CSR Companies Talk a Lot About \"Corporate

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. 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 worked with this assumption for his entire career, but in the real world investors are not purely rational. They get caught up in bubbles and crashes, they are risk averse, they invest in companies that are more familiar, and investors also invest on the basis of things besides investment return. For example, there exists ethical mutual funds, and that illustrates that some people do input ethics into their investing decisions. If this is the case, that casts doubt onto Friedman's theory. Or does it? If there are investors who utilize non-economic criteria in their investment decision, then companies may choose to attract those people with ethical policies. The same situation applies to customers. Firms may benefit from attracting customers on the basis of their CSR credibility, if the firm decides that this market is going to be profitable.

Further contributions over the next couple of decades has expanded on these concepts of corporate social responsibility. Some have argued that corporations should be primarily economic but should be free to pursue other goals. Others have contended that corporations pursue positive social policies only when they feel that those policies might be profitable, for example if those policies might help them differentiate from competitors. Others have suggested that opportunity cost must be part of the discussion, that an action which does has marginal value to the corporation less than its marginal cost is the only activity that can truly be said to part of CSR -- anything else is simply the pursuit of profit that happens to have positive (or less negative) externalities (Carroll, 1999).

Daudigeos and Valiorgue (2011) argue against this, stating that companies should use the need for improved CSR to pursue "strategic options…to manage its negative external effects in a way that creates social and economic value." Their point is that a company is not inherently pursuing profit if it chooses a socially responsible strategy, it is simply being pragmatic and realizing that CSR and profit are not mutually exclusive options. The decision to pursue profit and the decision to uphold CSR principles is not a binary one.

CSR and Business

Hospitality business, by their very definition, have direct interaction with consumers. It is precisely those consumers who can make their decisions based on whatever criteria they want. Most will choose rational economics, because most are of limited means and need to worry about pennies. They cannot afford to spend more if doing business with a socially responsible company costs more. Not that social responsibility needs to cost more, but for the sake of argument if it does, only people who can afford to pay more will do it. Thus, competing as a socially responsible company is something that is inherently a niche market strategy.

For those who can afford it, there is a perfectly reasonable economic reason why they are willing to pay more to do business with a socially responsible company. Most people recognize that there is more to this world than money. They derive pleasure and benefit from many things, and this benefit is called utility. People buy from socially responsible companies because they gain something from it, perhaps a clear conscience or perhaps the good feeling that comes from helping others. Social responsibility from the consumers' perspective is an economic transaction. This does not discount the possibility that altruism exists, but that is a matter for the philosophers to sort out, and they have yet to do so (Okasha, 2008).

For the business, CSR is usually an economic decision as well. Firms in a state of monopolistic competition must find a way to differentiate themselves from competition in order to survive. Michael Porter described a number of different approaches to this, including cost leadership and differentiation (QuickMBA, 2010). Cost leadership is something that only one or two companies in an industry can truly focus on. For the other firms, differentiation is a good tactic, and there is an audience in most products for goods or services that deliver utility based on appeals to one's sense of morals or ethics. The Body Shop's refusal to perform animal testing appeals to a fairly wide segment of the public, and forms a competitive advantage for that company. Wal-Mart reduces waste in its business because doing so saves it money -- such activities often score well on the responsibility scale but that is incidental to the cost savings.

The Airline Industry

In some ways, the airline industry is horrible for CSR. Air travel is one of the most wasteful things we do with our limited supply of fuel, and air travel creates tremendous pollution. Most of it is frivolous, too, for vacations or business that could be conducted over phones and the Internet. Worse, the hub and spoke model adds to the miles a passenger would otherwise fly, and competition means that many routes fly at less than capacity. For an airline to truly score well at social responsibility, it would need to stop operating.

But once we allow that airlines exist, the next thing to understand is that within the confines of the industry an airline can have a higher degree of corporate social responsibility or a lower one. Airlines can donate to charity, they can treat their employees well, they can hire from underprivileged groups and so on. Yet most of the time, there is an underlying rational explanation for the behavior.

Consider the case of Air Asia, the Malaysian airline based in Kuala Lumpur. The company is on a drive to increase the number of female pilots within its ranks, something that in a Muslim country is fairly bold social policy. Equal opportunity in a job that is known as almost exclusively male is good social responsibility. The reality, however, is that while the company enjoys doing good, it is growing rapidly and is facing a severe pilot shortage. It is tapping the female workforce for new pilot recruits so it can get more planes off the ground and earning money (Rivers, 2010).

Southwest Airlines has long sought to differentiate itself from its competitors on a number of attributes, ranging from price to friendliness and today CSR is included on this list. The company performs well on public examinations of the best companies in the U.S. For CSR, on the basis of its commitment to treating its employees well, good governance and (within the framework of being an airline) demonstrating good stewardship with respect to the environment. Yet, much of what Southwest does has financial benefit to the firm. It treats its employees well because it does not want them to unionize, and on the assumption that happier employees will deliver better customer service, which of course attracts more customers. Less fuel wastage is good for the environment, reducing a key negative externality of the industry, but fuel is the highest cost for most airlines, so reducing fuel used saves the company money. Given the tight margins that a discount airline faces, saving a few dollars here and there on fuel directly benefits the bottom line. Also, the company publishes press releases and blog posts about its CSR successes, using them as a marketing tool (Agnew, 2010).