CSR Companies Talk a Lot About "Corporate Essay

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CSR

Companies talk a lot about "corporate social responsibility," but quite frankly nobody really knows what the term means. Every company seems to interpret the idea a little bit differently. There is nothing inherently wrong with that, but it raises challenges for managers trying to understand the concept and what relevance it has to their organizations. The best approach has to be to analyze the different elements of CSR individually, and see how they apply. This approach also allows for the organization to integrate each element with its strategy -- trying to shoehorn a notoriously vague concept into strategy either results in it not really happening, or it happens but distracts the company from what it really wants to achieve.

The first part of this paper will explore the different conceptions of CSR. This is absolutely essential. The "social" is CSR is the key term, and it implies an external focus on the greater world. Social does not explicitly reflect the employees or just random stakeholder management. Social reflects society, and the position that the company plays within society and the greater social order. So we will start by looking at the literature to derive a true understanding of what corporate social responsibility really is.

The next section of the paper will apply this concept applies to the business, in this case an airline. It could be any business, but a consistent example illustrates the issues better. One of the more important questions that comes up in a discussion of CSR is to what degree CSR is self-serving. Companies actively choose to perform activities under the concept of performing CSR, but why do they choose those activities and not others? Is it always a rational choice based on expected value? These questions are also important, and will be addressed. But first, what is CSR?

Corporate Social Responsibility

The first word, 'corporate', is self-evident. We are talking about corporations. The second and third words are where the definition of corporate social responsibility gets a little bit fuzzy. Social seems to refer to society, social order and social constructs. Inherently, this means people, which rules out the environment, save of course for the impact the environment has on people. In a case like Deepwater Horizon, that can be significant. Responsibility refers to the degree to which the company is responsible. Usually, this debate comes down to stakeholder theory vs. rational investors and agency theory.

Carroll (1999) attempts to chart the shifting definitions of CSR over the years. The idea is a 20th-century construct, so prior to this point business was not really viewed as having social responsibility. For a long time, all businesses were small, with little impact beyond their immediate communities. They may still have had the capacity to do harm, but that harm was always limited, and there were immediate consequences from the community to the people who ran the business, and that ensured that every business was well aware of its responsibilities. It is only with the rise of corporations -- distinct legal entities often removed from their communities -- that the idea of CSR has come about. One early work, by Bowen in 1953, defined CSR as "the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society" (Carroll, 1999). Now, this definition leaves a lot of room for interpretation, but it implies what today would be known as stakeholder theory. A business interacts with the society in which it operates, and therefore needs to take into consideration the 'objectives and values' of that society. If the objectives and values of society are strictly about making money, then that is the only responsibility that the company has. If helping orphaned children is the only objective of society, that would be the social responsibility of the company. Our society is complex, and has a lot of competing objectives and values, and the vagueness of Bowen's definition therefore opens things up for different stakeholders within society to demand different things of business. Thus, a more comprehensive definition of CSR is needed.

Frederick (1960) argued in favor of business conducting activities that enhance total socio-economic welfare (Carroll, 1999). This brings up a critical element of the CSR discussion, the economic concept of externalities. Externalities are the things that are created as a by-product of economic activity. These include a whole host of outcomes that were not intended, but which occur anyway.

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What makes an externality special is that it is not priced into the product. Thus, a firm creates an externality, but that does not show up in the financial statements. An example for an airline would be the air pollution that is generated as a byproduct of flying a plane. Air pollution is negative, but the cost is spread among all those who come into contact with that pollution, rather than being charged to airline in the way that the plane is a direct cost or the fuel is a direct cost. The cost of the pollution, therefore, receives no accounting.

The concept of externalities is important in the discussion about CSR when one considers who the definition of CSR has become refined. Carroll points out that McGuire (1963) defined CSR as extending beyond the economic and legal obligations of the firm. This view directly contrasts with the shareholder perspective, which is based on rational choice and agency theory. This perspective was most famously outlined by Milton Friedman in 1971 when he argued that "the social responsibility of business is to increase its profits."

The idea behind Friedman's view is that corporations exist solely to earn return for their shareholders. Shareholders invest in corporations in order to earn returns, and for no other reason. Should shareholders want to contribute to social causes, they would do so out of the money that they earn from their investments. Managers in corporations act as agents for the shareholders. Their role is to pursue those initiatives that will increase shareholder wealth. Thus, managers should only pursue social responsibility if that is the option that most enhances shareholder wealth. In this argument, Friedman directly contradicts the position of McGuire, arguing that corporations should only be concerned with the economic and legal obligations.

Implicit in this view is the idea that because the corporation is still supposed to follow the laws of the land, any corporate social responsibility should be therefore written into law and enforced by government. Sjafell (2011) makes that same point -- that nations need to write laws to ensure that corporations behave in accordance with the norms of the land, or the objectives and values as Bowen would termed it. The issue with this idea is that corporations have as much say in the laws that are passed as the citizenry does, if not more. The structure of the democracy matters, because that structure influences how the laws will be written and enforced. If the interests of the citizenry take a back seat to the interests of corporations, then the notion that CSR can essentially be legislated according to social norms becomes hollow. The laws of the land reflect society's objectives and values in theory, and in a loose sense they probably do, but there is considerable room for deviation between the objectives and values of society and the legal environment. Worse, there is significant time lag between changes in those objectives and values. Consider that the average age of a Congressperson is over 60 -- that is much older than the mean age of Americans, and substantially older than the massive generation of Americans under 30. This is to say nothing of the disparity between corporate lobbying and citizen lobbying, or Citizen's United, or other factors. Influence over laws is not evenly distributed in our society, and this erodes the idea that CSR can be achieved through legal means alone.

Shum and Yam (2011) demonstrate that "financial market-driven economic responsibility does not automatically translate into social responsibility." The need to be other factors. If the legal system does not provide sufficient impetus for adoption CSR, and other systems are inadequate, that leaves only the economic system. This finding supports the view that companies only engage in CSR practices when it is profitable to do so. Certainly, there are many examples of companies who make CSR part of their business models. The Body Shop is one famous example, or Whole Foods, but it seems as though the best examples are firms that operate in a consumer space. Direct interaction with the consumer provides immediate feedback in support of more CSR, but companies that do not interact with consumers directly often do not receive this economic feedback, and are probably less likely to focus on CSR as a result.

There are a few points that undermine Friedman's view, however. One is that is view is predicated on the assumption that investors are purely rational. As an economist, Friedman.....

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