The central question in the CSR debate remains the same today as it was in 1932 when Adolphe Berle and Merrick Dodds, among the pre-eminent scholars of their day, debated it in the Harvard Law Review. Does the firm exist solely to maximise the profits it returns to its owners or do firms and managers have a broader responsibility to society at large?
While the CSR debate usually rages in the field of academia, there is no doubt that CSR is once again on top of many agendas. The added possibility of EU legislation in the area makes it a topic that requires serious consideration among those charged with the financial management of business.
CSR - why all the fuss?
Very often these questions begin with trying to find a definition for what exactly CSR is?
CSR has been defined as “the integration of business operations and values whereby the interests of all stakeholders, including customers, employees, investors and the environment are reflected in the organisations policies and actions.”
However CSR can still mean different things to different people and the lack of a clear and measurable definition brings its own problems. The key issue, particularly for those opposed to CSR, is that the vagueness of definitions allows huge leeway in what is proposed and accepted as CSR, how much is spent on it and which groups get prioritised for CSR type investments.
The case ‘against’ CSR
As recently as 2001, former Chief Economist of the OECD, David Henderson arguing against the current model of CSR said “the current widely-held doctrine of CSR is deeply flawed . and its general adoption by business would reduce welfare and undermine the market economy.”
Of the arguments against CSR, four stand out:
- profit maximisation and free choice
- competitive disadvantage costs and the free-rider issue
- the lack of requisite skills among business people
- the lack of accountability
For those opposed to CSR the maximisation of profits is seen as the only social responsibility of business and business people. Providing employment, paying taxes and complying with all relevant legislation and regulation is seen as enough social responsibility. In addition, profit is seen as a key measure of managerial effectiveness as well as a guard against the agency costs associated with employing professional managers to run an enterprise that they do not have an ownership interest in.
Economist and Nobel Laureate Milton Friedman has harshly criticised business people who promote CSR describing them as “preaching pure and unadulterated socialism”. Friedman’s stance is that activities not directly associated with the business incur additional costs which consumers must bear or which reduce profits for shareholders. His view is that neither shareholders nor consumers should incur such costs and that they can decide for themselves which social needs they want to resource and to what extent.
The ‘free-rider’ problem relates to the fact that companies who do not engage in CSR obviously do not bear the costs of CSR. Yet they still reap the societal benefits accruing from CSR activities of others. With the benefits shared disproportionately, those that do incur CSR costs are at a competitive disadvantage to those that do not.
The diversity of talent in any market makes it clear that different people have different skills and often seek to apply those skills in an appropriate domain. Those adept at solving social issues may gravitate toward serving society, for instance through valuable governmental or public service roles. In contrast, those with skills in identifying and satisfying a market need may gravitate toward business and profit seeking. Therefore, it is argued, business people do not have the requisite skills to deliver on social issues regardless of their success in the field of business.
Finally, as business already wields significant power in society, to willingly grant business people more power would be ludicrous. Put simply, business people who are not elected by the citizens and who have no accountability to the public should not be entrusted with the public purse or the power to decide which social issues should get priority. To combine social and profit making power in the hands of one group would be akin to encouraging the suicide of democracy.
The last words on the case against CSR come from marketing guru Theodore Levitt who argued that
“sentiment is a debilitating influence in business that fosters leniency, inefficiency and sluggishness. The governing rule should be that something is good only if it pays. Otherwise it is alien and impermissible.”
The Case ‘for’ CSR
Proponents of CSR including Michael Porter, Henry Mintzberg and Dave Packard see CSR as the very essence of a civilised society and at the core of business strategy.
Philip Drotning, a former Vice-Chair of an affiliate council of the US Dept. of Commerce, urges management to get truly active on CSR rather than use the thin veil of social policies as “placebos for the tortured executive conscience.” Drotning’s view that companies must do more than make a profit is echoed by Dave Packard. Accepting that money is an important result of business, Packard urges executives to see that ‘business’ exists to deliver something more to society than merely profits.
And doing something more for society has also been linked with delivering more for shareholders. Business strategist Michael Porter advises that the adoption of CSR can deliver a competitive advantage to businesses.
The case for CSR can be distilled into four key arguments:
- long-run self interest
- preventative avoidance of regulation
- shareholder interest and
- goal alignment.
It is argued that business receives a charter from society and that charter allows business to operate in society. Business must therefore deliver something back to society if it wishes to survive in the long-run. This ‘return’ could be to help reduce crime, poverty or social exclusion. The result of such efforts is a better environment for business which makes it easier to recruit customers, staff, investors and profits.
Additionally, if businesses voluntarily exceed their regulatory obligations then the need or will for Government interference in business affairs is reduced. This leaves business free to concentrate on maximising commercial returns and keeping shareholders and investors happy.
In relation to shareholder interests, economic and investment studies have shown that the interests of a fully diversified shareholder are best satisfied when the corporate sector as a whole engages in CSR, thus CSR delivers for shareholders again.
A fourth, but by no means final, argument in favour of CSR is the principle that business people, rational and all as we are, align our goals with the accepted societal norms of the day. If society expects business to deliver more than profits, then, having achieved the profit goal, we embark on CSR and non-profit activities.
And consumer support for CSR is strong too. In a MORI poll 68% of respondents said they bought a product because of its CSR attributes. However attitudes do not always translate into actions and despite the expressed consumer support, ethical or CSR products generally struggle to gain a market share of 1% to 3%.
So depending on who you listen to, CSR is either a socialist wolf dressed up as an ethical sheep or CSR is the pinnacle of corporate Darwinism in a modern society. However it is clear is that CSR strategy has far reaching implications for business.
In 2001 US companies spent US$9bn on their social responsibility activities. It is also worth noting that when surveyed, 80% of business editors said that the way a company communicated its CSR actions to them was important when judging that company.
CSR in Ireland
In Ireland 70% of consumers in a survey expressed their belief that a company’s CSR commitment is important when making their purchase decisions. In the same survey 60% agreed that Irish businesses do not pay enough attention to their social responsibilities. Yet ethical products account for a tiny share of most markets and plenty of anecdotal evidence suggests that CSR is widely misunderstood by both consumers and business people. Crucially, there is also a lack of research on CSR from the perspective of business itself. To address this issue Accountancy Ireland is conducting a survey of readers to benchmark for the first time the views of accountants in Ireland toward CSR.
Your participation is important in the survey is important.
Click here to take part. And note that we have a €150 voucher for the best answer to Question 5
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