The Business Case for Corporate Responsibility
The old thinking was that if you make money you can do this positive social and environmental stuff—but I think the true philosophy of sustainability is the interdependence. It’s not about charity; it’s about the fact that if you do the right things in the community, the community will do the right things for you. If you do the right things for the environment, you’ll have a stronger business so that you can make more money. It’s not about sort of a condescending view . . . I don’t know if that’s subtle or if people don’t get it, but it’s very important. It’s about interdependence rather than balance. It’s about mutual dependence or interdependence, rather than charity. It’s fundamental. (Manufacturing Executive, 2005).
In business practitioner terms, a ‘business case’ is a pitch for investment in a project or initiative that promises to yield a suitably significant return to justify the expenditure. In what has become known as the ‘business case for Corporate Social Responsibility (CSR)’ the concept is that a business can ‘do well by doing good’ that is an organization can perform better financially by taking care of its core business operations, but also taking responsibilities towards society in which the company is operating and work towards creating a better society. A large number of scholars have researched this proposition, both theoretically (Carroll, 1979; Swanson, 1995, 1999; Wood, 1991), and empirically (Cochran and Wood, 1984; Graves and Waddock, 1994; Mattingly and Berman, 2006; Russo and Fouts, 1997), primarily with a focus on conceptualizing, specifying, and testing some relationship between corporate social performance (CSP) and corporate financial performance (CFP).
The pitch is that a company can ‘do well by doing good’: that is, can perform better financially by attending not only to its core business operations, but also to its responsibilities toward creating a better society. A long tradition of scholars have examined this proposition, both theoretically (Carroll, 1979; Swanson, 1995, 1999; Wood, 1991), and empirically (Cochran and Wood, 1984; Graves and Waddock, 1994; Mattingly and Berman, 2006; Russo and Fouts, 1997), primarily with a focus on conceptualizing, specifying, and testing some relationship between corporate social performance (CSP) and corporate financial performance (CFP). The results are decidedly mixed: a firm that allocates resources to cater what are perceived to be its social responsibilities will financially perform either better, worse, or the same as it might have done otherwise, depending on which studies we line up and consult.
The Search for a Business Case: A Shift in Perspective
Business management scholars have been searching for a business case for CSR since the origins of the concept in the 1960s. An impetus for the research questions for this report was philosophical. It had to do with the long-standing divide between those who, like the late economist Milton Friedman, believed that the corporation should pursue only its shareholders’ economic interests and those who conceive the business organization as a nexus of relations involving a variety of stakeholders (employees, suppliers, customers, and the community where the company operates) without which durable shareholder value creation is impossible. If it could be demonstrated that businesses actually benefited financially from a CSR program designed to cultivate such a range of stakeholder relations, the thinking of the latter school went, then Friedman’s arguments would somewhat be neutralized.
Another impetus to research on the business case of CSR was more pragmatic. Even though CSR came about because of concerns about businesses’ detrimental impacts on society, the theme of making money by improving society has also always been in the minds of early thinkers and practitioners: with the passage of time and the increase in resources being dedicated to CSR pursuits, it was only natural that questions would begin to be raised about whether CSR was making economic sense
The socially responsible investment movement:
Establishing a positive relationship between corporate social performance (CSP) and corporate financial performance (CFP) has been a long-standing pursuit of researchers. This endeavor has been described as a “30-year quest for an empirical relationship between a corporation’s social initiatives and its financial performance.” .One comprehensive review and assessment of studies exploring the CSP-CFP relationship concludes that there is a positive relationship between CSP and CFP.
In response to this empirical evidence, in the last decade the investment community, in particular, has witnessed the growth of a cadre of socially responsible investment funds (SRI), whose dedicated investment strategy is focused on businesses with a solid track record of CSR-oriented initiatives. Today, the debate on the business case for CSR is clearly influenced by these new market trends: to raise capital, these players promote the belief of a strong correlation between social and financial performance.
As the SRI movement becomes more influential, CSR theories are shifting away from an orientation on ethics (or altruistic rationale) and embracing a performance-driven orientation. In addition, analysis of the value generated by CSR has moved from the macro to the organizational level, where the effects of CSR on firm financial performance are directly experienced.
The CSR of the 1960s and 1970s was motivated by social considerations, not economic ones. “While there was substantial peer pressure among corporations to become more philanthropic, no one claimed that such firms were likely to be more profitable than their less generous competitors.” In contrast, the essence of the new world of CSR is “doing good to do well.”
CSR is evolving into a core business function, central to the firm’s overall strategy and vital to its success. Specifically, CSR addresses the question: “can companies perform better financially by addressing both their core business operations as well as their responsibilities to the broader society?”
Gaining Competitive Advantage
A lot of organizations have found that corporate social responsibility (CSR) have various benefits, such as high differentiation for their product as well as larger appeal to consumers, e.g. organic goods or fair trade. CSR also have the potential to decrease operating costs. E.g. high level of loyalty among staff, lower costs in recruitment process it helps retaining employees and also reduced turnover costs. Organizations that are famous for their corporate social responsibility can reap the rewards like lower costs in setting up operations as, for example, they are not challenged by “not in my back yard protests”. This term specify the objections which are raised by people who are being negatively affected by the new developments or projects taking place in their neighborhood, e.g., a nuclear power station. One example can be cited as is Wal-Mart versus Target where Wal-Mart often faces stiffer legal challenges when attempting to site new stores and has been unable to enter some locations, despite costly and extended legal battles on the other hand Target has gained entry to those locations, such as Manhattan, New York.
Companies which invest heavily may enjoy increased ease of access to favorable relationships with partners and suppliers as well as lower risk of fines from regulatory authorities. To the degree that these benefits exceed the costs of engaging in the acts, a business case is made. As such, corporate social responsibility can be seen as enlightened self-interest. This simply shows that organization is aware that CSR investment is expensive and costly in short term, but it clearly understands that offsetting gains in the longer term. For example, a firm that funds a college scholarship now may become an employer of choice for talented employee’s years later.
So, the benefits of spending on CSR are intangible such as improved reputation and enhanced stakeholder relationships, which are tough to quantify. The business case stands in contrast to the ethical case, which can encourage firms to engage in corporate social responsibility even where it causes financial losses. Often the benefits are intangible, such as improved reputation and enhanced stakeholder relationships, and so can be difficult to quantify. The business case stands in contrast to the ethical case, which can encourage firms to engage in corporate social responsibility even where it causes financial losses.
This illustrated how CSR practices may be thought of in terms of building a competitive advantage through a cost management strategy. “Competitive advantages” was cited as one of the top two justifications for CSR in a survey of business executives reported in a Fortune survey. In this context, 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. This approach to CSR requires firms to integrate their social responsibility initiatives with their broader business strategies.
Ethical and Responsibility Frameworks Used in Europe
Questions of ethics, or the ‘right way to run a business’, are inherent in all aspects of corporate governance and in every board decision and action. Ethical choices are relevant within the core business strategies that boards pursue and the way that they direct the business as a whole to achieve them.
Since the introduction of an EU Directive in 2006 (2006/46/EU), all listed companies in EU member states have been required to publish a corporate governance statement (although many companies were already doing so voluntarily). This paper explores whether, in legislation, frameworks and codes of corporate governance across the EU and within its member states, there are any explicit statements or requirements to govern business in line with ethical principles or commitments. Is the implicit inter-relationship between corporate governance and ethics clearly articulated? Has the consideration of ethical principles explicitly influenced the development of corporate governance? And to what extent are there different notions of what is fair and responsible governance in different countries – in terms of both governance frameworks and governance processes?
Corporate governance lies at the very heart of the way businesses are run. Often defined as ‘the way businesses are directed and controlled’, it concerns the work of the board as the body which bears ultimate responsibility for the business.
Governance relates to how the board is constituted and how it performs its role. It encompasses issues of board composition and structure, the board’s remit and how it is carried out and the framework of the board’s accountability to its stakeholders. It also concerns how the board delegates authority to manage the business throughout the organisation. It does this by cascading down specified limits of authority to committees, the CEO and the executive team, who in their turn delegate tasks to management and employees more generally. This authority allows management to carry out, in accordance with specified budgets and timings, the purpose, vision and strategy which the board has agreed.
The extent to which business decisions reflect ethical values and principles is a key to long term success. The business case for business ethics has been well proven by the costs and impacts of the repeated high profile cases of corporate greed and misconduct, often by senior individuals crossing ethical boundaries as well as ignoring or circumventing the rules set out in law. Trust is essential in establishing an organisation’s licence to operate. Maintaining successful business relationships and operations requires businesses to manage their risks, including their integrity risks, and guard their reputations. Trustworthiness is a valuable asset and guarding that asset is a core remit for those running a company; it is a core remit of good corporate governance.
The imperative for ethical behaviours and practices to be part of governance has arguably never been more important. So how is ethics played out in the boardroom?
In this context, business ethics, defined as the application of ethical values to business behaviour, is essentially about the discretionary decisions a board takes to deliver on its duties as set down in law, specified by best practice, and demanded by shareholders and other stakeholders. Ethical choices are relevant within the core business strategies that they pursue and the way they direct the business as a whole to achieve them. Boards take decisions which have far-reaching consequences and directly affect the lives of their employees and other stakeholders. Conversely, a lack of decisive action may also have significant consequences.
Business ethics also refers to the way the board conducts itself and the way board members choose to behave in carrying out their role. High levels of competency and skill are required of the board, with directors exercising proper care in their duties, upholding high standards of integrity and acting fairly. The culture of an organisation will be strongly influenced by the nature as well as the quality of the leadership shown by the board. A lack of strong and clear leadership from the board will generally result in inconsistencies in ways of behaving and working, with practices deriving from employees’ personal preferences and habits continued from previous employment rather than being ethically driven. A board is responsible for determining, articulating and communicating the values and standards of the business, and for ensuring that the policies, procedures and controls in place act to embed, rather than hinder, ethical values throughout the business.
The diagram below illustrates the means by which a business is governed ethically. The board sets the ‘tone from the top’ of the organisation principally through five means and all these elements need to be in place in order for a board’s commitment to ethics to be put fully into practice:
? Behaviours – example and leadership
? Board structures and processes – appropriate committees, terms of reference and documentation, board/committee interface
? Purpose, strategy and vision – what the business will achieve and how
? Values and standards – the way in which business will be done
? Procedures and controls for oversight – appropriate policies, monitoring and reporting.
Principles apparent in governance frameworks of EU member states
An extremely high level of commonality was apparent, with most of the countries confirming that all of these principles were included in their governance codes. A few differences were notable:
• Some member states do not require individual director evaluation (Finland, Slovenia, Sweden and Luxembourg; and Finland does not require committee evaluation)
• France does not require a separate Chairman and CEO.
1 Matteo Tonello, the Business Case for Corporate Social Responsibility, 2011.
2 J. D. Margolis and Walsh, J.P. “Misery loves companies: social initiatives by business.” Administrative ScienceQuarterly, 48, 2003, pp. 268–305.
3 J. F. Mahon and Griffin, J .J. “Painting a portrait: a reply.” Business and Society, 38, 1999, 126–133.
4 Elizabeth Kurucz, Barry Colbert, The Business Case for Corporate Social Responsibility,2008
5 Julia Casson, A Review of the Ethical Aspects of Corporate and Governance Regulation Guidance in the EU,2013