The ‘Why’ Of Corporate Social Responsibility: A Normative Approach
Defining Corporate Social Responsibility
Corporate social responsibility (CSR) is currently one of the most discussed topics by business and scholars alike. The concept has been enthusiastically supported by three very disparate groups – by government,l by non government organisations (NGOs) ranging from charities to national and international industry groups, and by business itself, in particular large corporations. 2 This support comes at a time when there is greater awareness by individuals about environmental matters, sustainability, workplace rights and issues concerning labour in other countries, and occupational health and safety. Rhetoric about corporations ‘giving back’ to the communities that made them successful abounds.
Much of the corporate citizenship literature, both in Australia and internationally, looks at the superficial ‘what’ of CSR and examines actions that companies can take to be good corporate citizens. 3 Other authors delve deeper by looking at the ‘how’,4 and examine the variety of ways in which companies embrace CSR – ranging from cursory philanthropy to stakeholder engagement in the most fundamental decision making processes of the company.
This article takes a normative approach and looks at the ‘why’ of CSR; in particular, it will question whether governmental support and enthusiasm for CSR is appropriate, given the neo-classical view of corporations as entities devoted to the maximisation of shareholder wealth. Milton Friedman famously decried CSR as a ‘fundamentally subversive doctrine’ with the capacity to distract companies from their primary focus. It will be asked whether responsibility for the provision of some community services or the protection of various aspects of society and the environment should be devolved, albeit gradually and apparently with the consent of all concerned, to an unaccountable being, the business community, particularly where participation is on a voluntary basis.
Corporations, especially large, successful ones, are willing participants in CSR, for the protection and enhancement of their reputations. It is arguable that, with the retreat of the welfare state, governments take advantage of this to shift costs to the business sector. NGOs are also keen to encourage CSR to ensure that their own social objectives are advanced. However, the difficulty with reputation-driven CSR is that it might encourage companies to engage in activities which are ‘seen’ to be doing the right thing – conspicuous donations, support for high profile causes 5 – rather than the more fundamental protection of stakeholder interests, such as good treatment of their employees, timely and full payment of creditors and manufacturing of quality, safe and inexpensive products and services. The more that government promotes the visible forms of CSR, the more likely it is that companies will adopt these superficial measures of good corporate behaviour, window dressed to the maximum extent, rather than inherently sound business practices which are of true benefit to the community. For this reason, the espousal of reputational indices, which may support a culture of CSR ‘form over substance’, is to be discouraged.
Existing Legislation imposing Obligations on Companies
While there is an extensive international literature which looks at the costs and benefits ofCSR to companies individually, the current debate in Australia over CSR lacks a rigorous analysis of its costs and benefits to society as a whole. It is assumed that with corporate reputational enhancement flowing from schemes to benefit the community, all parties win. But this does not take into account consideration of what corporations could do in the alternative with their resources, which might be of equal benefit to society. It also fails to examine the long term consequences for society if a pattern of government retreat from the provision of social services or the protection of vulnerable parties becomes entrenched. It does not consider whether the money invested by corporations into CSR achieves the corporations’ stated objectives or whether the money is spent in an economically efficient or effective way.
This article begins with a discussion of the meaning of CSR, and how companies incorporate it into their activities. It then examines legislation that already imposes obligations on companies to behave in a socially responsible manner, and looks at some of the recent CSR initiatives in Australia. Next, the motivations for CSR are examined, highlighting the issue of protection of corporate reputation and the government’s motives for its encouragement of CSR. Finally, the proper role of CSR in Australia will be analysed. It will be recommended that a redefined CSR is appropriate to ensure the true protection of stakeholder interests.
Definitions of corporate social responsibility proliferate, although each is generally accompanied by the disclaimer that the term is neither universally or easily defined. 6 For brevity and simplicity, it is hard to go past Baron, who states that ‘[fjrom one perspective, it is the assumption and fulfilment of responsibilities beyond those dictated by markets’ .7 The report of the Parlialnentary Joint Committee on Corporations and Financial Services, issued in June 2006 and entitled Corporate Responsibility: Manag”ing Risk and Creating Value, stated that [c]orporate responsibility is usually described in tenns of a company considering, managing and balancing the economic, social and environmental impacts of its activities. It is about companies assessing and managing risks, pursuing opportunities and creating corporate value, in areas beyond what would traditionally be regarded as a company’s core business. It is also about companies taking an ‘enlightened self-interest’ approach to considering the legitimate interests of a company’s stakeholders.
Recognising that corporate responsibility is a multi-faceted concept the committee makes no attempt to reach a conclusive definition. Because of the sheer diversity of modem corporations – in tenns of size, sectors, stakeholders, structures and strategies – the concept of corporate responsibility can have a different meaning to different people and different organisations.
Costs and Benefits of CSR to Society as a Whole
The implementation of all CSR activities entails costs for all companies, regardless of the form of those activities. One common point of difference in definitions is whether corporate social responsibility involves the company’s core activities or is outside of those – in other words, whether the company should be recovering the costs of the programs or indeed be making money from them. At one end of the spectrum are those who consider it wrong to profit from these activities, and therefore treat CSR as external to the core business of the company.
Indeed some definitions demand that the company’s CSR activities are less profitable than ‘nonnal’ corporate actions. Manne and Wallich observed that ‘[t]o qualify as socially responsible corporate action, a business expenditure or activity must be one ‘for which the marginal returns to the corporation are less than the returns available from some other expenditure .
At the other end are those who believe that truly successful corporate social responsibility is embedded into a corporation’s core profit making activities and values, and goes far beyond superficial philanthropy. This approach was mentioned with interest in the Parliamentary Joint Committee report, where it was noted that evidence received by the committee .strongly underlined the importance of integrating the consideration of broader community interests into the core business strategy of companies, if corporate responsibility was to succeed’
This view is shared by a number of commentators, 13 but how widely this view has been adopted is debatable. The CAMAC Discussion Paper revealed research which found that This was noted by the Parliamentary Joint Committee who concluded that it demonstrated ‘the significant global rise of corporate responsibility as a factor in corporate decision-making and investment practices. Importantly, there also appears to be a global trend towards “doing” rather than mere rhetoric.’
In contrast, Batten and Birch noted 16 research in 1999 which found that only 7 percent of CEOs of top corporations viewed corporate citizenship as central to the strategic direction of their business. Their own survey, published in 2005, found that ‘[m]ost respondents defined corporate citizenship in terms of the community activities of the corporation … and felt that it did not include core products or services … or the way in which the corporation was organised or run. .
Indeed, a report commissioned by the Prime Minister’s Community Business Partnership 18 observed that while businesses are aware of the big picture issues of CSR and corporate citizenship, they lack expertise rather than commitment in implementing their CSR goals
The Motivations for Corporate Social Responsibility
The confusion over the definition of CSR and the fact that corporations struggle to determine how to integrate CSR into their operations suggests that businesses do not really understand the meaning or the purpose of CSR. Part V will suggest a new paradigm.
There is already considerable amounts of legislation in Australia which impose obligations on companies to behave in a socially responsible manner. Companies, as separate legal entities, have the usual obligations of legal persons in tort and in contract. The corporate veil is lifted by the Corporations Act 2001 (Cth)20 to impose liability on directors personally if their companies fail to meet some of these obligations. Examples include the protection of employee entitlements under Part 5.8A and the directors’ duty to prevent insolvent trading under Part 5.7B. Creditors are also protected against the improper actions of directors in the prelude to the company’s insolvency by the voidable transaction provisions of Part 5.7B.
Legislation other than the Corporations Act imposes additional obligations on companies and their directors in relation to employees and the. environment. For example, companies must pay their employees at least minimum rates of pay21 and they must comply with occupational health and safety, 22 anti-discrimination and equal opportunity requirements. 23 Companies must also comply with a wide range of environmental requirements. 24 Consumers and businesses are protected by laws proscribing companies engaging in anti-competitive behaviour and misleading or deceptive conduct.
In terms of reporting, there are two specific sections in the Corporations Act that are widely recognised as expanding company reporting in a way that relates to CSR. Section 1013D(1) of the Act imposes obligations on superannuation, life insurance and managed funds to disclose the extent to which they take account of environmental, social, labour and ethical standards in their investment decisions. Section 299(1)(f) requires companies to include within their annual reports details of breaches of environmental laws and licences.
However, despite the evident ability 26 of governments to legislate for the protection of corporate stakeholders in particular and society in general, there has been a push by government to increase the responsibility of corporations for these matters, not through regulation but by the enthusiastic promotion of CSR. 27 This is apparent from initiatives such as the Prime Minister’s Community Business Partnership, which was established in 1999. Chaired by the Prime Minister. it is ‘a group of prominent Australians from the community and business sectors, appointed by the Prime Minister to advise and assist the Government on issues concerning individual and corporate social responsibility.’ 28 It does this through three streams of activities – advocacy of the business case for CSR and for partnerships between business and the community, facilitation through the prOVISIon of information, and recognition of successful CSR through an awards program.
The Proper Role of CSR in Australia
The Australian Stock Exchange has also taken an active step In encouraging socially responsible business practices amongst listed companies. Its Listing Rules 30 require companies to state in their annual reports the extent to which they have complied with 28 ASX Council Recommendations, which are pursuant to ten Principles of Good Corporate Governance. Compliance with the recommendations is not mandatory, although companies must explain why an alternative approach was adopted. Three of the recommendations are relevant to CSR. They are Principle 3: Promote ethical and responsible decision-making; Principle 7: Recognise and manage risk; and Principle 10: Recognise the legitimate interests of stakeholders.
Business appears to have enthusiastically embraced the trend towards corporate social responsibility. The Parliamentary Joint Committee report noted a submission by Philanthropy Australia, stating that:
Much of this community involvement has manifested itself in philanthropic activities. 35 Recently, the Parliamentary Joint Committee on Corporations and Financial Services has released a report entitled Corporate Responsibility: Managing Risk and Creating Value 36 which has made a number of important recommendations, which encourage, but do not mandate, socially responsible activity by companies.
Much has been written about the multiplicity of drivers for companies to engage in CSR,38 but it would probably be fair to say that few companies would engage in socially responsible activities, beyond compliance with the law and the generation of profit for their shareholders, if nobody knew about it. 39 For this reason, CSR in Australia is most likely to fall into the ategory of strategic CSR40 and not be seen by courts as a breach of directors’duties.
Building and retaining a good reputation is therefore arguably the main motivator for CSR.42 However, there are many aspects of reputation-driven CSR, which can be broken down into three broad and sometimes overlapping and interrelated categories: company strategy, responding to community demands, and responding to external demands from government, industry, or national and international NGOs.
There are many strategic reasons why a company may choose to improve their reputation by the adoption of CSR practices. A company may undertake socially responsible initiatives to improve competitiveness and profitability,43 to win government favour44 or to attract investment from ethical investment funds, such as superannuation funds. 45 Improving employee morale is also often cited as a driver for CSR activities,46 as people, given a choice, would rather work for a company saving the planet than one which is destroying it.
CSR also allows companies to combine normal risk management practices with the appearance of social responsibility. Providing a safe workplace beyond the legally required limits or a stress reduction program for staff is both beneficial for building the appearance of a caring work environment, as well as reducing the financial cost from staff injury and absenteeism.
Conclusion
Another strategic reason for the voluntary adoption of CSR activities is the desire to avoid CSR regulation. 47 This is openly acknowledged by companies,48 often with the justification that legislative mandate would encourage a culture of box ticking and compliance, rather than a genuine expression of care for the communities in which companies operate.
Responding to cOlTIlTIunity demands and expectations, and enhancing and retaining a good reputation for doing so, are also drivers for companies to embrace CSR. The ready availability, via the media and internet, of information about corporate activities, good and bad, and the readiness of consumers and members of the community to complain and litigate is often noted. Commentators frequently speak of CSR as the price to pay for the ‘social licence to operate’. 50 Lucas cited ‘evidence … that Australians’ attitudes are less complacent, compared with their past attitudes, about the behavioural conduct of major Australian companies. ‘ 51 There is also a greater consumer sophistication and awareness of the environment and of product safety and manufacture, for example in relation to the manufacture of goods by child labour in third world countries.
Another motivator for the uptake of CSR has been the need to respond to the demands placed on companies by government, international treaties and non-governmental organisations (NGOs), and by industry groups. It can be argued that while all of these bodies may have valid and laudable reasons for wanting companies to improve their behaviour as corporate citizens, they use corporations’ need to protect and enhance their reputations as a means of boosting the acceptance of socially responsible activities as behavioural norms. This can be seen by the proliferation of reputational indices 53 that rate corporate behaviour and the call for mandatory triple bottom line reporting.
It is interesting to consider here why these diverse organisations appear to be united in their desire to encourage companies to be responsible for outcomes which traditionally were the duty of government. Two reasons for governmental enthusiasm for the voluntary adoption of socially responsible behaviour by corporations are most commonly cited. The first is their wish to shift the cost and obligation for the provision of social services away from government, and the second is the desire to reduce the need to pass and enforce appropriate legislation.
Moon notes that
Australian governments, like their 0 ECD counterparts, seek alternative solutions to social and economic problems. Budgetary constraints along with bureaucratic models of management give incentives to find alternatives to what have traditionally been seen as governmental responsibilities.’
The retreat of the welfare state has led to the increasing importance of NGOs, and, in tum, on the demands placed by NGOs on corporations. 56 It appears, therefore, that the enthusiasm of government for the protection of society is an enthusiasm for this to be done by others rather than by themselves.
The growth and proliferation of NGOs which promote CSR and sustainability has been remarked upon by a number of commentators. Phillips quotes Philanthropy Australia in saying that there are 700,000 NGOs in Australia. 58 Prominent NGOs playing a significant role in the call for CSR include Amnesty, the International Labour Organisation, the United Nations, the Australian Conservation Foundation, the Smith Family, Mission Australia, Oxfam, SustainAbility, AccountAbility and the St James Ethics Centre.
The appropriateness of relying on NGOs as the providers of services normally provided for by government or as the mechanism for putting pressure on corporations59 to supply those services has been questioned by some. Johns states: ‘The question must be asked, “even if the public interest could be defined, why would a process of bargaining between publicity seeking, single issue NGOs and profit seeking companies necessarily reach the right outcome?'”
Johns describes the pressure on companies from NGOs as a ‘tool in the transfer of power’. 61 He contends that ‘CSR advocates have discovered that they can place corporations under some pressure without recourse to government, the so-called soft path to power’62 – ‘business doing the work of government in conjunction with “other societal actors”‘. Whether this power has been deliberately sought, or is merely a consequence of the increasing reliance by government on NGOs is debatable.
The increase in the number of international treaties has further added to obligations by corporations to behave in a socially responsible manner, despite the absence of a regulatory imperative to do SO.64 These include the United Nations Global Compact,65 International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work,66 the United Nations Environment Programme’s Rio Declaration on Environment and Development67 and the United Nations Convention Against Corruption. 68 Again, the need to protect reputations against allegations of breach of these treaties provides a powerful incentive for companies to comply with their requirements, especially when their business is conducted internationally.
Arguably in response to these reputational pressures and the desire to avoid more onerous regulation and compliance costs, there has been a growth in the number of voluntary national and international schemes being promoted by industry bodies. 69 It can be seen, therefore, that the building and protection of corporate reputations is a leading driver of the adoption of CSR principles. As this objective is consistent with the generation of business and therefore with the maximisation of shareholder wealth, there is no breach of directors’ duties. However, there are a number of causes for concern when governments take advantage of this to shift, at least in part, responsibility for aspects of social protection and the provision of welfare services onto corporations. This will be explored in the next Part.
It was observed above that CSR is an ill-defined concept, and that some companies struggle to incorporate it into their mainstream activities. The ideas •of CSR are vigorously promoted by government, who appears anxious to shift some of the burdens of social welfare onto corporations whilst at the same time limiting the actual regulatory burden on them. Corporations respond because of a desire to protect and enhance their reputations, and this desire is arguably exploited by both government and NGOs who see the protection of reputation as a means of furthering their own objectives.
This Part will ask some critical questions about the role of CSR in Australian society. Is it appropriate for companies to be increasingly responsible for the welfare of society, or should their focus be on the generation of profits for shareholders and the consequent payment of tax to a government which bears this responsibility?70 Are there dangers in governments transferring social responsibility to corporations? If not, is it sufficient for the extent of that responsibility to be purely voluntary on the part of corporations, so that they can decide the objects and degree of their CSR activities?
Subject to meeting their legal liabilities, human beings as natural legal persons can choose to do what they like with their own resources, including generous philanthropy and socially responsible activities. Companies, on the other hand, are artificial legal persons created for the purpose of combining shareholder funds in order to maximise their return. Milton Friedman famously observed that The view has been gaining widespread acceptance that corporate officials and labour leaders have a ‘social responsibility’ that goes beyond serving the interests of their stockholders and their members … few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibilities other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine … the claim that business should This neo-classical economic perspective has its supporters. Some maintain that it is an abuse of the trust of members of the company if the funds they contribute are used for purposes other than the profitability and continuation of the company. Von Hayek72 argued that companies would gain ‘undesirable and socially dangerous powers’ if they deviate from the shareholder profit maximisation objective by taking into account ‘social considerations’ in their decision making.
Similarly in the United States, Porter and Kramer report that’ [e]xecutives increasing see themselves in a no-win situation, caught between critics demanding ever higher levels of “corporate social responsibility” and investors applying relentless pressure to maximise short-term profits’ .
Donations to charity are one context in which the debate on the proper role of CSR has arisen. Wilson relates the conflict which took place in the wake of the Asian tsunami. In early January, 2005, a spokesman for the Australian Shareholders association, Stephen Mathews, criticised corporate donations to aid in tsunami relief. It was reported that:
The Australian Shareholders Association has expressed disapproval at companies pledging money to the tsunami relief effort in Asia, saying they have no approval for their philanthropy. Association spokesman Stephen Mathews says finns should not generally give without expecting something in return. Mr Mathews says that in most circumstances, donations should only be made in situations that are likely to benefit the company through greater market exposure.
This argument is consistent with Milton Friedman’s view that ‘corporate expenditure on social causes is a violation of management’s responsibility to shareholders to the extent that the expenditures do not lead to higher shareholder wealth’ .
However, in the case of conspicuous donations to charitable causes, the company’s behaviour may be both socially responsible as well as profitable, due to the protection or enhancement of the company’s reputation. 77 Indeed, in relation to the tsunami donations, Wilson recounts that ‘community attitudes at the time seemed to be in favour of such donations, and the corporate sector in fact received criticism for not giving enough. ‘
Two factors contribute to the consideration of whether CSR is, in fact, profitable and therefore acceptable under neo-classical economic analysis. The first is the benefit to reputation that flows from being seen to be socially responsible. There is extensive literature internationally, particularly in the United States, on the issue of whether CSR is profitable. Some researchers have concluded that improvement in reputation from socially responsible behaviour has a positive correlation with increased profitability
However, there are other studies with neutral or contrary results. 80 The inconsistency in the findings of these studies has been attributed to a variety of factors. 81 Definitional differences in the term ‘CSR’ and the lack of distinction in many studies between strategic CSR, altruistic CSR82 and ‘coerced’ CSR83 has caused problems. 84 In addition, measures of CSR have been inconsistent. Some researchers use reputational index rankings and other use proxies such as environmental performance; as measures of financial perfonnance, some use improvements in share price and others use end ofyear financial performance figures.
Importantly, studies have not established causation, and the causative aspects of improvements in financial performance have been difficult to identify. This is particularly so in industries such as banking where all major competitors are active in CSR and therefore attracting additional market share is an unlikely explanation. 86 The Parliamentary Joint Committee report concludes that The second factor in the consideration of whether CSR is profitable and therefore acceptable under neo-classical economic analysis is the investment of funds in ‘ethical’ investments. The Parliamentary Joint Committee report notes that Although past returns do not guarantee future performance, the sustained positive trend, particularly over the long term, is an encouraging development and lends weight to the connection between good corporate behaviour and strong financial performance.
On the other hand, a study by Ali and Gold on returns from ethical investments concludes that ‘the empirical analysis demonstrates that a financial sacrifice is involved when excluding sinful industries [defined by the authors as alcohol, tobacco and gambling] from a market portfolio in the Australian context’ 90. Indeed, for the purpose of this exercise, it is difficult to define what amounts to either ‘ethical’ investments or to sinful ones. BHP Billiton, responsible in the past for substantial environmental damage at its Ok Tedi mine in Papua New Guinea, is one of Australia’s foremost exponents of CSR.
The British American Tobacco Australia website has substantial information on its CSR program, including environmental health and safety, community involvement, and youth smoking prevention. 92 Given the tax on tobacco products per annum in Australia is 70% of tobacco company revenue, or an estimated $5.2 billion in 2004-2005, it is arguable that this contribution to social wellbeing by tobacco companies extends well beyond individual CSR initiatives, despite the health related costs of smoking which must be offset against this figure. The Nike
company, widely criticised for using underpaid labour in third world countries, now lists all its factories on its website93 as part of a substantial corporate responsibility report.
While it may be debatable whether CSR is actually doing good for society, it is also important to question whether it may be doing harm. There are a number of arguments that can be raised to support this.
First, while there is an enormous international literature on the profitability of CSR to individual firms, the wealth of discussion of CSR conspicuously lacks a rigorous examination of the costs and benefits to society as a whole from its adoption. It is assumed to be beneficial to all concerned – the ·company benefits from improved reputational standing, government benefits from shifting the costs of the provision of certain services, and society benefits from the CSR initiatives of the corporations.
But this analysis makes two mistakes. It assumes that these benefits actually accrue, and it ignores the costs involved. 95 Because there isa lack of conclusive evidence that CSR is profitable, there is no evidence that the costs to companies of engaging in CSR do not exceed the benefits which the company receives. The benefits to society are also questionable. In 2005, the Department of Family and Community services released a lengthy report entitled ‘Corporate Australia Building Trust and Stronger Communities? A Review of Current Trends and Themes’. 96 The authors noted that ‘the focus on partnership processes has come at the expense of capturing partnership program outcomes – that is, the positive or negative impacts of the program. ‘ They reported that The costs also need to be quantified. If a company gives a charitable donation,99 the money this consumes lOO could be used in a number of alternative ways which could also have a positive economic impact on society – in reducing the cost to consumers of its products, in paying higher wages or in paying larger dividends. The donation may not be the most economically efficient or effective way of achieving the specified social objective, and more worryingly, the CSR debate fails to ask the question whether the relevant behaviour is efficient or effective or even if it should be. If the donation is tax deductible, then it reduces the revenue payable to the government which could be used to provide services, for example, in health, education or protection of the environment.
Secondly, engaging in CSR may complicate the focus of corporate decision making and distract firms from the activities which may benefit society the most – creating a strong business with secure jobs as well as favourable returns to shareholders, resulting in economic growth for society.
In this regard, there is a particular risk to companies from the importance of CSR to the protection and building of reputation. The more prevalent CSR becomes and the more it is endorsed by government as ‘the right thing’ to do, the more that all companies will feel pressured to do so, including companies which can ill-afford to spare the money. This may become a problem especially for small to medium companies as the trend set by the large corporations permeates down to them. Adoption of CSR could therefore come at a cost of financial viability for these companies, or have the effect of inhibiting the growth of their business.
Thirdly, the general encouragement and endorsement of CSR by governments and NGOs arguably allows companies to hide their poor practices in some areas behind elaborate window dressing. Moon quotes an interviewee:
The community ultimately gains the greatest benefits from a highly successful and profitable enterprise which operates within these high corporate standards [of ethical, social, safety, environmental, management and legal behaviour] rather than a company which has low standards but makes significant payments to community groups.
Fourthly, the more that companies do or admit responsibility for, the more that governments may relinquish their own responsibility in those areas. I03 If there were general acceptance of corporations as liable for the maintenance of social and environmental conditions, it would allow governments to shift those duties away from an entity which is accountable to the community, namely themselves, and on to others which are not accountable in the same way. Corporations are only answerable via the imprecise mechanism of ‘reputation’ which is capable of distortion both by window dressing and public relations ‘spin’. It is arguably just as wrong to make companies responsible for the improvement of social conditions as it is for governments to be relieved of that responsibility.
The dangers of this can be seen with the institutionalisation of charity to hospitals. It is well accepted in society that money needs to be raised from public appeals,I05 private benefactors, philanthropic foundations and companies to fund the purchase of major equipment for hospitals. In the same way, it is accepted that schools needs to raise money to fund buildings, computer purchases and other ‘extras’, and sponsorship is commonly being suggested as a way of doing this. If CSR becomes more
entrenched, will governments increasingly hand over responsibility to the private sector for the funding of hospitals, schools and universities? And if so, will this money be distributed evenly or given where it is needed most, 106 or will it go to the places where companies have their client bases?I07 It should, if it is to enhance their reputations and deliver profit maximisation benefits to their shareholders.
Fifthly, imposing responsibility on companies to care for society has the potential to allow important aspects of social protection to be overlooked. Companies will tend towards the protection of stakeholders where the damage from their non-protection is greatest. This includes consumer groups and employees, where adverse publicity is likely to have the most detrimental effect. Victims of tort, on the other hand, are less likely to be considered, unless the size of the class of claimants is large.
Finally, it can be maintained that CSR, with its rhetoric of consideration of stakeholder interests, simply raises expectations, and does not provide a formula for resolving disputes between competing interests. The fact that corporations adopt CSR voluntarily means that no one stakeholder group has standing to challenge corporate decision making on the basis that their interests were not given consideration or priority. 108 The reality is that the directors can legally defend any decision which puts shareholders first, arguably demonstrating the shortcomings of CSR as an effective means of social protection.
The negative aspects of CSR are therefore an important consideration when weighing up whether there should be such widespread encouragement of CSR by governments, NGOs and even by companies themselves. However, there are undoubtedly some benefits from CSR activities which could not easily be replicated by government.
For example, the initiative by some retail corporations and communities to protect the environment by replacing plastic bags with cloth alternatives would be difficult for governments to match. Legislation prohibiting plastic bags would be difficult and costly to enforce. The
Social Compass report also noted cross sector partnerships which can achieve objectives that individuals are not able to achieve on their own ‘because such partnerships combine resources and skills, can be an effective way to build social capital, community capacity, increase the skills required for the new economy and leverage resources. ‘
The increasing vulnerability of corporations to the scrutiny by N.GOs has had the effect of applying pressure to multinational corporations to improve their workplace practices in third world countries.IIO It would be difficult for the Australian government to apply pressure in the same way. To reconcile these points of view, and as a genuine way of taking into account the interests of corporate stakeholders, it is suggested that a new paradigm of corporate social responsibility be developed, along the following lines.
First, the primary responsibility of corporations is to run a financially sound business, for the benefit of all their stakeholders. III This will include paying dividends to shareholders, providing good working conditions and paying the full entitlements of employees, and ensuring that creditors and taxation authorities are paid in full and on time. Socially responsible corporations should also avoid all artificial schemes to deprive taxation authorities, employees or creditors of their entitlements. The community will benefit from the jobs created and the goods and services produced, as well as the taxation revenue paid.
Secondly, socially responsible corporations should obey the spirit, as well as the letter, of the law. This includes all laws relating to the protection of the environment, occupational health and safety, conditions for employees, and laws concerning restrictive trade practices and the protection of consumer rights.
Thirdly, socially responsible corporations should develop good reputations from producing quality and safe products and services, the price of which does not incorporate a premium to pay for philanthropic activities. Advertising is a necessary aspect of promotion, and doing so in a manner which benefits the community, such as by the sponsorship of a community activity, is to be encouraged. However, most importantly, the costs and benefits of doing so should be evaluated in the same way that other promotional strategies are.
In addition, companies should be supported in other behaviour to benefit the community provided that it does not have an adverse impact on their ability to carry out any of the responsibilities set out above. However, companies should not take on aspects of social responsibility that are arguably the province of government. Pava and Krausz describe the ideal corporate social responsibility program existing where there is a high degree of local knowledge, the corporation is responsible for the harm and takes responsibility for correcting it, stakeholders broadly agree and it enhances financial performance, although the authors agree that the first three are likely to be traded off against the last.
In its tum, socially responsible governments have a valuable role to play in ensuring that corporations are able to fulfil their proper functions. This includes matters such as the proper regulation and policing of environmental protection, employment conditions and consumer protection. Governments can encouraging a culture of partnerships between business, governments and NGOs where there is a gain to be made that could not be made otherwise, and where it is quantifiably and demonstrably beneficial to each of the parties concerned.
Government should encourage and facilitate, by removing bureaucratic impediments and by regulatory reform, the improvement of corporate behaviour. This is exemplified by some of the present industry initiatives where businesses combine to codify good behaviour – the ‘competition to be good’ .113 This is particularly useful in entrenching sound and desirable business practices, to help reduce the temptation to make quick and easy gains from breaking the law or from ‘cutting comers’ .
Governments can also build and support a strong economy, with stability for the protection of corporate enterprise and the protection of jobs. In addition, it should set the example of corporate citizenship, thereby modelling the way and encouraging business to follow suit. 114
Conclusion
This article has asked some critical questions about the role of CSR in our society and has asked whether the widespread growth of CSR and its enthusiastic support by government is beneficial to society.
It began with an examination of the meaning of CSR, which concluded that there is no accepted definition. More importantly, there was disagreement about whether CSR ought to be integrated into the core of the corporation’s business, and even where companies were willing to do so, there was a lack of understanding about how this could be done.
While there are already considerable amounts of legislation requiring companies to act in a socially responsible way, there are still a number of government initiatives, such as the Prime Minister’s Community Business Partnership, which encourage further adoption of CSR strategies by companies. The recent Parliamentary Joint Committee report made a series of recommendations which will further advance CSR uptake.
Because of the desire to protect and enhance their reputations, corporations have willingly embraced CSR, and this has been actively encouraged by governments and NGOs for purposes of their own. Despite this appearance of unanimity, however, there are a number of dangers from the widespread acceptance of CSR. These include a consideration of whether the costs exceed the benefits, whether it presents a distraction to business from their true function of profit maximisation and whether it is desirable for government to increasingly cede responsibility to the private sector.
Most importantly, it was suggested that there is a very real risk from governments endorsing a visible kind of CSR which designates corporations as good citizens because of their support for discrete projects or causes, where appearance could triumph over substance.
It was therefore suggested that a new paradigm of corporate social responsibility be developed, which focuses on companies fulfilling their
traditional roles in a manner that is socially responsible, with proper support from governments. This new definition is a genuine way of taking care of the interests of corporate stakeholders, rather than the piecemeal approach of superficial philanthropy.
To recommend that business no longer supports charities appears heretical. Indeed, realistically, it would be impossible to prevent companies from contributing to the communities in which they operate. Nonetheless, it is important to be careful in advocating more widespread adoption of CSR without considering what that means and what the consequences could be. Like all sound business decisions, the costs and benefits must be weighed up.