The underlying assumption is that a company’s purpose for being is to create and return profits to its owners. Therefore, assuming this strategy is returning profits, anything that supports the company’s strategy should be endorsed for the benefits of shareholders. But in order to understand this underlying assumption there are at least three things that need to be looked into;
- the purpose of business and how to measure business results
- the ties of strategy to business results, and
- how to tie the strategic use of CSR to business performance.
There are four basic methods of creating value;
- increasing price,
- increasing quantity,
- reducing costs, or lastly
- by reducing time used.
If, and only if, any one or a combination of the above is the outcome of any commitment of resources; value is created. Strategy should generate value because value leads to a wealthier society. Wealthy societies are in everyone’s interest. Hence, strategically used CSR should improve the quality of life for society. Bearing this in mind there are obvious problems one faces when analyzing the importance of such intangible things like the effect of Corporate Social Responsibility (CSR) or Human Resource Management (HRM). These problems are mostly measurement problems (Kearns). Friedman wrote an often cited article that interestingly enough addresses social responsibilities of businesses:
The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.
There has been much criticism on Friedman’s view, but one viewpoint is that there may actually be a way of tying CSR to business performance.
So if it is accepted that the businesses main area of responsibility is to provide value for shareholders, it goes without saying that there have to be some means of creating said value, these are the very foundation of the company. Kearns says that the organization might do well by having a vision of what the future will look like and a mission of where to go in the future, it then boils down to the business strategy to dictate how the company will get there.
“What business strategy is all about – what distinguishes it from all other kinds of business planning – is, in a word, competitive advantage. Without competitors there would be no need for a strategy” says Ohmae, he goes on to say “Corporate strategy thus implies an attempt to alter a company’s strength relative to that of its competitors in the most efficient way”.
Porter and Kramer put forward a pretty persuasive argument that strategic CSR is the way to go. They point out how companies have, in the past, found themselves a midst something that seems to be consumer outrage where they are, rightfully or not, being held accountable for social issues, and some cases even being targeted for seemingly little fault to further activist’s causes. In their article Porter and Kramer suggest that the most important aspect of adhering to strategic CSR is to balance the resources put into such projects against the value they create. This they claim reduces the risk of changes in the external or internal environment of the company shaking the foundation of the projects.
In their article Hine and Preuss bring together major arguments of the various groups, among others they discuss the social responsibilities of the corporation towards its stakeholders. There among other things they point out that in order for a corporation to accept any social responsibilities they need to become ‘morale’ agents but that in it self may be difficult as the company’s shareholders hire a management team to act as the company’s conscience. But what is very interesting in the article is the claim that while there has been much discussion about CSR in the past three decades, there is little empirical evidence showing the positive financial effect that CSR can potentially have on companies who actively pursue CSR projects. This, in fact, begs the question of whether the implementation of the CSR initiatives has left something lacking or whether the fundamental idea behind CSR simply is not viable. At least it seems clear that CSR for CSR’s sake is not a viable option and that using CSR to prevent detriment to reputation, a form of risk management if you will, may have mixed results. On the one hand companies may gain some goodwill, but on the other, a company of good financial standing may become a “target” for activist groups.
It is clear according to Hine & Preuss that CSR in and of it self is not the answer to the question of whether CSR is an attainable form of business ethics.
Porter and Kramer say that “broadly speaking the proponents of CSR have used four arguments to make their case: moral obligation, sustainability, license to operate, and reputation”. The moral obligation argument contradicts Friedman’s view as set forth above and seems a little normative and so does the license to operate argument. The reputation argument can with a clear set of measurements be put forth and argued on value creation basis since there is available research into the differing values of corporate brands, although analyses of those fall outside the scope of this essay. The sustainability argument revolves around the firm’s consumption of natural resources and interaction with the environment. In their article they maintain that it is best when external sustainability (environmental) and internal sustainability (business) go hand in hand.
Husted manages to tie together the views of those who believe that CSR is a viable approach and those who believe in strategic approach to doing business “To increase a ﬁrm’s competitive advantage, CSR projects must be cost effective and produce a clear return on investment”. Additionally Husted stresses the importance of optimizing, that is, creating as much value as possible at the lowest costs possible.
Porter and Kramer point out that what the current approaches to CSR “focus on the tension between business and society rather than on their interdependence”, in a word they are so integrated that neither could function without the other. They further point out that organizations frequently launch CSR projects independent of strategy loosing out on the opportunities of using their strengths to build competitive advantage or creating shared value. The notion of shared value between the company and society is a key element in Porter and Kramer’s view. Shared value is value created by use of company’s resources that benefits the company, but is also seen as beneficial to society. This approach needs to be totally integrated into the company’s infrastructure to ensure that the company engages in activity that balances the value created to both in order to create long-term harmony. They even go so far as to provide a framework, with good examples, to analyze the prioritization of social issues which breaks issues into; i) generic social issues, ii) value chain social impacts and iii) social dimensions of competitive context. With the latter two putting CSR into a strategic context.
In Porter and Kramer’s view the tighter a social issue is to a company’s business, the more chances are of creating shared value by leveraging the company’s resources.
It is noteworthy, that while the economist Milton Friedman denounces the social responsibilities of companies strategists like Michel Porter say there may in fact be ways of using CSR to further the organization’s cause and create value for shareholders. Both believe that the ultimate goal for the company is to create value, but Porter’s point of view seems to open up the possibilities of integrating whatever methods available to the company to create competitive advantage and thereby creating value for shareholders.
Imagine if you will an Airline company who subscribes to this notion, it can fairly easily tie strategic CSR to its business performance by measuring and announcing the added value its CSR efforts deliver. For example, measuring fuel usage per flown mile. This would mean that effort spent on reducing fuel usage has a corresponding value creation in the lowered costs for the airliner. These would fall under the Value chain social impact in Porter and Kramer’s model.
It must be duly noted that due to the limitations of time and the text’s relative length, that the counter arguments against strategic use of CSR were not as actively sought out as an introduction of this type warrants. The best argument, albeit a general one, was found in Hine and Preuss’ article where they point out the fact that the causal relationship between tendency towards CSR and financial performance is equally disputed. It almost is enough to knock the wind out of the whole debate.
I firmly believe there is a case for saying that CSR is an attainable form of ethics in business. But sans evidence that having a CSR policy makes the company more valuable the argument stands on a rather shaky ground. But then it should be noted that there are different degrees of committing to CSR ranging from the occasional gift to charity towards a using CSR as a totally integrated strategic tool to tie CSR to value creation. And, with an admitted lack of hard evidence, I think that the latter provides the company with a more disciplined way to spend its resources.
Friedman, M. The New York Times Magazine, September 13, 1970, accessed December 14th 2008, http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
Hine, J. A. H. S. and Preuss, L. “”Society is Out There, Organisation is in Here: On the Perceptions of Corporate Social Responsibility Held by Different Managerial Groups” Journal of Business Ethics, 2008.
Husted, B. W. “Governance Choices for Corporate Social Responsibility: to Contribute, Collaborate or Internalize?” Long Range Planning 36 (2003) : 481–498
Hine, J. A. H. S. CSR Lecture. CSR course. Reykjavik University, Efstaleiti Reykjavik ICE. 27 November 2008.
Kearns, P. HR Strategy: Business focused, individually centred. 2003. Burlington: Butterworth-Heinemann, 2008
Kearns, P. HR Strategy Lecture. HR strategy course. Reykjavik University, Efstaleiti Reykjavik Iceland. 06 November 2008. Ohmae, K. The Mind of the Strategist. New York: McGraw-Hill 1982.
Porter, M. and Kramer, M. R. “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility,” Harvard Business Review, December 2006.