What is Corporate social responsibility

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Since the early 1990's, corporate responsibility issues including the social obligations of corporations have attained importance in political and business debate. This is mainly in response to corporate scandals but also due to the realization that development centered only on economic growth paradigms is unsustainable and therefore there is a need for a more pro-active role by states, companies and communities in a development process aimed at balancing economic growth with environmental sustainability and social cohesion. Early roots of corporate social responsibility can be found in the actual business practices of successful companies and early theoretical views in the 1950s and 60s linked corporate social obligation to the power that business holds in society. Theoretical developments are currently broadly subdivided into the ethical and accountability issues and the stakeholder approaches to strategic management. 

The entirety of CSR can be distinguished from the three words contained within its title phrase: 'corporate,' 'social,' and 'responsibility.' Therefore, in broad terms, CSR covers the responsibilities corporations (or other for-profit organizations) have to the societies within which they are based and operate. More specifically, CSR involves a business identifying its stakeholder groups and incorporating their needs and values within the strategic and day-to-day decision-making process. Therefore, a business 'society' within which it operates, which defines the number of stakeholders to which the organization has a 'responsibility,' may be broad or narrow depending on the industry in which the firm operates and its perspective. This can be illustrated by the diagram below:

Companies need to answer to two aspects of their operations:

1. The quality of their management - both in terms of people and processes (the inner circle).

2. The nature of, and quantity of their impact on society in the various areas.

Outside stakeholders are taking an increasing interest in the activity of the company. Most look to the outer circle - what the company has actually done, good or bad, in terms of its products and services, in terms of its impact on the environment and on local communities, or in how it treats and develops its workforce. Out of the various stakeholders, it is financial analysts who are predominantly focused - as well as past financial performance - on quality of management as an indicator of likely future performance.

There seems to be an infinite number of definitions of CSR, ranging from the simplistic to the complex, and a range of associated terms and ideas (some used interchangeably), including 'corporate sustainability, corporate citizenship, corporate social investment, the triple bottom line, socially responsible investment, business sustainability and corporate governance'. It has been suggested that 'some…researchers…distort the definition of corporate social responsibility or performance so much that the concept becomes morally unintelligent, conceptually meaningless, and utterly unrecognizable'(Orlitzky 2005); or CSR may be regarded as 'the universal remedy which will solve the global poverty gap, social exclusion and environmental degradation' (Van Marrewijk 2003).

Some accepted definitions of CSR are:

The notion of companies looking beyond profits to their role in society is generally termed corporate social responsibility (CSR)….It refers to a company linking itself with ethical values, transparency, employee relations, compliance with legal requirements and overall respect for the communities in which they operate. It goes beyond the occasional community service action, however, as CSR is a corporate philosophy that drives strategic decision-making, partner selection, hiring practices and, ultimately, brand development.

South China Morning Post, 2002

The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time.

Archie B. Carroll, 1979

CSR is about businesses and other organizations going beyond the legal obligations to manage the impact they have on the environment and society. In particular, this could include how organizations interact with their employees, suppliers, customers and the communities in which they operate, as well as the extent they attempt to protect the environment.

The Institute of Directors, UK, 2002

Why is CSR relevant today?

CSR has become famous in the language and strategy of business and by the growth of dedicated CSR organizations globally. Governments and international governmental organizations are increasingly encouraging CSR.

CSR is rapidly becoming a major part of all business management courses and a key global issue because of three identifiable trends:

Changing social expectations

Consumers and society in general expect more from the companies whose products they buy. This sense has increased in the light of recent corporate scandals, which reduced public trust of corporations, and reduced public confidence in the ability of regulatory bodies and organizations to control corporate excess.

Increasing affluence

This is true within developed nations, but also in comparison to developing nations. Affluent consumers can afford to pick and choose the products they buy. A society in need of work and inward investment is less likely to enforce strict regulations and penalize organizations that might take their business and money elsewhere.

Globalization

The growing influence of the media sees any 'mistakes' by companies brought immediately to the attention of the public. In addition, the Internet fuels communication among like-minded groups and consumers-empowering them to spread their message, while giving them the means to co-ordinate collective action (i.e. a product boycott).

These three trends combine with the growing importance of brands and brand value to corporate success (particularly lifestyle brands) to produce a shift in the relationship between corporation and consumer, in particular, and between corporation and all stakeholder groups, in general.

The result of this mix is that consumers today are better informed and feel more empowered to put their beliefs into action. From the corporate point of view, the market parameters within which companies must operate are increasingly being shaped by bottom-up, grassroots campaigns. NGOs and consumer activists are feeding, and often driving, this changing relationship between consumer and company.

CSR is particularly important within a globalizing world because of the way brands are built-on perceptions, ideals and concepts that usually appeal to higher values. CSR is a means of matching corporate operations with stakeholder values and demands, at a time when these values and demands are constantly evolving.

CSR can therefore best be described as a total approach to business. CSR creeps into all aspects of operations. Like quality, it is something that you know when you see it. It is something that businesses today should be genuinely and wholeheartedly committed to. The dangers of ignoring CSR are too dangerous when it is remembered how important brands are to overall company value; how difficult it is to build brand strength; yet how easy it can be to lose brand dominance.

CSR is, therefore, also something that a company should try and get right in implementation.

Theoretical Frameworks and CSR Disclosure

The Legitimacy Theory

While there is no generally accepted theory for explaining CSR disclosure practices, recent research in the CSR literature has primarily relied on legitimacy theory (Deegan 2002, p. 285). Indeed, "it is probable that legitimacy theory is the most widely used theory to explain environmental and social disclosures" (Campbell, Craven and Shrives, 2003, p. 559) while, according to Gray, Kouhy and Lavers (1995), legitimacy theory has an advantage over other theories in that it provides disclosing strategies that organisations may adopt to legitimate their existence that may be empirically tested.

The Legitimacy theory, according to Ness & Mirza (1991), argues that the voluntary disclosure of social responsibility information can be perceived as a strategy to reduce political costs. Social theory reporting has been explained from a Legitimacy Theory perspective

LT has been considered as widely accepted theory to shed light on social reporting practices of a firm. It states that firms will take actions to ensure that their operations are obvious to be legitimate from the point of view of the society within which the organization is assumed to operate. That is, they will attempt to establish resemblance between social values associated with or indirect by their activities and the norms of acceptable behavior in the larger social system of which they are part.

Legitimacy Theory specifies a social contract between the organisation and society. Legitimacy is defined by Lindblom (1992) as:

"...a condition or status which exists when an entity's value system is congruent with the value system of the larger social system of which the social system of which the entity is a part. When a disparity, actual or potential, exists between the two value systems, there is a threat to the entity's legitimacy".

Hence, Legitimacy Theory implies that managers will not undertake any actions that will be considered as illegitimate in society. By engaging in social reporting, they tend to enhance the relevance of the financial statement as well as that of earnings by making people to believe in the reliability of what is being reported in the financial statements and by providing additional information on issues other than earnings and financial information. This may however redirect the interest of users away from the earnings figure.

Institutional theorists (e.g Fogarty, 1992) observe that organizations need to respond to social expectations. Public expectations have undergone significant changes in the last decades such that profit maximization is not the sole measure of performance expected from the economic entity. There are a lot of implicit and explicit expectations from society vis-a-vis the operations of the organization. According to Heard & Bolce (1981), with sensitive societal expectations, it is anticipated that successful businesses will react to attend to human, environmental and other social consequences of their activities.

In spite of being unregulated, social and green reporting has increased in annual reports of organizations. Empirical tests of the Legitimacy Theory by Hogner (1982) revealed that the extent of social disclosures in the annual reports varied in response to society's expectations of corporate behaviour. Deegan & Rankin (1996) found that prosecuted firms for environmental charges increased their green reporting while Gray, Kouhy & Lavers (1995) found that firms use corporate social reporting to fill the legitimacy gap.

It is assumed that the economic entity will have the 'legitimate' right to continue to operate in society to the extent that it fulfils the societal expectations. Otherwise, there will be a breach in the social contract between the entity and the society, and sanctions, such as fines, legal actions, and a fall in the demand of its product, will be taken. Society may revoke the organization's 'licence to operate' or contract to continue its operations, for instance. Under Legitimacy Theory, not only the rights of investors are considered, but a much bigger picture of the public at large is considered.

Furthermore, it is also expected that the organisation for its survival will have to adapt to the changing expectations of society. Downling & Pfeffer (1975) refer to communication strategies, that the entity can use in order to legitimate or maintain the legitimacy of its activities. Reference is made to the public disclosure of information, in annual reports, for instance, to inform and educate the public about the activities and performance of the firm and hence the manipulation of society's expectations, is made. In the same vein, they argue that one of the functions of annual reports would be to legitimate the existence of the organisation. Therefore, Legitimacy Theory proposes a relationship between corporate disclosures and societal expectations, as evidenced by a lot of research (Deegan & Ratkin (1996); Gray,Kouhy & Lavers).

Stakeholder Theory

Stakeholder theory (Gray, Kouhy & Lavers 1995b, p. 53) state that "the corporation's continued existence requires the support of the stakeholders and their consent are required and hence the activities of the business are adjusted according to that approval. The more powerful the stakeholders, the more the company must adapt. Social disclosure is thus seen as part of the dialogue between the company and its stakeholders".

Within the Stakeholder's point of view, the success of a business depends on its capacity to balance the differing demands of its various stakeholders. The definition of 'stakeholder' has altered considerably over the past four decades. At one end of the range the shareholder was believe the sole or principal stakeholder. This definition was based on arguments proposed by the Noble prize winner, Mr. Milton Friedman's view. According to him, the sole moral responsibility of a business is to maximize profits.

Freeman (1983), however, expands the definition of stakeholder to include a broader selection of constituents including opposing groups such as interest groups and regulators. He defines stakeholders as "any group or individual who can affect or is affected by the achievement of the organisation's objectives". Stakeholder Theory holds that managers ought to serve the interests of all those who have a "stake" in the firm. Stakeholders include shareholders, employees, suppliers, customers and the communities in which the firm operates - a collection which Freeman terms the "Big Five". Therefore, all groups in an area in which the firm operates and all individuals in such area are stakeholders.

Given that CSR reporting is attempted to underline how the company relates to society in the course of its different social activities, the stakeholder theory can be seen as a guideline which will direct firms to have proper way of disclosing CSR as they will know what type of actions stakeholders are expecting from them.

Corporate Governance

Corporate governance is the set of procedure, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.

Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business know-how, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes.

An essential part of corporate governance is to make sure the accountability of certain individuals in a business through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world

Principles of corporate Governance

Fundamentals of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.

More important is how directors and management develop a model of governance that line up the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.

Commonly accepted principles of corporate governance include:

Rights and equitable treatment of shareholders: company should respect the rights of shareholders and help shareholders to implement those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should be aware of the legal and other obligations that all legitimate stakeholders have.

Role and responsibilities of the board: The board needs a variety of skills and understanding to be able to deal with various business issues and have the aptitude to review and challenge management performance. It needs to be of adequate size and have an apt level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.

Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations, but it is also a crucial part in risk management and avoiding lawsuits. businesses should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

Disclosure and transparency: Organizations should simplify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement measures to independently validate and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Nevertheless "corporate governance," despite some weak attempts from various quarters, remains a vague and often misunderstood expression. For quite some time it was confined only to corporate management. It is something much broader, for it must include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment), and the commitment to run a transparent organization- these should be constantly evolving due to interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector.

CSR disclosure and CG

In our time awareness for CG has not only been increased but the concept has greatly been broadened. For example, it has started to envelop some areas normally viewed as being part of CSR. Following after accounting and ethical scandals in firms such as Enron, WorldCom, Ahold and Parmalat, firms are inclined to strengthen CG mechanisms concerning boards and its compositions, managers and auditors, control and risk, as well as the ethical aspects related to remuneration, managerial and employee behavior including whistleblower and complaint provisions for the organizations. In view of the fact that bank and other financial institutions generally experience higher stresses to be transparent and disclose information about major strategic decisions to stakeholders it has demanded increased requirements for other types of information above and beyond economic information.

In a preface to a report by the Global Corporate Governance Forum, Claessens states that ''in its broadest sense, CG is concerned with holding the balance between economic and social goals and between individual and communal goals'' (Claessens, 2003, p. 7). Maier (2005) suggested a broader definition of CG scope ''corporate governance defines a set of relationships between a company's management, its board, its shareholders and its stakeholders. It is the process by which directors and auditors manage their responsibilities towards shareholders and wider company stakeholders. For shareholders it can provide increased confidence of an equitable return on their investment. For company stakeholders it can provide an assurance that the company manages its impact on society and the environment in a responsible manner'' ( p. 5).

While the message mentioned by Maier is very coherent, one could expect such an approach from representatives of the fair investment community. Given that stakeholder interests are accounted for, it has been suggested that firms are to be bear in mind their degree of dependence on a stakeholder for resources (McLaren, 2004). The literature revealed that CG has a considerable impact on CSR issues within the organizations such as employee conditions (Deakin and Whittaker, 2007) and ethical aspects related to remuneration, managerial and employee behaviour (Ryan, 2005; Wieland, 2005). Research studies (Dahya et al., 1996; Carter et al., 2003; Branco and Rodrigues, 2008) also documented the likely impact of CG elements on firms' CSR disclosure initiatives the detailed of which are addressed in the next section.

CSR Disclosure and Corporate Governance in Mauritius: an overview

CSR reporting has traditionally been observed in developed countries but now it is gaining more and more importance in developing countries as well. Currently, in Mauritius, CSR disclosure is receiving significant interest, especially after the law in the finance act which stipulates every company must invest two percent of its book profit, even though CSR reporting is not mandatory. However the main issue which arises is that there are many international standards which may help firms in Mauritius to implement CSR activities but there are no disclosure requirements for social reporting. CSR disclosure can be in a modest way as supplement to usual financial reports.

On the other hand the corporate governance has gained prominence in Mauritius since few years. In September 2001, the Committee chaired by Tim Taylor was entrusted with the mission of enhancing the corporate governance environment of Mauritius, including the introduction of a Code. Corporate governance also got greater importance recently following the series of corporate scandals and failures in the US and Europe. Mauritius too has not been spared from corporate malpractice, and the restoration of public confidence in business practices has been accompanied by a fundamental reassessment of its corporate governance regime.

While corporate governance may be easy to understand, it is hard to achieve. To improve corporate governance, financial and non-financial disclosure must be of higher quality, and management should bear more independent oversight by a strengthening of the role and independence of both directors and external auditors. The level of financial and other disclosure has already been significantly enhanced under the Listing Rules and the Companies Act 2001, which requires adherence to International Accounting and Auditing Standards.

Hence following the rules which has been set up concerning CSR and corporate governance

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.