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Corporate Social Responsibility

Abid Aslam

When profit is not enough

The phrase ''corporate social responsibility'' (CSR) is used to describe why, when, and how businesses manage their social, environmental, and economic aims and performance. It is an expression of the belief that it is not enough for a company simply to profit its owners. Rather, CSR holds that a company also must ensure that it does little or no harm to, and preferably helps, its workers, the environment, and the communities in which it operates.

As such, CSR is a balancing act between the interests of a company's various ''stakeholders'' including shareowners, executives, employees, communities, and customers. It also is referred to as ''good corporate citizenship'', ''compassionate capitalism'', and ''business ethics''.

CSR has evolved in diverse ways for different companies, industries, and societies. In the United States, Latin America and Southeast Asia, for example, much CSR involves donations to social and artistic causes and other such acts of corporate philanthropy. In Europe, where charity is regarded as a peripheral aspect of corporate operations, debate about CSR has focused on the environmental and social impact of companies' business functions.

Hundreds of major firms around the world say they have adopted some form of CSR and advocates now are exploring prospects of CSR for small and medium sized companies.

At least two fundamental questions remain open, however: First, whether CSR should be mandated and enforced by regulators or left to corporate voluntarism. Second, whether CSR aids or obstructs a company's essential mission of maximizing profit for its owners.

A response to criticism

CSR, as we know it, emerged in the 1980s and 1990s. It came in response to criticism that companies were harming societies and the environment and to growing pressure for businesses to correct the negative impact of their operations. Early examples included allegations that Shell was despoiling the environment and violating human rights in Nigeria and complaints that companies sub-contracted by clothing companies Nike and Gap Inc. were violating their workers' rights.

With increasingly globalized businesses, activist groups and even some governments complained that national environmental rules, health and safety standards, and consumer protection laws were proving insufficient to regulate large global firms or multinational enterprises which traded and invested across borders -- specifically, in poorer countries with lower environmental and labor protections. The only way to ensure that companies did not exploit differences in national regulations, they argued, was to hold firms accountable under binding international standards of behavior with uniform penalties.

The United Nations took initial steps to address the role of global firms in the 1980s, when it drafted an international code of conduct for transnational companies. In 1992, it submitted new proposals to delegates at the U.N. Earth Summit in Rio de Janeiro, Brazil. These efforts failed because of a lack of support from governments and opposition from major firms, 50 of which had joined together in 1991 to form the World Business Council for Sustainable Development (WBCSD) to promote a voluntary, rather than mandatory, approach to CSR. At the Rio conference, many wealthy countries' governments withheld support for the U.N. proposals under lobbying pressure from these and other corporations. Many developing countries' governments also have opposed efforts to mandate higher universal standards, saying this would raise the cost of production and weaken their advantage over higher-cost competitors.

Business lobbyists have argued that laws and regulations represent, by necessity, lowest common denominators that set out minimum standards to be enforced. The WBCSD has said that voluntary measures may exceed what the law requires. And for their part, some international labor groups also have opposed specific proposals for binding universal rules, saying these would interfere with unions' ability to negotiate local or international collective bargaining agreements with individual employers or specific industries.

Even so, a number of environmental and development advocates continue to press for mandatory regulation. In their view, voluntary CSR cannot deliver accountability to people harmed by corporate operations. They add that often, these are among the poorest and most vulnerable people in any given society since it is the poor who work in factories and it is on the lands of the powerless that oil wells are sunk or forests are razed for timber.

Some activists also maintain that the risk of legal penalty would motivate markets because companies are seriously concerned about prosecution and lawsuits. In recent years, plaintiffs aided by labor rights and human rights advocates have sued companies over alleged violent repression against trade unions in Colombia and secessionists in Indonesia, and the alleged use of slaves in Burma, also known as Myanmar. Even if the lawsuits fail, as many have, they inflict years of bad publicity and considerable legal expense upon targeted firms. Businesses have responded to such moves in two ways: Many firms have introduced measures to improve labor conditions, to mitigate environmental damage, and to engage their critics in dialogue. At the same time, business associations have sought to limit plaintiffs' options for litigation. For example, the U.S. Chamber of Commerce has sought to scupper the Alien Tort Claims Act, a 1789 law that allows foreigners to sue foreign and domestic firms in U.S. courts for alleged violations of international law or U.S. treaties. In the examples cited above, plaintiffs in Burma, Colombia, and Indonesia filed suit under this law.

Thus, while debate continues over the best way to ensure good corporate behavior, CSR has evolved as a voluntary process and some companies and their stakeholders have found ways to address specific issues.

The business case for good behavior

Just as CSR's proponents must persuade some skeptics that companies can improve their behavior voluntarily, they also must convince others, including corporate directors and shareholders, that doing so will not compromise companies' primary responsibility to produce profit for their owners. So, in addition to using ethical arguments, CSR's supporters often make a ''business case'' for good corporate citizenship -- in other words, they try to demonstrate that it benefits firms in a number of ways.

The business case differs from company to company depending on industry, size, ownership structure, management culture, vulnerability to adverse public sentiment, and other factors. In general terms, it rests on thinking about profit as more than just how much money is returned to investors in the short run. Currently, business performance is assessed on short-term -- typically, quarterly -- financial results. CSR proponents, however, urge a longer-term perspective and a view of profit that adds social and environmental gains to the traditional, purely financial, balance sheet.

They cite a small but growing body of academic research showing a correlation, if not a causal link, between socially responsible corporate performance and improved total return, sales growth, and profitability.

Likewise, they argue that firms with a reputation for treating communities and the environment well enjoy consumer loyalty and can enjoy easier access to capital because investors consider them a safer bet than companies buffeted by social and environmental risks. To buttress this argument, they point to the growth of ''socially responsible investing'' by institutions and individuals who shun companies perceived as harmful. By some estimates, in the United States these investors account for two trillion-plus dollars or more than 10 percent of investment assets under professional management.

CSR supporters say that some CSR initiatives can reduce operating costs. For example, recycling programs can cut waste-disposal costs and generate income from the sale of recyclable materials. Flexible work hours and employee benefits can reduce worker absenteeism and help firms to retain experienced workers, saving companies the cost of recruiting and training replacements.

And they say that government regulators are less likely to scrutinize companies that enjoy a reputation for observing high standards of behavior.

Measuring progress

CSR continues to evolve. Voluntary codes of conduct and tools to measure and report on corporate performance continue to emerge. In some cases, companies have developed approaches unique to their business and these often are showcased on those companies' web sites. Business consultants, advocacy groups, and academics have developed other approaches and standards to address a broad range of CSR issues or to be used by a wide array of firms.

Many codes of conduct are ''aspirational'' in nature, meaning that they express values to which companies aspire but they do not prescribe how firms are to implement or monitor their commitments.

The Global Sullivan Principles, for example, commit firms to respect workers' freedom to form unions, to pay employees a living wage and to ensure workplace health and safety, among other things. Issued in 1999, they build upon the late Reverend Leon H. Sullivan's 1977 code of conduct for firms doing business in apartheid South Africa.

Likewise, the Organization for Economic Cooperation and Development has developed Guidelines for Multinational Enterprises, a voluntary code of conduct covering employment, environmental, and consumer issues. The United Nations has sought to promote CSR through the Global Compact, its partnership with multinational firms. And some leading international banks and investment houses adopted the Equator Principles, a framework for them to manage the social and environmental aspects of project finance.

With some exceptions, the question of just how to implement many voluntary codes remains very much up to each business. One coffee company might take direct steps to ensure that its suppliers practice eco-friendly farming while another might make a donation to an environmental group to campaign on the issue.

For that matter, firms are not obliged to use uniform methods to gauge their CSR efforts and impact. As a consequence, although many companies now issue statements of their social and environmental performance alongside their customary annual reports, these accounts often cannot be measured against those of other firms and sometimes, they cannot even be compared to the same firm's assertions of previous years. (Of course, officials and development experts often are unable to really measure the social and economic impacts of projects, so companies are not alone in this regard.)

Efforts to respond to the resulting confusion and to bolster CSR's credibility have included the development of independent reporting standards, certification schemes, and ratings indices.

Reporting standards provide companies with a way to communicate their responsibility performance to stakeholders, including the public. These have developed alongside concerns that CSR was just ''green wash'' or a public relations gimmick. The Global Reporting Initiative (GRI) was launched in 1997 to develop globally applicable standards for measuring all non-financial aspects of corporate performance. AccountAbility, set up in 1999 and complementing the GRI, has developed the AA1000 Framework and AA1000 Assurance standards to allow CSR reports to be verified.

Management and certification schemes measure specific CSR-related operations and enable companies to ensure that internal performance improves. These include the International Organization for Standardization (ISO) certification program and SA 8000, a system for tracking working conditions throughout a company's supply chain that was developed by the U.S.-based non-profit group Social Accountability International (SAI).

Rating indices are generated to compare companies on specific aspects of CSR and can produce pressure on companies to improve their performance in those areas. Participants in indices such as the Great Place to Work annual index select themselves to showcase their human resources achievements. In other cases, companies have no choice whether or not to participate in investment indices such as the Dow Jones Sustainability Indexes and FTSE4Good.

Clearly, CSR is unfinished business, a work in progress.

Trends to follow

  • Investor pressure for CSR is growing. Investors urge the companies whose shares they hold to address specific grievances or introduce policies to enhance their social and environmental performance. An increasing number of such shareholder proposals are brought before the annual meetings of firms based in the United States, Europe and elsewhere, and pressure groups are buying shares in targeted firms in order to engage in this kind of shareholder activism. (See also the related backgrounder on shareholder activism on this web site.)
  • CSR-conscious investment is growing. Investors are seeking out ''socially responsible'' ventures partly in the belief that these carry lower risks of damage to corporate property, employees, and reputations. This has led to the launch of the Dow Jones Sustainability Indexes and FTSE4Good, among other high-profile market initiatives aimed at tapping this investor demand. Many investment firms also offer investors the option of buying into proprietary funds made up of the stock and bonds of companies that have been screened on the basis of their environmental or social performance.
  • Concern about CSR and about corporate governance is converging. Investors and analysts concerned about corporate governance increasingly view good corporate treatment of workers, communities, and the environment as tools in managing a company's exposure to different types of risk and therefore demand that executives include a broad range of CSR issues in their efforts to ensure the firm's proper and efficient running. At the same time, activists stress that in order for a company to pursue CSR effectively, its managers and directors must be fully accountable and its decision-making processes must be transparent. (See also the related backgrounder on corporate governance on this web site.)
  • There is growing debate about how government can create a business environment that rewards companies for being more responsible and penalizes those who are not. This includes adding CSR to the criteria that government agencies use when deciding from which companies to buy goods and services, providing export credit support for responsibly performing companies or sectors, easing customs checks for responsible companies, and so forth.
  • Reporting and certification standards are beginning to converge after an initial proliferation. This process reflects years of trial, error, and learning by companies, their consultants, and their critics.
  • What do you think will work in your country context? Regulations are pointless if they are ignored, but will reaching an agreement with civil society players or a charismatic player in politics may be more effective to gain support around an issue?

More Tips for Reporting on CSR

  • Everyone has something to say about CSR, whether your story deals with specific firms and cases or larger questions of public policy and standards. Try to reach as many of the stakeholders involved as possible. They include shareholders, directors, management, employees, consultants, industry associations, analysts, regulators, activists, and people affected by corporate decisions.
  • When reporting on codes of conduct, whether voluntary or mandatory, find out what the penalties are for failure to comply and what means are in place to track a company's compliance and to ensure that the relevant penalty was imposed and implemented. This is the only way to figure out whether a given CSR standard has any teeth.
  • When writing about debate over regulatory versus voluntary approaches to CSR, consider what you and your sources think will work in your country. Regulations are pointless if they are ignored, and in some countries they have failed to have any impact. Will reaching an agreement with civil society players or a charismatic political figure prove more effective?
  • Find out what resources a company has committed to CSR initiatives and whether its CSR activities and claims are subject to any independent verification. Where has the company assigned staff members with CSR responsibilities? Are they assigned to operational departments or are they confined to the public relations office? Is CSR written into the company's core policy and mission documents? Does the firm take into account the views of all internal and external stakeholders? Do top-level managers and members of the board of directors review CSR plans and monitor their implementation? Do they require an assessment of the CSR impact of major company proposals? Do they provide employees with sufficient training and information to deal with conflicts between CSR and financial imperatives? Do they protect staff members who blow the whistle on company malfeasance or CSR failures? Finally, does the firm encourage business partners, governments, and others to adopt and support responsible business behavior?
  • Remember that while CSR is concerned with certain universal issues -- treatment of employees, communities and the environment, for example -- the specific issues at play and the relative importance of different stakeholders will vary between companies depending on their industry, size and ownership structure, among other factors. Oil companies, for example, have been known to play down the dangers of climate change even though they are among its major contributors. On the other hand, insurers and the reinsurance industry -- which insures insurance companies -- are thought to contribute relatively little to global warming but tend to be among those most worried by it because of the potential for floods, drought, and other calamities that could hit business and result in massive claims.
  • In most companies, CSR departments have to persuade other areas of the company that responsibility is good for the company. This can be a demanding task. Sometimes this means that corporate CSR executives are more willing to speak frankly with reporters than are other company officials. However, corporate CSR staff members often shrink from probing questions for fear that their internal advocacy work will be jeopardized if they are quoted as saying something that could be seen as critical of the firm or colleagues in other departments.

Publication Information

Type Backgrounder
Program Journalism Backgrounders
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