International Business and Corporate Social Responsibility - Literature review Example

Critical evaluation of the proposition “The interests of international business are incompatible with corporate social responsibility” Introduction The proposition that “the interests of international business are incompatible with corporate social responsibility” seems to suggest that the goals that international businesses set to achieve do not go hand-in-hand with the aims of corporate social responsibility (CSR). In a small way, this argument is true because CSR imposes an extra burden that international businesses have to bear as they engage in their businesses practices. This means that the time and resources that would have been used to mitigate and manage risks associated with the business are expended on CSR initiatives. On the other hand, the statement is wrong to a large extent because CSR initiatives in today’s business environment are part and parcel of corporations’ activities from planning, manufacturing to distributing products and services. Today, an organisation that fails to partake in CSR activities risks losing out on customers and is also subject to being reprimanded over some social or environmental issues by various authorities in the country or region in which it operates. Such actions have significant risk implications for the organisation. This essay therefore evaluates the two sides of the argument but supports the standpoint that the interests of international business are very well compatible with CSR with reference to risk management. Definition of CSR The European Commission defines CSR as an idea whereby organisations incorporate environmental and social issues in their business operations and in their dealings with stakeholders on a voluntary basis. With regard to this definition, CSR has a number of implications. First is that the incorporation of social and environmental interests within business activities implies that CSR is not mere philanthropy (European Commission 2008, p. 107). The focus is on how businesses conduct their daily work in terms of how they treat their employees, how they manufacture their products, how they market their products or services and so forth. CSR is therefore not merely concerned with what businesses do with their profits, but rather, how they make the profit. The second implication is that CSR is concerned with how businesses interact with stakeholders. Effective CSR needs dialogue and partnership with the company’s stakeholders such as non-governmental organisations, trade unions, governmental bodies and business representative organisations (European Commission 2008, p. 107). The third issue is that by describing CSR as voluntary, the definition implies that CSR relates to what businesses do in the environmental and social fields in addition to what they are required to do by law (European Commission 2008, p. 107). In some countries, CSR can be a question of getting enterprises to fulfil their legal commitments (European Commission 2008, p. 107). Argument one: CSR as a cost that is incompatible with international business interests Critics of CSR base their point of view on the fact that firms are legally inclined to maximise profits to shareholders (Corporate Watch Report 2006, p. ii). This obligation to maximise profits above all other concerns implies that companies can only be socially accountable if they are being insincere. Based on this argument, any doubtful social benefits that result from CSR are outmanoeuvred by the losses to communities in other fields (Corporate Watch Report 2006, p. ii). According to Larkin (2003, p. 212), critics of CSR argue that when CSR is implemented, business efficiency is impaired by the distractions of the CSR policies. In addition, it is argued that social issues are for governments, not business, or that CSR practices interfere with the proper working of the market and the efficiency of the corporate sector (Larkin 2003, p. 212). As well, because CSR seems to be a mandatory requirement for all business operations in the modern day, some businesses come up with unproductive, charitable, market-oriented solutions to environmental and social problems under the pretext of being responsible (Corporate Watch Report 2006, p. ii). Such companies only serve to justify the thought that “the interests of international business are incompatible with CSR”. A good example of a case where a company’s business interests seem to be incompatible with its CSR activities is that of a CSR initiative undertaken by Ford Motor Company. By 2009, Ford had donated more than $90 million to Susan G. Komen for the Cure, an organisation dedicated to helping cancer patients (see Susan G. Komen for the Cure and Circle of Promise 2009). By all standards, this is a very good initiative, and it has been noted so by Daw (2006, p. 22). Daw notes that Ford’s cause programme with Susan G. Komen Breast Cancer Foundation’s Race for the Cure successfully positioned the company (Ford) as a key target market: women. This is because the automobile industry has frequently felt disassociated with what is perceived as a more male-oriented industry. But the same initiative has not escaped criticism from a section of writers. For instance, McElhaney (2009, p. 63) argues that Ford’s core competency is the design, production and delivery of automobiles, not finding the cure for breast cancer. McElhaney therefore contends that Ford’s partnership with Susan G. Komen for the Cure shows a significant lack of connection between the company and the cause. McElhaney further argues that Ford did not choose an issue for which it owns part of the solution. Essentially, it can be argued that Ford’s CSR initiative does not mitigate any of the risks associated with the automotive industry in which the company operates, and neither does it contribute anything that can directly benefit the people using or affected by its products. Notably, McElhaney (2009, p. 63) suggests that if Ford’s management had taken its time to evaluate the exercise of CSR strategy development and comprehended what the company’s mission, values and vision were, they would realise that those values really have no connection with healthcare or breasts but are connected with developing the automotive technologies to take advantage of affordable sustainable new fuels and assisting consumers to save money on fuel – which is something that many consumers are concerned with at present. Therefore, going by McElhaney’s argument, the Ford case is an exemplar that some international business operations are not compatible with the CSR strategies that some companies choose to adopt. The case also exemplifies that although CSR strategies are voluntary, organisations have to be careful in regard to what they do because whatever they choose has to be in line with their core business operations if their wish is to strengthen their position in the market and protect themselves from the inherent market risks. As well, one argument posed by Heugens and Dentchev (2007 p. 157) is that the espousal of CSR activities can amplify the threats that outsiders are conscious of, particularly if companies fail to talk about their intent for adopting CSR initiatives in ways that gel with external audiences. For instance, it can be argued that Ford’s association with a cancer organisation may have been informed by the realisation that its products (automobiles) release emissions, which partly contribute to the prevalence of cancer. McElhaney (2009, p. 63) thus indicates that consumers are far less sceptical of a company that incorporates its brand with CSR for which it can see a good connection. In line with this, McElhaney (2009, pp. 63-64) and Pufé (2012, p. 65) argue that it is clearly in the interest of companies to closely link their CSR with their mission, vision and competencies and objectives – in order to align the CSR strategy with their business. Similarly, Urip (2010, p. 8) argues that given the complexity and challenges of the business environment, if a business is to survive despite the risks involved, it must define the most favourable balance among social, economic and environmental factors for short-term and long-run performance and profit. This implies that effective corporate governance and CSR practices should be entrenched into the company’s culture and become an integral component of the short- and long-run strategy of the company (Urip 2010, p. 8). A good example of a company that has aligned its CSR strategy with the company’s mission is Mazda. According to the Mazda (2011), the company plans and implements CSR initiative with the aim of contributing to the development of a sustainable society. Similarly Tullow Oil, a UK oil and exploration firm has identified the environment, health and safety, community, compliance and stakeholders as the key priority areas in its CSR initiative (Tullow Oil 2005, p. 5). Failure to have such an alignment only depicts incompatibility between business interests and CSR activities. Argument two: CSR is inseparable from international business interests Another argument about CSR is that CSR initiatives are part and parcel of international business operations and thus cannot be separated, especially given that CSR is perceived to help minimise some risks that organisations may exposed to. Incidents such as the Chernobyl nuclear power station catastrophe in Ukraine (1986) and the Union Carbide industrial accident in Bhopal, India (1984) put corporate accountability for environmental disasters on the national agenda Larkin (2003, pp. 208-209). There have also been corporate scandals such as WorldCom, Enron and Parmalat (Heugens & Dentchev 2007, p. 152). According to Larkin (2003, p. 209), Western governments reacted to such scenarios and created legal and regulatory guidelines for corporate answerability. The outcome has been that even firms in fields characterised with high risks of environmental hazards have established ways to transform their businesses by working together with various stakeholders. Today, CSR is not just about one aspect; rather, the priority issues addressed are rights of employees, human rights, environmental protection, supplier relations and community engagement (Urip 2010, p. 7). In addition, multinational corporations (MNCs) currently put employee rights on their CSR programmes (Visser et al. 2010, p. 154). By respecting the rights of employees in business environments, where such rights do not exist, or are commonly violated or neglected, they can be perceived as good, socially responsible national and global corporate citizens (Visser et al. 2010, p. 154). The consequences of failing to pay attention to some of the issues considered under CSR can be devastating, and pose a significant reputation risk to an international business. For instance, some of the organisations perceived not to respect their employees’ rights among other violations have been the subject of media headlines. See fig 1. Fig 1: Media headlines about companies not paying attention to the rights of their employees and other perceived violations Source: Larkin (2003, p. 212) The MNCs mentioned in the above headlines such as Nike, Nestlé, Gap, and McDonald’s have indisputably realised that there are real corollaries in getting things wrong. This is because the messages communicated to the public affect the mentioned companies’ reputations. According to Testa (2008, p. 3), managers aim to generate reputation advantages that perk up a firm’s prospect to attract resources, improve its performance and create a competitive advantage. Reputation is the determinant of how stakeholders are likely to perceive an organisation. It can affect the decisions made by investors to hold shares, suppliers’ and consumers’ willingness to sell to or buy from it, the nature and level of pressure group and media attention, probable recruits’ enthusiasm to join it and current workers’ inspiration to stay. The interplay between a firm and its stakeholders can increase or raise its reputation capital and thus affect the risk of perils and the opportunity platform (Testa 2008, p. 3). Notably, it is likely that if negative messages such as those highlighted above are spread about a company, its reputation capital will be adversely affected. Many writers and researchers have noted that CSR initiatives reduce an organisation’s level of exposure to risk or help to mitigate some risks. Risk is defined as a continuum where unidentified exposures become recognised, the associated uncertainty is analysed and comprehended and the threats are measured and appropriartely managed (Mullerat & Brennan 2011, p. 194). A study conducted by El Ghoul et al. (2011) on the impact of CSR on the cost equity of capital for a number of US companies revealed that socially responsible actions have a higher valuation and lower level of risk. Similarly, Levine (2008, cited by Souto 2009, p. 41) notes that the main benefit of implementing a CSR programmes is to deal with risks and to ensure legal conformity. That is, firms may be subjected to an array of reputational and legal risks if they fail to implement sufficient social compliance or CSR programmes. Even Michael Porter, who for a long time has praised the virtues of competitive advantage, has appreciated the belief that corporate and social activities are intertwined (Visser et al. 2010, p. 110). The renowned author has suggested that firms today ought to invest in CSR as part of their business strategy so as to become more competitive (Visser et al. 2010, p. 110). Further, The Economist’s 2008 story on CSR noted that CSR is made up of three broad closely linked layers: CSR as “traditional corporate philanthropy”, CSR as “a branch of risk management”, and CSR as an opportunity-based enhancement of business value and competitive advantage (Horrigan 2010, p. 34). As well, a Financial Times article of 3 November 2008 titled “Investing in Doing Good can be Good Risk Management” noted that investing the outmoded way, just by evaluating a company’s financial statements and making a decision on how the current share price relates to the fair value of the stock is a thing of the past (Funston & Wagner 2010, pp. 199-200). The article points out that firms need to address issues such as climate change, human rights and corporate responsibility – which are all elements of sustainable investment (Funston & Wagner 2010, p. 200). The arguments above indicate in every way that international businesses have no alterative but to embed CSR in their activities. As noted by Larkin (2003, p. 207), whether or not organisations are enthusiastic about adopting social environmental accountability, there appears to be an increasing corporate imperative to do so. Companies need to state how they deal with the four categories of penalties and incentives highlighted by Larkin (2003, p. 207-208): socially responsible investment (SRI) and targeting of shareholders; regulation, reporting and legal responsibility; competitive advantage; and reputation opportunity costs. SRI and shareholder targeting is important for firms since banks, asset managers and term assurers screen their shareholding while favouring organisations that show dedication to environmental and social programmes and against those that are involved in activities perceived to be harmful to society and the surroundings (Larkin 2003, p. 207). Regulation, reporting and liability are important for corporate transparency and helping to avoid corporate scandals such as WorldCom and Enron. The issue of competitive advantage has already been dealt with in this essay. According to Larkin (2003, p. 207), end users look at the corporate face behind a given brand and this affects their purchasing verdicts. Finally, and as noted earlier, reputation opportunity costs are related with the loss of current investment and inventiveness in marketing; problems with staffing and employee retention; and advertising initiatives that are belittled by public attention especially due to negative media publicity as mentioned earlier (Larkin 2003, p. 208). These are some of the ramifications that a company will be subjected to if it does not have an effective CSR policy. From the discussion above, it is evident that the interests of international business in the modern day can only be fulfilled if firms incorporate a clear and feasible CSR strategy. As such, business interests and CSR initiatives are very much compatible. As noted by Rendtorff (2009, p. 157), CSR is not only about risk management but aims at developing proactive operational procedures for values-driven management and stakeholder inclusion in order to improve social approval of the firm. This ultimately helps firms to mitigate reputation, financial, social and environmental risks as well as other related risks. Conclusion In conclusion, this essay has critically evaluated the proposition that “the interests of international business are incompatible with CSR”. On one hand, it has been argued that firms are not under an obligation to implement CSR since their target is to increase profit for their shareholders. CSR therefore comes as an unnecessary cost to businesses. In addition, some companies may not be able to align their CSR policy with their mission and goals, and this negatively affects how they are perceived by their shareholders and other interested groups. This reflects incompatibility between business interests and CSR. The other side of the argument is that CSR is part and parcel of business activities, and as such, international business interests cannot be separated from it. CSR is an issue that touches on many aspects including human rights, employees’ rights, relations with suppliers, environmental protection, and community involvement. Companies that adhere to such initiatives tend to have a better competitive advantage since they can attract more clients, staff and capital. Importantly, CSR is viewed as the key to managing risks and ensuring legal compliance. In this regard, business interests must go hand-in-hand with CSR initiatives, hence the two are compatible. References Circle of Promise 2009, ‘Ford Motor Company’, viewed 26 November 2012 Corporate Watch Report 2006, ‘What’s wrong with corporate social responsibility?’ viewed 26 November 2012 Daw, J 2006, Cause marketing for nonprofits: Partner for purpose, passion, and profits, John Wiley & Sons, New Jersey. 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Mazda 2011, ‘Mazda Sustainability Report 2011’, viewed 26 November 2012 McElhaney, K A 2009, Just good business: The strategic guide to aligning corporate responsibility and brand, ReadHowYouWant.com (online). Mullerat, R & Brennan, D 2011, Corporate social responsibility: The corporate governance of the 21st century, 2nd edn, Kluwer Law International, London. Pufé, I 2012, Best practices in corporate social responsibility: A cross-industry analysis - the examples BMW, Deutsche Bank and Bayer, GRIN Verlag, Munich. Rendtorff, J D 2009, Responsibility, ethics and legitimacy of corporations, Copenhagen Business School Press DK, Copenhagen. Souto, B F 2009, ‘Crisis and corporate social responsibility: Threat or Opportunity?’, International Journal of Economic Sciences and Applied Research, Vol. 2, No. 1, pp. 36-50, viewed 27 November 2012 Susan G. Komen for the Cure, viewed 26 November 2012 Testa, M 2008, ‘Corporate social responsibility and reputation risk analysis’, CRRC 2008: 7-9 September 2008, Queen's University Belfast, viewed 27 November 2012, Tullow Oil 2005, ‘Responsible, aware and committed’, Corporate and Social Responsibility Report 2005, viewed 27 November 2012 Urip, S 2010, CSR strategies: Corporate social responsibility for a competitive edge in emerging markets, John Wiley & Sons, New Jersey. Visser, W, Matten, D, Pohl, M& Tolhurst, N 2010, The A to Z of corporate social responsibility, 2nd edn, John Wiley & Sons, New Jersey. Read More