A Definition of Corporate Social Responsibility

A Definition of Corporate Social Responsibility Nowadays, the association of the words social and responsibility has become increasingly frequent. But in business world, there is another variant of these terms that prevail and it is the term Corporate Social responsibility (CSR). According to Archie Carroll (2008 p.19): though the roots of the concepts that we know today as CSR have been a long and wide-ranging history, it is mostly a product of the twentieth century, especially from the early 1950s up to the present time. Despite the fact that the concept of CSR has been present for such a long time, researchers still do not share a common definition or set of core principles (Andre Crane et al. 2008 p.4). This also brought about other questions on the interpretation of terms as being socially responsible and also is a firm capable of being responsible towards society. According to Wood (1991, cited in Moir, 1991, p.2), the basic idea of corporate social responsibility is that business and society are interwoven rather than distinct entities. Businesses are often assumed to have profit maximization for sole aim and ignore its responsibilities towards society. Milton Friedman (1970) said that the only one responsibility of business towards society is the maximization of profits to the shareholders within the legal framework and the ethical custom of the country. However supporters of CSR can also be found, Dave Packard (Co-founder of Hewlett Packard Company in 1939, cited in Harvard Business Review, 2002, p.54) claims that the assumption that people make of companies only making money is wrong. He also adds that: a group of people get together and exist as an institution that is called a company so that they are able to accomplish something collectively that they could not accomplish separately and simultaneously they make a contribution to society (Dave Packard, 1939). Votaw (cited in Garigga and Mele, 2004, p.51) wrote that corporate social responsibility means something, but not always the same thing to everybody. The diverging opinions can be categorized in two main points of view; one is that CSR is yet another means to maximize profit and the other is that CSR is here to help companies help society as a whole. CSR has been described in a number of various ways. Below are given different definitions of CSR: Corporate Social Responsibility is a commitment to improve community well-being through discretionary business practices and corporate resources. (Philip Kotler and Nancy Lee, Corporate Social Responsibility, Wiley, 2007) The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time. (Archie B. Carroll, 1979) Shell: We all need to assess the impact our business makes on society and ensure that we balance the economic, environmental and social aspects of everything we do (Moody-Stuart, 1999). The diagram below gives a visual description of what constitute CSR: Source: www6.miami.edu/ethics/pdf_files/csr_guide.pdf According to Lance Moir (2001), the area defined by advocates of CSR increasingly covers a wide range of issues such as plant closures, employee relations, human rights, corporate ethics, community relations and the environment. Aspects of CSR Drivers of CSR Drivers, in this context, refer to the reasons behind the choice of a firm to adopt a more socially acceptable behaviour. These reasons can be classified as being internal and external to the firm. Internal drivers: Internal drivers are the pressures that originate from the internal environment of the firm. Examples of components that can constitute the internal environment of a firm are, employees, suppliers, competitors, top management, etc. Flatter organisations have considerably changed the approach towards how business was once done. Nowadays, employees put pressure on how the organization conducts business using certain societal values (M.G.V. Dongen, 2006 p.9). They are more attracted by the non-material aspects of the organisation that employs them. Besides, employees seeking a more socially responsible firm, managers now have the task to reconcile the profit-making need of the company with the responsibility towards society. But as Haigh and Jones (2006) mentioned, for business managers, business is first. ODwyer (2003, cited in Haigh and Jones, 2006, p.2) said that social considerations come second and providing only that such considerations would not open an exploitable weakness. Haig h (2006) adds that the paradigm that managers face simply prevents overall improvements consistent with social welfare. The capacity to integrate CSR policies in the core activities of the firm can also act as a driver. According to Porter and van der Linde (2000, cited in Haigh and Jones, 2006, p.2), CSR is competitive driver that requires appropriate resources. Integrating CSR in a companys activities can be a tedious process. The diagram below shows how CSR can be incorporated at different levels of the company. Source: MVO Platform, (2002, illustrated in M.G.V. Dongen, 2006 p.10), Different intensities of CSR CSR can also be undertaken in a set of separate activities geared towards improving social welfare. This can take the form of sponsoring of sports activities or engaging in charitable activities. Another view to consider internal drivers to CSR is to consider them to be national drivers. The table below gives a number of different national CSR drivers and a brief description of each of them. Source: Visser, W. (2008) CSR Drivers: The Forces Shaping Corporate Sustainability and Responsibility, CSR Inspiration Series, No. 3. External drivers: External drives refer to the external pressures that compel a firm to engage in CSR. The external environment of a firm can include market structure, customers, government, economic situations, competitors, etc. Businesses no longer evolve in a static environment, threats are no longer limited to local competitors and the market is now a global one. Similarly, adopting the culture of foreign firms has become a must and CSR is one of the main concerns of all firms in this century. Castells (2000, as cited in M.G.V. Dongen, 2006 p.7) says that globalization increases the importance of social networks of a company on a worldwide basis. Moreover, consumers are more concerned by the fact that whether the firm, to which they are loyal, is contributing to societys welfare. As Castells (2000, as cited in M.G.V. Dongen, 2006 p.7) mentions, a lot of information is obtained more rapidly by consumers and it is easier to keep in touch with the various activities undertaken by any firm. The govern ment also contributes in making company conscious of their duties towards society. According to the European Union and MVO Platform (2002, as cited in M.G.V. Dongen, 2006 p.7), Governments are now engaging in the role of stimulating companies to be social responsible, not pressuring them. In M.G.V. Dongens 2006 paper: In search of the link between corporate social responsibility and legitimacy she enumerated a number of external factors that encouraged firm to adopt the concept of CSR. A few of these points are: Transparency. A very important aspect for a company to be socially responsible is transparency. This can be included in the profit-factor but is more and more considered as a prerequisite for a company to be socially responsible. Due to new information sources, e.g. the internet, and the shift in the control mechanisms for organizations from purely governmental to include the organizations stakeholders, this revolution has an enormous impact on the visibility of an organizations business practices.(M.G.V. Dongen, 2006 p.8) Time. A shift can be recognized from purely focusing on short-term profits towards more long-term objectives, which is necessary because societal and environmental issues are mostly long-term issues. Therefore this shift in time-thinking is essential for CSR to be successful. (M.G.V. Dongen, 2006 p.8) Here also, external factors are often associated with international drivers. The table below describes some of them: Source: Visser, W. (2008) CSR Drivers: The Forces Shaping Corporate Sustainability and Responsibility, CSR Inspiration Series, No. 3. In order to link both national and international drivers the diagram below visually establishes a link between both of them. Source: Visser, W. (2008) CSR Drivers: The Forces Shaping Corporate Sustainability and Responsibility, CSR Inspiration Series, No. 3. 3.2 Theories of CSR Many authors have tried to grasp an accurate idea of what is CSR by devising models in order to better understand the various factors involved and their impact. One of the first approaches to tackle CSR by means of a model was made in 1971 by the Committee for Economic Development (CED). It made use of three concentric circles. The definition of the three circles was given in the Social Responsibilities of Business Corporation (1971) as follows: The inner circle includes, the clear-cut basic responsibilities for the efficient execution of the economic function products, jobs and economic growth The intermediate circle encompasses responsibility to exercise this economic function with a precise awareness of changing social values and priorities: for example with respect to environmental conservation, hiring and relations with employees, and more rigorous expectation of customers for information, fair treatment and protection from injury The outer circle outlines newly emerging and still amorphous responsibilities that business should assume to become more broadly involved in actively improving the social environment After this theory others were developed, but throughout time only a few of them prevailed. The first theory that must be considered is the pyramid of CSR developed by Carroll. The pyramid of corporate social responsibility According to Carroll, the four main components or categories that constitute the CSR pyramid are: Economic Responsibilities, Legal Responsibilities, Ethical Responsibilities and Philanthropic or Discretionary Responsibilities. The two tables below give a description of these four terms. Source: Archie B. Carroll (1991), The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, Business Horizons Source: Archie B. Carroll (1991), The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, Business Horizons The theory of the pyramid relies on the fact the various components are stacked on each other, the economic responsibility being the base and the philanthropic responsibility being at the top. The logic behind the pyramid relies in the fact that firms are expected to aim for profit maximization but it must also cater for the other responsibilities in the pyramid, which is comply with the law, comply with rules of society and finally act as a good corporate citizen. The diagram below is a representation of Archie B. Carroll pyramid of Corporate Social Responsibility. The Stakeholder theory Moir (2001) refers to the stakeholder theory as being used used as a basis to analyse those groups to whom the firm should be responsible. For Carroll (1991, cited as cited in M.G.V. Dongen, 2006 p.13), stakeholder concept personifies the social actors that organizations should consider with their CSR orientation. Stakeholders generally refer to the actors who are directly or sometimes indirectly affected by the actions of a company. Freedman defines a stakeholder as any group or individual who can affect or is affected by the achievement of the organizations objectives (Freeman, 1984:46). Stakeholders can be classified in two main categories; primary and secondary stakeholders. Clarkson (1995: 106, cited in L. Moir, 2001, p.8) gives the description of a primary stakeholder as one without whose continuing participation the corporation cannot survive as a going concern with the primary group including shareholders and investors, employees, customers and suppliers, together with what is defined as the public stakeholder group: the governments and communities that provide infrastructures and markets, whose laws and regulations must be obeyed, and to whom taxes and obligations may be due (Clarkson, 1995, p.106). Moir (2001, p.8) defines the secondary groups are defined as Those who influence or affect, or are influenced or affected by the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival Source: Monique G. van Dongen (2006), In search of the link between corporate social responsibility and legitimacy The stakeholder theory focuses on a practical approach that explains an organizations need to address the various responsibilities (Dongen 2006, p. 13). The stakeholder theory relies on determining the most important stakeholder for the company and its responsibilities towards that stakeholder. In order to determine how the choice should be made, Carroll (1991) established two main criteria which are; power and legitimacy. Following Carrolls logic, in 1997, Michel et al develop a more detailed approach which includes a new dimension named urgency. The model develop was the the stakeholder salience model Power: the ability of those who possess power, to bring about the outcome that they desire (Mitchell et al., 1997). Legitimacy: the assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed systems of norms, values, beliefs, and definitions (Suchman, 1995). Urgency: exists when two conditions are met: 1) when it is time-sensitive, and 2) when it is important or critical to the stakeholder (Mitchell et al., 1997). The salience model helps to divide stakeholders in different groups and each of these groups is classified on the basis of having one or more the above characteristics. Mitchell (1997) defined the salience model as the degree to which managers gave importance to stakeholders claims. From this point of view, groups such as latent and expectant stakeholders were created and these groups were further subdivided on the basis of the number of characteristics they possessed. Moir stated that firms would pay most attention to those legitimate stakeholder groups who have power and urgency (Moir, 2001, p.9). Following this logic, an example could be the reputation of a company will have a great importance when it interacts directly with the public. In relation with CSR, Patten (1992 as cited in L Moir, 2006 p.9) gave the following example concerning the possible fluctuations in the level of urgency: environmental groups and issues became more urgent to oil firms following the Exxon Valdez oil spill. To sum up, stakeholder theory can help companies to point out stakeholders that can be sensible to CSR issues and generate a profit in these circumstances. 3.2.1 Mapping of CSR theories In addition to the above models, numerous other theories have been developed, but none of them gave an accurate framework which exactly defined what CSR was. Each and every writer who tried to build up a CSR theory ended up giving a personal opinion, hence creating confusion. Carroll (1994, p.14) described the situation as An eclectic field with loose boundaries, multiple memberships, and differing training/perspectives; broadly rather than focused, multidisciplinary; wide breadth; brings in a wider range of literature; and interdisciplinary. In addition to the above mentioned theories, Frederick (1987, 1998) tried to classify CSR in four main categories namely CSR1, CSR2, CSR3 and CSR4. Other attempts to define theories can take the form of the concept of corporate citizenship by Altman (1998), Issues Management by Wartick and Rude (1986) and Wood (1991) and Brummer (1991) classification of four CSR theories based on six criteria. In order to harmonize all these different models Elisabet Garriga and Domenec Mele (2004) grouped all the actual theories under four main headings namely; instrumental, political, integrative and ethical theories. Theories were placed in a group on the basis of their similitude, for example instrumental theories grouped models that were based on the assumption that organization are here only to make profits. The table below gives a brief summary of each group and the different theories composing them. Source: Elisabet Garriga and Domenec Mele (2004), Corporate Social Responsibility Theories: Mapping the Territory, p.62-63 3.3 Advantages and Disadvantages of engaging in CSR CSR is often view as a companys intention to do good for society, but there can also be times when behind the socially responsible mask the intentions are not the ones expected. In can be quite contradictory but although CSR is assumed to be good, it can have drawbacks. Advantages and disadvantages arising from CSR are as diverse as the domain in which the practices are applied, for analysis purposes standard or most common pros and cons will be considered. First pros or advantages of CSR will be considered. According to Bhattacharya et al. (2008), the first advantage of CSR is that in helps in the recruitment and selection process and more specifically within the competitive graduate student market. Kytle et al. (2005) continue by adding that CSR helps in risk management. Building a genuine culture of doing the right thing within a corporation can offset the risks of losing reputation because of any scandal or environmental accident (Kytle et al, 2005, p.10). Another benefit atributed to CSR is brand differenciation. Paluszek (2005) says that CSR can play a role in building customer loyalty based on distinctive ethical values. CSR can help in building customer loyalty by helping them feel that the company with which they are involved care for them. It must also be added that CSR has a significant impact on customers as well. According to Berger et al. (1995, cited in Maignan and Ferrell, 2004) consumers show more fervent support to companies committed to cause-related marketing, practices that help the environment, or business ethics. Furthermore, the studies conducted by Lichtenstein et al., (2004) proved that CSR helped to develop an emotional attachment with the company and hence it helped in boosting the percentage of sales. Sen et al., (2006) continued by saying that those conscious of actual corporate social activities had more positive responses to, and stronger identification with, the organisation, increased demand for trade and investment intent and demand to get a job with this type of organisation than those unaware of any initiative. In addition to the above advantages, others were published in the Investment News (2007) and they are listed below; Proactive enforcement of stricter quality and environmental controls reduces the risk of negative events (e.g. recalling defective products or fines for excessive polluting). Commitment to CSR increases the ability to attract and retain employees. Benefits include reduced turnover, recruitment and training costs. CSR practices enable corporations to be compliant on ethical issues and attract investors who enforce ethical filters One of the main disadvantages of CSR arises from the misuse of the initial concept behind it. Businesses are here to maximise profits and CSR is in direct conflict with this goal. As Malloy (2003) described corporations exist to provide products and/or services that produce profits for their shareholders. Another disadvantage attributed to CSR, is too use it as a marketing tool to promote the companys image. CSR can help companies to be more profitable. This can be proved by the action taken by British petroleum after the discovery of the global warming phenomenon and the promise to have a world beyond petroleum. Here also the investment News 2007 came with a list of arguments against CSR: Expenditure on CSR dilutes the funds available for shareholders. Corporate Management is not equipped to address social or environmental problems. Expenditure on CSR imposes additional costs which consequently reduce competitiveness Expenditure on CSR can only be made during periods of high profitability 4.0 Customer satisfaction According to marketing literature, higher customer satisfaction improves financial performance by increasing the loyalty of existing customers, reducing price elasticities, lowering marketing costs through positive word-of-mouth advertising, reducing transaction costs, and enhancing firm reputation (e.g., Anderson, Fornell, and Lehmann (1994), Fornell (1992), and Reichheld and Sasser (1990)). Many believe that customer satisfaction is the key to a business success. The advantages to the fact of obtaining satisfaction from customers are various but before considering all of them in details, a definition of the term must be given. Customer satisfactions definition varies in accordance to the domain in which it is used. For instance it will have a different meaning whether it is used in marketing literature or in other sectors. A definition of customer satisfaction from a service management point of view is that customer satisfaction refers to how the perception of the customer affects the value received in a transaction or relationship where value can be defined as the perceived service quality compared to price and customer incurred acquisition costs (cited in Blanchard and Galloway, 1994; Heskett et al., 1990) in comparison to the expected value to be generated from transactions or relationships with competitors (Zeithaml et al., 1990). From the marketing point of view customer satisfaction will be defined as a vital part of the strategy of an organization (Fornell et al. 2006) and a key driver of increased profits on the long-run and boosting market value (Gruca and Rego 2005). Link between CSR and Customer satisfaction A number of studies link customers directly to CSR initiatives. In order to undertake a proper analysis, at least three major dimensions can be considered. The first being Scotts (1987 cited in Luo and Bhattacharya, 2006 p.3) institutional theory and the second stakeholder theory (Maignan, Ferrell, and Ferrell 2005) suggest that a companys actions appeal to the multidimensionality of the consumer as not only an economic being but also a member of a family, community, and country (Handelman and Arnold 1999). Basing themselves on these three approaches Daub and Ergenzinger (2005) developed the term generalized customer. It can be defined as people who are not only customers who care about the consumption experience but also actual or potential members of various stakeholder groups that companies need to consider (Daub and Ergenzinger, 2005; Luo and Bhattacharya, 2006, p.3). Generalized customers derive more satisfaction from the transaction which involves a firm which is socially respo nsible. The second dimension rely on the aspect that establishing the link between the two components is the fact that being highly active in the CSR domain creates a favorable context that positively boosts consumers evaluations of and it gives a favorable image of the firm (Brown and Dacin 1997; Gà ¼rhan- Canli and Batra 2004; Sen and Bhattacharya 2001). Handleman and Arnold (1999) noted that consumers used the concept of positive word to mouth about firms that were committed to actions that were associated with institutional norms (1999, cited in Maignan and Ferrell, 2004). Studies by Berger and Kanetkar (1995), Barone et al. (2000) and Creyer and Ross (1997) resulted in the fact that consumers are willing to actively support companies committed to cause-related marketing, environmentally-friendly practices, or ethics (cited in Maignan and Ferrell, 2004). CSR initiatives constitute a key element of corporate identity that can induce customers to identify with the company. Indeed, Lichten stein, Drumwright, and Bridgette (2004, p. 17) note that a way that CSR initiatives create benefits for companies appears to be by increasing consumers identification with the corporation à ¢Ã¢â€š ¬Ã‚ ¦ [and] support for the company. Not surprisingly, identified customers are more likely to be satisfied with a firms offerings (e.g., Bhattacharya, Rao, and Glynn 1995; Bhattacharya and Sen 2003). The third dimension examines the antecedents of customer satisfaction (Luo and Bhattacharya, 2006, p.3). One example of a key antecedent can be perceived value and that has been empirically shown to promote customer satisfaction (Fornell et al. 1996; Mithas, Krishnan, and Fornell 2005b; Luo and Bhattacharya, 2006). In the actual case, all else being equal, customers likely derive better perceived value and, consequently, higher satisfaction from a product that is made by a socially responsible company (Luo and Bhattacharya, 2006, p.4).Another antecedents that is known to impact on customer satisfaction is the knowledge of the customer himself. Jayachandran et al (2005) added that improving customer knowledge represents another antecedent that has been found to enhance customer satisfaction. Although the three dimensions above establish a link between CSR and customer Satisfaction it does not indicate whether it is a positive or a negative one. Mac Donald and Rundle-Thiele (2008) pointed out that researchers have studied the impact of CSR on a number of factors, including word of mouth, attitudes, intentions, emotional attachment, shopping in-store, loyalty and brand identification, a limited number of studies have taken into consideration the relationship between satisfaction and CSR (Mac Donald and Rundle-Thiele, 2008, p.174). The only study that directly linked CSR to customer satisfaction was that carried out by Luo and Bhattacharya (2006). They studied Fortune 500 companies, to find that a direct relation between CSR and customer satisfaction existed. Their study identified that satisfaction as a link which formed a relationship between CSR and firm market value (Mac Donald and Rundle-Thiele, 2008, p.174). The diagram below depicts the relationship between customer satisfaction, market share and CSR as studied by Luo and Bhattacharya. Source: Xueming Luo C.B. Bhattacharya, 2006, Corporate Social Responsibility, Customer Satisfaction, and Market Value Despite the direct linking, researchers found cases where CSR was found to have a negative impact on customer satisfaction. Bhattacharya and Luo (2006, cited in Mac Donald and Rundle-Thiele, 2008, p.174) found that, firms which tend to lag in the innovative process, CSR actually reduced the level of customer satisfaction and, through a reduced amount of satisfaction; it adversely affected the market value. In some cases, it may be found that it is more appropriate to use customer oriented initiatives to increase satisfaction than CSR initiatives. CSR initiatives in this case could lead to wastage of precious resources which could have been used in a better way. CSR initiatives against Customer-oriented initiatives Pomering and Dolnicar (2006, cited in Mac Donald and Rundle-Thiele, 2008, p.174) studied that a banks CSR initiatives indicated that customers tend to be more responsive to customer-oriented initiatives, rather than those that had a social orientation. In this study, eight CSR initiatives were proposed such as dedicating one per cent of profit to community programs and launching an indigenous scholarship program. The success of these initiatives did not match the level of satisfaction obtained from customer-oriented initiatives. Pomering and Dolnicar (2006) concluded that consumers consideration for personal well-being may outweigh their consideration of broader social impacts. 4.2.1 CSR initiatives and Customer satisfaction In 2004, Bhattacharya and Sen (2004, cited in Mac Donald and Rundle-Thiele, 2008, p.175) proposed six dimensions to CSR. They are listed below, as published by KLD Research: employee diversity Supporting employees product impact on the environment overseas operations Supporting society 4.2.2 Customer oriented initiatives and customer satisfaction On the other hand, customer-oriented initiatives for the banking sector were also classified. Chakrabarty (2006) observed that customer oriented actions for the banking sector was not the same as for other sectors. Chakrabartys (2006, cited in Mac Donald and Rundle-Thiele, 2008, p.175) research resulted into four factors that determined the total level of customer satisfaction amongst a sample of more than 12,000 UK retail banking customers. They are listed in order of importance as follows: in-branch satisfaction economic satisfaction remote satisfaction ATM satisfaction Later in 2007, Manrai and Manrai (2007, in Mac Donald and Rundle-Thiele, 2008, p.175) came up with another set of four factors. In order of importance, they are: Problems attributed to the personnel Concerns of a financial aspect Concerns about the in-branch environment Convenience-related considerations