~ MGMT 334 ~ CORPORATE SOCIAL RESPONSIBILITY

1. ~MGMT 334~CORPORATE SOCIAL RESPONSIBILITY 2011 Summer SchoolEastern Mediterranean University

2. Chapter 1: Toward a Responsible Society(Read Pages 1 - 21 from the main text book) 1.1 Introduction 1.2 What is CSR? 1.3 Corporate Strategy and CSR 1.4 What CSR Is and Is not 1.5 The Evolution of CSR 1.6 The Cultural and Contextual Assumptions 1.7 A Moral Argument for CSR 1.8 A Rational Argument for CSR 1.9 An Economic Argument for CSR 1.10 Why is CSR Important? 1.11 Why Is CSR Relevant Today?

3. Chapter 1: Toward a Responsible Society 1.1 Introduction People create organisations to leverage their collective resources in pursuit of common goals (during which they interact with others inside a larger context - society). Based on their purpose, organisations are classified as: • For-profits: they seek to gain for their owners • Governments: they exist to define the rules and structures of society within which all organisations must operate • Non-profits (NGOs) : they emerge to achieve social good when the political will or the profit motive is insufficient to address society’s needs

4. Chapter 1: Toward a Responsible Society For-profit organizations (e.g. corporations, companies, businesses, proprietorships, firms, etc.) also interact with society, affecting government, non-profits, and other stakeholders. Stakeholders: A firm’s stakeholders include those who effect or are affected by the firm’s goals (they include those groups that have a stake in the firm’s operations).

5. A Firm’s Stakeholders Globalization • Economic Stakeholders • Customers • Creditors • Distributors • Suppliers • Organizational Stakeholders • Employees • Managers • Stockholders • Unions • Societal Stakeholders • Communities • Government & Regulators • Nonprofits & NGOs • Environment Technology

6. Chapter 1: Toward a Responsible Society A firm has three kinds of stakeholders: • Organizational Stakeholders (internal to the firm) • Economic Stakeholders (external to the firm) • Societal Stakeholders (external to the firm) All stakeholders sit within the larger context of a globalizing business environment, driven by revolutionary technology that is rising the importance of CSR for business today

7. Chapter 1: Toward a Responsible Society • Firms do not always comply with every stakeholder demand • In democratic societies, laws, rulings by governments agencies (e.g. Tax), and judicial interpretations (e.g. Court decisions) provide a minimal framework for business operations • Because government cannot anticipate every possible interaction, however legal action takes time, and a general consensus is often slow to form; regulatory powers often lag behind the need for action (e.g. in areas of rapid change such as information technology and medical research) (give examples)

8. Chapter 1: Toward a Responsible Society Thus, we arrive at the discretionary area of decision making that businesses face on a day-to-day basis and two questions from which the study of CSR springs: • What is the relationship between a business and the societies within which it operates? • What responsibilities do businesses owe society to self-regulate their actions in pursuit of profit?

9. Chapter 1: Toward a Responsible Society CSR is both critical and controversial: It is critical because the for-profit sector is the largest and most innovative part of any free society’s economy • Companies create most of the jobs, wealth, and innovations that enable the larger society to prosper. • They are the primary delivery system for food, housing, medicines, medical care, and other necessities of life • Without modern day corporations, the jobs, taxes, donations, and other resources that support governments and nonprofits would dramatically decline, significantly affecting the wealth and well-being of society as a whole.

10. Chapter 1: Toward a Responsible Society It is controversial because people who have thought deeply about “Why does a business exist?” or “What is the purpose of business within society?” do not agree on the answers. A more general question: Do companies have obligations beyond the benefits their economic success already provides? Some say No Some say Yes And some have more balanced arguments

11. Lecture 3 (5 July 2011 – Tuesday)

12. Chapter 1: Toward a Responsible Society • 1.2 What is CRS • CRS: Corporate, Social, and Responsibility • CSR covers the relationship between corporations (or other large organizations) and the societies with which they interact. • CRS also includes the responsibilities that are inherent on both sides of these relationships. • CRS defines society in its widest sense, and on many levels, to include all stakeholders and constituent (forming)groups that maintain an ongoing interest in the organizations’s operations.

13. Chapter 1: Toward a Responsible Society • Consistent definitions, labels, and vocabulary have yet to be solidly established in the field of CSR. The range of competing terminology that is used is a source of confusion and disagreement. • “Corporate responsibility” or “business responsibility” • “Corporate citizenship” or “global business citizenship” • “Corporate community engagement” • “Community relations” • “orporate stewardship” • “Social responsibility” • (please read Figure 1.2 -page 6- for brief definitions of key CSR concepts)

14. Chapter 1: Toward a Responsible Society Stakeholder groups range from consumers, employees, suppliers, creditors, regulating authorities, local communities and the environment. For the firm, tradeoffs must be made among these competing interests. Each firm must identify those stakeholders that constitute its operating environment and then prioritize their strategic importance to the organization. Firms need to incorporate the concerns of stakeholder groups within the organizations’s strategic outlook or risk losing societal legitimacy.

15. Chapter 1: Toward a Responsible Society CSR helps firms embrace these decisions and adjust the internal strategic planning process to maximize the long-term viability of the organization. (read three different views about CRS on page 8) Archie Carroll’s framework (pyramid of corporate social responsibility) shows the distinction between different kinds of organizational responsibilities.

16. Figure 1.3 The Hierarchy of Corporate Social Responsibility

17. Chapter 1: Toward a Responsible Society Economic Responsibility A firm’s responsibility is to produce an acceptable return on its owners’ investment. Legal Responsibility Within a law-based society, firms have a duty to act within the legal framework drawn up by the government and judiciary. Ethical Responsibility A firm has an ethical responsibility to do no harm to its stakeholders and within its operating environment. Discretionary Responsibility Firms have a discretionary responsibility which represents more proactive, strategic behaviors that can benefit the firm and society, or both.

18. Chapter 1: Toward a Responsible Society CSR is a fluid concept. It is both a means and an end and an integral element of the firm’s strategy: Means: the way the firm goes about delivering its products or services to markets End: a way of maintaining the legitimacy of its actions in the larger society by bringing stakeholder concerns to the foreground The success of a firm’s CSR reflects how well it has been able to navigate stakeholder concerns while implementing its business model.

19. Chapter 1: Toward a Responsible Society CRS means valuing the interdependent relationships that exist among businesses, their stakeholer groups, the economic system, and the communities within which they exist. CSR is a vehicle for discussing the obligations a business has to its immediate society, a way of proposing policy ideas on how those obligations can be met, as well as a tool by which the mutual benefits for meeting those obligations can be identified. Simply, CSR addresses a company’s relationships with its stakeholders.

20. Chapter 1: Toward a Responsible Society • 1.3 Corporate Strategy and CSR • CSR is a key element of business strategy. • Strategy strives to provide the business with a source of sustainable competitive advantage. • For any competitive advantage to be sustainable, however, the strategy must be acceptable to the wider environment in which the firm competes. • CSR done incorrectly (or compeletely ignored) may threaten whatever comparative advantage the firm holds within its industry. • Today, Greenpeace and other activist groups highlight corporate actions they deem to be socially irresponsible, sometimes leading to voluntary corrective action on the part of companies (example: Shell Company Brent Spar oil platform case - http://en.wikipedia.org/wiki/Brent_Spar) • http://www.youtube.com/watch?v=KToV-c8uvPc

21. Chapter 1: Toward a Responsible Society • 1.4 What CSR Is and Is Not • CSR embraces the range of economic, legal, ethical, and discretionary actions that affects the economic performance of the firm (Fig. 1.3) • A significant part of a firm’s CSR is complying with legal or regulatory requirements • Breaking the laws is not socially responsible • However, legal compliance is merely a minimum condition for CSR • Strategic CSR focuses more on the ethical and discretionary concerns that are less precisely defined and for which there is often no clear societal consensus.

22. Chapter 1: Toward a Responsible Society • Ideally, leaders should address stakeholder concerns in ways that carry strategic benefits for the firm. • CSR is not about involving in activities that are not related to a firm’s operations (e.. saving whales or reducing powerty) • Instead, CSR is about economic, legal, ethical, and discretionary issues stakeholders view as affecting the firm’s plans and actions. • The solution to these isues, the overlap where economic benefit and social benefit meet, is the heart of and succesfull CSR responsibility.

23. Chapter 1: Toward a Responsible Society • Sometimes, the end (e.g. Shareholders wealth) is used to justfy th means (e.g. Polluting the environment). • Strategic CSR is concerned with both the ends of economic viability and the means of being socally responsible. • The connection between these two concepts is an important focus for strategic CSR, which sets it apart from other social responsibility areas. • This distinction becomes apparent when discussing an issues such as ethics which is concerned about the honesty, judgement, and integrity with which various stakeholders are treated.

24. Chapter 1: Toward a Responsible Society • There is no debate: Ethical behaviour is a prerequisite assumption for strategic CSR. • It is hard to see how a firm’s actions could be both socially responsibe and unethical. • Ethics, however, is not the central focus for strategic CSR, except insofar as constituents are affected or the larger society defines the firm’s approaches as unethical, thus harming the firm’s societal legitimacy and profit potential.

25. Chapter 1: Toward a Responsible Society • Likewise, a rich body of other socially important issues also exist outside the direct focus of strategic CSR. Concerns over: • Domestic and international income disparity • Gender issues • Discrimination • Human rights • Spirituality and workplace religiosity • Technological impacts on indigenous populations • and other issues all affect societal well-being.

26. Chapter 1: Toward a Responsible Society 1.5 The Evolution of CSR The need for social responsibility among businesses is not a new concept (writings of Ancient Chinese, Egyptian, and Sumerian) Ever since, public concern about the interaction between business and society has grown in proportion to the growth of corporate activity. Evidence of social activism in response to organisational actions also stretches back accross the centuries (In 1790 – England – because of large scale consumer boycott, traders switched from slave-harvested to free-labor harvested sugar)

27. Chapter 1: Toward a Responsible Society Although wealthy industrialists have long sought to balance the actions of their firms with personal or corporate philanthropy as a response to social activism or complaints, CSR ultimately originates with leaders who view their role as stewards of resources owned by others (e.g., shareholders, the environment). These leaders face a balancing act that addresses the tradeoffs between the owners (shareholders) that employ them and the society that enables their firms to prosper. When society (or even elements of society) views leaders and their firms as not meeting societal needs, activism results, whether in 18th century England or today.

28. Chapter 1: Toward a Responsible Society Current examples of social activism in response to a perceived lack of CSR by organizations are on newspapers, and TV news (people protest the impact of global corporations on developing societies and consumers boycott specific products ). CSR has become an increasingly relevant topic in recent decades in corporate boardrooms, business school classrooms, and family livingrooms. In addition to public relations fiascos that damage a firm’s sales and image, the direct financial impact of CSR failures in a litigious (tending to engage in lawsuits.) society is never far behind.

29. Chapter 1: Toward a Responsible Society Widespread, long-term industry practices, which may have previously been deemed discretionary or ethical concerns, can be deemed illegal or socially unacceptable under aggressive legal prosecution or novel social activism. Such violations are less likely in firms with a strong commitment to CSR. Businesses operate against an ever changing background of what is considered socially responsible. CSR is not a stagnant concept. It continues to evolve as cultural expectations change, both here and abroad ( yesterday’s accepted business practices will not necessarily be accepted today)

30. Chapter 1: Toward a Responsible Society On the one hand, these ever changing standards and expectations compound the complexity faced by corporate decision makers. Those standards vary from society to society, even among cultures within a given society. Faced with a kaleidoscopic (A series of changing phases or events) background of evolving standards, business decision makers must consider a variety of factors on the way to implementation. (what may be legal, even encouraged, in one country may bring legal repercussions in another – e.g. Nike) http://www.guardian.co.uk/society/2003/nov/17/17

31. Chapter 1: Toward a Responsible Society Today, media and NGO activists are more likely to criticize the poor treatment of workers in developing economies by holding corporations to standards found in their home markets (especially in US and EU). The result is increased complexity and risk that can harm economic outcomes when CSR is lacking. On the other hand, it is important to reinforce that the pursuit of economic gain remains an absolute necessity. CSR does not repeal (abolish) the law of economics under which for-profit organizations must operate to society’s benefit.

32. Chapter 1: Toward a Responsible Society Example: manufacturing offshore in a low-cost environment remains a valid strategic decision, particularly in an increasingly globalizing business world. Where CSR considerations play a major role is in how much such decisions are made and implemented. As societies rethink the balance between societal needs and economic progress, CSR will continue to evolve in importance and complexity.

33. Chapter 1: Toward a Responsible Society • 1.5 The Cultural and Contextual Assumptions • Firms operate within broader context of society • The resulting interaction requires a CSR perspective for firms to maintain their social legitimacy. • Societies differ, therefore does what they consider acceptable. • Though differences range from the anthropological and sociological to the historical and demographic, two dimensions consistently influence the role of CSR: • Democracy • Economics

34. Chapter 1: Toward a Responsible Society • Different societies define the relationship between business and society in different ways. • Unique expectations spring many factors, with wealthy societies having greater resources and, perhaps, more demanding expectations that emerge from the greater options wealth brings. • Reasoning: • In poor democracies, the general social well-being is focused on the necessities of life (e.g. food, shelter, transportation, education, medicine, social order, etc.) • Governmental or self-imposed CSR restrictions add costs that poor societies can ill afford. • As societies advance, however, expectations change and the general social well-being is redefined. • This ongoing redefinition and evolution of societal expectations causes the CSR response also to evolve.

35. Chapter 1: Toward a Responsible Society Differences in CSR expectations among rich and poor societies are a matter of priorities. Example: The need for transportation evolves into a need for nonpolluting forms of transportation as society becomes more affuluent. As a society prospers economically, new expectations compel producers to make vehicles that pollute less – a shift in emphasis. In time, these expectations may evolve from a discretionary to a mandatory (legal) requirement.

36. Chapter 1: Toward a Responsible Society It is any organization’s best interest (for-profit, nonprofit, or governmental) to anticipate, reflect, and strive to meet the changing needs of its stakeholders in order to remain successful. In the case of for-profits, the primary stakeholder groups are its owners (its shareholders), consumers, and employees, without which the business fails. Other constituents, however, from suppliers to the local community, also matter. Therefore, businesses must satisfy key groups among these constituents if they hope to remain viable over the long term. When the expectations of different stakeholders conflict, CSR enters a gray area and management has to balance competing interests.

37. Chapter 1: Toward a Responsible Society • An example of such conflicts exist among different classes of investors (individuals, broakers, investment companies, etc.) in the firm • short-term perspectives vs. long-term strategic considerations • In investment and loyalty terms, the link between shareholder and company has largely disappeared • (Read Figure 1.4 – page 14-15) • CSR represents an argument for a firm’s economic interests, where satisfying stakeholder needs becomes central to retaining societal legitimacy (an, therefore financial viability) over the long term. • Much debate (and criticism) in CSR springs from well-meaning parties arguing the same “facts” from different perspectives, breaking down along partisan and ideological lines. • A brief introduction to the underlying moral, rational, and economic arguments within the CSR field will be presented next.

38. Chapter 1: Toward a Responsible Society • 1.7 A Moral Argument for CSR • Profits are necessary for any business to survive • For-profit organizations are only able to obtain those profits because of the society in which they operate. • CSR emerges from this interaction and the interdependent relationship between for-profit s and society. • It is shaped by individual and societal standards of morality, ethics, and values that define contemporary views of human rights and social justice.

39. Chapter 1: Toward a Responsible Society • To what extent does a business have an obligation to repay the debt it owes society for its continued business success? • What responsibilities do businesses face in return for the benefits society grants? • To what extent do the profits the business generates, the jobs it provides, and the taxes it pays already meet those obligations? • CSR represents an organized approach to answering these questions.

40. Chapter 1: Toward a Responsible Society • At one level , the moral argument for CSR reflects a give-and-take approach , based on a meshing (engaged with another) of the firm’s values and those of society. • Society makes business possible and provides it directly or indirectly with what for-profits need to suceed: • education and healthy workers • a safe and stable physical and legal infrastructure, and • a consumer market for their products • Because society’s contributions make businesses possible, those businesses have an obligation to society to operate in ways that are deemed socially responsible and beneficial. • And, because businesses operate within the larger context of society, society has the right and the power to define expectations for those who operate within its boundaries.

41. Chapter 1: Toward a Responsible Society 1.8 A Rational Argument for CSR Because societal sanctions, such as laws, fines, prohibitions, boycotts, or social activism, affect the firm’s strategic goals, efforts to comply with societal expectations are rational, regardless of moral arguments. It may be more cost-effective to address issues voluntarily rather than wait for a mandatory requirement based on some government or judicial approach. Companies may have a reactive approach (as oppose to proactive approach): wait for the mandated requirements and then react to them This reactive approach may permit for-profits to ignore their moral obligations and concentrate on maximizing profits or other business goals.

42. Chapter 1: Toward a Responsible Society By not adopting a proactive (or at least accomodative) approach to fair treatment, many businesses found their behavior suddenly (and expensively) curtailed through legislation, judicial and agency interpretations, and penalties because of a failure to interpret corretly the evolving social and business environment. The rational argument for CSR is summarized by the iron law of social responsibility: “in a free society discretionary abuse of societal responsibilities leads, eventually, to mandated solutions” In a democratic society, power is taken away from those who abuse it (political or business). E.g. Enron

43. Chapter 1: Toward a Responsible Society 1.9 An Economic Argument for CSR Summing the moral and rational arguments for CSR leads to an economic argument. CSR is an argument of economic self-interest for business. CSR adds value because it allows companies to reflect the needs and concerns of their various stakeholder groups. By doing so, a company is more likely to retain its societal legitimacy, and maximize its financial viability, over the long term. Simply put, CSR is a way of matching corporate operations with societal values at a time when these parameters can change rapidly.

44. Chapter 1: Toward a Responsible Society • 1.10 Why Is CSR Important? • CSR is important because it influences all aspects of a company’s operations. • Increasingly, • consumers want to buy products from companies they trust; • suppliers want to form business partnerships with companies they can rely on; • employees want to work for companies they respect; • large investment funds want to support firms that they see as socially responsible; and • nonprofits and NGOs want to work together with companies seeking practical solutions to common goals.

45. Chapter 1: Toward a Responsible Society Satisfying each of these stakeholder groups (and others) allows companies to maximize their commitment to their owners (their ultimate stakeholders), who benefit most when all of these groups’ needs are being met. 1.11 Why Is CSR Relevant Today? CSR as an element of strategy is becoming increasingly relevant for businesses today because of four identifiable trends – trends that seem likely to continue and grow in importance throughout the 21st century:

46. Chapter 1: Toward a Responsible Society • Increasing Affluence • Affluent consumers can afford to choose the products they buy and are more likely to pay a premium for a brand they trust. • A poor society, in need of work an inward investment, is less likely to enforce strict regulations and penalize organizations that might otherwise take their business and money elsewhere. • Increasing affluence on a global basis will make CSR matter more in the future. • Changing Social Expectations • Consumers in developed societies expect more from the companies whose products they buy. • This sense has increased in the wake of the corporate scandals at the turn of this century that reduced public trust in corporations and public confidence in the ability of regulatory agencies to control coporate excess.

47. Chapter 1: Toward a Responsible Society • Globalization and the Free Flow of Information • The growing influence of global media conglomerates makes sure that any CSR lapses by companies are brought rapidly to the attention of the public – often instantaneously – worldwide. + Internet • Ecological Sustainability • Earth has ecological limits • Whether these limits are fast approaching is a complicated issue on which the experts do not agree • However, firms that are seen as indifferent to their environmental responsibilities are likely to be criticized and penalized: by court-imposed fines, negative publicity, or confrontations by activist groups.

48. Chapter 1: Toward a Responsible Society • QUESTIONS FOR DISCUSSION AND REVIEW • Why do firms exist? What value do businesses serve for society? • Define corporate social responsibility. Explain the arguments in favor of CSR. • Explain “the Pyramid of Corporate Social Responsibility” model. • Define stakeholders and explain the internal and external stakeholders of a firm. • Discuss briefly the moral, rational, and economic arguments for CSR. • What four factors make CSR more relevant today?