This essay will aim to convey the various definitions of what corporate social responsibility is and its importance in contemporary business management. In addition to this, this study will aim to show what happens to firms which ignore its external environment leading to a failure to adopt an ethical or socially responsible way of trading. In contrast, this essay will also sum up the real benefits of corporate social responsibility and the possible reasons as to why a firm may ignore it.
There are many definitions as to what corporate social responsibility is; Investopedia (2012) defines corporate social responsibility as "a corporate initiative to assess and take responsibility for the firm's effects on the environment and impact on social welfare". Similarly, McWilliams et al (2006) defines corporate social responsibility as the notion of a firm going beyond compliance and engaging in actions that promote social good, beyond the interests of the business and that which is required by law. However, these are just two definitions of corporate social responsibility. Numerous definitions of corporate social responsibility have been proposed and often no clear definition is given, making the actual measurement of corporate social responsibility itself and its influence rather difficult. Some firms choose to embark on social reporting to somewhat measure their impact on their external environment (Morrison, 2006).
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Recently, corporate social responsibility has become fundamental in management as it has the potential to allow a firm to survive in a volatile market environment. In such markets, where consumer preferences become more and more irregular and multifarious, adopting a socially responsible strategy could be seen as a dominant tool for survival; as multiple stakeholders increasingly demand that firms are to be held accountable for their actions (Werther and Chandler, 2005). A study conducted by FTSE aiming to decipher the roles in which corporate boards should play in directing CSR found that they should be responsible for: setting values and standards, developing a socially responsible strategy, being constructive in regards to regulation, using internal controls to assign responsibility and creating a culture of integrity whilst taking into account the circumstances, threats and challenges specific to their markets (Moskowitz, 2008).
Many companies however, have neglected CSR and have ended up paying for it with their reputations and revenue. In the early 1990's Nike faced a huge consumer backlash due to its somewhat disturbing practices at its Indonesian suppliers - a topic which was reported by many news corporations all over the world; the public responses surprised Nike as they hadn't previously thought that this was part of their business responsibilities. Similarly, this also happened to Royal Dutch Shell in 1995, when they decided to sink the Brent Spar which could have potentially ruined the surrounding marine ecosystem - this lead to widespread Greenpeace protests which hit international headlines forcing RDS to revert on their decision (Porter and Kramer, 2006).
Such events shows that many of these activist organisations do indeed hold a lot of clout amongst many of a firm's external stakeholders - as Porter and Kramer (2006) outlines that aggressive activist organisations have grown more effective in bringing public pressure to bear on firms. Having said this, whether the issue at hand is small or poses a minimal disturbance to society; activist organisations are able to draw media attention to it and magnify it.
Another firm which took a blow from being socially irresponsible was BP. The Deepwater Horizon oil spill of 2010 resulted in a spillage affecting majority of America's southern coastal communities saw the death of 11 people and extensive damage to marine wildlife; in addition to this, the fishing and tourism industries. The American Government found that BP attempted to minimise costs on such a dangerous project thus causing the spillage, the Government also found that within the Petroleum industry, firms aren't taking their social responsibility issues serious enough and on that note without effective government oversight and regulation, many Petroleum firms such as BP will not attempt to reduce the risk of spillages for the good of society or have contingency plans in place to combat emergency situations, consequently BP plc were fined $4.5bn dollars and their share price took a massive blow on the stock market - leading to billions being wiped off BP's value. This concludes that unethical or socially irresponsible activities can seriously damage a firms integrity, reputation and furthermore, result in devastating outcomes for society.
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Having said that, good public relations and a clean reputation appears to be the main justification for firms adopting a socially responsible role in its external environment, alongside three other main motives; moral appeal, sustainability and competitive advantage in order to reduce the risk of the public scrutiny firms like BP, Royal Dutch Shell and Nike have come under in recent years.
A study of consumer attitudes towards socially responsible behaviour by Mohr et al (2001) indicates that many consumers believe that the firm should take responsibility for their impacts on society, this was further correlated with purchasing behaviour becoming increasingly responsive to social responsibility. This perhaps implies a change in consumer preferences; consumers are becoming more socially aware and thus demand that firms are also taking responsibility - when met, this gives the firm a better perception to consumers than its competitors. Moreover in order for a firm to be sustainable, it must be socially aware, environmentally aware and economically aware, in other words; bearable, viable and equitable, this ties in with the United Nations (2005) three pillars of sustainability. Ex-Norwegian Prime Minister Gro Harlem Brundtland defined firm sustainability as environmental and community stewardship which allows a business to meet the needs of the present without totally compromising the ability of future generations to meet their own needs (Porter and Kramer, 2006).
Furthermore, the above factors gives the firm a competitive advantage. Making it not only more appealing to potential consumers, but also potential investors; given that the green/ethical movement is becoming a recent trend, a firm can respond to this by socially reporting its ethical activities and possibly measure it to analyse the added value by undertaking a socially responsible strategy. In addition to this, many theorists suggest that corporate social responsibility can bring a long term financial benefit in terms of consumer loyalty and an influx of new socially aware customers to firms given a change in consumer preferences and trends (Lipsey and Chrystal, 2011), this means that the ethical revenues earned could outweigh the costs of being socially responsible; perhaps posing a benefit to the firm rather than a costly disadvantage. Conversely, Corporate Watch (2011) hints that CSR can be seen as a scheme for firms to avoid regulation and scrutiny from Government quangos.
Alternatively, many firms may choose to ignore undertaking CSR as a strategy because it's costly and there is no hard evidence to show or forecast that such a strategy will equate to sustained margins or revenue. Corporate Watch (2011) argues that CSR is very much invisible and goes un-noticed, even to the external stakeholders it may benefit. CSR has come under fierce scrutiny from critics who describe the strategy as a costly attempt to 'greenwash' consumers by appealing to their consciences and desires, whilst simultaneously covering up any underlying malpractices and negative impacts on society.
Yet, many firms may also view CSR as rather minor and less of a priority given the dire state of the economy, embarking on such a costly and highly uncertain strategy which may only pay off in the long term might not be desirable for a firm trying to oust competitors and lift itself from the economic crisis in the short to mid-term as doing what's best for society means sacrificing profits (Lipsey and Crystal, 2011). MIT (2010) illustrates that managers who forgo profits for the common good of society are in effect imposing a 'social tax' on their shareholders and subjectively making a decision on how this should be spent. Karnani (2012) from the Wall Street Journal conveys that as social responsibility is just a financial calculation for executives; the only way to influence a corporate decision is to impose an unacceptable cost by mandates, taxes and media humiliation on socially unacceptable behaviour.
In summary, it can be argued that as the CSR concept gains more influence, it will become more and more significant for all firms to adopt in order to stay economically buoyant; but also to avoid harsh regulation and scrutiny or backlash from its stakeholders. If a firm is able to assess its impact on its wider external environment and stakeholders, this gives it to some extent, a competitive edge over its rivals as it's a strategy which appeals to many more consumers - as the study by Mohr et al (2001) suggests. One could argue that going the right thing for society (as a firm) could be perceived as being a by-product of their pursuit for growth and achieving targets in tough economic times.
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It can also be concluded that firms who choose to ignore their corporate social responsibilities suffer in many different ways - they can come under pressure to change their trading activities by aggressive activist groups, the media and ultimately the government, thus leading to a sense of distrust amongst consumers; this results in a huge financial loss and/or potential fines for unethical behaviour. Porter and Kramer (2006) draw upon awaiting legislation in the UK which will require all publicly listed firms to publish social reports - including all social, environmental and ethical risks - which many firms are engaging in today; of the 250 largest multinational firms, 64% regularly publish social reports. This puts the view forward that firms are indeed recognising their responsibilities and may not continue to ignore CSR - as it could be their long term strategy to success.
The only down side to social reporting is the sheer ambiguity in data analysis. This leads to the following questions; How is it possible to measure qualitative results/results on social factors and compare them against others? Can social reporting be standardised like financial statements and reports? and what is the true benchmark of being socially responsible, what does this entail? - Once these queries are fully answered then the business world may be fully ready to adopt social reporting as a complimentary statement to a financial one; whereby stakeholders can not only assess the firm's performance internally, but externally too (Tayeb, 2000).