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In this debate, the primary subject is the ‘business case’ for corporate social responsibility (CSR). The business case refers to the underlying arguments or rationales supporting or documenting why the business community should accept and advance the CSR ’cause’. The business case is concerned with the primary question: What do the business community and organizations get out of CSR? That is, how do they benefit tangibly from engaging in CSR policies, activities and practices? The business case refers to the bottom-line financial and other reasons for businesses pursuing CSR strategies and policies. Various traditional arguments have been made both for and against the idea of business assuming any responsibility to society beyond profit-seeking and maximizing its own financial well-being. The goal is to describe and summarize what the business case means in relation to business profit maximization.
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Profit Maximization and corporate social Responsibility.
Any business does not operate or exist in a vacuum but rather it undertakes its activities in an environment that is usually surrounded by human beings who form the larger component of the social factor. While it operates within human vicinity, a business is formed or commenced mainly to earn profits and thus its operators will always strive to maximize them. Because of the existing conflict between the business and the society, a debate has been set to look into them by focusing on the importance of corporate social responsibility to the profits of a firm and also the arising implications of such practices.
A firm or company could be termed as a transforming organ; that involves social agents (people) and technical and technological means, working together in a global and competitive environment. Hence underlying its objectives and goals, a firm also assumes rights and obligations due to economic, political and social activities it performs. This is to create and develop values such as protection, sustainability, compromise and acting responsibly and economically as far as the environment is concerned. This is also applicable to people and society in general, both in short and long term. Thus the final goal of a firm is to increase the humanity welfare (Gill, 2007).
Thus based on the above, there are numerous reasons as to why modern managers should pursue corporate social responsibility besides striving to maximize the firm’s profits. These are; creating good images, gaining competitive advantage, cost and risk reduction, promoting the continuity of life and other development projects, sustaining the environmental welfare, maintaining customer loyalty to the products and gaining good government trusts and approval.
Business-case arguments for CSR practices
Cost and risk reduction
Cost and risk reduction justifications constitute arguments that contend that engaging in certain CSR activities will reduce costs and risks to the firm. ‘T]he primary view is that the demands of stakeholders present potential threats to the viability of the organization, and that corporate economic interests are served by mitigating the threats through a threshold level of social or environmental performance (Kurucz et al.2008, p. 88). Cost and risk reduction may also be achieved through CSR activities directed at the natural environment. Being environmentally proactive results in cost and risk reduction lowering the costs of complying with present and future environmental regulations enhancing firm efficiencies and drive down operating costs. Environmentally responsible commitments may also reduce the negative impact of social concern.
Corporate social responsibility activities directed at managing community relations may also result in cost and risk reductions (Berman et al, 2009). Building positive community relationships may contribute to the firm’s attaining tax advantages. In addition, positive community relationships decrease the amount of regulation imposed on the firm, because the firm is perceived as a sanctioned member of society. Cost and risk reduction arguments for CSR have been gaining wide acceptance among managers and executives.
CSR activities in the form of equal employment opportunity (EEO) policies and practices and environmentally responsible commitments enhance long-term shareholder value by reducing costs and risks. It can be agreed that explicit EEO statements are necessary to illustrate an inclusive policy which reduces employee turnover through improving morale.
Developing reputation and Legitimacy
When a business managers are socially responsible, their companies and businesses create good image with the external world (environment). Since most companies are involved in creating products that can be consumed by the society, when it has maintain good social responsibility, the social agents mostly people will feel good to associate themselves with the company because its good image. This association is what will help maintain a constant number of customers and other stakeholders. The good image that a business creates results into the business securing quick credit advancement from its creditors. Also most companies that are operating globally will get a good cover from the governments of such nations because of the good image, especially when the company helps in aiding its development projects such as building hospitals and other social facilities. The good image will thus result into level of sales volume because of having a good number of customers.
Gaining competitive advantage
Corporate social responsibility has resulted into major companies gaining competitive advantages over others especially if such competitors are new entrants into the market. A company that has been operating for along time in the market while simultaneously maintaining good relationship with the society in which it operates will have almost all consumers on its side because of the existing rapport it has created. Thus when a new company is entering the market, offering the same commodities like the old operator, will have few customers and might even spent more money on advertising in order to penetrate the market. The excess expenditure will have to reduce the sales volume because of the advertisement expenditure incurred. This will make the old company that was originally in the market to have a good competitive edge over the competitor.
Competitive advantage justifications contend that, by engaging in certain CSR activities firms may improve their competitiveness. Stakeholder demands are seen as opportunities rather than constraints. Firms strategically manage their resources to meet these demands and exploit the opportunities associated with them for the benefit of the firm (Kurucz et al, 2008). Corporate social responsibility initiatives enhance a firm’s competitive advantage to the extent that they influence the decisions of the firm’s stakeholders in its favor. Firms build a competitive advantage by engaging in those CSR initiatives that meet ‘the perceived demands of stakeholders’ (Kurucz et al 2008 p. 89). In other words, one or multiple stakeholders will prefer the firm over its competitors specifically because of the firm’s engagement in such CSR initiatives.
When a business has largely been involved in extending its support to the state of any country, then its security is guaranteed. For example a business that has funded government activities despite having paid its taxes, will be protected in case other competitors poses to be a threat. A country may pass laws and regulation regarding the conduct of any company and in such scenarios only those business that have been working with the state will be given an upper hand. Also external competitors may not be allowed to enter the market by the set rules making it of enormous value and advantage to companies already in existence. Therefore it is of great importance that business managers are socially responsible with its stakeholders to ensure that its operation is not disturbed. This cooperation is likely to increase its profitability in the long run.
Strong brand loyalty
Loyalty can only be created when one ensures that the existence of others is not hindered. (Crane et al, 2007).Thus a business will create brand loyalty only after ensuring that its consumers are largely involved in designing of those products. Also when a firm strives towards eliminating the common problems that face man in the society; like sponsoring students to undertake studies, alleviating poverty, and working towards the prosperity and progression of any given society, then it will have created a huge impact to the society, thus maintaining a good loyalty for its products. Hence in order to ensure that there is profit maximization in the long run, business should use part of the realized profits in short run to invest back in the society and in the long run enjoy greater profits as a result of the loyalty it will have created from such investment.
Most customers after using certain products tend to develop strong choices and preferences over other products. This has been witnessed largely in the communication sector especially mobile industries, because of the earlier relationship that they created with the consumers of such products. Large companies such as Nokia have been able to maintain good competitive advantages over others, not because of enormous campaigns in terms of advertising but in terms of creating good relationship with global economies and supporting even most of their development projects. Such heavy investments have resulted into most customers from such economies remaining loyal to Nokia products. It will be of great merit if modern managers pursued to maintain good relationship with their customers in terms of corporate social responsibility and in the long run enjoy good profits.
Sustaining the environmental welfare
The environment in which businesses operate has created a lot of concern to companies. Especially the global environmental organizations have raised an alarm over the environmental degradation as a result of business operation and activities. Companies which produce poisonous emissions into the atmosphere and within the environment can not therefore afford to focus on profit maximization while neglecting the consequences of their activities. The survival of any firm will always be based on the environment, within which it operates, because of the emerging threats and opportunities (Ascolli et al, 2009).
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Owing to these problems created by the business, there is need for the modern managers to ensure that the environment is clean to enable human survival and other living creatures. As such the only possible course of action will be to use part of its profits to clean up the environment. When a company is discharging chemicals in to running water bodies, then it should ensure that such discharge is seriously treated before being released into water bodies. Thus in terms of maintaining corporate social responsibility, a company may decide to construct water boreholes that can be used by people who use the surrounding water bodies. Doing these could help ensure that business operation is not threatened thus in proposal, business managers should always working towards ensuring that their activities are not hurting the society, and if they do so then even their level of returns will be high.
There are various groups of people that contribute to the revenue earnings of the business. These include; employees, consumers, suppliers, creditors and the government. If business managers largely focus on profit maximization while neglecting its employees’ preferences, then it is headed towards the rocks. This because employees tirelessly to ensure that the set targets are realized and when profits have been earned, then even the salaries of employees should be considered. In terms of acting socially responsible a firm can avoid collision with labor institutions by ensuring that employees are compensated adequately. Compensating employees well like increasing their earnings whenever a business makes profits will result into an increased motivation among them hence making them to work even harder and this will increase the future returns of the business.
Seeking win-win outcomes through synergistic value creation
Synergistic value creation arguments focus on exploiting opportunities that reconcile the differing stakeholder demands. Firms do this by ‘connecting stakeholder interests, and creating pluralistic definitions of value for multiple stakeholders simultaneously’ (Kurucz et al. 2008, p. 91). Porter and Kramer (2002 p. 66) argue that, when companies ‘get the where and how right’, philanthropic activities and competitive advantage become mutually reinforcing and create a virtuous circle. They contend that corporate philanthropy may be used to influence the competitive context of an organization, which would allow the organization to improve its competitiveness and at the same time fulfill the needs of some of its stakeholders. For example, charitable giving to education causes would improve the quality of human resources available for the firm. Similarly, charitable contributions to community cause would result in the creation and preservation of high local quality of life, which may sustain ‘sophisticated and demanding local customers’ (Porter and Kramer 2002, p. 60).
The win-win perspective to CSR practices is aimed at satisfying stakeholders’ demands while, at the same time, allowing the firm to pursue its operations. By engaging its stakeholders and satisfying their demands, the firm finds opportunities and solutions which enable it to pursue its profitability interest with the consent and support of its stakeholder environment. The win-win perspective to CSR practices provides a view in which CSR is perceived as a vehicle that allows both the firm to pursue its interest and stakeholders to satisfy their demands.
Limitations of business-case arguments for CSR practices
While acceptance of the arguments for the business case for CSR has been growing, it is worth noting some of its criticisms and limitations. It can be argued that consumers may not have the ability to support companies engaging in CSR activities, owing to their limited power in the marketplace. Accordingly, CSR initiatives are not rewarded, and the business case for CSR does not hold. To support CSR initiatives and make the business case for CSR, I do propose that policy-makers empower consumers by providing consumers with more information through mandatory reporting on social and environmental performance and the development of a comprehensive social or CSR label. This is because the cost of CSR is passed on to the consumers hence likely to result into low profit turnover to the companies.
Another limitation of the business case for CSR is the implied assumption that the positive correlation between carefully chosen CSR initiatives and firm financial performance is perpetual. This implied assumption may not be accurate. In other words, firms may be rewarded, in an economic and financial sense, for engaging in CSR practices to a certain extent. Beyond a given level of CSR investment, the market will cease to reward it. For example the stock market is willing to reward social responsibility only to a point. It pays to be good but not too good.
It has bee found out that CSR activities are driven mainly by regulatory structures and the pursuit of direct cost reductions in small and medium-sized manufacturing firms. The environment in which those firms operate fails to recognize the benefits of the broader business case. In that environment, CSR practices are motivated by regulatory compliance and direct causal relationships between CSR and firm financial performance, therefore in pursuit of the above practices regulations should not move towards reducing the profits earned by firms.
Summary and conclusions
The business case for CSR refers to the arguments that provide rational justification for CSR initiatives from a primarily corporate economic/financial perspective. Business-case arguments contend that firms which engage in CSR activities will be rewarded by the market in economic and financial terms. A narrow view of the business case justifies CSR initiatives when they produce direct and clear links to firm financial performance. Mostly, the narrow view of the business case focuses on immediate cost savings. By contrast, the broad view of the business case justifies CSR initiatives when they produce direct and indirect links to firm performance. The advantage of the broad view over the narrow view is that it allows the firm to benefit from CSR opportunities. The broad view of the business case for CSR enables the firm to enhance its competitive advantage and create win-win relationships with its stakeholders, in addition to realizing gains from cost and risk reduction and legitimacy and reputation benefits, which are realized through the narrow view.
The rationale for the business case for CSR may be categorized under four arguments: (1) reducing cost and risk; (2) strengthening legitimacy and reputation; (3) building competitive advantage; and (4) creating win-win situations through synergistic value creation (Kurucz et al, 2008). Cost and risk reduction arguments posit that CSR may allow a firm to realize tax benefits or avoid strict regulation, which would lower its cost. The firm may also lower the risk of opposition by its stakeholders through CSR activities. Legitimacy and reputation arguments hold that CSR activities may help a firm strengthen its legitimacy and reputation by demonstrating that it can meet the competing needs of its stakeholders and at the same time operate profitably.
A firm therefore would be perceived as a member of its community, and its operations would be sanctioned. Competitive advantage arguments contend that, by adopting certain CSR activities, a firm may be able to build strong relationships with its stakeholders and garner their support in the form of lower levels of employee turnover, access to a higher talent pool, and customer loyalty. Accordingly, the firm will be able to differentiate itself from its competitors. Synergistic value creation arguments hold that CSR activities may present opportunities for a firm that would allow it to fulfill the needs of its stakeholders and at the same time pursue its profit goals. The pursuit of these opportunities is only possible through CSR activities.
Growing support for the business case among academic and practitioners is evident. Generally, the business case for CSR is being made by documenting and illustrating that CSR has a positive economic impact on firm financial performance. The broad view of the business case, however, brings attention to the details of the relationship between CSR and firm financial performance. Mediating variables and situational contingencies affect the impact of CSR on firm financial performance. Therefore, the impact of CSR on firm financial performance is not always favorable. Rather, firms should understand the circumstances of the different CSR activities and pursue those activities that demonstrate a convergence between the firm’s economic objectives and the social objectives of society. Only when firms are able to pursue CSR activities with the support of their stakeholders can there be a market for virtue and a business case for CSR. Thus in this modern world business managers should focus largely on profit maximization but also on ensuring the well being of the society it operates in.
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