Why Do Companies Engage in CSR?

Miles and Munilla (2005) describe the motives for participating in CSR by using Van Marrewijk’s (2003) CSR Framework and Carroll’s (1991) Pyramid of Corporate Social Responsibility, which can be observed in table 1. This table illustrates how different levels of commitment to CSR are related to motives and outcomes. The framework describes that a company’s CSR philosophy can be, compliance driven, profit driven, driven by caring, synergetic or holistic. In the first stage of CSR category, which is called the legal stage, companies engage in CSR as it is their duty and obligation to follow laws andregulations. In the economic stage, companies use CSR as a strategy to create a competitive advantage and gain improved financial performance. The ethical and philanthropic stage has the aim to have a balance between the profit, people and the planet. In this stage the company does not only focus on profit but also on social welfare. (ibid)

Several authors argue that companies can gain enormous benefits by being socially responsible (Idowu & Papasolomou, 2007). However, there are a large number of different views of why companies engage in CSR and what benefits a company actually gets from participating in CSR.

Kotler and Lee (2005) argue that companies participate in CSR in order to look better, feel better, do better and live longer. They explain that by participating in CSR the company will look good in the view of potential customers, business colleagues, investors and in the media etcetera.

Furthermore, employees, customers, stockholders and board members will actually feel good.

Many also argue that CSR improve the brand, and some claim that companies with a strong reputation for CSR will last longer. Kotler et al. (2005) describes that companies can gain great benefits from participating in CSR and that these benefits are the reasons for their engagement in

CSR. Kramer and Porter (2006) describes the reasons for participating in CSR by moral obligation, sustainability, license to operate and reputation.

Moral obligation – The companies engage in CSR since they believe it is their duty to be a good citizen and “do the right thing”.

Sustainability – The company focuses on environmental and community stewardship with the belief that it is best for the company in the long run. A good explanation for this comes from The World Business Council who explains sustainability as followed: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

License to operate – Many companies only engage in CSR because they are forced to since they need to follow regulations and permissions from governments, communities and other stakeholders to be able to conduct business.

Reputation – Many companies explain that they use CSR to improve the reputation and company image, to strengthen the brand, in order to demonstrate moral and because it even could raise the company’s stock value.

Kotler et al. (2005) has another view they describe that companies participate in CSR in order to gain several benefits, they explain the following as the main ones:

• Increased sales and market share – There is strong evidence that when customers make decisions of which product to buy they consider factors such as the company’s participation in CSR- activities.
• Improved brand positioning – When a company or a brand is associated with CSR it affects the brand image and customers are likely to have a positive feeling towards it.
• Improved image and clout – The company can gain positive publications about their CSR activities in different reports and business magazines.
• Increased ability to attract, motivate and retain employees – Employees working for companies that participate in CSR-activities describes that they are proud of their company’s values and that it motivates them. 

Decreased operation costs – Many companies describes that their CSR activities result in decreased operating costs and increased revenue. A company can for example reduce costs for marketing campaigns, as it is common that the company gains increased free publicity as a result of their CSR engagement.

Increased interest for investors and financial analysts – Some argue that CSR activities can increase stock value and that it is easier for companies participating in CSR to get access to capital. (ibid) Even though many argues that companies can gain enormous benefits from participating in CSR Kramer et al. (2006) explains that it is hard to determine what benefits a company really gets from their CSR engagement. They continue to describe that analyses of benefits gained from participating in CSR are inconclusive. Moreover, Kramer et al. argue that the connection between good actions and customer attitudes are so indirect that it is impossible to measure.

However, they are convinced that CSR will become even more important for competitive success in the near future.

Moreover, some argue that CSR do not affect the company at all, while others argue that CSR even can affect the company negatively (McGuire et al, 1988). The main critic for CSR is that it challenges the traditional corporate objective of profit maximization. Furthermore, many argue that companies should maximize shareholder wealth not social welfare and that managers do not have any obligation, right or experience to improve social issues (Clark-Murphy, Gerrans, Kristoffersen, 2005). Chairer, Hansen and Leung (2005) even claim that CSR activities can affect the shareholder value negatively.

Smith (2007) believes the opposite, he argues that companies rated high in participation of CSR have a better performance than companies scoring low at this dimension. Furthermore, he argues

that by engaging in CSR companies can gain a competitive advantage as well as improved reputation.

Idowu et al. (2007) describe that e.g. stock markets and financial institutions have started to register companies that are participating in CSR as well as information about their actions. This has increased the pressures for companies to participate in CSR. It has also become common that institutional investors demand guidelines and information about the company’s CSR activities and many investors and stakeholders take this in to consideration when deciding which company to invest their money in.

Kramer et al. (2006) has a similar view they describe that the pressure has increased for companies to participate in CSR from e.g. stakeholders, governments, activists and the media.

Moreover, Kramer et al. (2006) claim that people are also starting to hold companies to account for the social consequences of their business activities.

Golob and Podnar (2007) also share similar views they describe the core of CSR as the idea that no company can afford to act opposed to or without concern to the society. Therefore it is crucial for companies to engage in CSR in order to meet societal and stakeholder wants and expectations. Smith (2007) explain that the demand for companies to participate in CSR has increased since the concern for the environment has grown and that companies therefore have started to engage in CSR.

To conclude, Chairer et al. (2005) argues that most companies do not participate in CSR in order to do the right thing, they do it to create increased financial value for the company.

Corporate Social Responsibility History

CSR may be viewed as a relatively new concept, but some of its practices can be traced back in history. Chryssides and Kaler (1993) describes how the Roman Catholic Church, particularly in the Medieval period, defined pieces of can law which prescribed what was legitimate behaviour in different fields of the business world. The Law of Moses prevented reapers from harvesting all crops, since they should leave some for the poor. Servants were entitled to their Sabbath rest day, just like their masters. There was to be an amnesty

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period every fifty years in which all debts were cancelled, what was called the Year of the Jubilees. The first books on CSR were published in the 1930´s with one of the most influential being the “Social Responsibilities of the Businessman” by Howard. R. Bowen in 1953 (Windell,

2006). It could be said that the actual concept of CSR in the West has its beginning in 1948, after World War 2, when the United Nations created the Human Rights Declaration. This doctrine was followed by the ILO Declaration on Fundamental Principals and Rights at Work in 1972. In “Making Globalization good, the moral challenges of global capitalism”, Davies (2003) describes how the concept of CSR emerged first in the 1960´s among internationalizing companies from America and those involved in former colonial states in Africa and Asia. The companies emerged in stakeholder dialogues to justify their presence in new markets, but also as a response to the American civil rights movements in the 1960´s and 1970s. A number of writers in the last quarter of a century recognised that the activities of organisations have an effect on the external environment. The authors suggested that companies should be accountable not only to their shareholders but also to other stakeholders. These concerns first appeared in the 1970s and were for example stated by Ackerman in 1975 who argued that companies were realizing the need to adapt to a new social climate of community responsibilities, but that the focus on financial results prevented them from social responsiveness. The rights of all stakeholders have to a great extent been a relatively new phenomenon (Crowther & Rayman-Bacchus, 2004). There have also been arguments against the concept of CSR. Milton Friedman debated against CSR in New York Times Magazine in 1970, where he was quoted “there is only one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as its stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” ( Windell, 2006).

The CSR movement initially had a strong focus on environmental issues. The first UN global environment summit was held in Stockholm in 1972. The Earth Summit in Rio de Janeiro in 1992 marked a start for a changing business approach when business community made efforts to contribute to the dialogue on environmental, economic and social issues by establishing the Business Council for Sustainable Development (BCSD). In his speech at the World Economic Forum in Davos in January 1999, Kofi Annan, UN Secretary General, challenged businesses and countries to adopt universally agreed upon values in the areas of human rights, labour standards and environmental protection. This was the start of the network Global Compact for the 21st Century. In July 2000 The Global Compact initiative was launched in Johannesburg. The claims it makes on the global economic system are threefold:

1. The respect of, and support for, human rights
2. The elimination of all forms of forced child labour
3. The response to ecological challenges.

The European Union is concerned with Corporate Social Responsibility since CSR is considered to positively contribute to the strategic goal decided in Lisbon 2000: “to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion”. A Green Paper on Corporate Social Responsibility was developed with the aim to launch a wide debate on how the European Union could promote Social Responsibility at both the European and international level (Green Paper Promoting a European framework for Corporate Social Responsibility, 2001). In 2006, 14 of the 25 European countries claimed that they had been actively engaged in promoting CSR in their respective countries and 16 governments claimed that they had established business incentives in the area of CSR. Despite this lawmaking in the area of CSR is not very well developed in Europe but some efforts have been made. For example, Belgium, Germany, Sweden and UK have regulated their national pensions funds to include social, ethical and environmental concerns and the number of funds with these concerns have increased from 54 to 354 in Europe between 1990 and 2004 (Windell, 2006). In between the events mentioned above, a number of frameworks, guidelines and code of conducts have been developed. To show the diversity of initiatives some of the main initiatives are presented in appendix 1. When we talk about the CSR development in the West it is important not to forget the differences between various nations and regions. Not even Europe can be treated as one homogenous region with regard to the development of business ethics and Corporate Social Responsibility.

In the study “`Implicit´ and `Explicit´ CSR: A conceptual framework for understanding CSR in Europe” (Matten & Moon, 2004), the authors present a conceptual framework of CSR with the objective to understand the differences between CSR in Europe and CSR in the United States. The report tries to explain why the CSR agenda in Europe traditionally has not been as developed as in the United States and to explain the more recent and relatively rapid rise in CSR in Europe.

The rights of employees have been one of the more important topics in the United States. Fair wages, working time and conditions, healthcare, redundancy, protection against unfair dismissal are examples of key issues to which CSR policies have been addressed. The authors conclude that the absence of CSR policies in many European companies with regard to employment related issues is because many of these issues are set within the institutional framework, as rules or laws, in Europe. CSR as a voluntary corporate policy in Europe do not get the same attention since these issues are part of the legal framework. The European companies do not appear to be as engaged in philanthrophy as the American companies. This is explained by the fact that in Europe relatively high levels of taxation together with a more developed welfare infrastructure result in companies perceiving an area such as CSR to primarily be the overall responsibility of governments. It is not only the CSR agenda that derives from the United States. The formal academic subject of business ethics is to a great extent an American invention and has most of its roots and a large part of its traditions in the United States (Matten & Moon, 2004). The reception of business ethics in Europe is fairly young and only became visible in the beginning of the 1980´s. While the authors of the study ” `Implicit´ and `Explicit´ CSR: A conceptual framework for understanding CSR in Europe”, try to explore the differences between CSR in Europe and CSR in the States, Crane and Matten (2004) try to explain the differences in business ethics between the United States and Europe.

As an example, in the United States there is a strong culture of individualism which means that individuals are responsible for their ethical choices. It is the individual who usually is expected to be responsible for making the right ethical choices. In Europe governments and trade unions have been key actors in business ethics. The key guidelines for ethical behaviour in Europe tend to be stipulated in the legal framework. In the United States the key guidelines come from business themselves, as corporate codes and similar. Since the state in the United States, does not take full responsibility for regulating areas like workers rights and salary issues, these concerns become the responsibility of the individual company. In Europe, in contrast, social issues are usually organized in the framework for businesses.

The application of CSR

According to Graafland, Eijffinger, Stoffele, Smid and Coldeweijer (2004) CSR relates to a set of highly diverse behavioral aspects within a company. Based on previous research, Graafland et al. (2004) have distinguished more than 60 concrete aspects of CSR. It is even possible to refine these aspects even further in order to observe even more aspects of CSR. Baring this in mind, the high diversity of CSR makes it difficult to give an exact definition. Graafland et al. (2004) stresses the importance of determining how companies apply CSR in their business by determining how they choose to define what CSR is since it differs significantly between companies. They therefore give the following three examples originally established by “Social Economic Council” and “World Business Council for Sustainable Development” to illustrate this: (ibid)

Example 1: A firm takes on a visible role in the society which goes beyond the core business and beyond what the law requires and which leads to added value for the company and the society.

This definition was established in order to advice companies about CSR. However, Graafland et al. (2004) argues that this definition is too narrow for two main reasons. Firstly, CSR often relates closely to the core business of a company. For example, an oil company invests in alternative and less polluting petrol brand which contributes to the welfare of the society as a whole. Secondly, criticism speaks out that CSR does not only concern aspects that go beyond the law. It should also refer to how serious a company applies the law. For example, when preventing fraud and guaranteeing safety. Does a company really act in accordance with the intention of the law and not apply a minimum interpretation? (ibid)

Example 2: CSR incorporates two elements.

1 Sufficient focus by the enterprise on its contribution to public prosperity in the longer run

2 The relationship with its stakeholders and society at large This definition was established in response to the criticism of the former definition. The first paragraph points out that a company can be viewed as a value creating entity. In this case, value creation does not only relate to economic value. Moreover, it refers to value creation in three dimensions; this is called the “Triple P bottom line” and it is divided into: Profit, People and Planet. (ibid)

• Profit, the economic dimension. This dimension refers to the creation of value through the production of goods and services and through the creation of employment and sources of income.
• People, the social dimension. This has a variety of aspects concerning the effects for human beings, inside and outside the organization, like good labor relations, safety etc.
• Planet, the ecological dimension. This dimension relates to the effects on the natural environment.

Graafland et al. (2004) states that an important aspect of the second example is that it take the relationship of the company with its stakeholders and the society at large into consideration. The definition also points out the importance of good stakeholder r elations as well as having an open way of doing business and a willingness to have a continuous dialogue with several interested parties. Furthermore, it distinguishes between primary and other stakeholders. Employees and shareholders are considered to be primary stakeholders since they have forms of structural consultation with the managers of the company. All others who have a certain interest in the company’s activities are considered “other stakeholders”. These can include: consumers, suppliers, competitors, the government as well as the society at large. (ibid)

Example 3: CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community at large.

The third example has been established and it differs slightly from the previous two examples. Firstly, the third example refers to ethical behavior; this is not addressed in the other examples.

In comparison with example two were the so called “three P´s” are addressed, here it is simply referred to as “quality of life”. Thirdly, example three does not stress the relationship with stakeholders, which example two does.

Principles of Corporate Social Responsibilities

Many companies are adapting to the CSR idea and are involved in some activities that they consider to be CSR. However there has been a lot of uncertainty the has surrounded this term and its necessary to have a clear idea to be able to measure it later on. According to David Crowther & Guler Aras, there are three main principles of CSR. They are Sustainability, Accounting and Transparency.

* Sustainability

As the word sustainability suggests, sustainability is all about the decisions taken at present in a company and its impact on the future. Sustainable development is both possible and desirable by most of the companies. So, firms should make a conscious effort to invest in technology and in development towards the society. As per the study by Zwetsloot (2003) every company needs to continuously invest in technology and be actively involved in continuous improvements and innovations to be able to have sustainable development.

A detailed study is done on sustainability and published in the Brundtland Report published in 1987. As per the Brundtland Report the sustainable development has been defined as

“Development which meets the needs of the present without compromising the ability of the future generations to meet their own needs.”

As per the Brundtland Report there have been other report formats also that have been developed and the concept of Triple Bottom Line has evolved from this report. Most of the companies now consider that focusing on the economic, social and environmental aspects is sufficient for the companies to sustain themselves. However, in the present scenario these three parameters under Triple Bottom Line are considered to be insufficient and are not accepted to be the only aspects to sustainable development. The study by David Crowther & Guler Aras has redefined the components of sustainability. First parameter is societal influence, which is defined as the measure of societal impact on the companies, stakeholders influence and their future actions. Second, is the environmental impact, which considers the influence of the company’s decisions and actions, taken at present on the surrounding environment. Third, is the Organizational culture, which is defined as the relationship of the company with its employees and other internal stakeholders. The fourth and final parameter that is used to ensure sustainability of the organization is the financial parameter. This is defined as the amount of return that the company generates for the investment that they have done and the risk taken by the company. All these parameters ensure a fine balance between sustainability and sustainable development of the company.

* Accounting & Transparency

There is a great emphasis on the ethical aspects of the company and this in turn demands the company to be accountable to its internal customers i.e. employees, its external employees and the stakeholders. Businesses attempts to maximize profits as their first and foremost goal, however now days companies cannot just stop at that. They have to focus on the ethical and the social factors also equally and ensure the they maintain transparency in their accounting systems and the policies that they follow in the companies. According to the study by Crowther, David (2005) ethics is a natural and structured process of acting in line with the moral judgments’, standards and rules. As ethics is a very subjective topic is it difficult to define it accurately and its implication for each and every company could be different. Companies need to follow business ethics and need to maintain a certain standard, as the companies who don’t follow ethics and don’t maintain honesty would be far away from achieving their goal and keeping their stakeholders satisfied (Aras, 2006). Most of the consumers believe that the companies which maintain the ethical standards are having more open accounting standards and are transparent in their processes. Accountability of such companies is considered to be much higher than the other companies.

There are four main imperatives that the companies need to pursue while practicing the CSR. They are maintaining the minimum legal, economic, ethical and philanthropic aspects that are expected by the customers and stakeholder.

Drivers of CSR

The catalytic forces of the Exxon Valdez oil spill, Shell’s Brent Spar oil spill and (Reis, Dayr; Betton, John; Pena, Leticia, 2004, p. 5) the hanging of Ken Saro-Wiwa, the writer and champion of Ogoni rights in the Niger Delta were the main causes that ignited the Corporate Social Responsibility movement. The forces that are driving CSR today are essentially due to the overwhelming shift in the interaction of the state, the individuals, and the market. The core drivers of CSR are the growth in stakeholder expectations, the responsibility for the supply chains, the diminishing role of the state and the increasing pressure from the shareholders. (2004, p. 1) An article by Reis, Betton and Pena indicates that stakeholders of businesses that are affected by the management’s decisions have come into the mainstream by voicing their ever growing interest in the workings of the corporations and is forming different stakeholder groups which include employees, consumers, activists, community members, shareholders. Also chief executives and politicians both are recognizing that their good relations with their own as well as other countries would determine their future environment. They have realized the benefits of an open country and are thus involving stakeholders in its decision making process as well as are being accountable to them.

(Mr. Doug Miller, 1999) According to the survey by Environics’ Millennium on Corporate Social Responsibility conducted on approximately 25000 citizens from 23 different countries found that 20 per cent of consumers were content and suitably rewarded or fell short and therefore punished by the companies based on their perceived social performance, also the majority of them wanted that companies should highlight their social and environmental goals rather than their economic goals. (Ltd., 2001) It also reported that companies that did not address social responsibility held their market share at risk.

Another driver of CSR is the shrinking/diminishing role of the state, and it is also linked to the growth in stakeholder expectations. (Ayres, 1997)Political theorist Jeffrey Ayres comments “globalization, by weakening the powers and capacities of the state to intervene in traditional areas of social, political, economic, and cultural concern, has in turn reduced the attractiveness of the state as the locus for dissent”.

The basic drivers for propelling the CSR practice in the companies are as discussed below:

1. Maintaining Quality Employees:

It has become an essential factor for all the companies to retain their employees and maintain a certain quality of the employees. Most of the companies are finding it difficult to manage the attrition rate of their companies as employees are opting for companies that have better social visibility and are actively involved towards the betterment of the society. According to a survey reported in International Business Report (IBR) in 2008, most of the companies cited employee retention as one of the major drivers for CSR activities. The companies have indicated this factor as a driver for CSR across a wide range from 53% being the factor for countries in Hong Kong to 89% in the companies located at Denmark. While some employers in certain countries face the problem of skill shortage, while in other countries there is a major problem to retain the employees.

According to Moller, Jan Hetland from Grant Thornton, Denmark

“Business ethics is a key factor for recruitment and retention in Denmark’s tight labour market. Privately held businesses ignoring CSR issues are facing future skills shortages that will threaten their global competitiveness.”

Denmark is considered to have the lowest rate of unemployment.

2. Managing Cost:

It is necessary for every country to manage its expenses and try to reduce the costs whenever possible. One of the ways of keeping the company expenses in check is by maintaining good quality standards and following the standard operating procedures. In today’s competitive world managing the levels of carbon dioxide emission in the environment would also save a considerable cost to the country. More than 50 % of the countries responded this driver to be of foremost importance to indulge in CSR activities. More than eleven countries have rated cost management as the most important driver for CSR activities. Brazil and India are among the top two countries with 89% and 85% respectively for cost management as the most important driver.

3. Brand Building

Many companies believe that indulging in CSR activities would bring a lot of fame to the companies. This can go a long way in promoting a company’s brand name and thereby helping the company in brand building exercise. It has also been noted that the attitude of the people changes towards a company if it indulges in any CSR activities. 56% of the countries considered positive attitude and brand building to be an important driving factor for CSR. In some countries like Mexico and Greece, this is the driving factor for a company to indulge in CSR contributing to 85% to 89% while in countries like France this factor contributes to only 27% among the drivers. It is interesting to note that brand building is a drive which comes after employment and cost management for most of the companies. This implies that companies are moving towards ethical practices for employee welfare and cost management and giving more importance to these aspects than public image and brand building of the company. A contrasting factor is that as the companies expand and move towards global markets, brand name and public opinion would matter much more than for the smaller companies.

4. Tax benefits

Many countries believe in indulging in CSR activities for tax relief. Tax benefits were cited as the largest incentive any company could get in countries like Brazil and Vietnam. Many companies who would like to be publicly listed have to maintain transparency in their taxations and have standard employment practices. In Brazil this is prerequisite for any company to have public listing, which is desired by most of the companies.

5. Investor relations

Some countries consider maintaining investor relations as an equally important factor and in an effort to do so these companies comply by the ethical business practices. It has been seen that Vietnam is one of the countries which gives Investor relations considerable importance as compare to other countries. Most of the emerging countries like India, Philippines, Brazil, Turkey are giving importance to investor relations.