25/03/2014

IBU5GW

Governance
in a Globalising World

Week 5
Corporate Social Responsibility

This week

Corporate social responsibility

Shareholders vote

Finalise groups for Assignment 2!

Ch.6 Corporate
Social Responsibility
Thomsen, S., Conyon, M., 2012,
Corporate Governance; Mechanisms
and Systems, McGraw Hill.

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Introduction
The way in which firms seek to voluntarily align the
interests of owners and other stakeholders with the long-
term best interests of the society
Stakeholders include customers, employees, suppliers,
government, the environment and the wider society
Proponents argue that firms receive tangible benefits by
making long-term strategic decisions compared with
focusing on short-term returns
Critics argue that CSR deflects CEOs from the economic
role of the firm, to maximise profit

Corporate Social Responsibility

The commitment of business to contribute to

sustainable economic development, working
with employees, their families, the local
community and society at large. This to
improve their quality of life in ways that are
both good for business and good for
development.
[Institute of Directors UK]

A Further Definition

A concept whereby companies integrate

social and environmental concerns in their
business operations and in the interaction
with stakeholders on a voluntary basis.

[European Commission 2001]

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Four Principles

Economic business has an obligation to be
productive and responsible to meet business
needs;

Legal economic responsibilities carried out within
the confines of the law;

Ethical norms and values derived from society
which go beyond the law;

Discretionary philanthropic and voluntary.

CSR Initiatives
Incorporating into mission statements & policies;
Employment policies;
Green policies;
Quality and environmental standards;
Customer focus;
Health and safety;
Advertising;
Philanthropy;
Employee volunteering.

Milton Friedman 1970

"there is one and only one social

responsibility of businessto use
its resources and engage in
activities designed to increase
its profits so long as it stays
within the rules of the game,
which is to say, engages in open
and free competition without
deception or fraud.

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Friedman Philosophy

Make the largest profit

Obey the law
Meet the current expectations of
society
It is the shareholders money
Do not spend money on
philanthropic or voluntary
projects;
Who decides which groups
receive assistance?
Why these groups?

Friedman is the great advocate of

economic freedom.

The free market is the most effective

mechanism for allocating resources and
improving the well being of the people.

Minimise the role of government in a

free market creates political and social
freedom.

Against big government seeing it as

interfering too much and so hindering
Milton Friedman
1912 - 2006
the efficiency of the free market.

The Classical View (Friedman)

If socially responsible actions:

Reduce profits, then shareholders lose
Reduce wages and salaries, then employees
lose
Increase prices, then consumers lose
Distorts the market for investment capital, whole
countries lose

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Friedman

Make the largest profit;

Obey the law;

Meet the current expectations of society;

It is the shareholders money.

Do not spend money on philanthropic or voluntary
projects;

Who decides which groups receive assistance?

Why these groups?

Friedman
The directors are not serving as an agent of
the shareholders, customers or employees if
money is spent in any way different than how
they would have spent it.

The shareholders, customers and employees

could separately spend their own money on
the particular action if they wished to do so.

Corporate executives spending

money on social responsibility

Actions of social responsibility such as

hiring "hardcore" unemployed instead of
better qualified available workmen to
contribute to the social objective of reducing
poverty.
altruistic contributions - charities

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Pause for thought!

Elderly person does not pay electricity bills, power is cut off, the person dies.

What if the electric company never turns off the power?

Is it the responsibility of the company?
Who is responsible?

Firms acting ethically:

In democracies the socio-cultural

environment is tied to the political/ legal
environment through elections. Therefore
managers for firms who act ethically
(within the shared norms and values of
society) are less likely to get knocked
around by changes in laws.

Profit from acting socially responsible

Giving as a form of marketing

Treat your socially responsible action as a
product

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The social responsibility of a business

is to increase its profits

...to make as much money as possible

while conforming to the basic rules of
the society, both those embodied in law
and those embodied in ethical custom.
Profit is maximised when the
stakeholders are considered: the
shareholders, employees, consumers,
and relevant externalities current and
future.

CSR: The Milton Friedman critic

Firms have no responsibilities beyond making
profits
Managers are employees, hired to optimize the
welfare of their employer i.e. the owners
The idea of CSR implies that managers can take
actions that conflict with the welfare of the owners,
thus relocate someone elses capital in accordance
with the managers perception of social interest.
This is a decision shareholders could take
themselves as part of philanthropy if they want to.

Does this mean that managers

can act in any way to increase
profits?

Lets have a break

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Stakeholders and shareholders

The standard economic model provide that the firm
exists to maximise profits
Stakeholder theory challenge the standard
economic model
The enlightened value maximisation theory
considers all constituencies as they try to create
value in society
Arguments that firms should have a single-valued
objective function that allows managers to focus
and evaluate whether actions have been
successful or not

Contemporary views on CSR

Three approaches to CSR:

1. Win-win: engaging in CSR leads to higher
profits
2. Delegated philanthropy: stakeholders prefer
firms that engage in philanthropic activities on
their behalf
3. Insider-initiated corporate philanthropy: CSR
is motivated by the managers desire to
allocate money based on their own
preferences.

The socioeconomic view

Businesses are corporate citizens

Like human citizens, they have responsibilities to
the society that creates and sustains them

Managers should be concerned with financial
viability over the long run, not short-term profit
maximisation

This involves protecting societys welfare:

Not polluting

Not discriminating

Not engaging in deceptive advertising

Not harming employees

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Balance Effectiveness Approaches

Owners Financial return

Stakeholder Approach
the satisfaction of Employees Satisfaction, pay,
groups that have a supervision
Customers Quality
stake in organisational
performance can be Creditors Creditworthiness
assessed as an Community Contribution to
indicator of community affairs
performance Suppliers Quality of goods,
timeliness
Government Obedience to laws,
regulation

Social Analysis Criteria

(Thorne Mc Alister, Ferrell & Ferrell, 2005:173)

Environment

Workplace

Product safety & impact

International operations & human rights

Indigenous peoples rights

Community Relations

Arguments for businesses assuming

social responsibility

Public opinion is shifting towards a demand for greater
corporate social responsibility

Social irresponsibility reduces long-term viability --
increasing community hostility and damaging
reputation

Responsible activity has a higher (moral) value than the
pursuit of profit

A favourable public image provides economic benefits:

Increased sales

Better employees

Less litigation

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Arguments for businesses assuming

social responsibility

Corporate social responsibility reduces
government intervention

Corporations are powerful -- power should be
balanced with responsibility

Socially responsible corporations good for
investors over the long run

Societal problems impact on business -- it is
business interests to contribute to finding
solutions

Arguments against businesses

assuming social responsibility

Businesses are being socially responsible
when they focus on their specific purpose
profit maximisation

Market mechanisms are unable to allocate
the costs of social responsibility

The pursuit of social goals extends the
already extensive power of business

Arguments against businesses

assuming social responsibility

Business managers are not qualified to
decide or intervene in social policies

Business managers are not accountable
beyond to the community in the way that
political representatives are

There is little consensus within the
community about corporate social
responsibility.

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External Ethical Environment

Community relations;

Consumer relations;

Packaging;

Ethical investment;

Shareholder relations;

Advertising;

Product safety;

Exploiting under-developed countries;

Business crime.

Internal Ethical Environment

Work/life balance;

Equal pay for work of equal value;

Physical working environment;

Management style;

Learning and development;

Recruitment and selection.

Two opposing views

The sole function of any company is to generate and diffuse capital for
the benefit of shareholders.

Directors should be legally required to concentrate on their primary
role as sole trustees of the economic interests of their shareholders.

Few trends could so thoroughly undermine the very foundations of our
free society as the acceptance by corporate officials of a social
responsibility other than to make as much money as possible for their
shareholders.

The classical view:

A business has one important type of stakeholder -- its shareholders

Businesss sole responsibility is to maximise financial returns for
shareholders

The socioeconomic view:

Business has multiple stakeholders (customers, employees, community
groups, governments etc)

Business is part of, and depends on society. It has a responsibility to
contribute to societal development
WHICH APPROACH DO YOU SUPPORT AND WHY?

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Some empirical examples

Companies promote CSR for a variety of reasons
Its good for business
Customer demand
Improves corporate reputation
Increases financial performance
The right thing to do Apple Inc.
The role of rating agencies
Measure CSR according to a wide set of benchmarks
Environment and health/safety concerns for employees
appears to attract most interest among firms

Some empirical evidence

Crucial question: how does CSR relate to firm
performance
Some, but not universal, positive impact of CSR on
firm performance in a competitiveness report from
the EU 2008
More wide-ranging studies find only small effects
on firm performance
CSR appears to alter managerial behaviour. Firms
with low ratings by external rating agencies tend to
improve environmental performance more than
other firms.

Incentive to Report

Corporate image

Marketing strategy

Pressure from consumers

Attract investment

Internal ethics

Shareholders demand

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Cadbury UK

Good ethics and good business go together naturally. We firmly
believe that our reputation and responsibility as a good corporate
citizen plays an important role in our ability to achieve our
objectives of growing value for our shareholders.

We have clear obligations to our stakeholders customers,

suppliers, colleagues, wider society, communities and the natural
environment which are managed across ;- corporate governance,
human rights and ethical trading, employment practices,
community and social investment, the environment.
Sir Adrian Cadbury

Cadbury
Our task is to build on our tradition of quality and
value; provide brands, products, financial results
and management performance that meets the
interests of our shareholders, consumers,
employees, customers, suppliers and the
communities in which we operate.

Federal Express
People, service, profit.

Summary
CSR has become an important part of corporate
governance in the last three decades

The link between CSR and financial performance

remain uncertain as research has returned mixed
results

Debate concerns who the stakeholders are, how

social welfare is defined, and how competing
interests should be balanced.

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Next week

Boards and directors

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