The Strategic Importance of Corporate Social Responsibility

Competitive Advantage or Contemporary Trend?


Bachelor Thesis, 2010
49 Pages, Grade: 1,3

Excerpt

Table of Contents

List of Figures

List of Abbreviations

1. Introduction: From the Honorable Merchant to the Responsibilities of Multinational Companies

2. Business Ethics: The Creative Tension between Entrepreneurial Freedom and Moral Constraint
2.1 The Company as a “Corporative Actor”
2.2 Moral and Profit: Two Antithetical Concepts?
2.3 Globalization: Economic Chances and Ethical Challenges
2.3.1 The Importance of Human Rights for CSR
2.3.2 Benchmarking CSR: The UN Global Compact

3. Strategic Corporate Social Responsibility
3.1 Hurdles to Effective CSR
3.2 Strategic Planning and Strategy Realization
3.2.1 The Responsibilities of a Company
3.2.2 The Intersections of Business and Society
3.2.3 Responsive CSR contra Proactive CSR
3.2.4 Strategic Corporate Philanthropy
3.3 Supply Chain Sustainability and Context Improvement: The CSR Strategy of Nestlé in India

4. Conclusion

Bibliography

Appendix

List of Figures

Figure 1: What Responsibilities does CSR include?

Figure 2: Signatories of the UN Global Compact

Figure 3: The Four Elements of Competitive Context

Figure 4: Social Responsiveness Categories

Figure 5: Internal and External Relations of a Company

Figure 6: The Relevance of Stakeholders for MNCs

Figure 7: Participants of the UN Global Compact

Figure 8: The Ten Principles of the UN Global Compact

Figure 9: The Pyramid of Corporate Social Responsibility

Figure 10: The Social Impact of the Value Chain

Figure 11: Responsive CSR and Strategic CSR

List of Abbreviations

illustration not visible in this excerpt

“ Profit is as necessary as the air we breathe, but it would be terrible if we worked only to make a profit, just as it would be terrible if we lived only to breathe. ”

Hermann Josef Abs, former CEO of Deutsche Bank

1. Introduction: From the Honorable Merchant to the Responsibilities of Multinational Companies

“ What Every True and Honest Merchant Must Have Within Himself. Integrity always suits him,

Long foresight keeps him well,

And what he promises doesn ’ t come lacking;

And he should be, if able, of beautiful and honest behaviour According to what need or reason he intends.

And to buy cheap he sells dear,

Beyond rebuke with a beautiful welcome,

He awails himself of the church and gives for God, He grows in a merit, and sells with a word. Usury and the game of dice are forbidden

And take away everything.

He writes his calculations well and does not err. Amen ” 1

Ethical behavior in commerce has a long tradition. The idea of a “true and honest merchant”2 existed already in Europe in the fourteenth century, as the lines above point out. It was of decisive importance for a merchant to be reckoned honorable. Much of what was expected of the renaissance merchant is still reflected in today’s vision of sustainable and responsible business practice. Often the managers’ lack of virtues such as integrity, honesty, sincerity, modesty and fairness is decried. However, a generally accepted or universal ethical code of business conduct does not exist - neither for society, nor for corporate executives - which does not mean that unethical practices are without consequences. At worst, the medieval and renaissance merchant could face ostracism and exclusion from the community in case of dishonorable behavior. Today’s consequences might be far less existential for managers, but for companies it may hold very well. The examples of the bankruptcy of Enron at the beginning of the century3, Shell’s involvement with turmoil and conflicts in Nigeria4 or the immense stock market losses and penalty fines Beyond Petroleum (BP) faces currently, illustrate the menacing ramifications that unsustainable and irresponsible corporate behavior can entail. The old proverb among merchants: “Ehre verloren - alles verloren”5 can be translated into the present: “Vertrauen verloren - alles verloren” (Robert Bosch). Bourdieu characterized the value of prestige, reputation, honor and social status as “symbolic capital”6 and hints at the relevance of these immaterial assets for a company. Corporate Social Responsibility (CSR), as a way to manage these symbolic capitals, is of vital importance at the juncture between moral and business interests today.

According to Heald the idea of a social responsibility of businesses or, as he calls it, a “corporate conscience”7 of companies goes back to the beginning of the 20th century. But not until the 1970s the debate gained mainstream public interest, when after years of expansive economic growth following the Second World War negative externalities of economic activities surfaced.8 After having satisfied basic materialistic needs companies were expected to take on responsibility for further aspects than the efficient production and provision of goods and services. This is not merely to be understood in the sense of Bertolt Brecht’s famous bon mot “Erst kommt das Fressen, dann die Moral”9, but rather as the beginning of a changing mentality of Western societies: The protests of 1968 shook the fundaments of established values and norms by criticizing the capitalist system; The first environmental movements changed the perspective on sustainability: Renewable energies, alternative business models and healthier and sustainable lifestyles came into the political and public focus; Green parties were founded and started to get elected into parliaments; A culture of questioning the status quo and the conventional norms was not only a rising phenomenon at the far left political spectrum, but influenced societies as a whole towards more post-materialistic values. Managers slowly began to consider themselves responsible for broader groups of stakeholders. In The Davos Manifesto of 1973 managers pointed out their duty to serve the overall good not only of their customers, employees and creditors, but of the society as well.10 The concept of efficiency as the sole legitimization for companies to operate while exploiting nature and human capital was not sufficient anymore. The notion of assuming further responsibilities than economic ones to be tasks of an enterprise led to controversial debates on what the core objectives of a company are.

Figure 1: What Responsibilities does CSR include?

illustration not visible in this excerpt

Source: adapted after Carroll (1979), p. 499

Figure 1 points out the evolutionary process of what has been defined as CSR already at the end of the 1970s. Must a company be concerned about further matters then economic ones? And if an enterprise ought to consider environmental, social and governance (ESG) issues in its strategy, how can a firm be committed to do so - voluntarily or by means of regulation?

These questions press for an answer in order to bring global problems closer to a solution, but also for the sake of companies themselves. Multinational companies (MNCs) are held accountable for their actions and wrongdoings by Non-Governmental Organizations (NGOs), politicians, the media and an increasingly observant public in the web 2.0 more than ever before. Costs for information, communication and mobility have decreased dramatically and in the same way companies have been globalizing, their critics have gone global as well. MNCs do not only have to interact with their business partners solely, but with various stakeholder groups within the society. Because of their augmented influence, power and financial strength big enterprises noticeably play a (socio-) political role.11 At the beginning of the 21st century CSR has become a central factor at the interface of business, morality and societal expectations.

The research question of this thesis “Does CSR constitute a long-term competitive advantage or is it a contemporary trend?” focuses on the strategic importance of CSR. Can CSR - under adequate conditions - be a process that reinforces itself due to competitive advantages a company receives from engaging in ESG issues? Or is CSR currently the talk of the town12 because social and ecological sustainability satisfies the contemporary zeitgeist and CSR activities are necessary to communicate a company’s philanthropic behavior in order to increase its reputation or manage potential risks?

Following these questions, the first chapter examines the intrinsic problem areas of CSR such as the differences between individual and collective responsibility; the fundamental conflict between profit and moral; and the tension between universal ethical norms, national or international legislation and entrepreneurial freedom. In the last two subchapters the challenges and chances of globalization are illustrated.

The second chapter focuses on the business perspective on CSR. The aim of this part is to reconcile the conflicts described in the first chapter in ways that can create mutual benefits for both the society and companies. At first, practical problems of planning, implementing and evaluating CSR activities are discussed. Starting from there, a strategic concept of CSR is developed that understands ethical and philanthropic responsibilities as firm and context specific competitive advantages. Management tools are presented that help to localize and address ESG issues with beneficial potential for society and business alike. Concluding, the activities of Nestlé in India illustrate a good practice example for a CSR strategy that aligns social communal engagement and profitability.

2. Business Ethics: The Creative Tension between Entrepreneurial Freedom and Moral Constraint

The core thesis of business ethics refers to the company’s orientation towards values and norms in the pursuit of corporate interests. Strategic and operative tasks guided and accompanied by a normative philosophy ought to create the basis for business success.13 The discourse on this subject centers on the question in how far monetary motives of companies and moral ideals can be reconciled. A new approach to business ethics focuses on the responsibilities of a profit-oriented organization. The media, politicians, a conscious publicity and academic researchers increasingly often identify global ESG issues to be caused by activities of companies. Due to climate changes, humanitarian crisis, environmental disasters and scandals concerning working conditions, food or pharmaceutical products the understanding of a company’s obligations has shifted towards CSR.

The thesis at hand is based on the assumption that certain moral norms are universal and egalitarian principles. Political, organizational and financial infeasibility of enforcing them does not discredit their legitimacy or validity. This includes the presumption that the majority is able to set a legal framework, which does not mean that everything that is legal, is ethically correct.14 Within this framework this thesis wants to analyze whether moral/CSR and self-interest/profit-maximization are two antagonistic concepts that can only be achieved by abdication one or another. The hypothesis that companies may attain a competitive advantage by employing honest and sustainable CSR refers to the conception of business ethics of Suchanek and Homann.15 Thereafter, the incentive- compatibility of moral and profit is a question of institutional arrangements. Responsibility is understood as a behavior that does neither reduce the freedom entrusted to companies in order to conduct its business nor must it harm a third party in doing so. Briefly, it must not undermine the company’s “license-to-operate”16. In this context, it is necessary to answer the questions how morally desirable behavior can be made profitable or how profitable business activities are morally justifiable under the condition of a universal morality.

Below, the controversies about business ethics in general and CSR in particular are examined from an analytical and theoretical viewpoint. The objective is to show and explain the basic conflicts related to this matter and hint at reasons, why CSR is still a difficult and abstract concept for most companies. References to concrete examples are to facilitate the understanding of theoretical considerations.

2.1 The Company as a “Corporative Actor”

Before analyzing possible intrinsic antagonisms of CSR and the question, whether a corporation has (social) responsibilities, it is worthwhile to take a closer look at the protagonist itself: the company. Being a fairly new concept of modernity17 firms have significantly added to the overall welfare. A company constitutes an economic and legal entity18 that has manifold internal and external relations (see figure 5, Appendix). Yet, the question arises if it is generally possible to view a company as one collective moral actor. Or is an enterprise rather a construct of various single components and responsibility (of which sort whatsoever) has to be seen on an individual level?19

Over time enterprises have adopted apparent personal features. In the same way as one thinks in terms of individual identity, values, knowledge, tradition, characteristics and philosophy companies have developed or strive to induce their corporate identity, representative values, organizational know-how, family-like traditions, unique characteristics and a motivating and positive philosophy. While a corporate culture evolves from internal processes or is purposely created to communicate friendly and affirmative features, a company’s responsibilities are, for the most part, articulated by external stakeholders such as clients, investors, governments, the media, environmental organizations etc. The reconciliation of different and sometimes diametrically opposing interests of these various stakeholders is reflected in the economic order of a state and eventually sheds light on the responsibilities of an enterprise.

Suchanek argues that the best institutional system to align various interests creating mutual advantages is the market economy.20 His underlying assumption of business ethics says that the actors within a market economy cooperate for their common benefit. In this framework a firm constitutes a “corporative actor”. A corporative actor creates added value for the members of a company due to synergy effects and gains from coordination and cooperation on the one hand and it simplifies the relations with stakeholders on the other hand. One can attribute characteristics to a corporative actor, have a notional understanding about the features and the quality of its products and estimate its performance on the stock market without knowing a single individual working there. The whole idea of brands, their recognition and symbolism, the abstraction of qualities and goodwill depends on this concept. In this context Waldkirch talks about a “Zurechnungsschema”21 that reduces the complex structures and processes within a company to a perception of its basic facets. The experiences a costumer makes with products or personnel are projected on the firm and constitute one’s attitude towards that enterprise. If a car breaks down, one cannot and does not blame the unknown worker at the assembly line, but the company for bad quality management, a lack of control or maybe employing unqualified staff. The representative character of single employees or products and their features reveals whether an enterprise has built up “governance structures”22. Without governance structures companies could not develop a reputation, an image or trust. These normative qualities - a high reputation, a positive image or trustworthiness - are undoubtedly of importance for buying decisions and business success and add moral and ethical aspects to the economic and legal entity of a corporative actor.

One should not overlook, however, that an institutional corporate responsibility could lead to the tendency of disconnecting the single employee’s or manager’s decisions and actions from his moral judgments. A company board posting an ethical code must thus be cautious not to degenerate its employees and managers from self-responsible morally differentiating subjects (le sujet moral) to an agent of morality (l ’ agent moral)23 who then unconditionally consults the ethical code instead of his own “moral impulse”24.

Then again, individual responsibility diffuses when economic relations become anonym and final goods are detached from the single employee due to a multitude of working steps in their complex production processes.25 Action and consequence are decoupled. Two short examples might visualize the advantages of an institutional approach to CSR: A corporate philosophy that strongly emphasizes the company’s dedication to high quality could raise the awareness of the worker at the assembly line to pay extra attention to filter out damaged parts. On the managerial level, an ethical code promoting personal integrity may prevent executives from billing their private travelling expenses to the company.

Consequently, on the one hand companies face the challenge of bearing responsibility as a corporative actor by inducing the necessary institutional conditions, e.g. via an adequate corporate culture. On the other hand the individual moral consciousness of employees and managers must be strengthened by promoting a sensibility for norms, values and the cultural environment they work in. Both combined constructs the basis for integral and organizational CSR strategies and ethical business conduct in a globalized world economy.

2.2 Moral and Profit: Two Antithetical Concepts?

In the discussion on business ethics two concepts seem to be irreconcilable and fundamentally conflictive: moral and profit. Employers or shareholders might claim that increasing competition often forces firms to take unpopular measures to cut costs in order to stay profitable. Critics of globalization, environmental activists or spokespersons of trade unions on the contrary argue that companies abuse their given freedom and a too liberal legislation. May one sympathize more with the first or the second position, it is a fact that business leaders frequently face dilemma situations and are to make a decision between a (rather) morally legitimate or a (rather) profit- increasing alternative that has to be communicated and explained to the stakeholders and shareholders respectively.

The liberal economist Milton Friedman tried to solve this predicament by locating corporate responsibilities solely in the economic field: “The social responsibility of business is to increase its profits”26. This statement clearly had a provocative purpose, but also considers the institutional framework and basic principles of a capitalistic system (market economy, incentive structures, competition, property rights etc.) logically from a liberal perspective and adds valuable ideas to the CSR debate. Friedman’s argumentation is twofold:

(a) First, he denies that a corporation itself can have responsibilities and therefore sees moral obligations only on the individual level. Thus, managers primarily have a “fiduciary duty”27 to the owners of the company, “which generally will be to make as much money as possible”28. The individual may feel responsible for plenty different matters such as minority rights, environmental protection, charity, his neighborhood, homeless shelters, sports clubs, the education of underprivileged children etc. and is very well free to devote his personal income, time and effort to these causes, but not the resources entrusted to him by the company owners. There has to be a distinctive differentiation between the executive or agent appointed to run a corporation and the private person who then acts as a principal himself.

(b) Second, Friedman implies that a company’s social obligation is to stay profitable and in business. By employing and paying workers, producing products and offering services society needs, investing in new technologies and creating jobs a firm already decisively increases the overall prosperity. In other words it would be unethical and irresponsible of a company to risk its existence and the employees’ jobs by reducing its competitiveness through social engagement.

Furthermore, the realization of profit is a reliable indicator for the executive’s performance while it is difficult to evaluate in how far a social or ecological problem was solved by disposing the shareholders’ equity29 (given the case that this was even desired by the owners). Friedman is of the opinion that social responsibility rather belongs in the hands of politicians and state officials than in the ones of corporate managers. It is the task of the state to deduct taxes from the employers’ and employees’ income and spend it in such a way that it optimally serves the public interest (redistribution of income, improvement of the educational system, cultural funding, afforestation projects, qualification programs for permanently unemployed persons etc.). Moreover, it is the government’s duty to set the legal framework for companies in order to pursue social or ecological motives (e.g. lay-off protection or ceilings for emission rates). Generally, all firms face the same legal constraints and equal market conditions, while a company that incurs significantly more expenses in the field of social responsibilities than others runs the risk to become less price-competitive than its competitors. A company investing capital and effort solely in social projects instead of new innovations might be driven out of business by “the process of creative destruction”30 in the long run.

Yet, Friedman overlooks that not all social issues and ethical dilemmas31 can be regulated by state legislation. He underestimates the conflict between moral and profit.32 Especially in the process of globalization, intergovernmental coordination is far slower than the rise of new economic possibilities, emerging markets and competitive pressure. Not few social and ecological problems of globalization are due to imperfect market conditions.33 Friedman considers a company to be a closed system34, which is a too narrow perspective for MNCs virtually affecting every area of life. By reducing responsibility to an individual managerial level Friedman disregards the positive economic effects that CSR can have for the corporation itself (e.g. motivation of employees, a brand reputation of sustainable, honest and high quality products or an increased competitiveness).

Friedman does not deny any moral motives admitting that managers must run a company in accordance with the law and “ethical custom”35. This side note leads to questions such as ‘What are the ethical customs of a given society?’ or ‘How much attention should a company attribute to the ethical customs?’ and proves that not even for a strict liberal interpretation of CSR the conflictive concepts of moral and profit are easily answerable.

Since Friedman has written his article on CSR in 1970 the level of globalization has increased drastically. Alongside with the changed situation the role of companies must be seen from a new perspective. In the following subchapter the area of conflict between international laws and regulations on the one hand and ethical business practice on the other hand will be dealt with in more detail.

2.3 Globalization: Economic Chances and Ethical Challenges

The process of globalization has significantly altered nature, behavior and power of corporations as well as relations between firms and the society, governments and various other stakeholders. In the past decades nation states have experienced a weakening of their sovereignty in terms of their ability to adjust their national economic policies. This is partly due to international institutionalization and a voluntary cession of national competences to supranational entities such as the European Union (EU) or the World Trade Organization (WTO). But also companies were able to influence national legislation. Increased mobility and lower communication and transportation costs allowed MNCs to offshore their place of business to the country offering the most attractive legal framework and the lowest costs of labor. Governments found themselves in a competition that forced them to grant concessions regarding corporate taxation and social and environmental standards in order to prevent companies from relocating their activities elsewhere.36 In open markets firms (even smaller ones without an influential lobby) are able to choose between various alternatives and hence are less bound to national legislation.

[...]


1 See Balducci (1340): Practica della Mercatura, as quoted in Dotson (2002), pp. 86 f.

2 Dotson (2002), p. 86.

3 For a detailed description of the Enron case see Suchanek (2007), pp. 149-152.

4 For a detailed analysis of the conflicts between Shell and the Ogoni see Wheeler/Fabig/Boele (2002), pp. 297-318.

5 Burkhart (2006), p. 45.

6 Bourdieu (1998), p. 47.

7 Heald (1957), p. 375.

8 See Homan/Blome-Dress (1992), p. 169.

9 Brecht (1928), p. 67.

10 See Dyllick (2004), pp. 1 f.

11 See Holtbrügge (2004), pp. 205-206; An up-to-date example of such an initiative seeking to influence the political decision-making process in drastic contrast to honest CSR is the appeal of 40 German top- managers declaring their support for longer operation periods of nuclear power plants (see Eigendorf et al. (2010), p. 3).

12 Exemplarily hereunto see Harvard Business Manager (2007), pp. 15 ff.

13 See Homann/Blome-Drees (1992), p. 112.

14 See Lohmann (2010).

15 See Suchanek (2007); Suchanek (2004); Homann (2007); Homann/Blome-Drees (1992); for an oppositional approach see Ulrich (2001).

16 Porter/Kramer (2006), p. 5.

17 See Suchanek (2007), p. 116.

18 See Heeg (2002), p. 16.

19 A position that affirms the existence of institutional ethics in companies is held by Steinmann (see Steinmann/Löhr (1995), p. 79 ff.) while Leisinger on the contrary argues that organizations do not have a consciousness, soul or physicality and therefore rejects an institutional responsibility (see Leisinger (1997), p. 46).

20 See Suchanek (2007), p. 116.

21 Waldkirch (2002), p. 164.

22 Suchanek (2007), p. 119.

23 See Foucault (1986), pp. 36 ff.

24 Bos (1997), p. 1009.

25 See Homann/Blome-Drees (1992), p. 171.

26 Friedman (1970), p. 122.

27 Suchanek (2007), p. 126.

28 Friedman (1970), p. 122.

29 See Suchanek (2007), p. 127.

30 Schumpeter (1994), p. 104.

31 Suchanek exemplarily names corruption of competitors, offshoring from a structurally weak region, child labor of subcontracts, pre-products for war materials, the financing of environmentally questionable projects, the price policy of pharmaceutical companies in developing countries etc. (see Suchanek (2007), pp. 131 f.).

32 See Suchanek (2007), p. 128.

33 For instance, environmental requirements or regulations for financial institutes (standards for rating agencies, the introduction of a Tobin-tax etc.) are to be sought on an as global level as possible in order to create equal conditions for all companies.

34 See Luhmann (1997).

35 See Friedman (1970), p. 122.

36 Holtbrügge (2005), p. 195.

Excerpt out of 49 pages

Details

Title
The Strategic Importance of Corporate Social Responsibility
Subtitle
Competitive Advantage or Contemporary Trend?
College
Otto-von-Guericke-University Magdeburg  (Lehrstuhl für Internationales Manegement / Institut für Philosophie)
Grade
1,3
Author
Year
2010
Pages
49
Catalog Number
V181835
ISBN (eBook)
9783656052265
ISBN (Book)
9783656052524
File size
988 KB
Language
English
Tags
Strategic CSR, Business Ethics, Unternehmensverantwortung, ESG, License to operate, Suchanek, Homann, Porter, Kramer, Korporativer Akteur, sujet moral, agent moral, Moral, Profit, Friedman, Human Rights, Global Compact, Greenwashing, Nestlé, Shell, BP, Nike, Enron, Corporate Welfare, Corporate Philantrophy, Pyramid of Corporate Social Responsibility, Corporate Performance, Toyota Prius, Competitive Context, Responsive CSR, Proactive CSR, Cause-related Marketing, Supply Chain Sustainability, Utilitarism
Quote paper
Timo Wilhelm Rang (Author), 2010, The Strategic Importance of Corporate Social Responsibility, Munich, GRIN Verlag, https://www.grin.com/document/181835

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