The Corporate Social Responsibility Concept - Example

Executive Summary This paper evaluates the debates surrounding whether firms should be responsible for anything else other than maximizing shareholders value. In other words, should firms engage in corporate social responsibility or not. The two major debates are the stakeholder theory which argues for engagement in corporate social responsibility as well as the shareholders theory which is against firms engaging in corporate social responsibility arguing that firms ought to only obey the laws while maximizing shareholders wealth. Despite the fact that corporate social responsibility theory is supported by a majority of social societies, it is obviously not a cure to existing social shortcomings. This paper therefore concludes that firms should endeavor to legally maximize shareholders wealth based on laid down ethical procedures. If they are to engage in corporate social responsibility, this should be for the sole purpose of maximizing shareholders worth. The corporate social responsibility concept According to Jennet (2007, 65), corporate social responsibility has multiple definitions ranging from performance of laid down ethical procedures to the enhancement of societal welfare. However, despite the many definitions, the common denominator relates to how business activities affect various stakeholders. Corporate social responsibility can therefore be generally termed as the firm’s social responsibility encircling legal, moral, discretionary and economic prospects of the society on the firm any given time (Byron, 2006) Therefore, corporate social responsibility entails businesses voluntarily pursuing social efforts going beyond legal regulations and may entail philanthropic giving, community service, employee welfare and caring for the environment. Friedman and Levitt who were early opponents of CSR saw the sole purpose of business as that of using its resources in activities which enhance its profitability within the legal framework in order to maximize shareholders wealth. To them, CSR diverts shareholders funds to society’s use thus defeating the wealth maximization goal of the firm. In the past, the CSR concept was seen as an irrelevant and frowned upon concept due to its tendency to divert from the firm’s sole goal of shareholder’s wealth maximization. As such, many business leaders rejected it and did not see the need of practicing it. However, modern businesses have realized that CSR can play a significant role in enhancing the business’ reputation thus enhancing the firms’ profitability and thus shareholder wealth maximization in the long run (Sterlin, 2010). As such, firms are increasingly adopting corporate social responsibility policies into their business structures as part of their long-term shareholder wealth maximization strategies. Furthermore, there has been increasing pressure from civil societies for businesses to act responsibly and reduce their detrimental environmental effects. Major reasons for adoption of corporate social responsibility by the firm include humanity, security and policy (Henderson, 2009). The business has increasingly recognized that CSR plays a great role in creating a competitive advantage against their rivals thus enhancing their market share. Corporate social responsibility distinguishes a firm from its competitors by stimulating employee, societal and consumer goodwill. As such, the CSR concept debate is gradually shifting from whether firms should engage in it to how they should do it. However, whether firms should be responsible for engaging in anything else other than shareholder wealth maximization remains debatable. The various debates regarding this are explored below; Debates surrounding the corporate social responsibility concept The various debates regarding whether firms should or should not engage in anything else apart from shareholder wealth maximization can be classified into those opposing corporate social responsibility and those supporting it. Jensen (2002) has broadly classified the debates into stakeholders’ theory and shareholders theory. The stakeholders’ theory advocate for the firms’ involvement in CSR by providing for the society’s discretionary expectations on the business both for their benefit and as a way of remedying the society for the various damages caused by the firm to the society through its various activities (2002, 19). Firms should be concerned about their actions on the suppliers, customers, employees, the general public as well as others that may have a stake in the firm in order to ensure their continued survival and success (Wicks & Parmer 2004, 72). An example of a company that has fully incorporated the CSR concept in their structure is Unilever global company limited. The company lists its corporate responsibility as follows, customers, staff, management, the community and stockholders (Sterlin, 2010). By engaging in CSR, firms will become more attractive to customers and hence maximize shareholders wealth in the long run. On the contrary, solely maximizing shareholders wealth is myopic since it only focuses on short-term profit while ignoring the long-term survival and shareholders wealth maximization. In the modern business environment, business managers must be concerned about corporate social responsibility given its transformation into reputation economy where what a firm stands for matters more than what it produces and sells (Ostrander, 2002). Dan a senior company executive at Microsoft in charge of corporate citizenship states that people’s willingness to buy, recommend invest in or work for a company is 60% dependent on their perception of the company while 40% is dependent on their perception on the company’s products. Microsoft has identified seven dimensions of corporate reputation which include workplace governance, citizenship, products, services and innovation. Of the seven dimensions, , citizenship, governance and workplace are in the CSR category implying that 42% of how people feel about a company is based on their perception on the company’s corporate social responsibility practices. CSR tells who the firm is, what it believes in and how it does business. Firms able to effectively engage in CSR will hence build sustainable business in the future. This explains Microsoft citizenship mission of serving the needs of communities around the world and fulfilling their responsibilities to the public. According to Dan, engaging in CSR has been instrumental in making Microsoft what it is today. Through engaging in CSR, firms will engage in environmental friendly activities and thus ensure sustainability in all their activities. Owing to the ever increasing number of industries and automobiles, harmful exhausts are being released into the environment on a daily basis resulting into global warming. Thus, there is an increasing need for the firm to be more socially responsible in order to ensure their continued survival while shielding the community against the harmful effects that the firm’s activities have on the environment. This will not only safeguard the stakeholders’ health but will also ensure sustainability and hence shareholder wealth maximization in the long run. The mayor of the city of London is one of the managers concerned about environmental protection as a CSR initiative. According to him companies should contribute to protection, promotion and enhancement of the environment as part of their CSR without necessarily investing in expensive new technologies to lower energy costs while reducing carbon emissions. According to him, measures that reduce travel expenses, water consumption and carbon emissions as well as socially responsible waste disposal are some of the CSR practices that will not only reduce environmental pollution but will also result in enormous cost savings for the companies. As such, managers concerned about the impact of their companies’ activities should explore such CSR practices that use little if any of shareholders funds and also result in huge cost savings. In addition, such managers should implement green procurement procedures which will motivate employees, promote cooperation and dialogue with the supply chain, clients and stakeholders and influence the market hence resulting in sustainable production. Community involvement or cooperation between the firm and one or more communities is a CSR initiative that would help address community and business needs for mutual benefits. This could be monetary or volunteering support. In this case, the company could identify areas in which to cooperate with the community with an aim of improving its reputation among the community. With improved reputation, the firm is assured of loyalty from the community which hosts it and is the source of the company’s employees, customers and suppliers. A manager concerned with his company’s activities effects on the environment could support communal initiatives geared towards environmental protection while increasing awareness on the need to conserve the environment among the community. As such, the community will have ensured that the community’s welfare is improved while ensuring its sustainability and hence long tern shareholders wealth maximization. On the other hand, proponents of shareholders theory (Critics of CSR) argue that the firm should only maximize shareholders’ wealth through legal and ethical means only but should not be held responsible for enhancing social welfare Smith (2003, pp45). By offering their goods and services to the society at reasonable prices, the firm will have done enough for the society and need not do more. It would be unethical for the firm to engage in unprofitable social causes. According to Malloy (2001, pp112), shareholders invest their money and depend on the firm to maximize their wealth in the long run. They hire managers to act in their best interests but not to act like charitable organizations to the society. The firm’s business is to make money and through maximizing shareholders wealth, the firm generates wealth which benefits the society. This is because they secure better pay for their employees and superior quality products at more reasonable prices to the consumers. Furthermore, when shareholders wealth is maximized, they would be free to use part of it for the society’s benefit since they are part of the society and hence they understand the society’s needs better than the firm. This means that the firm should only engage in CSR if it will lead to maximization of shareholders wealth. There is therefore no moral justification for managers to spend shareholders resources for any cause that does not maximize shareholders wealth be it in the short run or in the long run.. In his book, Johannes (2011) argues that what firms should ensure they meet their sole obligation of shareholder wealth maximization through legal and ethical means only. By so doing, managers concerned about their firms activities on the environment do not have to feel at loss. By conforming to all the rules regarding environmental conservation and carbon emissions, such managers will ensure that their firms’ activities do not harm the environment without necessarily having to use shareholders money in promoting environmental friendly initiatives (Guthrie and Parker, 1989). Thus by strictly adhering to all legal and ethical requirements, the firms will not only benefit the shareholders but will also benefit the wider society. Engaging in corporate social responsibility is thus uncalled for provided organizations will seek to maximize shareholders wealth using legal and ethical means. Since it is not possible to quantify CSR benefits to shareholders as far as wealth maximization is concerned, it is not right to hold the firm accountable for activities other than shareholder wealth maximization. For instance, it is not possible to estimate how much each dollar used for the social cause contributes to profits. As such, a manager concerned about his company’s impact on the environment may not tell with certainty the extent of damage posed to the environment and how much is enough to repair the damage. Thus, to remain sustainable and to ensure environmental protection, firms just need to stick to the legal provisions on environment. Furthermore, corporate social responsibility if not carefully undertaken may give room for such managers using shareholders funds to improve their own welfare in the name of society’s welfare. Furthermore, firms tend to only engage in CSR in times of crisis while they keep on reporting on their CSR initiatives. Other firms report on their CSR activities while doing nothing on the ground thus misleading the society for their own benefit. Despite the increased advocacy for CSR, firms can not in practice engage in increasing stakeholder welfare at the expense of the shareholders wealth but only report on CSR initiatives in order to improve their reputation among the society. As has been established above the CSR concept remains a debatable one with some advocating for organizations to engage in corporate social responsibility while others are strict that firms should only pursue their sole purpose of maximizing shareholders wealth. It is no doubt that by engaging in other activities that benefit the society other than maximizing on shareholders wealth, firms stand to gain on maximized shareholders wealth in the long run (Davis, 2001). This is because having stakeholders whose welfare has been taken care of implies that they will be more supportive and loyal to the firm hence bringing about wealth maximization in the long run. For instance, CSR will result in more satisfied employees who will be proud for the firm they are working for. As such, they will be more loyal to the firm and employee turnover will be minimized. In addition, owing to the great impact CSR can have on employee well being as well as motivation, the firm will be able to offer high quality products and services hence gaining the customer and society’s confidence. This in turn translates into more profits and hence wealth maximization in the long run (Daniels, M2010). Research also indicates CSR improves the attitude of customers towards the firm and hence they buy more from the firm and probably change from competing brands. Thus, firms practicing CSR have a competitive advantage over their rivals. A survey conducted by Better business journey in UK indicated over 80 percent of consumers are more likely to buy from firms engaging in activities that improve the society (Johannes, 2011). CSR is also likely to result in positive public relations implying that firms will save a lot in terms of marketing and advertising costs. CSR will generate free publicity for the firm hence making it benefit from word of mouth advertising. CSR doesn’t have to cost money at all times but can indeed result in more business opportunities and hence be of financial benefit to the firm. This is because it enables the firm to continually engage with the stakeholders meaning that the firm can be the stakeholders’ choice whenever new business opportunities arise (Freeman, 1991). In the long run, CSR will ensure wealth maximization and business continuity as well as a more sustainable society. However, despite the above merits of firms engaging in CSR, whether firms should engage in initiatives not supported by shareholders and which will not result in maximization of shareholders wealth is still a major issue of concern. It is only good that firms engage in maximization of shareholders wealth but this should not be at the expense of stakeholders and ethical procedures (Ostrander, 2002). Firms should not make profits by harming stakeholders but at the same time they should not promote stakeholders welfare if it does not result in shareholders wealth maximization. However, it’s worth noting that firms will not prosper if their relationship with stakeholders is wanting. In the same way, they can not remain profitable if they are to meet all stakeholders’ needs. As such, a firm’s activities should be geared towards making profits while ensuring laws are obeyed and ethical standards observed (Judie, 2002).Therefore, firms should only engage in corporate social responsibility if such activities will maximize shareholders wealth in the long term. As such, am of the view that firms should only engage in corporate social responsibility if it results in long term wealth maximization for the shareholders. This does not restrict managers concerned about their firms’ activities on the environment on using shareholders funds for improvement of the society’s welfare but this has to have a positive effect on the company’s performance in the long run (McWilliams, 2001). Thus, the manager should not engage in philanthropic tendencies which are at times carried out for personal welfare improvement. However, the manager will in no way be prevented from undertaking projects that would improve the environment as long as it has a direct effect on the company’s performance in the long run. For instance, assuming that the company engages in mining or farming, the manager should ensure that the environment is conserved for the sake of the company’s continued operations. In essence, the manager is not limited on the extent to which he/she can engage in CSR but indeed broadens the scope of participation. For instance, this will enable the manager to require of suppliers and vendors to verify their product’s sustainability hence ensuring the final product’s sustainability (Rodgers, 2010). This is likely to improve consumer confidence and hence future firm’s profitability. The position will also enable the manager to put in place human resources strategies that ensure a motivated workforce in order to ensure the company offers quality services and products to consumers. In addition, my position enables the manager undertake measures that conserve the environment through overcoming pollution and harmful exhausts which ensures that the surrounding community’s health is safeguarded bearing in mind that the firm exists in the society which on the other hand provides labor, suppliers as well as customers (Martin, 2009). My position would therefore require the manager to meet some of the society’s needs that would directly affect shareholders’ wealth maximization. In other words, my position would only call for the manager to be extra careful in engaging in CSR so as to ensure that the stakeholders do not benefit at the expense of shareholders while the shareholders do not benefit at the expense of stakeholders. In other hand, my CSR position ensures that CSR cultivates a symbiotic relationship between the stakeholders and the shareholders (Ostrander, 2002). Therefore, the manager will now have to ensure that shareholders also benefit from CSR just like the stakeholders thereby bringing an end to philanthropic tendencies by firms. References: Jennet, P2007. Corporate social responsibility. Journal of economics and management strategy. Vol.16, no. 2, pp.683-717 Byron, Y2008. Emerging issues in the management of contemporary organizations. London, Rutledge Wicks, B., & Parmar, D2004. A modern conceptual model of corporate performance. Academy of management review. Vol. 4, no. 5, PP. 70-105 Jensen, P2002. The adoption of corporate social responsibility in the contemporary organizations. Journal of Sustainable Development, vol. 19, pp9-77. Guthrie, J& Parker, L1989. Corporate social reporting: A rebuttal of legitimacy theory. Accounting and Business research. Vol.19, no.76, pp.343-352. Sterlin, B2010, Corporate social responsibility: Case studies. Oxford, Oxford university press. Davis, B2001. Corporate social responsibility. 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