reports as a way of protecting the interests of those controlling scarce resources, who find themselves in a favourable situation, and weakening the position of those who are do not possess such resources (Deegan 2000).

On the other hand, Bourgeois Political Economy ignores such issues. This theory centers its attention on the interactions of the different groups in society (Gray et al 1996). Bourgeois PET asserts that an organization cannot survive while operating in isolation and it needs to interact with its environment. The Legitimacy and Stakeholder theories originate from this branch of PET (Gray et al 1996).

Legitimacy Theory

The legitimacy theory has emerged in the context of analyzing the interaction between organizations and society. Lindblom (1994) defines legitimacy as being a state where an entity's value system is congruent with the value system of the larger social system of which the entity forms part. Basically, this means that the values of the business must be aligned to match those of the society itself. This theory is based on the premise that there exists a social contract between corporations and society, and the contract is said to have both explicit and implicit terms and it is conceived to exist between the firm and the public (Shocker and Sethi 1979).

Lindblom (1994) points out that there is a threat to the legitimacy of the entity if there exists a disparity between its value system and that of the larger society. This view is supported by Deegan and Rankin (1996), who states that failure to comply with the expectations of society may lead to the revocation of the contract.

Hybels (1995) contends that good models of legitimacy should consider all the relevant stakeholders and evaluate how each of them is crucial to the survival of the organization. Maintaining legitimacy is of significant importance since society's expectations have changed over the past few years. While in the past, a firm's profit was the only consideration in determining its legitimacy, there seems to be a movement away from this school of thought. Matthews (1993) argues that organizational legitimacy no longer arises from merely making profits and abiding by the law. Instead, a firm needs to pay attention to the prevailing norms and values in society if it is to be bestowed legitimacy. Moreover, Heard and Bolce (1981) argues that, at a time where social expectations are higher, successful businesses will be the ones which attend the human, environmental and other social consequences of their activities.

Stakeholder Theory

Gray et al (1995) suggests that the similarities that exist between the Legitimacy and the Stakeholder theory are such that it would be wrong to treat them as two completely different theories. Stakeholder theory asserts that for the corporation to survive, it must have the support and the approval of its stakeholders (Gray et al 1995). Furthermore, the activities of the firm may need to be adjusted to gain that approval. According to this theory, corporations need to manage its relationships with those who have an interest in the firm and its activities.

There are two branches of the Stakeholder theory; the Managerial branch and the Ethical branch. The Managerial (positive) branch posits that managers will put in more effort to manage the relationships with those stakeholders who are more important to the organization (Gray et al 1996). Deegan (2000) argues that stakeholders control access to the resources required by the corporation, directly or indirectly. Thus, the amount of power that stakeholders possess is determined by the level of control they have over the scarce resources. Ullman (1985) provides evidence for this, suggesting that corporations are more likely to satisfy the demands of stakeholders if the latter control resources which are essential to the firm.

The Ethical (normative) branch however ignores the how powerful the different stakeholders are. It deals with how an organization should treat its stakeholders and how it should manage the interests of each particular group (Deegan 2002). This theory suggests that the firm should be accountable to all stakeholders.

Stakeholders of the Business

While corporate social responsibility posits that firms are accountable not only to their shareholders but to a wider group of constituents, it does not specify who these groups might be. The stakeholder theory mentions the interests of a number of 'stakeholders'. Knowing who these stakeholders are is critical for the success of a CSR strategy. In fact, Savage et al (1991) argues that identifying the relevant stakeholders and managing them is important for the success of business activity itself.

Freeman (1984) defines a stakeholder as any group or person who can affect or is affected by the achievement of the objectives of the organization. This definition encloses adversarial groups such as interest groups and regulators.

The definition provided by Freeman is very broad and further refinements to the term 'stakeholder' were made over the years. According to Clarkson (1995), any person or group which at any point in time has a 'stake' or claim in the firm and its activities is to be considered as stakeholders. Moreover, Clarkson (1995) classifies stakeholders into two broad categories:

Primary Stakeholder

Secondary Stakeholder

Primary stakeholders are defined as those groups whose participation is essential to the survival of the business. In other words, the primary stakeholders are those who maintain the business in activity through the relationship and the interaction they have with it. Investors/shareholders, employees, customers and suppliers are the ones who generally make up the primary stakeholder group together with the government and the regulators who provide the legal, political and economic framework in which business is carried on (Clarkson 1995).

Secondary stakeholders are those groups who have an influence on or who are influenced by the corporation; however they are not engaged in transactions with it. Unlike the primary stakeholders, their presence is not essential to the survival of the business. The media and special interest groups are considered as secondary stakeholders (Clarkson 1995).

As we have seen from the perspective of the Legitimacy and Stakeholder theories, firms are under pressure from a wide variety of groups within society and need to satisfy their demands for their continued survival. While economic performance was the only yardstick by which a firm's success was measured, stakeholders are now insisting on more responsible business, especially in the wake of corporate debacles such as Enron (Waddock et al 2002).

Shareholders, who are the owners of the business, expect a reasonable return on their investment, mainly in terms of dividends and share value. However, there has been a growing pressure from investors that goes beyond wealth-maximization; it is a fact that investors are now considering CSR in their decisions (Waddock et al 2002). This view is supported by Heslin and Ochoa (2008) who finds that around one out of every ten dollars of assets under management in the U.S. in 2006 was being held in companies that are highly ranked on social responsibility scales. A possible explanation for this trend could be the fact that many studies on CSR have concluded that adopting socially-responsible business behavior can have a positive impact on a firm's financial performance (Bowman 1978, Anderson & Frankle 1980, McGuire et al 1988).

Employee opinions about where to work can be used as a competitive tool by firms (Waddock et al 2002). Generally, people would prefer to work for companies they can be proud of. As such businesses which perform well on the social front may be more attractive to employees than those who do not. In fact, Montgomery & Ramus (2003) finds out that MBA graduates, from Europe and the U.S., were willing to take lower wages to work for companies that have a good social image. The fact that employees are including social performance of companies in their decision about where to work is further evidence that people are now expecting more from the corporate world when it comes to social and environmental issues.

This particular stakeholder group, namely students completing their tertiary education, will be the focus of this research project. Their views and opinions on corporate social responsibility will be collected then analyzed. This will be discussed in more detail in the methodology section.

Customers are putting more pressure on companies to accept and manage their responsibilities through their choices. Mohr et al (2001) finds that consumers want more information concerning the CSR activities of firms. Moreover, reports from Cone (1999) and Walker (1994) indicate that customers are becoming increasingly aware about company practices and are more likely to purchase from firms which they consider to be more socially responsible. Furthermore, public expectations regarding businesses have changed significantly, as explained in the earlier section on legitimacy. Social, environmental and other issues relating to labour need to be tackled by firms if they are to be successful (Heard & Bolce, 1981).

Other stakeholders, like the government, non-governmental organizations or regulators are also putting increased pressure on firms to adopt socially responsible practices.

Although corporate social responsibility has been discussed quite extensively in the literature (Gobbels 2002), implementing CSR successfully can be a bit tricky. As Henderson (2001) notes, the lack of consensus on the subject does not provide firms with a strong basis for actions. Furthermore, Banerjee (2001) states that the scope of CSR is just too wide for it to be relevant to businesses.

However, Heslin and Ochoa (2008) argue that the principles underlying CSR practices can be easily adapted to be applicable to a wide range of businesses. They contend that while it would be unwise to mimic other corporations' practices, firms need to consider the contexts in which they operate as well as their competencies in order to develop effective CSR plans.

Over the years, many standards have emerged trying to give more details about the areas of CSR practice. The most notable among those are:

The United Nations Global Compact

The Global Reporting Initiative (GRI) Sustainability Reporting Guidelines

Accountability 1000 (AA1000)

The Social Accountability International SA8000 standard.

There are some common features to all these guidelines on corporate social responsibility. The International Institute for Sustainable Development (IISD) drew on these codes of practice and in 2007, issued a report concerning the implementation of CSR in business. Some of the areas that CSR cover according to this report are:

Corporate governance and ethics

Health and safety

Environmental stewardship

Human rights

Sustainable development

Community involvement

Corporate philanthropy

Accountability, transparency and performance reporting

Anti-bribery and anti-corruption measures.

Many of these practices are today being implemented by firms worldwide. For instance, the United Nations Global Compact (UNGC) was proposed by Kofi Annan in 1999 and it included 10 principles regarding the way business is carried out that firms had to integrate into their practices. By 2008, over 4000 organizations from over 100 countries were members of this compact (Heslin and Ochoa 2008). Furthermore, a KPMG survey (2008) reveals that nearly 80% of the biggest companies in the world, as per the Global Fortune 250 (G250), publish reports regarding corporate social responsibility and even more of them include corporate responsibility information in their annual reports. Companies in the U.K. and Japan disclose the most on their social activities while in countries like Brazil or South Africa, social information is being integrated in annual reports more and more by firms.

The adoption of CSR practices and their subsequent disclosure in reports is not just about satisfying stakeholders demand. According to the same survey, there is a strong business case behind social reporting. The WBSCD (1998) identifies a number of advantages that firms can benefit from provided they develop a reliable CSR strategy.

Risk management is one of the benefits from CSR that the WBSCD (1998) identifies. Heal (2004) underlines the importance of CSR in minimizing potential conflicts with external stakeholders in society, in particular NGOs. He argues that the cost of conflicts with such groups can be very high, causing a lot of damage to the reputation of a business and lead to a fall in market share and value of the firm.

Another argument in favour of CSR put forward by the WBSCD is that it allows firm to identify and develop new markets. Heslin and Ochoa (2008) support this argument, positing that strategic CSR programs can enable firms to learn about possible business opportunities while actively helping with social problems. Knowledge gathered from such endeavors can help build up the organization's competencies.

THE IISD Report (2007) mentions that corporate social responsibility can enhance a company's ability to recruit and retain staffs, due to pride in the company's practices or products or better human resource policies. Moreover, Heal (2004) goes on to say that companies with good CSR record tend to have a more motivated workforce than others.

Easy access to capital is also an advantage that socially responsible firm can gain. According to Heal (2004), socially responsible investing (SRI) can enable a firm to reduce its cost of capital. Moreover, Sparkes and Cowton (2004) note that SRI is increasingly being adopted by a wider range of investors, including large investment institutions. As such, a good social record can help a company attract such investors more easily.

A number of other benefits such as improved relations with regulators, increased competitiveness, and ability to build supply chains are mentioned in the IISD (2007) report.

Criticisms of CSR

Although corporate social responsibility has been widely accepted by companies and is now common practice, the concept has suffered a lot of criticism over the years. The famous economist Milton Friedman is the most outspoken critic of CSR, arguing that the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders would undermine the very foundations of our society (Friedman 1962). Some of the major arguments against CSR are:

Friedman (1962) argues that the business function is economic and as such it should be driven by economic motive only; action guided by anything other than the profit maximization goal impairs the economic efficiency of the business and represents a cost to those who will suffer from this inefficiency, mostly shareholders. In the same vein, Simon et al (1972) notes that if businesses are to consider factors other than profit maximization then it would be at the expense of profits.

There is a competitive disadvantage argument against the practice of CSR, positing that social action will represent a cost to the firm and will eventually lead to a loss in competitiveness. Organizations not involved in socially responsible activities will be more cost-efficient than their counterparts.

Another point noted by Friedman (1962) was that even if businesses do have a social responsibility other than profit maximization, then how should they know what it is. This argument suggests that firms may not be competent to address social issues because they do not have the technical skill required or because other institutions, like the government, are more apt at dealing with these problems. As Vogel (1978) notes, many of the social ills do not present much scope for corporations to solve them.

A further argument we find in the literature is that of legitimacy. Critics of CSR state that social issues are the responsibility of the government, not of businesses. Silk and Vogel (1976) note that the business person feels contributions outside the scope of business should be voluntary and that the government has legitimate social concerns which businesses support through the payment of taxes. Therefore, businesses should stick to their corporate activities and leave social ones in the hands of the government.

Although these arguments carry some weight, Simon et al (1972) notes that businesses should not completely ignore the consequences of their activities on society; they should at least attempt to correct the wrongs that result from their actions.

The Case of Mandatory versus Voluntary CSR

The government of Mauritius took a bold step in making CSR an obligation. Yet, this decision is subject to debate. The role of CSR in the development of countries has been discussed from several points of view. For instance, Matthew (2004) contends that corporate social responsibility is most effective if it is voluntarily undertaken by firms. Government intervention should be limited to providing the necessary conditions that will promote good corporate citizenship. This view supports the idea that government intervention impedes the proper functioning of the free economy and creates inefficiencies (Utting 2005).

On the other hand, there are those who assert that voluntary CSR is bound to fail. Engaging in social responsibility imposes a cost on firms which is not recovered. As such, given the lack of profit potential of such initiatives, it is unlikely that firms will adopt CSR. Utting (2005) suggests that regulation of social activities is required in the case of multi-national companies establishing themselves in countries all over the world. This view can be applied to local businesses as well, especially where the profit motive is expected to outweigh all over considerations.

Both claims have its strengths and weaknesses. Mandatory CSR could well be a good thing for Mauritius which encourages foreign businesses to set up through its low tax regime; it ensures that businesses contribute to the welfare of society.