Corporate social responsibility can be defined as business practices that involve initiatives that are meant at benefiting society. It could involve different tactics such as engaging in greener business operations and donating a portion of an organization’s proceeds to charitable causes among other strategies (Crifo & Forget, 2015). Reinhardt, Stavins and Vietor (2008) simply define corporate social responsibility as the act of sacrificing profits in the social interest.
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Today, corporate social responsibility is not a new aspect but one that most firms are aware of and practice it to some extent. There exists a corporate social responsibility policy that works as a self-regulatory device through which a business organization monitors its operations and procedures and ensures it complies with the set laws, ethical standards as well as local and international norms. The main idea behind the concept of corporate social responsibility is that organizations have various responsibilities to maintain on a day to day basis. The responsibilities vary in importance, some being basic and other tertiary. The basic responsibilities usually obligate a company to the shareholders and the law and have to be met under all costs. On the other hand, there are higher level responsibilities that are meant to benefit the society and in most cases, they are met after the basic responsibilities. It is however worth noting that the implementation of corporate social responsibility in a business may go beyond compliance and involve activities that appear lean towards some social good (Carroll & Shabana, 2010). This is mostly beyond the organization’s interests.
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This piece of paper will give an in-depth discussion of corporate social responsibility and various aspects associated with it. Much emphasis will however be on the economic perspective of corporate social responsibility. Some of the issues that will be highlighted include the reason why firms should engage in corporate social responsibility, the various types that corporate social responsibility may take and the feasibility of engaging in profit-sacrificing corporate social responsibility. Other aspects include the market imperfections that drive corporate social responsibility, corporate social responsibility as it relates to financial performance as well as social and environmental performance
Why corporate social responsibility exist
Corporate social responsibility is an aspect that has been widely debated, with some parties supporting it fully while others criticize it. According to Caramela (2016), corporate social responsibility is becoming more mainstreams as many business organizations entrench sustainability into the core of their business procedures as a way of creating shared value for business as well as the society. Many firms have realized that sustainability and social good is not only vital for the people and the environment but also for business success.
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On a practical level, corporate social responsibility stands for the initiatives, policies and practices that in one way or the other help companies to manage themselves with transparency and honesty. In turn, this helps them to have a positive impact on environmental and social wellbeing. Corporate social responsibility has also become a concern for the consumers. Consumers are now more aware of the global social issues and thus they place some significance on corporate social responsibility when choosing where to do shopping. Customers are drawn to organizations that give back to society and it is therefore a good thing to exercise corporate social responsibility in order to be successful and remain relevant. Other than customers, top talent or experts consider an organization’s corporate social responsibility strategy when choosing where to work (Carroll & Shabana, 2010). This shows the importance of corporate social responsibility, not only for the sake of the society but also for them to succeed and remain relevant.
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According to Okpara and Idowu (2013), it is a win-win situation when a company engage in socially responsible initiatives. In addition to appealing to top talent and socially conscious employees and customers, an organization is in a position to make a valid difference in the world, an aspect that is quite impressive. Engaging in corporate social responsibility is also a way of earning the public’s trust, through honesty and transparency. It is advisable to engage the workers and customers in giving back. This not only enhances transparency but also make them feel that they are appreciated and they have a voice. The corporate world has considerable power, which should be used to make positive changes in the world and solve social problems. In turn, this may help bring individuals of different backgrounds and interests together for a better cause.
Forms of corporate social responsibility
Business organizations have various responsibilities that they are supposed to maintain, other than carrying out activities for profit making. These responsibilities are part of corporate social responsibility. In the event that the responsibilities are orchestrated in a pyramid, the basic ones should appear at the bottom while those relate to benefiting the society are placed higher. Corporate social responsibility could take various forms. Some of them include economic responsibilities, legal responsibilities, ethical responsibilities and philanthropic responsibilities.
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The economic responsibilities of a firm are usually a priority. Every business is basically concerned with making profits. Profits makes a company grow and keep on moving forward. A business that is not in a position to make profits cannot survive for long and for this reason; it cannot take care of its social and other responsibilities that come second to making profits. Being profitable is one step towards a company becoming a good corporate citizen (Carroll & Shabana, 2010).
Orlitzky, Siegel and Waldman (2011) point out that legal responsibilities are quite essential for a business firm. They entail the requirements that are placed on the firm by the law. Apart from making sure that a business organization is profitable, it is important to ensure that it abides by all the laws that surround the business. Some of the legal responsibilities that ought to be maintained by a firm include criminal law, labour law, securities regulations and environmental law among others.
The importance of ethical responsibilities cannot be underemphasized. The economic and legal responsibilities are major commitments of a business firm. It is therefore after an organization has fulfilled these basic responsibilities that it can be in a position to embark on ethical responsibilities. These are the obligations that an organization puts on itself, not because they are mandated to do so but because they believe it is the right thing to do. Some of the responsibilities that could fall under this category include engaging in operations and procedures that are environmentally friendly, not doing business with oppressive nations and paying fair wages and treating employees ethically among others (Orlitzky, Siegel, & Waldman, 2011).
The last category is philanthropic responsibilities. These obligations can only be possibly met if an organization is in a position to meet all the other responsibilities as discussed above. These obligations go beyond the set requirements as well as what the organization deems right. They entail efforts directed towards benefiting the society. This could include donating money and other resources to local and national charitable causes, participating in projects aimed at conserving the environment and providing services to community organizations and programs among others (Carroll & Shabana, 2010).
All these forms of corporate social responsibility are essential in maintaining a conducive environment between the stakeholders and the wider society. The fact that maintaining the above discussed responsibilities requires money and other resources means that it is not an easy thing but one that the business organizations ought to make sacrifices in order to participate in the obligations. There is need to set up and implement an effective strategy that allows for participation in corporate social responsibility activities while at the same time running the business smoothly and retaining a substantial amount of profit.
Feasibility of engaging in profit-sacrificing corporate social responsibility
The right time for firms to engage in profit-sacrificing corporate social responsibility is contentious since it is not easy to pin point the optimal time. Reinhardt, Stavins and Vietor (2008) assert that in some instances, business organizations engage in corporate social responsibility activities voluntarily, while in some cases, they do it under pressure from market or other social forces. All in all, the end result is corporate social responsibility. Regardless of whether the initiatives are voluntary or not, the social expectations and market pressures that surround a company greatly influence their economic sustainability.
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Voluntary corporate social responsibility
This is usually viewed as the purest form of corporate social responsibility whereby the stakeholders sacrifice profits voluntarily. This could involve employees and shareholders acting as the major economic agents when it comes to funding the activities. However, this is not usually automatic and there could be some resistance or lack of willingness. In some instances, employees such as the executives could sacrifice part of their earnings to promote social good. This is more so if they are offered a chance to use their earnings and benefits to support corporate social responsibility projects. This is an explicit move. On the other hand, the employees could engage in corporate social responsibility in an implicit manner for instance when an organization works in a field that is socially responsible (Reinhardt, Stavins & Vietor, 2008).
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Reluctant corporate social responsibility
As opposed to voluntary corporate social responsibility, this kind of initiative could be out of lack of an alternative. Here, the corporate decisions are made by directors and managers as opposed to the organization as a unit. In most cases, the decisions further the profits of shareholders who are profit-minded in nature. Investors could be left with little choice other than accepting some level of corporate social responsibility profit-sacrificing initiatives. External constraints could also force investors to accept profit-sacrificing initiatives. This could be applicable in the developing world whereby environmental regulatory stands are way behind compared to developed nations (Reinhardt, Stavins & Vietor, 2008). The strength of shareholder oversight and the structure of managers’ compensation greatly influence the amount of profits that managers may sacrifice against the wishes of investors.
Unsustainable corporate social responsibility
Corporate social responsibility is not always sustainable. In most instances, business organizations that engage in costly corporate social responsibility activities are forced to be involved in various aspects such as increasing prices, paying smaller dividends, accepting smaller profits and cutting down on wages and other costs as a way of dealing with the economic consequences involved. A good example is whereby a company’s stock price may go down until it is proportional to returns. In turn, this makes it difficult to attract new capital since returns are way below the market averages. There could also be other short-term economic consequences that are associated with engaging in costly and unsustainable corporate social responsibility. They include increased insurance costs, loss of reputation, increased borrowing and insurance costs and loss of market share among others. On the other hand, long term consequences could include corporate takeover, shareholder litigation or even closure (Reinhardt, Stavins & Vietor, 2008).
All this shows that inefficient organization are not in a position to participate in corporate social responsibility and survive. As a result of economic survival of the fittest, companies that get involved in corporate social responsibility initiatives that are not sustainable often do not go far. Getting involved in unsustainable corporate social responsibility simply means that the company suffers at the expense of meeting some other social responsibilities, which should never be the case. The decision of whether a company may sacrifice its profits in the social interest is influenced by many factors. This could include the size of the company; with larger organizations being in a better position to sacrifice relatively more profits. Also, public visibility could work towards increasing pressure on companies to engage in corporate social responsibility activities (Reinhardt, Stavins & Vietor, 2008). The scope and line of operation also matters, with firms in certain industries being more likely to participate in corporate social responsibility than others.
Market imperfections that drive corporate social responsibility
The economics of corporate social responsibility could be understood as a response with respect to market imperfections, as a way of satisfying social preferences. Market imperfections that drive corporate social responsibility decisions could in one way or the other affect competition, regulation or contracts (Crifo & Forget, 2015). The imperfections could fall under incomplete contracts, imperfect competition and public goods and altruism.
One way of understanding the economics of corporate social responsibility in firms is examining the delegated responsibility in imperfect contracts. Contracts are intrinsically incomplete thus necessitating the allocation of discretionary power to company executives. Therefore, by allowing the executives to exert their discretion in a manner that favours the interests of other stakeholders and not only the shareholders, corporate social responsibility strategies could act as an effective tool when it comes to incomplete contracts. Under this setting, corporate social responsibility strategies are compelled by incentives in a company’s agency association with its stakeholders, founded on internal pressure from the directors, employees as well as shareholders (Kitzmueller & Shimshack, 2012).
Corporate social responsibility can also be understood as a business strategy in imperfect competition. This is more so when aspects of market contestability, information asymmetries and product differentiation are involved. According to Crifo and Forget (2015), firms may use corporate social responsibility as a vehicle to compete with rivals, signal on credibility goods attributes as well as differentiate on the market. This therefore works as a tactical corporate social responsibility policy that a firm uses to gain competitive advantage over the competitors. Looking at imperfect completion thoroughly, it is evident that corporate social responsibility strategies are fuelled by incentives in the organization’s market structure, with respect to the competitive pressures that comes from the competitors, consumers or reputation issues.
Public goods, bads and altruism
Externalities, altruism and public goods are an example of market imperfections that drive corporate social responsibility. Orlitzky, Siegel and Waldman (2011) argue that most corporate social responsibility initiatives, especially those founded on social and environmental factors, are geared towards generating positive externalities or minimizing negative externalities. It can therefore be said that the firm’s corporate social responsibility strategies are driven by incentives that surround the firm to curtail public bads while at the same time produce public goods. The external pressures could originate from altruists, activists or even regulators. The market imperfection-driven corporate social responsibility initiatives could draw their motivations from; responding to private politics or social pressure, daunting public politics or public regulations and exercising their moral duty in undertaking social activities.
It is evident that one of the above market imperfections or a combination of them is capable of driving corporate social responsibility strategies in organizations. Whatever the case, it is important to ensure that the interests of all the stakeholders involved are considered.
Corporate social responsibility and financial performance
Corporate social responsibility influences the financial performance of an organization in different ways. There has been contentious debate on the issue of whether corporate social responsibility causes an increase in financial performance or not. According to Carroll and Shabana (2010), although the impact of corporate social performance on corporate financial performance of a firm could be minimal, it is usually positive and important. Despite the fact that corporate social performance has no much effect on value, it is interesting as it does not destroy shareholder value. There is no standard answer as to whether corporate social responsibility can contribute to superior organizational performance or whether financial performance would be a necessity for corporate social responsibility. A desirable attribute is for a firm to be successful on both financial as well as social levels. This is however not always possible.
Crifo and Forget (2015) assert that not much has be said with regard to the connection of corporate social responsibility and the financial performance of a firm and as such, there is need for further research in this areas as a way of making it more understandable. In fact, some studies have shown positive, negative or even neutral influence of corporate social responsibility on financial performance, making it hard for one to come up with a convincing result of the relationship between the two aspects. However, it still remains a significant issue for corporate management and should not be ignored. In case a positive relationship could be a possibility between corporate social responsibility and financial performance, it is advisable for the management to pursue the activities to yield positive results. On the other hand, in case some actions seem to be negatively associated with an organization’s financial performance, then the management ought to be cautious and trade carefully in this area.
Corporate social responsibility and social and environmental performance
Apart from financial performance, corporate social responsibility also touches on the social and environmental performance of a firm. The fact that corporate social responsibility results with public goods that are provided privately means that it is essential to assess its effect on nonfinancial performance as opposed to relying on financial performance only. The nonfinancial performance could be understood through environmental and social performance. When it comes to market imperfections that affect regulation, it can be said that the effect of corporate social responsibility in social performance are contentious since corporate social responsibility does not essentially heighten social welfare. On the other hand, corporate social responsibility could be understood in terms of public politics. Here, it can be a less costly adventure for government mandates. For this reason, it may increase welfare although it could also work by distorting regulatory decisions in a manner that affects social welfare negatively. All this translates to the fact that the effect of pre-emptive corporate social responsibility is influenced by various factors such as if it is done unilaterally or via a voluntary arrangement with the regulator (Crifo & Forget, 2015). It could also be dependent on whether the regulator is influenced by a given interest group or is purely out to maximize welfare.
Corporate social responsibility could also be understood in terms of private politics. To some extent, social pressure from nongovernmental organizations could be beneficial for the society since the negative externalities are minimized. The organization could act as an essential function and could enhance sterner international standard, this enhancing welfare.
Altruism is also an aspect of concern. A positive externality could be as a result of pro-social attributes that stem from image concerns. The image value that is associated with a responsible company has the ability to increase the private individual return of an organization and to some extent minimize the negative social externality costs to be rectified (Crifo & Forget, 2015). This translates to the fact that corporate social responsibility that is motivated by altruism could substitute publicly offered public goods, thus enhancing social welfare.
From the above discussion, it is apparent that the concept of corporate social responsibility is surrounded by a lot of controversy especially with regard to its relevance. Nonetheless, it is evident that it is a concept that cannot be overlooked if a business is to succeed in the contemporary competitive business world. A company could engage in various corporate social responsibility activities depending on how well they do in terms of profits and how they find it best to give back to the society. The responsibilities could be economic, legal, ethical or even philanthropic. The feasibility of firms engaging in profit-sacrificing corporate social responsibility is also an aspect that is not standardized and could vary from one company to another and depending on the business situations involved. While some firms engage in voluntary corporate social responsibility, others participate in reluctant corporate social responsibility and other are involved with unsustainable corporate social responsibility. All these are influenced by many factors. Market imperfections are also economic aspects that influence firms in engaging in corporate social responsibility initiatives. They include incomplete contracts, imperfect competition and public goods, bads and altruism. It is also worth noting that corporate social responsibility does not work in isolation but rather interacts with various economic aspects that surround organizations. For instance, corporate social responsibility influences the financial, social and environmental performance of organizations. A firm should be careful when deciding to engage in corporate social responsibility initiatives and consider all the underlying factors. This will work towards allowing for sustainability and not compromising the operation of the organization.
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