Social Responsibilities of the Firm CSR

SOCIAL RESPONSIBILITIES OF THE FIRM

Social Responsibilities of the Firm

Introduction

In the realm of economics, corporate social responsibility (CSR) happens to be a crucial managerial economics concept. This is more so the case given that the implications that this very concept has for economic entities happens to be rather broad and pronounced. There appears to be general consensus that commercial enterprises ought to ensure that they adhere to the laws and regulations established within the jurisdictions in which they operate. However, over the last few decades, there has been debate over what other responsibilities firms have beyond compliance with the relevant laws and regulations. This text concerns itself with the social responsibilities of firms. In so doing, it will amongst other things explore the concept of corporate social responsibility, assess its theoretical framework, and highlight the extent to which it is sustainable.

Discussion

The Concept of Social Responsibility

From the onset, it would be prudent to note that as Akerlof and Kranton (2005) point out, some surveys conducted in the past have established that a firm’s performance on the social front happens to be one of the most significant considerations that customers and investors alike take into consideration before making a decision on whether or not to engage the firm. It therefore follows that CSR is increasingly being considered a key organizational ideal by managers. It is for this reason that many organizations today, including small/medium enterprises and multinationals, are actively seeking to be recognized as having made a mark in as far as CSR engagements are concerned via the various certifications such as ISO14001, the Corporate Giving Standard, etc.

So what exactly is CSR? It should be noted that to a large extent, CSR does not have an assigned definition. In essence, this means that there are numerous definitions that have been offered by various authors in an attempt to assign a concise meaning to CSR engagements. According to Paton (2005), CSR could be perceived as the various undertakings that enterprises engage in as part and parcel of corporate governance in an attempt to see to it that the various undertakings of a company are not only ethical, but also of benefit to the society. On the other hand, the World Bank (as cited in Kotchen, 2006) defines corporate social responsibility as “the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders to improve their lives in ways that are good for business, the sustainable development agenda, and society at large” (p. 79). The said definition clearly indicates that CSR engagements extend far beyond the responsibilities of the firm mandated by law or the various regulatory standards.

In the past, various economists have sought to establish what CSR comprises of and the exact responsibility of firms beyond what is mandated by the regulatory regime. For instance, as Paton (2005) observes, at the onset of the CSR debate, the main concern was whether the social responsibility of enterprises extends beyond the production of goods and services, profit maximization, as well as employment of personnel. As a matter of fact, these appear to have been the neoclassical borderlines of CSR engagements or undertakings.

Among prominent economists who delved into the discourse was Milton Friedman. Amongst other things, Paton (2005) points out that Milton Friedman was of the opinion that profit maximization was the primary CSR role of an enterprise. It is important to note that the profit maximization ideal in this case is with reference to the promotion as well as advancement of shareholder wealth and wellbeing. Further, it could also be described or defined in terms of what Baye and Prince (2017) describe as “maximizing the value of a firm, which is the present value of current and future profits (p. 14). Thus, according to Milton Friedman, the society or general public was not on the radar of commercial enterprises in as far as CSR engagements are concerned. More specifically, in the words of the author, Friedman was categorical that “an entity’s greatest responsibility lies in the satisfaction of the shareholders” (Paton, 2005, p. 310). This perspective could be reconciled with that of Adam Smith to who the concept of profit maximization is not necessarily bad for society (Baye and Prince, 2017). Indeed, as Baye and Prince (2017) observe, Smith was of the opinion that the needs of the society are met as a firm seeks to secure its own interest (i.e. that of profit maximization). In as far as Milton Friedman’s point of view is concerned, Paton (2005) points out that it was anchored upon the assumption that the government was largely responsible for most of what we could refer to as the advancement of social good and wellbeing (i.e. what today lies in the realm of corporate social responsibility). To a large extent, this point of view could be referred to as the ‘for-profit’ aspect of CSR. However, this perspective largely appears to ignore other equally important stakeholders of an enterprise. The said stakeholders could be inclusive of, but they are not limited to, consumers, the community, suppliers, employees (both existing and potential), etc. In merging the two considerations, i.e. ‘for-profit’ aspect of CSR and the ‘social’ or ‘mission’ aspect of CSR, we come up with the idea of strategic CSR.

There are also various definitions that have been floated in an attempt to define strategic CSR. In one such definition, Kotchen (2006) defines strategic corporate social responsibility as the inclusion “of a holistic CSR perspective within a firm's strategic planning so that the firm is managed in the interest of a broad set of stakeholders to achieve maximum economic and social value over the medium to long term” (p. 84).

Theoretical Frameworks

To a large extent, strategic CSR could be born out of a number of theoretic frameworks. The said frameworks are inclusive of, but they are not limited to; public policy, private activism, financial markets, as well as product markets and labor markets. These will be taken into consideration in the subsequent sections of this text.

a) Public Policy

To begin with, when it comes to public policy, it should first be pointed out that CSR efforts are, as has been pointed out elsewhere in this text, considered to be beyond the prevailing legal or regulatory mandates of the firm. It therefore follows that the mere compliance with such rules and regulations is not considered a CSR engagement or undertaking. Thus, with regard to public policy, firms could opt to engage in CSR activities so as to preempt the implementation of enactment of certain regulations, i.e. what Akerlof and Kranton (2005) refer to as the “overcompliance” strategy. This is more so the case given that the enactment of certain rules and regulations by the government of the day could come at a massive cost (i.e. in terms of adjustment costs) to the concerned firms. With this in mind, firms opt to engage in specific CSR activities as an indication of their willingness and ability to ‘self-regulate’ and thus effectively discourage government intervention. Indeed, as Akerlof and Kranton (2005) observe, it is indeed possible for formal government intervention to be crowded out by CSR (in the form of enhanced self-regulation). This is the finding that the authors arrive at in their assessment of how corporate social responsibility, regulation, as well as activism interplay.

b) Private Activism

Next, with regard to private activism (or what could also be referred to as social activism), the motivation for engagement in CSR activities happens to be a move to ‘hedge’ against the risk of an adverse mention of the firm that could end up hurting its standing in the business and social arenas. Negative publicity happens to be a reality in the present day and age as a consequence of the growth of social media. Here, any unsatisfied activist could spread negative info about a company, effectively costing the firm its reputation – a move that could have a negative impact on the firm’s bottom line. By engaging in CSR activities, a firm seeks to somewhat insure itself against such a risk. This one of the perspectives that Baron (2001) advances as a motivation for some strategic CSR engagements. The other two motivations that have been explored by the author are altruism and the maximization of profits.

I would also add that strategic CSR in this case could discourage an ‘evil’ activist from unfairly targeting a firm. An ‘evil’ activist could in this case be a ‘gun for hire,’ i.e. an influential, but unethical, social media influencer hired by a competitor to malign the name of the enterprise. In embracing CSR activities and creating a name for itself as a responsible and ethical corporate citizen, the firm would be discouraging such efforts as no evil player would invest in a plot that is doomed to fail at first instance.

c) Financial markets

There are various authors who have in the past made an observation to the effect that the relevance of corporate social responsibility in the financial markets have been growing over the last few decades. As a matter of fact, as McWilliams and Siegel (2000) point out, this has given rise to the new concept of socially responsible investment. In the words of the authors, socially responsible investment (SRI) could be defined as “a strategy that considers not only the financial returns from an investment but also its impact on environmental, ethical or social change” (McWilliams and Siegel, 2000, p. 604).

With investors being increasingly being interested in the CSR record of commercial enterprises, it makes great sense for firms competing for equity in the financial markets to actively engage in strategic CSR activities. There has also been the emergence of a special class of investors called social investors. The said investors, who are inclusive of corporate and individual investors, tie their financial involvement in a specific firm with the sand firm’s social impact. Ideologically, social investors could be distinguished from neutral investors whose only interest happens to be the financial performance of an enterprise. With the growing prominence of socially responsible investment (SRI), a firm keen on attracting equity investment and maintaining good standing in the stock market would be motivated to engage in strategic CSR efforts.

d) Product Markets

Do consumers really care about a firm’s CSR record? Surveys conducted in the past indicate that customers do indeed assess enterprises CSR records and are likely to consume the services of, or buy the products of a firm that is visible or active on CSR front. According to Kotchen (2006), in one such survey, three out of every five people pointed out that they were more in favor of enterprises that appeared concerned about the wellbeing of the society, than they were about profit maximization. In yet another survey, corporate reputation as well as image were mentioned alongside brand quality and customer service as some of the factors that influence people’s decision to choose one firm over another. It therefore follows that the relevance of CSR cannot be overstated from the customer/consumer perspective. Yet another factor that Kotchen (2006) weaves into this discourse is that CSR could result in product differentiation. This is to say that it could be used as a strategy to distinguish the firm and its services or products from those of other firms – thus effectively making the said goods or services more appealing to the target market.

e) Labor Markets or Economics

In the labor market context, as Kotchen (2006) points out, moral hazard can be reduced by strategic CSR. This is to say that for firms that would want to attract high-caliber, motivated, and morally upright candidates, strategic CSR could be a viable motivator. Further, there are those who are convinced that a firm may be able to reduce or minimize its labor costs and attract hardworking employees simply by increasing its involvement on the CSR front. Indeed, as Small and Zivin (2005) point out, “the cost of a firm’s commitment to CSR may be offset by its appeal to motivated employees who work harder for lower wages” (p. 212). As the authors further point out, surveys conducted in the past demonstrate that companies keen on CSR engagements are more likely to attract cooperative employees who are interested in being associated with a firm that has its priorities right in as far as its social accountability is concerned. Such employees may, thus, not be necessarily driven by the compensation package offered. Thus, according to Small and Zivin (2005), enterprises do indeed reap cost advantages from engagement in CSR activities or engagements.

CSR Sustainability

To a large extent, CSR undertakings of a firm could either be sustainable or unsustainable. It is important to note that as McWilliams and Siegel (2000) point out, in some instances, firms that engage in CSR activities are forced to ether reduce dividend payouts, slash wages and related costs, or increase prices so as to continue being in business. Others opt to embrace reduced profits. These are some of the consequences of CSR engagements that are nor often highlighted. In some instances, the said economic consequences could be dire. For instance, as a consequence of withholding dividend payouts, a firm could be unable to raise new capital or see the price of its stock decline despite its business fundamentals remaining firm or stable. On the other hand, increased prices of goods and services could result in the loss or market share. In the worst of scenarios, a firm could experience closure or corporate takeover. It therefore follows that CSR engagements should receive their fair share of managerial assessment to establish viability. It is only in those instances whereby it is established that CSR actions are sustainable that firms should proceed with the implementation of the same.