Corporate Social Responsibility and the Free Market Economy:- 1. Introduction to CSR 2. Evaluation of Market Society 3. The Function of SRI 4. Function of CSR Procurement 5. Emerging Trends and Prospects of Corporate Social Responsibility 6. Human Responsibility 7. Criticism of the Doctrine of Positive Responsibility.
- Introduction to CSR
- Evaluation of Market Society
- The Function of SRI
- Function of CSR Procurement
- Emerging Trends and Prospects of Corporate Social Responsibility
- Human Responsibility
- Criticism of the Doctrine of Positive Responsibility
1. Introduction to CSR:
At first we will define the concept of Corporate Social Responsibility CSR. The first typical understanding of CSR is that it involves a balance between economic and social aspects. But CSR is a discussion on the process of corporate economic activities per se, not how to balance economic performance and social performance.
The second is a typological understanding. Caroll (1981) defines the concept of CSR as a pyramid formed in four parts; 1st-economic responsibility, 2nd-legal, 3rd-ethical and discretionary responsibility = philanthropy
However, this typological approach cannot analyse the complicated relationship between corporations and society. The third understands CSR as a distribution of added value. A theory of CSR accounting shows that added value should be distributed equally not only to stockholders but also to other stakeholders.
The essence of CSR discussion is the process of economic activity itself which produces the economic values. Corporations are required to conduct activities in a socially responsible way to develop a sustainable socioeconomic system.
The essential point of CSR is to incorporate social fairness, ethic, environmental and human rights in the management process to make clear their accountabilities to the stakeholders. The questioned is how to manage the issues such as environment, labour and employment, human rights, products, work environment and human rights in developing countries, and the disclosure of information. It’s not proper to define that compliance comes first and CSR goes beyond it.
2. Evaluation of Market Society:
Up to now, CSR has been treated as a periphery of business management, and as a social issue. However, recently it is beginning to be understood as a major part of management, and as an economic issue. It was seen that companies that caused social problems used to be asked their responsibilities, and they came under pressure from social movements outside the marketplace.
But since the 1990s, not only boycott activities, but the criterion of CSR has been incorporated into investment, finance, transaction and procurement. Rating and choosing companies in the market by the criteria of CSR is starting to become mainstream.
The following are the main five reasons for demanding CSR in the market:
1. Purchasing Standards of Consumers- NGOs monitoring the corporate activities and providing information have grown and gained public support.
2. Code of Conduct- Standards of corporate activities set by NGOs, international and management organisations. ISO now discusses the setting for a new guidance on the social responsibility of an organisation; ISO 26000.
3. Standards of Investment- The total assets of Socially Responsible Investment (SRI) have grown for the past ten years, and have increased in popularity. A growing number of institutional investors, mainly in pension funds, are beginning to carry out SRI.
4. Standards of Finance- Development of environment-CSR conscious financial products. UNEPFI established the Principle of Responsible Investment (PRI) in 2006.
5. Standards of CSR Procurement- A standard of CSR is incorporating into transaction and procurement conditions. CSR is becoming incorporated also into government procurement.
By setting a standard of rating corporations in the market beyond costs and the quality of products and services, CSR is growing in demand, and corporations are asked whether their production process is proper or not, and whether their management system is accountable or not, CSR elements will get involved with criteria in consumers buying products, investors evaluating corporations to invest, and financial institutions making a loan. Also, CSR is beginning to be included in procurement agreements with suppliers.
Environmental and social aspects are joining with subjects such as quality, and cost and delivery date, and CSR procurement is appearing in the market. Through incorporating CSR into the base of economic activities, a new norm is gradually developing in the marketplace, and is leading to the formation of a new standard of corporate evaluation.
With these trends in the marketplace, companies have no choices other than to respond to CSR issues property whether they can afford to ‘invest’ or not. Of course that does not mean CSR is already incorporated and fixed as a mainstream of the marketplace. But in the past ten years, such movements have gradually spread around the US and EU markets. It can be said that the discussion of GSR is maturing and comes to stay as one of the norms in the market.
3. The Function of SRI:
Let’s focus on the following two styles of SRI:
1. Social Screen- Selection of investment stocks, by rating corporations by both the financial index and the social index and the establishment of SRI mutual funds.
2. Shareholder Activism- Dialogue and engagement with corporate managers taking shareholder resolutions.
SRI assets in the USA rose more than 3.6 times from $639 billion in 1995 to $2.29 trillion in 2005. This is 9.4 per cent of the $24.4 trillion in total assets under professional management. Nearly one out of every ten dollars is involved in SRI. In England, total assets by social screen stood at £224.5 billion in 2001, 12.7 per cent of the market.
It grew about 10 times comparing to £22.7 billion in 1997. One of the reasons of this growth, especially with the revision of Pension Act in 2000 as a turning point, is that pension funds incorporated SRI into their performance.
In Japan, the size of SRI is still very small, it is composed of only SRI mutual funds and just a few corporate pension funds. As of the end of March 2006, there were 24 SRI funds, their total assets 258.5 billion. The total net asset of all the mutual funds in Japan at that time is ¥58.479 trillion, so the percentage of SRI assets is only about 0.4 per cent. This means SRI mutual funding is not enough strong to influence on the market.
SRI has not yet become a mainstream of the market even in the US, nor in England, have the largest SRI market. The current small size of the market does not allow companies which are selected in the SRI index and mutual funds to have the advantage of others in fund raising. However, corporations chosen from the bread rating standards such as social, environmental and economic aspects, receive good reputations in the market society.
It might take a little more time until earning a high reputation in the SRI rating comes to be understood as a common criterion in the general finance market. To have the market mature to evaluate CSR, establishing the laws and systems expanding SRI and helping individual/institutional investors to grow are also required.
With the trend of SRI becoming a mainstream as indicated above, the mainstreams in finance have tended to include SRI in their financial scheme recent years. In financial institutions, a trend of incorporating Environment (E), Society (S) and Governance (G) into investment standards is beginning to spread. The rating of corporations is based on financial data in the mainstream, but in the mid-and long-term, environmental risks and an inadequate governance system influence the financial performance.
There is such a movement to try to take on these material elements into corporate evaluation. It is said that this style involves only socially- critical risk factors and differs from the basic SRI style that covers all of the social and environmental issues. However, as the market matures, mainstreams in finance face to meet these needs responsively. It is said that the rating systems for corporations have been gradually changing.
Asset Management Working Group of UNEPFI issued a report “Materiality Report” on June 2004. Materiality is a term that means having an important impact on corporate management and evaluation. UNEPFI is considering an investment principle for institutional investors that points out that those factors such as Environment, Society and Governance have a great impact on the investment portfolio of institutional investors.
The United Nations secretary general Kofi Annan launched “The Principle of Responsible Investment” in April 2006. This is a guideline of how to consider E, S and G when financial institutions make investment decisions and involve themselves in the stock market. The importance of a rating style called “Materiality Evaluation” is starting to be realised now.
4. Function of CSR Procurement:
Next we will look at how CSR procurement works. If CSR comes to be incorporated as a part of procurement standards, corporations will get influenced directly by its movement. Along with a spread of production network, not only for parents companies but subsidiaries, supply chains and subcontractors both at home and abroad, their business process and CSR systems are beginning to be questioned.
Quality, cost and delivery dates are indispensables for purchase agreements. In addition, ‘”environmental procurement” which outlines standards for the environment has been incorporated into purchasing criteria and has spread and stabilised over the last ten years. Along with the globatisation of production activities, strict environmental standards are required also in local production factories. In addition, compliance followed by labour and human rights issues is to be included in the criteria.
As a negative part of globalisation, the ‘sweatshop’ problem, forced labour under poor working conditions, has been revealed in the developing countries. NGOs criticising and monitoring labour, human rights and environmental issues in factories in developing countries are growing.
Should the boycott movements become spread in the market, corporate reputations would get severely damaged, in this situation, companies including suppliers and their partners abroad are beginning to engage in making procurement standards on labour, human rights and environmental issues. IT companies in the US and Europe establishes a unified platform of CSR procurement.
For instance, Hewlett-Packard has been active in CSR procurement since 2003. The following companies have joined HP- Del, IBM, Cisco Systems, Microsoft and Intel and so on They collaborated to establish a uniform standard of CSR procurement “Electronics Industry Code of Conduct” (EICC) in the fall of 2004, EICC have been outlining standards to promote industry criteria for socially responsible business across the globe since 2005.
The Code is made up of five sections.
(2) Health and Safety.
(4) Management System,
The companies work collaboratively with suppliers to develop harmonised approaches for the monitoring, reporting, and auditing of the social and environmental issues and programmes to enhance supplier capabilities.
In Europe, Global e-Sustainability Initiative (GeSI) is developing a supplier Standard based on CSR in the information and community industry. The core members of the working group, CSR on supply chains, are BT, ERICSSON, Vodafone, Motorola. Deutsehe telecom and Panasonic mobile. EICC and GeSI established a partnership in the fall of 2005. HP and Cisco system are the same members of this group. They are expected to establish a unified method of monitoring suppliers and of risk assessment.
Some Japanese companies are also making efforts to set CSR procurement standards. Sony participated in EICC in 2005. NEC has incorporated CSR into fundamental policies of their procurement standards since 2005, and they are demanding their suppliers to consider CSR.
The following six points are indicated as major issues especially from the point of risk management:
(1) Quality and safety risk of products,
(2) Environmental risk,
(3) Information security risk,
(4) Risk of fair-trade,
(5) Occupational safety and health risk,
(6) Human rights risk.
In implementing CSR procurement, it’s important to make collaborative efforts with group companies and suppliers without a one-sided rule for subcontractors, the same way as environmental procurement is conducted.
For example- the CSR manager of Mitsubishi Plastics Inc. says that they are timing for sustainable development with their partners as following the standard, not focusing on selecting their business partners. In contrast, Wal-Mart in China takes a strong position to have no commitment or to even cancel their contracts with companies without a certain achievement of CSR.
As the network of CSR procurement spreads in the market society, its influence becomes much stronger. NEC is included as one of the top 40 suppliers of HP from the beginning when it started in 2003, and NEC were also demanded CSR procurement from Vodafone in England.
But they could not manage issues such as improving working conditions and human rights in developing countries although they were preparing for their CSR management system. They had to grasp the situations of suppliers and take a serious approach to CSR consistently on a global scale. With their group companies, they reviewed their code of conduct, and have started to develop a new approach to those issues since April 2004.
There is global pressure on many Japanese companies concerning CSR procurement because they have not properly managed their local subsidiaries’ and suppliers’ activities in developing countries. Domestic suppliers and small and medium-sized companies are finding themselves in a situation where they can’t say they have enough resources to carry on CSR any more. The requirements of CSR procurement will spread more in the near future.
When implementing CSR procurement, we face financial burdens. It costs a tot for manufacturers to develop their own standards of behaviour in order to operate and improve systems that supervise, manage and monitor their suppliers.
To reduce such costs and prevent the companies which are already committed from being disadvantaged, it is a good idea to construct common platforms. For the suppliers, it’s tough work to meet the demands of compliance with each standard from different manufacturers. If a unified standard comes to be specified by industry, that would lead to cost saving.
5. Emerging Trends and Prospects of Corporate Social Responsibility:
Social responsibility is an ethical or ideological theory that an entity whether it is a government, corporation, organisation or individual has a responsibility to society. This responsibility can be ‘negative’ in that it is a responsibility to refrain from acting (resistance stance) or it can be ‘positive,’ meaning there is a responsibility to act (pro-active stance).
While primarily associated with business and governmental practices, activist groups and local communities can also be associated with social responsibility, not only business or governmental entities.
There is a large inequality in the means and roles of different entities to fulfill their claimed responsibility. This would imply the different entities have different responsibilities, in so much as states should ensure the civil right of the citizens, that corporations should respect and encourage the human right of their employees and that citizens should abide with written laws. But, social responsibility can mean more than these examples.
Many NGOs accept that their role and the responsibility of their members as citizens is to help improve society by taking a pro-active stance in their societal roles. It can also imply that corporations have an implicit obligation to give back to society (such as is claimed as part of corporate social responsibility and/or stakeholder theory).
Social responsibility is voluntary; it is about going above and beyond what is called for by the law (legal responsibility). It involves an idea that it is better to be pro-active towards a problem rather than reactive to it. Social responsibility means eliminating corrupt, irresponsible or unethical behaviour that might bring harm to the community, its people, or the environment before the behaviour happens.
In today’s society, a business must maintain ethical principles in order to be successful. Kaliski, 2001. Businesses can use ethical decision-making to strengthen their businesses in three main ways. The First way is to use their ethical decision-making to increase productivity. This can be done through programmes that employees feel directly enhance their benefits given by the corporation, like better health care or a better pension programme.
One thing that ail companies must keep in mind is that employees are stakeholders in the business. They have a vested interest in what the company does and how it is run. When the company is perceived to feel that their employees are a valuable asset and the employees feel they are being treated and such, productivity increases.
A second way that businesses can use ethical decision-making to strengthen their businesses is by making decisions that affect its health as seen to those stakeholders that are outside of the business environment. Customers and Suppliers are two examples of such stakeholders. Take a look at companies like Johnson & Johnson, their strong sense of responsibility to the public is well known.
In particular, take for instance Johnson & Johnson and the Tylenol scare of 1982. When people realised that some bottles of Tylenol contained cyanide they quit buying Tylenol stocks dropped and Johnson & Johnson lost a lot of money. But they chose to lose even more money and invest in new tamper resistant seals and announce a major recall of their product. There was no ‘certain amount’ for this situation; Johnson & Johnson had to Jose money to be socially responsible, but in the long run they gained the trust of their customers.
Now when people look at other products, there is a sense on with and trust in that Johnson & Johnson would not allow a product to harm people just to meet their own bottom line. The exactly opposite picture had been portrayed by Union Carbide in the Methyl Isocy anide gas leak incident in Bhopal, India in 1984.
A third way that business can use ethical decision-making to secure their businesses is by making decisions that allow for government agencies to minimise their involvement with the corporation. For instance, if a company is proactive and follows the EPA guidelines for admissions on dangerous pollutants and even goes an extra step to get involved in the community and address those concerns that the public might have, they would be less likely to have the EPA investigate them for environmental concerns.
“A significant element of current thinking about privacy, however, stresses ‘self-regulation’ rather than market or government mechanisms for protecting personal in information”. Most rules and regulations are formed due to public outcry, if there is not outcry there often will be limited regulation.
While social responsibility hold obvious moral value, it carries with it economic value as well. This economic value can be defined as the total dollar amount individuals are willing to pay for or invest in socially responsible goods or practices. It has been estimated that over $530 billion can be extracted from the United States’ gross domestic product for the purpose of funding socially responsible practices.
6. Human Responsibility:
One part of social responsibility is being responsible to people, for the actions of people, and for actions that affect people. Social responsibility is about holding a group, organisation or company accountable for its effect on the people around it. People within the company, people working with the company, the community the company is in and those who buy from the company.
The idea of being responsible, to customers has actually long been imbedded in the ethics of business. The idea of treating a customer with respect and attention is not new particularly in sales and commission based work. What is new is the idea that it’s not to profit from the customer, but to genuinely care about what the customer wants and needs.
Accountability for people inside a company is something new. Many times when a scandal or irresponsible behaviour comes to light in the corporate world the company and those involved often try to distance themselves as much as possible. Cover ups, buy offs and “golden parachutes” all fall under this behaviour.
Social responsibility would nearly be the opposite of what goes on the business world today a company taking the blame and doing what is needed to fix the problem rather than committing more crimes to cover up the first one.
In many countries, by law, a corporation’s only responsibility is to make as much money as possible for shareholders (economic responsibility) and to obey the law (legal responsibility). Social responsibility holds companies and organisations responsible for the people they affect, even directly. It also holds a company responsible, for inaction, or indecision.
Basing on the idea that a company or organisation has the power to help people or, at the least, not harm them, it has the moral responsibility to do so. Social Responsibility is a doctrine that says that every being whether it is a village, town, state, corporation, organisation, government or individual has responsibility to society.
If people take a look at business ethics as a whole and how those individual decisions within a company are made we can gain a better understanding of how socially responsible ethics works within the context of human responsibility. First most (at least half) of all corporations base their decision-making off of the company’s code of ethics.
This ethical code allows for business managers to have an outline to bring forth their decisions from. The code of ethics is just a starting point within the company, a tool to be used by CEOs to help guide employees when they are faced with ethical dilemmas.
There are always three Factors that we can confront in facing an ethical dilemma. The first factor is the individual factor or what decision we might make ethical when we are left to our own judgment, the next is the social factor or the decision that we might make with social reasoning interjected and the last being the opportunity factor. To place these factors in a better light we can use the following example.
Let us pretend for a moment someone is standing in front of a 7-11 store. That person sees a gentleman come out of the store and drop a ‘twenty-dollar bill in front of them and keep walking down the street. That person looks around there is no else there, the gentleman is now half way down the block. No one else except that person saw him drop the twenty-dollar bill.
What should the do? Should he return the twenty dollars to the man who dropped it, even though he is far away at this point and might take some effort to catch up with? Should he take the twenty dollars and run in the 7-11 and quickly spend it? Or should he go for the middle of the road option and hand the money to the clerk behind the counter at 7-11, in case the man returns to try and find his missing money? This is the individual factor, what should he do when faced with an ethical decision as an individual.
Now people can take the same scenario and change it slightly. Now instead of standing in front of the 7-11 alone you are now with a group of friends. Say you all are standing out in front of the store having a new beer and now you and your friends see the gentleman drop the twenty-dollar bill and keep walking.
What do you do? What do your friends do? If your friends take the money and you don’t agree would you say something to them? Would you try and stop them? At what point do your ethics change given your social surroundings? Would you make the same ethical decisions if instead of a bunch or your friends you were with co-workers? What if it was just you and your spouse? What if you were in the same situation but you were there with your children. This is the social factor.
The opportunity factor comes into play in that if the gentleman never drops the twenty-dollar bill, people never have to make an ethical decision. Our code of ethics comes in under our social factor. Once the opportunity factor has been introduced, and then even as an individual in a work place setting we have a code of ethics to guide us as a social factor.
These codes are created, however, just to be guidelines. After all “There is no way that all situations that involve ethical decision-making an organisation can be addressed in a code. Codes of ethics must be monitored continually to determine whether they are comprehensive and usable guidelines for making ethical business decisions.
When it comes to the actual decision process in the human responsibility part of socially responsible ethics there are many other factors that can be used to make ethical decisions. For instance, there are several areas that a manger could point an employee to outside a code of ethics to assist them with making an ethical decision.
Some of them are:
a. The Golden Rule- Act in a way you would want others to act towards you.
b. The utilitarian principle- Act in a way that results in the greatest good for the greatest number.
c. Kant’s categorical imperative- Act in such a way that the action taken under the circumstances could be a universal law, or rule, of behaviour.
d. The professional ethic- Take actions that would be viewed as proper by a disinterested panel of professional peers.
e. The TV test- Always ask, “Would I feel comfortable explaining to a national TV audience why I took this action?”
f. The legal lest- Ask whether the proposed action or decision is legal. Established laws are generally considered minimum standards for ethics.
g. The four-way test- Ask whether you can answer ‘yes’ to the following questions as they relate to the decision: Is the decision truthful? Is it fair to all concerned? Will it build goodwill and better friendships’? Will it be beneficial to all concerned?”
All of these can help to guide an employee when the code of ethics is lacking or simply when the code does not cover all areas that an employee might run into. These factors come into what is needed to explain human responsibility part of socially responsible ethics.
7. Criticism of the Doctrine of Positive Responsibility:
Many, particularly libertarians, assert there is no ‘social responsibility’ to do anything, but to refrain doling. They argue that social responsibility only exists to the extent that an individual or business should not initiate physical force, threat of force, or fraud against another.
In his famous article The Social Responsibility of Business is to Increase Profits, Nobel economist Milton Friedman (Classical View/theory of Social Responsibility) asserts that businesses have no social responsibility other than to increase profits and refrain from engaging in deception and fraud. He maintains that when business seek to maximise profits, they almost always incidentally do what is good for society.
Friedman does not argue that business should not help the community but that it may indeed be in the long-run self-interest of a business to “devote resources to providing amenities to [the] community…” in order to “generate goodwill” and thereby increase profits. Another famous economist highly critical of this doctrine is R. Edward Freeman, author of a number of papers on stakeholder theory from an explicitly libertarian perspective.