Chapter 1: What is CSR

Organizations can be classified in 3 categories:

1) For profits: Seek gain for their owners
2) Government: Exists to define rules and structures of society within which all organizations must operate
3) Non-profits: Emerge to do social good when the political will of the profit motive is insufficient to address societies needs

Stakeholders: Includes all those who are related in some way to a firm
“A stakeholder in an organization is any group or individual who can affect or is affected by the achievement of the organizations objectives” could range from clearly defined customers, employees, suppliers, creditors, and regulating authorities, to other more amorphous constituents such as local communities

CSR is both critical and controversial; It is critical because the for-profit sector is the largest and most innovative part of any free societies economy. However CSR remains controversial; In spite of the rising importance of CSR today for corporate leaders, academics, and bureaucrats alike, many still draw on the views of the Nobel Prize- winning economist Milton Friedman, who argues against CSR because it distracted leaders from economic goals. Friedman believed that the only “social responsibility of a business is to increase its profits”- that society benefits most when businesses focus on maximizing their financial success. David Packard, a co-founder of Hewlett-Packard however, believes “a group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately- they make a contribution to society”

CSR: A view of the corporation and its role in society that assumes a responsibility among firms to pursue goals in addition to profit maximization and a responsibility among a firms stakeholders to hold the firm accountable for its actions. Archie B. Carroll (1979): “The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time” Figure 1.1- Carroll's conceptual framework in graphical form: The CSR Hierarchy

Discretionary Responsibility

Ethical Responsibility Legal Responsibility

Economic Responsibility

Archie Carroll was one of the first academics to make a distinction between different kinds of organizational responsibilities. He referred to this distinction as a firms “pyramid of corporate social responsibility” Fundamentally, a firms economic responsibility is to produce an acceptable return on its owners investment An important component of pursuing economic gain within a law based society, however, is a legal responsibility- a duty to act within the legal framework drawn up by the government and judiciary Take one step further, a firm has an ethical responsibility to do no harm to its stake holders and within its operating environment Finally, firms have a discretionary responsibility, which represents more proactive, strategic behaviors that can benefit the firm and society or both.

As a firm progresses up Carroll's pyramid, so its responsibilities move from being fundamental to becoming more discretionary or voluntary. A socially responsible firm encompasses all four responsibilities within its culture, values and day to day operations.

* one of the central arguments for this book is that what was ethical or even discretionary, is becoming increasingly necessary today due to changing environment within which businesses operate

CSR is both a means and an end: The way a firm goes about delivering its products or services to markets (means). It is also a way of maintaining the legitimacy of its actions in the larger society by bringing stakeholder concerns to the foreground (end).

*Ultimately the success of a firm is directly related to its ability to incorporate stakeholder concerns into its business models. CSR provides a means to do this by valuing the interdependent relationships that exist among businesses, their stakeholder groups, the economic system, and the communities within which they exist.

Strategic CSR

A significant part of a firms fundamental responsibility is complying with the legal or regulatory requirements that relate to day-to-day operations. To break these regulations is to break the law, which does not constitute socially responsible behavior. Clearly, adhering to the law is an important component of any ethical organization. But, legal compliance is merely a minimum condition of CSR. Rather than focus on firms legal and regulatory obligations, Strategic CSR focuses more on the ethical and discretionary concerns that are less precisely defined and for which there is ofter no clear societal consensus, but which are essential for firms to accommodate. Firms do this (minimize competitive risk, while maximizing potential benefit) by fully embracing CSR and incorporating it within the firm's strategic planning process.

Unilever's adoption of its “sustainable living plan” and GE's commitment to “ecoimagination” demonstrate the competitive advantage that CSR can deliver to firms that embrace CSR as a strategic point of differentiation in the market. CSR allows executives to address stakeholder concerns in ways that carry strategic benefit for the firm A firm that seeks to implement a CSR policy that carries strategic benefits is concerned with both the ends of economic profitability but, more importantly, is concerned about the means by which those profits are achieved. As such, the connection between these means and ends, the processes by which the firm operates, is central to the concept of strategic CSR and something that sets it apart from other areas of social responsibility.

“widespread, long term industry practices, which were previously considered discretionary or ethical concerns, can be deemed illegal or socially unacceptable under aggressive legal prosecution or novel social activism. Such violations are less likely in firms with a strong commitment to CSR.”

Businesses must operate against an ever- changing background of what is considered socially responsible

“CRS, in other words, is not a stagnant concept. It is dynamic and continues to evolve as cultural expectations change. On the other hand, these ever- changing standards and expectations compound the complexity faced by corporate decision makers. Worse, these standards vary from society to society; even among cultures within a given society. Worse still, they also evolve over time. Faced with a kaleidoscopic background of evolving standards, business executives must consider a variety of factors on the way to implement.”

What may be legal, even encouraged, in one country may bring legal restrictions in another

Profit is a necessary but insufficient justification for business and, by itself an inaccurate determinant of value added. Just because money can be made, doesn’t mean that it necessarily should be made. CSR is a valuable filter through which firms business decisions should pass. CSR alone however, also is not enough. It certainly does not replace the need for an effective business model, and no company, whatever the motivation, can or should spend money that it does not have indefinitely.
**(Malden Mills example: pg 17-18)**

It is in any organizations best interest (for profit, nonprofit, or government) to anticipate, reflect, and strive to meet the changing needs of the stakeholders in order to remain successful When the expectations of different stakeholders conflict, CSR enters a gray area and management has to balance competing interests

FOUNDATIONS OF CSR

CSR represents an argument for a firm's economic interests, where satisfying stakeholder needs becomes central to retaining societal legitimacy (and, therefore, financial viability)

An ethical argument for CSR Core to an argument grounded in ethics is the issue of whether ethical values are subjective or absolute. An ethical argument for CSR states that, rather than being relative constructs (I.e, varying from individual to individual and culture to culture) ethical values are absolute (I.e, inalienable rights that are consistent across cultures and apply to all human beings) Corporations must not only do the right things (which is CR) but do things right (which is ethics) Broadly, an ethical argument for CSR rests on one of two philosophical approaches- consequential reasoning or categorical reasoning. Consequential reasoning locates ethicality in terms of the outcomes caused by an action (closely aligned with utilitarianism) - “an action is considered ethical according to consequentialism when it promotes the good of society, or more specifically, when the action is intended to produce the greatest net benefit (of lowest net cost) to society when compared to all the other alternatives”. In contrast, categorical moral reasoning “is defined as embodying those activities which reflect a consideration of ones duty or obligation”. Categorical reasoning represents more of a process- orientation, rather than the outcome- oriented focus of consequestionalist reasoning In terms of practical application, the two ethical perspectives become realized in social norms- “those standards... which have been accepted by the organization, the industry, the profession, or society as necessary for the proper functioning of business” and are codified within the organization in the form of Code of Conduct or Ethics, which then act as a point of reference in determining “whether a company is acting ethically according to the conventional standard” This logic is the foundation of the Social Contract Theory that is based on societal expectations that bind firms because compliance is directly related to a social license to operate. To violate these implicit ethical boundaries can lead to a loss of legitimacy that threatens the long term viability of the organization

A moral argument for CSR Charles Handy: “The purpose of a business... is not to make profit, full stop. It is to make a profit so that the business can do something more or better. That “something” becomes the real justification for the business... It is a moral issue” Profit for a company is like oxygen for a person. If you don't have enough of it, you're out of the game. But if you think your life is about breathing, you're really missing something” (pg25) Society makes business possible- Because societys contributions make business possible, those businesses have a reciprocal obligation to society to operate in ways that are deemed responsible and beneficial. And, because businesses operate within a social context, society has the right and the power to define expectations for those who operate within its boundaries. A rational Argument for CSR Because societal sanctions (such as laws, fines, prohibitions, boycotts, or societal activism) affect the firm's strategic goals, efforts to comply with societal expectations are rational, regardless of ethical or moral reasoning. The rational argument rests on the sanction avoidance- it may be more cost-effective, for example. To address issues voluntarily, rather than wait for a mandatory requirement based on government or judicial action. By ignoring the opportunity to influence the debate in the short term through proactive behaviors, an organization is more likely to find its business operations and strategy hampered over the long term The rationale argument advocates self- interest in avoiding the inevitable confrontation. BY not adopting a proactive (or at least accommodating approach to fair treatment) “In a democratic society, power is taken away from those who abuse it” USCAP (United States Climate Action Partnership), which “supports the introduction of carbon limits and trading... was set up by energy companies and industrial manufacturers” who might otherwise have opposed government action in this area. General Motors, for example, became the first US automobile manufacturer to join USCAP, “which seeks economy-wide greenhouse gas emission reductions of 60 to 80 percent by 2050. Implementing a rational perspective, these firms realize that it is their interests to engage with regulators, rather than oppose legislation that they see as inevitable

An Economic Argument for CSR CSR is an argument of economic self- interest for business. CSR adds value because it allows companies to reflect the needs and concerns of their various stakeholder groups. By doing so, a company is more likely to retain its societal legitimacy and maximize its financial viability over the medium to long term. Simply put, CSR is a way of matching corporate operations with societal values and expectations that are constantly evolving. Even for those who believe that the only purpose of a business is to increase the wealth of the owners, being perceived as socially irresponsible risks losing access to an already significant (and growing) segment of investors and their capital FIVE DRIVING FORCES OF CSR

1) Affluence (the state of having a great deal of money) Consumers in developed societies can afford to choose the products they buy and, as a consequence, expect more from the companies whose products they buy Firms operating in affluent societies, therefore, face a higher burden to demonstrate they are socially responsible

2) Sustainability Human economic activity is depleting the world's resources and causing dramatic changes to the earth's atmosphere- changes that could become irreversible in the near future. As a result, firms that are perceived to be indifferent to their environmental responsibilities are likely to be criticized and penalized. Examples include court imposed fines, negative publicity (eg. Monsanto) or confrontations by activist groups

3) Globalization Operating in multiple countries and cultures- more laws and regulations to understand, more social norms and cultural subtleties to navigate The range of stakeholders to whom multinational firms are held accountable increases, as does the potential for conflict among competing stakeholder demands. Increased the potential for efficiencies gained from production across borders, it has also increased the potential to be exposed to a global audience if a firms actions fail to meet the needs and expectations of the local community.

4) Media The growing influence of social media makes sure that any CSR lapses by companies are brought rapidly to the attention of the worldwide public, often instantaneously. In addition, the internet fuels communication among activist groups and like-minded individuals, empowering them to spread their message while giving them means to coordinate collective action

5) Brands Companies try to establish popular brands in consumers minds because doing so increases their competitive advantage, which then results in higher sales and revenue. In addition, consumers are more likely to pay a premium for a brand they know and trust. A firms reputation is precarious- hard to establish and easy to lose Brands are more valuable than ever and firms need to take ever greater steps to protect an investment that is essential to their continued success