Critical Reflection On Corporate Social Responsibility Projects Accounting Essay
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The aim of this paper is to provide a critical reflection considering the ethical point of view of the CSR projects which companies are increasingly launching with the global emerging trend of corporate social responsibility in the business world today. The purpose is to evaluate the objectives of these campaigns, comparing if they are rather actions targeting profits or/and better corporate image or if they are truly altruistic actions driven by the increase of the concern involving the global issues nowadays.
WHAT IS THE PURPOSE OF A CORPORATION?
Indubitably, this question has been widely discussed for many years, as great theorists show different point of views, arguing that either the primary objective of an organization is to maximize value or to be devoted to its mission and essentially satisfy the stakeholders' needs.
Basically there are two main theories: shareholder value theory and 'stakeholder' theory. The first one argues that the only objective of a company is to maximize profit and generate value to its shareholders. At the other extreme is the 'stakeholder' theory, which suggests that the organization not only should make profits and create value to the shareholders but also please their stakeholders, such as customers, employees, suppliers, local communities, and society at large. (Morgan Stanley, 2008)
One of the earliest precursors of the shareholder value theory is Milton Friedman that emphasized once:
'So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no they do not.' (Friedman, 1974)
On the other hand, Dave Packard the co-founder of the Hewlett Packard proposed a distinctive cause for company existence:
'I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company's existence, we have to go deeper and find the real reason for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately'they make a contribution to society, a phrase which sounds trite but is fundamental.' (Packard, 2002)
The ground of the stakeholder theory is not far from the corporate responsibility concept or trend, which undeniably attract much attention in the last years. As the theory, CSR objective is to determine all the stakeholders and pursue a 'balance' between the main concerns and goals of each one of those (Morgan Stanley, 2008). While Friedman's and Packard's points of views represent extremes opinions, others have promoted a mid-term approach. Peter Drucker, for example argued that a middle ground is essential for one business to be considered successful as illustrated on the statement bellow:
'A business that does not show a profit at least equal to its cost of capital is socially irresponsible; it wastes society's resources. Economic profit performance is the base without which business cannot discharge any other responsibilities, cannot be a good employer, a good citizen, a good neighbor. But economic performance is not the only responsibility of a business' Every organization must assume responsibility for its impact on employees, the environment, customers, and whomever and whatever it touches. That is social responsibility.' (Drucker, 1954)
All in all, the fact is that there are many diverse opinions among specialists and executives. Therefore, in my opinion the CSR of one company is influenced mainly according to the beliefs and values of its leaders, especially the CEO, rather than the mission statements of the organization.
CORPORATE SOCIAL RESPONSIBILITY IS INCREASING AS A TREND BUT DECREASING WITHIN COMPANIES
Before analyzing more extensively the corporate social responsibility as a trend within the companies, I truly believed that the CSR practices were substantially increasing. However after reading the 2008 Morgan Stanley publication about the topic, I was surprised with the results.
Considering the methodology utilized by Morgan Stanley, It seems that the overall 'real' concern of CSR is decreasing over the last 15 years. Although the organizations might be investing more in CSR projects, the damage/harmfulness caused by the companies is increasing on larger scale. So, this means that the negative actions are not being covered by CSR practices. Instead, the careless with CSR is increasing much more than the projects as could be analyzed in the table below. KLD defines a set of potential strengths (for example, 'charitable giving') and a set of potential concerns (e.g., 'hazardous waste'). For each company, KLD assigns a value of '1' if the strength or concern exists and a '0' otherwise.
(Morgan Stanley, 2008)
In conclusion, besides the strengths are increasing, the concerns are rising more rapidly and the net value of the strengths minus concerns is decreasing each year. Evidently, that the result presented could be argued and probably other studies with different methodologies could show diverse outcomes. However, I personally like the methodology because not only shows what companies are doing well but also consider what they are doing wrong. Nevertheless, in my opinion does not matter if they are investing more if they are depreciating even more.
Even though, companies are not emphasizing CSR as I would expected so, unquestionably the trend is increasing within the society, followed by the pressure for new management practices and concerns with the environment.
A good evidence to illustrate that hypothesis is the rise of the relevance and coverage of this topic at the universities. One study conducted by Lisa Jones Christensen in 2007, aimed to further investigate the importance of CSR, Ethics and Sustainability at the top 50 global MBA programs. The results showed that 84% of the schools that responded oblige students to take courses of one or all of these subjects. Even more 25% represented a stand-alone course. Comparing with The Ethics Resource Center study conducted in 1988, when 75% of Ethics, CSR, and Sustainability Education were a required part of the program and only 5% of the MBA programs required a separate course on ethics. (Christensen, Peirce, Hartman, Hoffman, & Carrier, 2007)
Summarizing, in my point of view CSR is a relevant subject and it is an increasing trend among the society, however companies are not giving the importance they should to these practices. Moreover, as will be presented on the next section, companies could gain more profits with a different approach of CSR.
COMPANIES INVEST IN CSR AS MEANS TO MAXIMIZING VALUE OR TO DO 'THE RIGHT THING' AS AN END ITSELF?
As Michael Jensen discuss in the article 'Value Maximization, Stakeholder Theory, and the Corporate Objective Function', published by the Journal of Applied Corporate Finance in 2001, there are two alternative reasons for organizations to finance CSR initiatives. The first one is known as the 'moral' theory, which CSR considers organizations as 'good corporate citizens' by losing profits when necessary to serve other stakeholders, including society at large (Jensen, 2001). Above all, corporations have responsibilities to their customers, employees, and communities that should be given at least equal priority with their economic goals for their shareholders. On the other hand, the economic theory for CSR suggests it as a positive-NPV investment. More simply, presume CSR as the same as any business investment decision: Invest in all essential stakeholders if there are expected returns, at least equivalent to the cost of capital. (Morgan Stanley, 2008)
Nevertheless, the main question to address is why companies are investing in CSR? For economic reasons, expecting returns, or they are really concerned and are investing with 'moral' arguments? To answer that question, once again I will reference the Morgan Stanley study.
The article states the premise that corporations that are more disposed to reduce shareholder returns for stakeholders would probably invest not only to increase their CSR strengths but also to decrease their CSR concerns. In other words, those organizations would adopt the idea of 'First, do not harm.' Therefore, such companies would make efforts both to increase their CSR strengths and reduce their CSR concerns. In contrast, companies concerned with the returns of the investment in CSR would give priority on building their strengths, as many of them do it to make a public demonstration of one's progress, instead of focusing their efforts to address the weaknesses. Especially because usually is very costly to eliminate many CSR concerns.
As I predicted, the results shows that companies invest on CSR projects primarily to maximize value rather than endorse stakeholder commitments as an end in itself. This means that businesses are financing CSR to strengthen their attributes instead of eliminating the CSR concerns.
However, the most interesting factor is that the same research found that companies with more CSR strengths or fewer CSR weaknesses presented higher returns. This suggests that financing CSR initiatives generates profit and long-term value maximization, as could be observed in the graph below. Even more, companies which focus on reducing the concerns and thinks primarily on the stakeholders rather than profits, in a long run makes better results that corporations which allocate resources on strengthen their CSR attributes and have the economic approach. In other words, being ethic and altruistic considering the investments is more profitable! (Morgan Stanley, 2008)
(Morgan Stanley, 2008)
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