Topic 4 - Corporate Social Responsibility & Corporate Governance PDF

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Topic 4: Corporate Social Responsibility and Corporate Governance Chapter 12 – Corporate Social Responsibility (CSR) Case 12: Competing Visions at Malden Mills  3 of MM’s buildings burnt down in 1995.  Feuerstein, patriarch of family-owned firm announced  wages and benefits for affected workers w...

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Topic 4: Corporate Social Responsibility and Corporate Governance Chapter 12 – Corporate Social Responsibility (CSR) Case 12.1: Competing Visions at Malden Mills  3 of MM’s buildings burnt down in 1995.  Feuerstein, patriarch of family-owned firm announced  wages and benefits for affected workers would continue and facilities rebuilt. o Widespread acclaim for CSR. o He could have used the $300m in insurance to move to low-wage countries like competitors, or retired. o Received numerous awards, invitations to speak and honorary degrees.  BUT heavy debt from rebuilding forced him into bankruptcy in 2001. Emerged from bankruptcy in 2003, owned and operated by former creditors (GE Capital).  F wanted to retain ownership – motivated by responsibility to the workers and to the community.  Brand was built on quality and customer loyalty  focus on quality and differentiation, rather than cutting costs. o Different vision to new CEO (GE Capital) F’s pledge to continue paying workers eventually cost them their jobs and cost F his company. Introduction  Corporations are primarily business organisations run for the benefit of shareholders, BUT they have a wide rage of responsibilities, to their: o Employees o Customers o Suppliers o Communities o Society  Often stated in companies’ formal statements of principles or beliefs.  Many have institutionalised CSR as an integral part of operations.  Also, external groups monitor CSR (e.g. NGOs, socially-responsible investors, etc.). 

Three questions at issue: 1. Why do corporations have a social responsibility? 2. What is the extent of this responsibility? What do corporations have a responsibility to do? 3. How should corporations decide what CSR activities to undertake, and what is required to implement CSR programs effectively? (main question now; not whether, but how).

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CSR is closely linked to 2 other movements: 1. Corporate social performance 2. Corporate citizenship

The Meaning of Social Responsibility 

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Social Responsibility = The selection and evaluation of corporate goals and outcomes, based not only on profitability and organisational well-being, but ALSO on ethical standards or judgments of social desirability. o i.e. consistent with corporate objective of earning satisfactory level of profit, but there should be a willingness to forego a certain measure of profit in order to achieve noneconomic ends. Goes beyond economic and legal responsibility. Extends to ethical conduct that is expected but NOT legally required – i.e. voluntary. Some of the most successful corps are also the most social responsible (link?). Carroll views SR as a 4-stage continuum: o (Far end) Discretionary responsibilities  not legally required or even demanded by ethics, but cops accept them to meet society’s expectations.

Corporate Social Responsibility as THREE Concentric Circles  1971 Committee for Eco Development issued report that characterised CSR in concentric circles as follows: 1. Inner circle – clear-cut basic responsibilities for efficient execution of a corporation’s economic function: products, jobs, and economic growth. 2. Intermediate circle – encompasses responsibility to exercise this economic function with an awareness of changing social values and priorities  for example, with respect to environmental conservation, employee relations, information availability, and safety. 3. Outer circle – responsibilities that address such major social problems as poverty and urban blight. Broad involvement in actively improving the social environment. Examples of Corporate Activities that exhibit Corporate Responsibility  Choosing to operate the corporation on a level higher than the law requires. o E.g. Mattel closely monitors its factories in China to ensure its high labour standards are observed.  Contributing to civic, charitable, and non-profit institutions.  Providing benefits to employees and improving quality of the workplace beyond requirements. o E.g. family-friendly programs such as flexible work and childcare.  Taking advantage of an economic opportunity that is less profitable but more socially desirable. o E.g. Starbucks pays an above-market rate for fair-trade coffee that benefits growers in poor countries.  Using corporate resources to address some major social problem. o E.g. Merck developed and now gives away in Africa a drug for the treatment of the disease river blindness.  These activities are not necessarily antithetical to corporate interests. o “Goodwill” that CSR activities create make it easier to conduct business.  Enhance company’s reputation.  Attract and retain loyal employees.

Responsiveness  Important aspect of CSR.  Responsiveness = the ability of corporations to respond in a socially responsible manner to new challenges. o Friedrick  capacity of a corporation to respond to social pressures.  Emohasis on process of responding or readiness to respond, rather than the content of the actual response.  Integrated into strategic planning process instead of ad hoc reaction to specific crises. o Socially responsive corporation uses its resources to anticipate social issues and develops policies, programs and other means of dealing with them.  Wood combined all three elements of corporate social responsiveness: 1. The principle of being socially responsible 2. The process of social responsiveness 3. The socially responsible outcome Corporate Citizenship  Broader meaning than CSR to include the impacts of a corporation on all groups in society, society as a whole, and the environment.  Corporate Citizenship = “Process of identifying, analysing and responding to the company’s social, political, and economic responsibilities as defined through law and public policy, stakeholder expectations, and voluntary acts flowing from corporate values and business strategies.”  Contrast to CSR: o CSR often perceived to be voluntary activities IN ADDITION to its core business. o CC = INTEGRATION of social and enviro concerns into company’s policies and practices. Obligation  arise in virtue of membership in a larger community. (widespread adoption in recent years).  BUT NOTE: Corps aren’t “citizens” so the term may be misleading and unhelpful in understanding responsibilities of corps. The Normative Case for CSR 

Do companies have a moral obligation to exhibit CSR or, at least, morally permitted to exhibit CSR? o NO: The Classical View (dominant in the US)  Against CSR.  Problems with the classical view (3 problems) o NO: Milton Friedman’s argument against CSR  Also against CSR.  Criticism of Friedman’s position  The “taxation argument”

The Classical View  

Major challenge to social responsibility. Three basic propositions: 1) Economic behaviour is separate and distinct from other types of behaviour. Thus, businesses do NOT have the same goals as other organisations in society. 2) The primary criteria of business performance are economic efficiency, growth in the production of goods and services, including technological development, and innovation in goods and services. 3) The primary goal and motivating force of business is profit.

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Corps should engage in purely eco activity and be judged in purely eco terms. o Social concerns not unimportant, but they should be left to other institutions in society. Part of a larger debate about the legitimate role of corps in a democracy. o Confining corporations to eco ends is intended, in part, to limit their role in society so as to preserve other kinds of institutions, both public and private.

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Problems with the Classical View 1) The Moral Minimum of the Market o A certain level of ethical conduct is necessary for business activity to take place at all. o Social responsibility is required by free markets (e.g. not to pollute and clean it up if they do). o Obligation of doing business in a manner that minimises social injury and prevents specific harms from occurring. o Good to operate above moral minimum  avoid external interference (i.e. pressure from society and the government). o By internalising the expectations of society, corporations can retain control over decision-making and avoid the costs associated with government regulation. o Theodore Levitt article. 2) Power and Responsibility o Corporations have become so large and powerful that they are not effectively restrained by market forces and government regulation. o Some self-imposed restraint is needed (i.e. in the form of a voluntary assumption of greater social responsibility)  to secure public welfare. o Classical theorists respond  because of the immense power of corps it would be dangerous to unleash it from the discipline of the market in order to achieve vaguely defined goals. o BUT  power affects when it is used and not used. 3) Giving a helping hand to government o Classical view assumes that business is best suited to provide for eco wellbeing of members of society, whereas non-eco goals are best left to the gvt & other institutions  BUT this division in only

true as a generalisation  does NOT mean that corps have NO responsibility to help. o Some criteria is needed for distinguishing situations that they have an obligation to help. The following criteria have been proposed: 1. Urgency of the need; 2. Proximity of the corporation to the need; 3. Capability of a corporation to respond effectively; 4. Likelihood that the need will not be met unless a corporation acts. 

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Classical View admits the legitimacy of THREE functions of government: 1) Governments may force business to internalise externalities of social harms such as pollution and worker injury. 2) Free market results in inequalities in the distribution of income and wealth. Job of government to manage the equity/efficiency trade-off (e.g. through progressive taxation). 3) Government should use its powers of taxation, public expenditure, and control of the money supply to stabilise the economy as free markets are prone to instability (e.g. inflation, recession and unemployment). So the classical view is compatible with some intervention in business activity by government in order to secure public welfare. o The restraints are almost entirely external. o Classical view does not permit corps to act in a socially irresponsible manner  only relieves them of the need to think about matters of social responsibility.

Milton Friedman’s View 

Friedman’s Arguments Against Social Responsibility o Corporate officials, acting in their official capacity and not as private persons, have NO social responsibility beyond serving the interests of their stockholders. o Corporate executives are agents of shareholders  have NO right to spend someone else’s money – the stockholders’, customers’ or employees’ – for a general social interest.  BUT note that company executives have very little discretion in pursuing CSR  agenda largely set by outside groups. o Friedman acknowledges that business must observe certain essential limitations on conduct (i.e. “rules of the game”).  i.e. corporations should engage in open and free competition, without deception or fraud  also, to prevent anticompetitive practices and to enforce contracts.  Does not mean that corporations ought to be permitted to act irresponsibly.  Some supposed CSR actions are really disguised forms of self-interest (philanthropic activities have indirect benefits).  Some government is necessary to enforce these rules.

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The “Taxation Argument” o Addressing the point  in exercising corporate social responsibility, managers are spending someone else’s money. o Taxation argument  Investors entrust their money to the managers of a corp in order to make profits for shareholders.  Do spending money to pursue social ends is a form of taxation. o Issues with the taxation argument  Many other groups have both moral and legal claims that compete with those of shareholders: 1) The question of means o Though managers are obligated to earn a profit for shareholders, they are NOT morally permitted to do so by any means possible. o Greater responsibility than Friedman’s minimal list of “rules of the game”. 2) Taking a long-term view o Obligation not merely to secure maximum return but also to preserve the equity invested in a corp. o Must consider the stability and growth of the corp. o Maximum return for shareholders in the long run requires socially responsible actions. o Must satisfy the legitimate expectations of society. 3) Interests of shareholders are not narrowly economic o Managers are often more profit-minded than shareholders themselves. o Shareholders are consumers, citizens of communities, and even environmentalists  they are affected when corps don’t act socially responsibly, or may be morally opposed to some socially irresponsible behaviour. o Friedman’s response: shareholders who favour social goals can use dividends for that purpose.

The Business Case for CSR   

Business case  doesn’t argue that CSR is the “right” thing to do, but only that it is to a company’s advantage to adopt CSR. Core  “being socially responsible is good business.”  but is this always true? Adoption of CSR is to the company’s advantage: 1. CSR contributes to profitability o Market rewards responsible behaviour and punishes a company’s lapses. 2. CSR can be a source of competitive advantage o Enables companies to meet society’s heightened expectations and protect their reputations in ways that are more focused and vigorous than those in the past.

TWO ARGUMENS FOR CSR:

1. The Market for Virtue o If CSR = profitable; profitability should be sufficient to induce managers to implement CSR. o Possible lack of awareness of this link. o David Vogel  The market for virtue = the power of market forces to produce CSR activities.  Supply = CSR Activity  Demand = from customers, investors, employees, etc. o Examples of CSR activities:  Certification for socially/environmentally responsible products.  Socially responsible investment (SRI) + Investor Advocacy + Community Investment  NGOs  advocacy groups (e.g. Greenpeace); human rights, enviro, etc.  Peer companies  Government-driven CSR o How effective is the market for virtue in promoting CSR?  Most powerful factor = ability to damage reputation & brand name. 2. Competitive Advantage o CSR = possible source of CA. o Bring analytical tools to CSR  source of opportunity, innovation and CA. o E.g. Nestle in India  built a dairy in an area of severe poverty. o E.g. Whole Foods Market  Successful business model with social values at its core. Social values made to be part of internal strategy. Can charge higher prices because of added value. CSR programs: Selection and Design  CSR activities should: 1. Account for the management of reputation risk. 2. Be linked to employment needs. 3. Be aligned with company mission and/or core activities. 4. Fit the company’s strategies. 5. Incorporate stakeholder engagement or dialogue. Implementing CSR  Need to formulate and implement a successful CSR program  AND deal with reporting of CSR performance.  Triple-bottom-line accounting: financial, social, and environmental.  Program Selection and Design o Mutually beneficial interdependence b/w business and society. o Management of reputation risk  identify activities that could be target of moral criticism (e.g. human rights, environment, and public health). Anticipate and address quickly. o CSR activities that are linked to employment needs or product sales  yield easily identifiable and measurable benefits.

E.g. McDonald’s has great need for entry-level workers, and has conducted training programs that help new workers to learn valuable work skills & attitudes. o CSR program should make use of a company’s mission and core competencies.  E.g. Coca Cola = #1 employer in Africa. Using advertising capabilities to assist in fight against AIDS. o CSR program should identify opportunities that fit with a company’s strategy.  BP  “Beyond Petroleum” – committed to researching new energy sources. o Incorporate stakeholder engagement or dialogue. Understand needs and outlook of others and engage for mutual benefit. 

Reporting and Accountability  Movement  o social and ethical auditing, accounting and reporting (SEAAR), and o triple-bottom-line accounting (3BL).  Impetus: o Companies seek to evaluate performance of CSR programs. o Rating organisations rank companies on social performance e.g. Dow Jones Sustainability Index. o Socially Responsible Investment funds apply their own measures to company performance. o Academic research devoted to measuring corporate social performance and comparing this with financial performance.  Results only as reliable as the data and interpretation. o Social and enviro performance can’t be given same precise treatment as financial data, which are recorded, reported, and verified according to uniform accounting and auditing standards. o Several companies attempted to change this – e.g. Global Reporting Initiative.  Although some companies may be hypocritical in their use of SEAAR or 3BL, most appear to be genuine in their commitment. Case 12.2: Starbucks  Fair trade coffee.  Corporate philosophy = put people first.  Events: o Starbucks coffee growers in poor regions of world paid small portion of world price for beans. o 2000  Starbucks confronted with demand to use fair trade coffee by NGO (Global Exchange). Threatened a national boycott.  Fair trade products meet certain conditions. o E.g. Fair prices, fair labour conditions, environmental sustainability.  Demand by GE to use FT coffee fit with principles of S’s mission statement  BUT executives concerned whether it was compatible with S’s successful strategy of offering high-quality coffee at premium prices.

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o New suppliers  unknown consistency, quality, etc. Will it meet quality standards? o How much of the money would actually go to the grower? (vs. middle-men, etc). o Was the fair trade movement really the answer? Questions: 1. What ethical responses can Starbucks make? 2. Suppose you were representing TransFair USA, and someone suggests to you that you were in fact an unnecessary middleman; how would you respond?

Case 12.3: Timberland  Community service.  Company developed an expanding program of community service. o ‘Path of Service’  launched in 1992  allowed employees to devote 16 hours of company-paid time each year to community service.  1994  expanded to 32 hours.  1997  40 hours.  Participation optional.  Community Enterprise Department.  Origin of T’s commitment to CS  chance encounter made with NGO City Year  CEO engaged in community service and appalled by social problems he saw. Chapter 13 – Corporate Governance and Accountability Summary  Corporations have responsibilities to many groups.  Disagreements inevitably arise regarding the exact responsibilities corporations have.  Stakeholder theory is presented and criticized as an alternative to shareholder control. Corporations also are legally accountable under the legal responsibilities that are set forth in the voluminous body of business law. Case 13.1: Cracker Barrel  Based in Tennessee.  1991  11 employees dismissed for their sexual orientation.  New company policy  no longer employ non-heterosexual individuals or those whose lifestyles was “contrary to traditional American values”.  Discrimination laws do not cover sexual orientation  employees not protected.  NYCERS owned 121,000 shares of CB  proposed that “sexual orientation” be added to company’s equal employment policy and company take steps to ensure compliance. o Shareholders had legal right to propose a resolution. BUT company has legal right to refuse to submit a proposed resolution to a shareholder vote under several conditions.  SEC agreed with refusal. o Created massive shift in position and storm of protest.  Shareholders had no right to vote on any resolution dealing with employment policies.

In response  2003 – SEC announced plans to examine whether shareholders should hav...