No Universally Agreed Definition Of Corporate Social Responsibility Management Essay

With no universally agreed definition of Corporate Social Responsibility, myriad of terms – Corporate accountability, Corporate sustainability, Corporate citizenship or Sustainable responsible business – have been used interchangeably to describe the practice of CSR. Basically, CSR is a discharge of duty towards society. Business and society are interrelated rather than being distinct entities and therefore, society has certain expectations for appropriate business behaviour and outcomes (Wood, 1991). According to Mallen Baker (2004), CSR is about how companies manage business operations to produce positive impact on society. Consequently, companies need to account for the quality of their management (both in terms of people and process) and the nature of and quantity of their impact on society in various areas.1

In the 1950’s, Howard Bowen first published a seminal book “Social responsibilities of businessman” in which he famously posed the question “What responsibilities to society may businessman reasonably be expected to assume”. This publication evidently marked the beginning of a modern era of CSR as it we know it today (Carroll, 1999). Since then, the notion of CSR has come to dominate the society-business interface and various theories and concepts have been proposed. According to Bowen (1953), social responsibilities refer to “the obligation of businessman to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of objectives and values of our society”.

The most applied definition of CSR comes from Archie Carroll (1979) who argues that “the social responsibility of business encompasses economic, legal, ethical and discretionary expectations that society has of organisations at a given point in time”. This approach encompasses a whole range of responsibilities of a firm. In the same vein, Lichtenstein et al. (2004) and Lindgreen et al. (2008) consider that “an organisation needs to define its role within the society and implement the necessary ethical, responsible, legal and social standards to their firm”. Conversely, GÓssling and Vocht (2007) described CSR from a different viewpoint as an obligation of the business world to be accountable to its entire stakeholder – customers, employees, shareholders, communities and ecological consideration in all aspects of their operations (Gokulsing, 2001).

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2.1.1 Corporate Social Responsibility & Corporate Social Performance

The current globalisation trend and growing demand from stakeholders towards companies to adopt CSR practices within their business strategy have indeed encouraged companies’ involvement in such practices (Chapple and Moon, 2005). Therefore, companies that are considered as socially responsible are experiencing triple bottom line benefits associated with such social initiatives. Additionally, companies are not only assessed via traditional performance indicators but also by the way they interact with broad set of social demands. However, CSR being impossible to measure (Van Beurden & Gossling, 2008), an observable and measurable outcome of CSR term Corporate Social Performance (CSP) is used to capture the performance of CSR strategies within the society.

Carroll (1979) vaguely defines CSP construct as “a three dimensional model that consisted of social responsibility categories, social issues and philosophies of social responsiveness”. Building on Carroll’s attempt to define CSP, Wartick and Cochran (1985) offer a general framework of CSP by defining CSP model as the “underlying interaction among the principle of social responsibility, the process of social responsiveness and the policies developed to address social issues and show how several competing perspectives (economic responsibility, public responsibility, social responsiveness) can be incorporated into his framework”. Nevertheless, Wood (1991) argues that although Wartick and Cochran (1985) model is innovative, it is still incomplete. Wood (1991) asserts that the term “performance” relates to actions and outcomes and not interaction and integration.

Consequently, Wood (1991) refine Wartick and Cochran’s (1985) model to integrate various theoretical perspectives into a coherent CSP model and as such, he defines CSP as “a business organisation’s configuration of principles of social responsibility, process of social responsiveness and policies, programs and observable outcomes as they relate to the firm’s societal relationships”. Wood (1991) affirms that the “principles of social responsibility” operates at three levels specifically; institutional, organizational and individuals. Conversely, Gond and Crane (2010) define CSP as an “umbrella concept” which includes organisational process of environmental assessment, stakeholder management and various measures of its external output and societal manifestations (Orlitzky, 2008).

2.1.2 Forms of CSR initiatives

Basically, CSR includes a variety of socially responsible activities. Kotler and Lee (2005) identified six major initiatives under which most CSR related activities fall generating a positive impact on the company. The six different forms of CSR initiatives are as follows:

2.1.3 Main approaches of CSR

In response to the question “to whom an organisation has a responsibility”, Marrewijk (2003) presents a sequence review of three corporate responsibility approaches – Shareholder approach, Stakeholder approach and Societal approach.

2.1.4 Factors influencing level of CSR activities

Review of prior literature indicates that companies actually differ in how they implement their CSR strategies. This can normally be explained using a range of company level attributes that influence the company’s CSR participation. These attributes entail:

Company size

Waddock and Graves (1997) and Itkonen (2003) provide that company size is related to CSP since bigger companies have been found to be more socially responsible than smaller ones.

Type of industry

McGuire et al. (2003) argues that the type of industry plays an important role in identifying the level of CSR activities. For instance, the CSR activities differ from manufacturing sector to service sector (Kolk, 2003).

Financial risk

Orlitzky and Benjamin (2001) assert that a company with low CSP shall consider and manage its social responsibility since such a company will have an adverse impact in terms of risk.

2.1.5 Social Responsibility Models

The Pyramid of CSR

The professor Archie Carroll is one of the first academics to make a distinction between different kinds of organisational responsibilities. This distinction is referred to as a firm’s “pyramid of Corporate Social Responsibility”. The pyramid implies a hierarchy of responsibilities moving from economic and legal through more socially oriented ones of ethical and philanthropic responsibilities (Carroll, 1979; 1991).

http://www.witszen.com/wp-content/uploads/2011/02/carrollCSR.jpg

Source: (http://www.witszen.com/how-companies-should-use-social-media-for-better-corporate-social-responsibility/)

Economic Responsibilities

Carroll (1979) argues that business institutions are basic economic unit in society and have a responsibility that is economic in nature or kind. The economic responsibility is the most fundamental responsibility of a company which reflects the essence of a company as a profit-making business organisation. The remaining three kinds of social responsibility are based on the economic responsibilities. The economic responsibility implies that society expects business to produce those goods and services demanded and make a profit as an incentive or reward for the business’ efficiency and effectiveness.

Legal Responsibilities

The legal responsibilities entail expectations of legal compliance and playing the “rules of the games”. From this perspective, society expects business to fulfill its economic mission within the framework set forth by the society’s legal system (Jamali, 2008). Crane and Matten (2004) further adds that all companies attempting to be socially responsible are required to follow the law.

Ethical Responsibilities

According to Schwartz (2011), the ethical responsibilities embody those standards, norms or expectations that reflect a concern for what consumers, employees, shareholders and the community regards as fair, just or in keeping with the respect or protection of stakeholders’ moral rights. Therefore, society expects corporations to act ethically towards its stakeholders (Crane and Matten, 2004).

Philanthropic Responsibilities

These responsibilities which represents the smallest layer of the pyramid, involves the corporation’s willingness to enhance the quality of living of their stakeholders through charitable donations and organisational support that are entirely voluntary and seen as desirable by society. The philanthropic responsibilities are sometimes on the same level as ethical. However, the difference is that it is not seen as unethical behaviour if business does not contribute their money to humanitarian programmes (Carroll, 1991).

Carroll’s CSR Pyramid in Developing Countries

In a review of CSR in developing countries, Visser (2006) bases himself on the empirical studies undertaken by Pinkston and Carroll (1994), Edmondson and Carroll (1999) and Burton et al. (2000) to underline the fact that culture may have an important influence on perceived CSR priorities. As such, the widely accepted Carroll’s pyramid is revisited in the context of developing countries as shown below:

Source: Visser, W. (2006) Revisiting Carroll’s CSR Pyramid: An African Perspective, In E.R. Pedersen & M. Huniche (eds.), Corporate Citizenship in Developing Countries, Copenhagen: Copenhagen Business School Press

Visser (2006) contends that the order of CSR layers in developing countries – taken as relative emphasis assigned to various responsibilities – differs from Carroll’s classic pyramid. Hence, in developing countries, even if economic responsibilities still get the most emphasis, philanthropy is given the second highest priority followed by legal and then ethical responsibilities. This is explained partly by the traditional attachment to philanthropy by the fact that it is most direct way to improve living conditions in their immediate surroundings and also by a traditional culture of fatalism, dependence and assistance in developing countries (Ragodoo, 2009). Conversely, the pressure to comply with existing legislation is less as compared to the developed countries.

Three Domain Model of CSR

Schwartz and Carroll (2003) highlight certain limitations in Carroll’s CSR pyramid. Firstly, the pyramid suggests a hierarchy of CSR domains whereby one may conclude that the domain at the top is more important than the domain at the base. This is clearly not the kind of CSR priorities that Carroll intended in his CSR pyramid. Secondly, the pyramid framework cannot fully capture the overlapping nature of CSR domains. Hence, extrapolating from Carroll’s model, Schwartz and Carroll (2003) proposed an alternative approach to conceptualise CSR – a three-domain model.

The three-domain model is presented with three core domains of economic, legal and ethical responsibilities that are depicted in a venn model framework. Initially, it suggests that none of the CSR domains is prima facie more important or significant relative to the others. The venn model framework actually yields seven CSR categories from an overlap of the three core domains. However, the exception with this model is that the philanthropic category, if exist, is subsumed under the ethical and/or economic domains. The figure below illustrates the venn model framework originated from Schwartz and Carroll (2003) research:

Source: Management for Social Enterprise, Bob Doherty, George Foster, Chris Mason, John Meehan, Karon Meehan, Neil Rotheroe, Maureen Royce

2.2 CSR Reporting

Based on their research on CSR disclosure, Holder-Webb et al. (2009) assert that “it is not enough for corporations to simply engage in CSR activities but it is also important and desirable to make information about these activities available to stakeholders”. Additionally, the call for disclosure of non-financial information has grown in response to the awareness that financial statement omits salient information about the company (Adams et al. 2011). The financial statement actually portrays a limited picture of the company through providing merely financial metrics. Therefore, the relevance of non-financial information has increased markedly over the years. The emergence of non-financial reporting can be seen as an attempt to increase transparency with respect to corporate actions concerning social and environmental issues (Nielsen & Thomsen, 2007). Further, it is acknowledged that the disclosure of non-financial information is essential to reduce information asymmetry that exists between management and key stakeholders (Narayanan et al. 2000) as well as to allow investors to better assess key areas of performance and support a broader view of corporate performance that encompasses society at large (Holder-Webb et al. 2009).

2.2.1 Motivation for CSR Reporting

Along with the increased interest to engage in CSR activities, today corporations across the world are more voluntarily disclosing information about their CSR performance. Undeniably, numerous motivational bases can explain companies’ involvement in CSR reporting practices.

Threat to the organisation’s legitimacy

The legitimacy theory posits that there is a “social contract” between companies and the society in which they operate (Deegan 2002; Mathew 1993; Patten 1992). Therefore, corporation try to legitimise their corporate actions by engaging in CSR reporting to get the approval from society and thus, ensuring their continuing existence (Belal, 2008).

Increase access to capital and shareholder value

Roberts (1992) assert that one way that firms consider CSR disclosure is to increase access to capital and shareholder value by satisfying stakeholder’s expectation. Investors are choosing to invest in organisation that is demonstrating a high level of CSR (Baron, 2008).

Enhance corporate reputation

Branco and Rodrigues (2008) argue that CSR disclosure (CSRD) is an important mechanism to enhance the effect of CSR on corporate reputation as well as representing a signal of improved social and environmental conduct. In their research on CSRD and corporate reputation, Bayoud et al. (2012) confirms that a high level of CSRD is strongly associated with corporate reputation for stakeholder group.

Risk Management

According to Kytle et al. (2005), reporting practices have become a key management tool to the growing complexity to multinational business management. He further argues that reporting helps to integrate CSR activities into companies’ strategic risk management so that the impact of CSR activities can be maximised.

Employee attraction, motivation and retention

Waddock et al (2002) argue that employee’s perceptions about how a corporation accepts and manages its responsibilities are often part of the employee’s decision about where to work. Therefore, publication of sustainability related information can play a role of positioning a company as an ’employer of choice’ and as such, this status can enhance loyalty, reduce staff turnover and increase a company’s ability to attract and retain high quality employees (Group of 100 & KPMG, 2008).

Financial performance

Margolis and Walsh (2003) claim that corporation’s engagement in CSR activities and its disclosure can foster corporate performance and as such their research conclude a positive relationship between CSR performance and financial performance. Similarly, Balbanis, Philips and Lyall (1998) find that economic performance is related to both CSR performance and disclosure although having a weak relationship and lack of overall consistency.

2.3 Theories on CSR

Various theories have been used over the years to demonstrate the behavior of economic units related to CSR issues. The relevant theories are:

Agency theory

Proponents of economic theories are among the first to write about corporate social involvement although considering it as a flaw in corporate thinking.

Stewardship theory

Social contract theory

The social contract theory begins in the classic period of history and takes its modern form in the 16th and 18th centuries with best known philosophers like Hobbes, Locke and Rousseau.

Legitimacy theory

Deegan and Unerman (2006) assert that the legitimacy theory relies upon the notion that there is a “social contract” between an organisation and the society in which it operates. The social contract as explained by Deegan (2000), represents myriad of expectations that society has about how an organisation should conduct its operations.

Stakeholder theory

Freeman (1984) argues that managers should not just focus on stockholder’s need, but rather must satisfy a variety of stakeholders. As such, the stakeholder theory is used to analyse those groups to whom a firm should be responsible (Moir, 2001).

2.4 Corporate Financial Performance

Price and Mueller (1986) assert that corporate financial performance (CFP) depicts the financial viability of an organisation. Therefore, corporations need to disseminate information about their financial performance as an account of management’s stewardship as well as a means of assessing the entity’s capacity to generate cashflows (Stein, 2000). Additionally, the financial performance is a subjective measure of the effectiveness with which an organisation makes use of its resources to attain its economic or financial goals.

Basically, an organisation’s financial performance can be measured using three alternative approaches – market-based measure, accounting-based measure and perceptual-based measure (Orlitzky, 2003). The market measure focuses on the firm’s stock price to evaluate its financial performance. McGuire et al (1998) argue that the market measure represents investor’s evaluation of the ability of a firm to generate future economic earnings. Alternatively, the accounting-based measure captures the firm’s competitive effectiveness and internal efficiency as well as optimal utilisation of assets. This measure represents financial performance using three divisions: (i) Return on Asset (ROA) and Return on Equity (ROE) (Waddock and Graves, 1997); (ii) profitability in absolute terms (Stanwick and Stanwick, 1998) and (iii) multiple accounting based measure with the overall index score of 0-10 (Moore, 2001). Finally, the perceptual measure uses subjective judgment about the firm’s financial performance which is provided by survey respondents (Wartick, 1988).

2.4.1 Relationship between CSP and CFP

The nature of the relationship between a firm’s socially responsible behaviour and its financial performance has extensively been debated till today and yet it remains unsolved (Margolis and Walsh, 2003). Preston and O’Bannon (1997) actually highlights two important issues in the relationship between CSP and CFP: Direction and Causality of the relationship. The direction of the relationship can be positive, neutral or even negative.

The positive direction of the relationship can be explained using the instrumental stakeholder theory. This theory suggests that the satisfaction of various stakeholder groups is instrumental for the organisational financial performance (Donaldson and Preston, 1995). Conversely, the negative relationship is based on the neoclassical economic theory which argues that a socially responsible firm’s costs are considered unnecessary and thus can lead to a competitive disadvantage such that a decrease in firm’s profit and shareholder wealth (Preston and O’Bannon, 1997). Finally, the neutral relationship between the two constructs, as provided by Waddock and Graves (1997) exists by coincidence. McWilliam and Siegel (2001) further explain that a company acting responsibly to customers can have different demand curve as compared to a less responsible one. Therefore, the CSR activities are only a way to attain differentiation and thus, do not impact on company’s profit.

The causality of the relationship as pointed out by Preston and O’Bannon (1997) actually denotes whether CSP or CFP is an independent or dependent variable. Therefore, in such a case, if CSP is an independent variable, it comes first to affect CFP while if CSP is a dependent variable, CFP comes first to affect CSP. Such an argument is also raised by Griffin and Mahon (1997) who question whether a company is better off focusing on CSP or CFP first. In view of explaining the causality of the relationship, Waddock and Graves (1997) and Dean (1999) proposes two theories such as the slack resource theory and good management theory. The slack resource theory explains that a firm shall have good financial performance to contribute to the corporate social performance. It further posits that a company conducting social performance requires some funds that may result from the success of financial performance. Therefore, this theory argues that financial performance comes first and is an independent variable to affect CSP. Conversely, the good management theory argues that social performance actually comes first. This theory provides that CSP is an independent variable resulting in CFP and companies having good reputation achieve good financial position through market mechanism.

2.5 Empirical review