Corporate Social Responsibility (CSR)

There is a belief that organisations should have some social responsibility.

• With social responsibility there is social accountability - organisations must account for their actions.
• The belief means that there may be a difference between how the world is now and how it should be.

Defining CSR

World Business Council for Sustainable Development (WBCSD)

A formal definition of Corporate social responsibility (CSR) has been proposed by the World Business Council for Sustainable Development (WBCSD):

'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 and society at large.'

CSR thus refers to the idea that a company should be sensitive to the needs and wants of all of the stakeholders in its business operations, not just the shareholders.

The stakeholders of a company are all those who are influenced by, or can influence, the company's decisions and actions.

Examples of stakeholder groups are:

• shareholders
• directors
• other employees
• customers
• suppliers
• the government
• lenders of funds
• community organisations, especially in the local neighbourhood.

A closely linked idea is that of sustainable development,that companies should make decisions based not only on financial factors, but also on the social and environmental consequences of their actions.

The WBCSD see CSR fitting into overall corporate responsibility as follows:

However the distinctions between each category can be blurred.

Key issues in the CSR debate include:

• employee rights, e.g. laws to prohibit ageism and other discrimination at work
• environmental protection, e.g. reducing factory emissions of poisons and pollutants
• supplier relations
• community involvement.

Illustration

Marks and Spencer approach CSR by following three basic principles:

• products - throughout the three stages of each product's life (production, selling and usage), the aim is to encourage ethically and environmentally responsible behaviour
• people - everyone who works at the company is entitled to a mix of benefits. This approach is also encouraged amongst the company's suppliers, franchisees and other business partners
• places - the company recognises its obligations to the communities in which it trades. Successful retailing requires economically healthy and sustainable communities.

The importance of CSR to an organisation's success

The traditional view has been that corporate social responsibility offers no business benefits, and destroys shareholder value by diverting resources away from commercial activity. Such traditionalists argue that companies should operate solely to make money for shareholders and that it is not a company's role to worry about social responsibilities. Companies pay taxes to government, and it is governments and charities that should be responsible for social matters.

This traditional view is losing support amongst all sizes of businesses. The modern view is that a coherent CSR strategy can offer business benefits by enabling a company to:

• monitor changing social expectations
• manage operational risks
• identify new market opportunities
• retain key employees.

By aligning the company's core values with the values of society, the company can improve its reputation and ensure it has a long-term future.

The single-minded pursuit of short-term profitability will paradoxically always end in reduced profits in the longer-term, as customers drift away from the company if they no longer feel any attachment to it.

There is considerable evidence that the cost of CSR initiatives should be thought of as an investment in an intangible strategic asset rather than as an expense.

Illustration 

BAA plc owns and operates seven airports in the UK. BAA recognises that they are responsible, both directly and indirectly, for a variety of environmental, social and economic impacts from their operations.

Positive impacts: employing 12,000 people; allowing business people to travel to meetings, thus supporting the global economy; allowing tourists to enrich their cultural experiences;allowing dispersed families to visit each other.

Negative impacts: large consumption of fossil fuels; emission of greenhouse gases; noise affecting people living close to airports.

BAA sees its CSR programme as managing these operational impacts in order to earn the trust of their stakeholders.

For example, local people living near airports are sensitive to the noise of aircraft approaching and taking off. If BAA did nothing about this issue, local people could complain to politicians who could pass laws to curb the number of flights which would damage the company. As part of its CSR programme, BAA will therefore offer to buy the properties of local people concerned about aircraft noise, or will offer to pay for sound-proofing of the properties.

You should consider whether such expenditure is an expense against the company's profits, or an investment in building up a strategic asset of goodwill among the local community.

The impact of CSR on the organisation

CSR is a philosophy that should be implemented throughout the business from top to bottom. Traditional methods of assessing how well a company is performing have tended to look only at the recent financial results over a short period, e.g. the previous six months. CSR cannot be properly reflected in such performance statements since nearly all expenditure on CSR activities is written off as an expense as it is incurred, without any benefit or asset being recognised in the accounts. Thus expanded methods of performance reporting have been proposed.

The balanced scorecard

The balanced scorecard approach emphasises the need to provide the user of a set of accounts with information which addresses all relevant areas of performance objectively. This information should include both financial and non-financial elements, and the usual balanced scorecard approach is to report performance from four separate perspectives:

• The financial perspective reports the traditional information of profits, capital employed, etc.
• The customer perspective reports how well customer wants have been satisfied.
• The internal perspective reports on the internal efficiency of the business.
• The innovation perspective reports on the development of new products and services.

It is argued that only by succeeding in all four of the perspectives can a company flourish in the long-term.

Triple bottom line reporting

Triple bottom line reporting refers to expanding the reporting framework to include not just financial outcomes but also environmental and social performance. The phrase associated with triple bottom line reporting is 'People, Planet, Profit'. Academics are gradually developing workable approaches to the reporting of environmental and social performance, but there is no agreed consensus yet.

Further discussion

The discussion of what exactly constitutes CSR and how firms should respond to it is a subject of much debate. A range of such definitions and models can be found here.

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