Corporate Social Responsibility: A Critical Review
by Miriam Lehmann, May 29, 2022
Why do businesses exist? To earn profit? Or to serve a purpose?
These and similar questions related to the concept of Corporate Social Responsibility (CSR) have been in the focus for several decades now. Back in the 1970s, after the publication of Milton Friedman’s famous book “Capitalism and Freedom” the prevailing opinion of the public was that the only responsibility of a company is to increase its profits. According to Friedman, who was a strong advocate of economic liberalism, “in a free society, there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”. In his opinion, acting socially responsible means to spend someone else’s money for a social interest. Friedman’s main argument was that business and politics should be separated and by mixing up the functions, the basis of a free society could become endangered.
However, in contrast to this view, today it is generally agreed that modern companies must assume a different role. Especially in the last 20 years, there has been a major change in attitudes to corporate responsibility. Nowadays, companies are expected to meet the expectations of society, which include to acknowledge its social responsibility and to contribute to the sustainable development on a global scale. Companies are expected to be transparent, ethical and compliant, which let some countries enact laws concerning the regular publication of CSR reports.
Not only consumers but also more and more investors assign greater importance to business ethics when making decisions. However, despite growing awareness by the population and by decision-makers concerning global issues like climate change, discrimination and human right abuses, there is still evidence that some major corporations do not act in accordance with general CSR principles. Countless media reports of scandals like the VW scandal, Nestlé’s water privatisation policies or Shell’s ongoing environmental pollution in the Niger Delta have shaken consumer confidence permanently.
For this reason, the following essay aims to discuss the current role of big corporations in society and the importance and effectiveness of CSR principles and guidelines.
What is Corporate Social Responsibility (CSR)?
As an integral part of business ethics, the concept of Corporate Social Responsibility (CSR) describes a company’s responsibility towards society and its natural environment, based on social norms and values. However, despite the increasing importance of CSR in today’s business world, there is no universally accepted definition.
One possible practical guidance for organizations has been provided by the International Organization for Standardization (ISO) in 2010. According to ISO 26000 (which refers to the ten principles of the UN Global Impact), businesses should support and respect the protection of internationally proclaimed human rights and make sure that they are not complicit in human rights abuses. The UN guidelines also request the elimination of all forms of forced and compulsory labour, the effective abolition of child labour and the elimination of discrimination in respect of employment and occupation. Moreover, businesses should undertake initiatives in order to promote greater environmental responsibility and they should work against all forms of corruption, including extortion and bribery.
Doubtless, one cannot deny that the standards include significant principles, which are based on international law. However, the question arises how effective these standards truly are. Although the underlying principles recognise social responsibility and although they engage stakeholders to integrate socially responsible behaviour into organisations, the main problem is that they only provide a guidance to corporations and therefore, there is no international binding rule of law. As a consequence, wilful misconduct by organisations can only be punished at national level, not internationally.
The role of big corporations in today’s societies
Regarding the question what role big corporations in today’s societies play, one has to consider two things: First, CSR has never played a more important role in organisations. Second, companies have never accumulated as much wealth as today.
While on the one hand, the demand for fairly and sustainably produced products has increased significantly over the last few years, there is no denying the fact that companies do also try to profit from this trend. Although most globally active companies claim to be sustainable and environmentally conscious, certain actions clearly speak against it. Through strategies like “greenwashing”, fashion companies like H&M & Primark were able to pretend producing environmentally friendly fashion products, while in fact, they were not. Strategies like these have the immediate effect that consumers easily are getting fooled and at the same time, by setting up strategies like these, the company’s actions stand in stark contrast to the assumption that they aim to work towards the UN sustainable development goals.
Experts estimate that the actual share of socio-ecologically oriented companies in Germany is currently only around ten percent, although most big companies publish sustainability reports on a regular basis. As already mentioned, one major factor contributing to this issue might be the fact that there is no uniform and legally binding standard. This enables companies to take the standards not as seriously since there are no severe financial penalties.
At the same time, research has shown that many companies use their financial resources to improve their brand image rather than to invest in actual sustainable initiatives. For example, companies like Shell plc have demonstrated that CSR reporting can also be used as a strategic PR mechanism to improve one’s own image. By taking a closer look at Shell’s website, it becomes clear that the company publishes CSR reports on a regular basis on topics like sustainability, transparency and environment. However, already in the 1970’s the company was accused on being responsible for severe environmental damages in parts of Nigeria. Due to Shell's refusal to maintain their pipelines, millions of tons of oil seep into Nigeria every year - with disastrous consequences for the local population and the sensitive ecosystem of the Niger Delta. Although the Dutch company makes annual profits of around seven billion dollars, Shell since then never paid any form of compensation to the local people.
Another extreme example displays the Tazreen Fashions garment factory in Bangladesh, which caught fire in November 2012. The garment factory produced clothing for big companies like Walmart, C&A, Kik etc. At that time, over a hundred of workers were injured and killed due to the fire. Although some companies took responsibility and created a fund to compensate the family members and survivors, Tazreen’s biggest purchaser, Walmart, has not yet allocated funds to pay any compensation.
Officially and publicly, many companies claim to be socially responsible. They publish CSR reports, launch CSR programs and have whole CSR departments. Of course, some initiatives may show significant improvements and some companies may have sincere intentions to use their resources for good.
However, many examples in the past have clearly shown that there are many companies which favour profit over social impact and sustainability. The global restructuring in the last decades has shown that low costs play a more important role than respecting basic human rights and the environment. Due to this reason, many large companies have outsourced their production facilities to developing countries like Bangladesh, Cambodia etc. Although the legal framework within the European Union prohibits human rights abuses and severe environmental damages in Europe, the legal framework in developing countries has no enforceable measures to punish companies which violate the law. This allows companies to regularly violate CSR guidelines.
Success factors of the future
How can companies stay successful in future? In general, organisations need to find a balance between profit and morality. Combining both ideas must be made top priority for companies. Nowadays, focusing on mere profit may not only hurt society but the company itself. Studies have shown that good CSR management increases sales due to the shifting values and rising awareness among customers. By implementing effective CSR guidelines within the organization, companies can offer products which have been produced fairly and which are still profitable. However, this would require transparent CSR communication, which is, of course, also fraught with risks. Sole “greenwashing” of products and brands is not an effective mean anymore and through lying, companies might damage their image in the long-term.