Corporate Social Responsibility

Table of Contents

1 Introduction

2 Corporations and markets
2.1 Power of MNCs
2.2 Markets and globalisation

3 Defining corporate social responsibility
3.1 Corporate Citizenship
3.2 Stakeholder Theory
3.3 CSR and NGOs
3.4 CSR and governments
3.5 CSR and corporations

4 Arguments against and for corporate social responsibility
4.1 Arguments against CSR
4.2 Responses to these arguments

5 CSR at least

List of References

1 Introduction

While countries negotiate the opening of borders for foreign investments and dropping trade barriers in favour of powerful, worldwide acting multinational corporation (MNCs), non-governmental organisations (NGOs) gather people and power for the disadvantaged people of these developments. Somehow the idea of a free, global market economy is not approved by everybody. The capitalistic paradigm seems to have an inbuilt error, the promise of wealth and welfare does not fulfil itself.

That is roughly the viewpoint of the supporters of the World Social Forum (World Economic Forum, 2005). Although a subjective point of view, the arguments are connected to this essay's main notion, corporate social responsibility. They lead to the questions why corporate social responsibility should have a right to exist, what proves its validity and what are the reasons for and against it?

The following text should provide in depth answer to that. To do that the scene needs to be set at first. This discussion is based upon the definitions of market economy and globalisation. An introduction to the characteristics of MNCs and the reasons why MNCs deserve a closer consideration in this discussion follows. Then corporate social responsibility (CSR) will be defined, its theoretical fundaments will be presented and it will be distinguished from Corporate Citizenship. This is followed by the arguments of its strongest adherents, non-governmental organisations, and an description of NGO-tactics to enforce CSR. The 'players' of CSR also include governments and, of course, corporations. Their involvement in and standpoint towards CSR will be presented. Nevertheless, strong arguments against CSR exist, too. But the responses to these arguments are also justifiable. After this insight into the existing conflict, a deeper consideration of the notion of ‘responsibility’ is undertaken, to clarify who can be made accountable, if an accountable subject exists at all. Finally, a short summary concludes the text outlining what CSR could mean at least, as a minimum.

2 Corporations and markets

2.1 Power of MNCs

"Of the 100 largest economies in the world, 51 are corporations; only 49 are countries (based on a comparison of corporate sales and country GDPs)" (Anderson & Cavanagh, 2000, p. 3). This statement clearly outlines the power of the world's largest multinational corporations¹. Although it is questionable whether size reflects power and whether gross domestic product (GDP) and revenue are directly comparable², it is nevertheless true, that MNCs do have an immense impact on everyday life throughout the world. Of the about 61.000 multinational companies only a few hundred are dominating forces (UNCTAD, 2004). The largest 1.000 of them create 80% of the world output (The Economist, 2000, cited in Gabel & Bruner, 2003), the largest 300 have control about 25% of the worlds productive assets (The Economist, 1993, cited in Gabel & Bruner, 2003). For the 500 multinationals that the Fortune Magazine annually chooses for its Fortune 500 index that means alone "$45 trillion in assets, $14 trillion in revenues, $667 billion in profits, and about 47 million employees in 2000" (Fortune Magazine, 2000, cited in Gabel & Bruner, 2003, p. 7).³ Their products are part of our everyday life, as toothpaste, as television program or as water out of the tab. It is undoubted to say that the multinational corporation is an important economic force in the world, with regards to the creation of wealth, the use of resources, employment, to the fulfilling human needs, contribution to society in form of taxes, environmental impacts, governance and technology (Gabel & Bruner, 2003).

This economic significance spreads out to other non-economic areas of life. Assuming that people spend most hours of a day working, the attitude towards employees and the values that guideline the employer-employee relationships are significant for the happiness of the average employee. Responsible for 3% of the world's workforce (UNCTAD, 1994, cited in Gabel & Bruner, 2003), 20%, if reduced about employment in the agricultural sector, and paying wages of $1.5 trillion (UNCTAD, 1999, cited in Gabel & Bruner, 2003), MNCs have a direct impact on the well-being of a considerable part of the world's industrial and service- oriented workforce, unregarded the impact on the indirectly effected ones.

Considering the billions in profit multinationals make, taxation becomes a big issue. Government tax revenues are the most important source of funds that could be reinvested in public health, social security, economic aid and salaries for governmental and administrative staff (Gabel & Bruner, 2003). That is why percentages around 4,6% that MNCs contribute to the U.S. government revenues up to 12,2% that they account for in Peru or 15,5% in Guatemala are significant quantities. If a company is lost as a taxpayer it could have delicate effects on the community.

MNCs are driving forces, not only for the economy as a whole, but especially in terms of inventions, scientific and technological progress and innovation. Besides state-funded research and development, they are the only entities which can afford extensive R&D programmes. They have the resources to finance and exploit R&D in such scales, that the profit from the following (mass-)sales of the products exceed the costly investments. This is partly due to the fact that MNC can source necessary knowledge and equipment globally (Gabel & Bruner, 2003).

As globally acting enterprises multinationals are able to source capital worldwide as well. Because of their global position it is much easier for them to diversify risks globally what consequently leads to better conditions to raise capital. Like no others MNCs can send their capital around the world to allocate it where its most profitable use is expected. These corporate investments, known as foreign direct investments (FDI), often provide between 5 to 50% of a nation's GDP and therefore have an immense influence on taxes, employment and the nation's economic development (Gabel & Bruner, 2003). However, the power of multinationals has gained public attention and finally led to concerns.

Much of this concern stems from the fact that many modern multinational corporations have developed resources to such an extent that they are no longer answerable to any national government, [...] the corporation[s] can move quickly when challenge or opportunity strikes, [...] their agility, initiative, focused power, and access to capital and resources allow them to [...] influence the world on a scale and at a speed far beyond those of a nation-state and at a rate the world has never seen before (Gabel & Bruner, 2003, p. x).

The concerns might not always be justified and depend on the observer's worldview. Multinationals do also cause knowledge spillovers in less developed countries and provide new technologies to use natural resources and raw materials more efficiently and therefore more sustainable. But MNCs also harbour a negative potential.

MNCs "have developed an array of sophisticated methods for lowering their tax burden" (Gabel & Bruner, 2003, p. 124). The use of transfer pricing gives global operating firm the opportunity to shift profits in low- or no-tax tax havens. The advantage of exploiting different taxation systems between countries, leads to a competition between countries to attract capital inflows from company profits and, consequently, falling absolute tax contributions of MNCs (Gabel & Bruner, 2003).

Global capital flows do not only cause a highly efficient use of resources, they are also very flexible in deposit and withdrawal. If $1.5 trillion are moved around the world daily, which only represent a small portion of the generally long-term oriented FDI, these shorttime-investment still matter when they are a small portion of 20% or 30% of a nation's GDP. (United Nations Development and Human Rights Section, n.y., cited in Gabel & Bruner, 2003). Moreover "the sheer volume of these international flows can lead to tremendous repercussions" (Gabel & Bruner, 2003, p. 128) like it became apparent during the financial crisis in Asian in the late 1990s. MNC-activities also affect national culture. Although new products, technologies and management styles can lead to a cultural enrichment, the power of the imposed advertising and mass production, of new roles and values can override other cultures and cause disintegration in an alien society.

As three out of the five largest companies of the world regarding sales are oil and gas producing and processing industries, multinationals are directly or indirectly responsible for a considerable part of the world's CO2 emissions. Although multinationals often use better resource-saving and less polluting techniques than national corporations, especially in industries like mining, refining and smelting, an organisation-based lack of responsibility in this regard could have devastating consequences globally (Gabel & Bruner, 2003).

Multinationals challenge the ability of sovereign nations to control corporate operations and impacts; they are just too large and too powerful (Boatright, 2003). Additionally, the poor enforcement of international law finally causes a legislative vacuum, that only self-imposed, -enforced and -monitored standards can fill, a risky undertaking. The public concern grows about the fact that company representatives due to the power they exert are not democratically elected, and, therefore do not represent society's interests. Thus, there is a lack of social and environmental responsibility on side of the multinational, but "social responsibility arises from social power" (Davis & Blomstrom, 1975a, cited in Boatright, 2003, p. 377 ) which MNCs undoubtedly possess. Even if self-imposed standards exist they are most likely addressed only to the corporation's interests and the 'stage' where the corporation acts, the marketplace.

2.2 Markets and globalisation

The marketplace, location where goods and services are exchanged, where prices represent the scarcity of resources and where supply meets demand, is based on individual choice. Agents as individuals or organisations sell and buy goods according to their needs and wants to achieve personal satisfaction. It is assumed that this 'satisfaction' is determined by the amount of goods and services purchased. An increased consumption of goods leads to greater pleasure, under a positive but decreasing absolute utility that every added unit of goods provides.⁴ Self-interest is the driving force of the market. The entirely rational consumer is looking for the good which has the best value. As far as goods are comparable, he selects the lowest price among products of the same quality⁵, or the highest quality out of equally priced products. The better the product matches the customer's need the higher price he is willing to pay. At the same time the customers' interests are dynamic and highly unpredictable, as well as the product ideas of entrepreneurs and corporations. The latter, as suppliers of these goods, act identically self-interested. Profit, the means for the purpose of satisfaction for the individual behind the organisation, needs to be maximised. The profit, in terms of market share and profit margin, will be maximised for the company which offers the goods of best quality-price relation and best meets customers' need. Thus, every corporation is pursuing either a permanent price reduction of its products through cost reduction of its production process or a permanent enhancement of its product quality through inventing and exploiting new product solutions, or both. Corporations which create the same goods find themselves in a competition for the profit-maximising, best-value product. Competition is not as 'natural' as self-interest, it needs to be safeguarded by market rules from the 'natural' intention of the suppliers to concentrate and co-ordinate their activities. The combined market- and legislative forces ensure the highest overall pleasure for all the agents in the market. 'Everybody is better of at the end', as a result of the advancements and advantages that everyone ultimatively enjoys through the market dynamic levering change and economic progress (Fisher & Lovell, 2003). This is the classical-liberal-economic approach based of the insight of, to name a few, Adam Smith (1723-1790), Friedrich Hayek (1899-1992) and Milton Friedman and the model of economic man to describe human behaviour. Furthermore, the adherents of the classical view promote the least governmental interference as possible. Every redistribution of profits apart from market exchanges is seen as unjust and unethical. This, classical approach is also applicable in a global context, referring to the previously mentioned multinational corporations which act on a global market.

Over the centuries mankind has constantly enlarged its technological knowledge with economic consequences. Means of transportation passed the stages of horse-drawn wagon, sailboat, steamship, railroad, motor vehicle and airplane as well as the forms of communication, developed from simple oral transmission to a global computer network of real-time multichannel broadcasting. The time and the price to get goods and messages from one point in the world to another becomes less and less, the world is becoming virtually smaller, faster and more connected (Gabel & Bruner, 2003). All in all these are good conditions for risk-takers and entrepreneurs to take the chance to spread goods and services from local, to regional and later to a global marketplace. This also leads to an inflow of goods, services, people and ideas. International trade has multiplied more than 25 times since 1950 (Gabel & Bruner, 2003), and multinationals are, by nature, the most important drivers and winners of this development. According to classical thought, it means that new and cheaper sources of capital, knowledge and labour can be exploited as well as profit and sales can be increased by opening new markets. The economic change is accompanied by a process of political deregulation. The political convergence of nations after World War II also caused a drop in tariffs as a percentage of total trade values from 40% 1947 to 5% in 1990 (Gabel & Bruner, 2003) and the creation of areas of international economic integration, like the European Union, NAFTA, MERCUSOR and ASEAN. This increases the quantity and speed of global transactions. But still organisations like the World Trade Organisation (WTO) or the World Economic Forum (WEF) encourage less protection and further opening of national market as well as continuing privatisation and deregulation. Both organisations, WTO and WEF “have been severely criticized for what has appeared to some as an overzealous pursuit of open markets in developing countries at the expense of the small local businessperson, local agriculture, and human services, with the resulting system biased toward large corporate enterprise" (Gabel & Bruner, 2003, p. 16), although they were founded because of honourable reasons. The WTO emerged from GATT to establish a "common and known set of rules and procedures for settling disputes, financial disclosure [and] investment" (Gabel & Bruner, 2003, p. 16), and the WEF is actually "[c]ommitted to improving the state of the world" and promotes "[s]ustainable worldwide prosperity based on both economic and social development" (World Economic Forum, 2005).

So it is not surprising that during the period of deregulation the number of multinational enterprises doubled several times up to about 61,000 (UNCTAD, 2004). Many of them grow very large in a very short period of time. Fast growth can also lead to fast decline and, indeed, the process of globalisation reduced the lifecycle length of corporations. MNCs have just a short period of time left to generate profits before they are merged with others or overtaken by competitors on a larger, global market and under increasing speed of technological evolution.

3 Defining corporate social responsibility

The concept of corporate social responsibility arose at the beginning of this globalisation process, between the1950s and the 1970s. It was the time when the post-war investments for the economic recovery in Europe and Japan paid off for U.S.-American companies. So they had the resources that helped them to open new markets beyond U.S.- borders and, consequently, they grew in size and power. Social problems like poverty, racism and unemployment, as well as pollution, raised requests for a changing role of the U.S.- industry and more involvement in community. At first corporate responsibility just requested a concern to secure and maximise share prices for institutional investors, representing the typical American households. Later, social and ethical responsibilities rose after some big- scale corporate wrongdoing came to light, like tax evasion and exploitation of foreign governments by the manipulation of transfer prices. From the 1990s to today corporations have been facing the changes that come along with the process of globalisation. The world is becoming one global marketplace and competition is becoming more dynamic, and simultaneously more merciless, than ever before. Active MNCs permanently reduce costs of their inputs, mainly labour and capital, which defines new demands on CSR. New stakeholders, like NGOs, formulate their own interests on behalf of the ones they represent and are willing to enforce these interests (Boatright, 2003).

The main responsibility of every corporation is, of course, to make profits in order to benefit its stakeholder groups. That is why the corporation exists. It includes returns for its stakeholders, income and satisfaction for their employees, safe products of a high quality for its customers and contributions to the community through taxes, for example. But this responsibility is not static; it is rather dynamic. Stakeholder-interests might change over time, and in order to stay in business, the organisation needs to strive for technological improvements, marketable innovations and optimal efficiency, all under constantly changing market conditions.

Besides the economic responsibility, the organisation has to do business according to the law and fulfil its legal responsibilities. Although business laws represent a relatively clear form of what the society expects of its members, including corporations, there are doubts that legislation can cover every justified claim that members of society have towards corporations, especially when this society is the world community and the corporation a multinational. Both economic and legal responsibilities are rather definite forces imposed to the corporation. Noncompliance will have immediate negative consequences for the firm.

However, responsibilities that are not obligatory and only slightly enforced are more 8 ambiguous. Social responsibility includes both economic and legal responsibility, but also adopts "ethical standards or judgements of social desirability" (Boatright, 2003, p. 373). In a broader sense it also includes the environmental responsibility and the concern for sustainability. These "additional behaviours and activities are not necessarily codified into law but nevertheless are expected of business by society's members" (Carroll, 1979, p. 500, cited in Boatright, 2003, p. 374).

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¹ A multinational corporation is a company whose business spans multiple nations. Usually the value chain is divided between locations in different countries, whereas the headquarter is centralised in the country of origin.

² De Grauwe and Camerman suggest to compare a nation's value added (VA) and GDP, because "The GDP of a nation is the sum of the values added by each producer. It is not the sum of total sales of these producers" (2002, p. 3). But even if the comparison is carried out this way, the VA of every corporation still present between 25% and 35% of its sales.

³ All monetary figures in $ mean US-Dollar.

⁴ This causality, based on observation of human behaviour, is also called law of diminishing marginal utility.

⁵ Quality is a complex notion. It is composed of all the characteristics that the consumer ascribes to a product, i.e. its appeal, its design, its newness, its technical sophistication, its durability, its performance, etc.