Friday, December 10, 2010

What drives businesses to adopt Corporate Social Responsibility (CSR)? Does it really matter what the secret agenda (of the firms involved in CSR) is?

Let’s first have a look at what the various definitions of CSR are in the context in which we are talking about it. These are the two definitions I would refer to in this paper.

1. Corporate social responsibility(CSR) is an expression used to describe what some see as a company’s obligation to be sensitive to the needs of all of the stakeholders in its business operations. A company’s stakeholders are all those who are influenced by, or can influence, a company’s decisions and actions. These can include employees, customers, suppliers, community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods, investors, and shareholders

2. CSR is concerned with treating the stakeholders of the firm ethically or in a responsible manner acceptable in civilized societies. Social includes economic responsibility. Stakeholders exist both within a firm and outside. The natural environment is a stakeholder. The wider aim of social responsibility is to create higher and higher standards of living, while preserving the profitability of the corporation, for peoples both within and outside the corporation.

What is the first thing that strikes us here? In both these definitions we are looking at stakeholders. Not any particular stakeholder. Both these and numerous other definitions focus on the entire gamut of stakeholders in the entire environment. Now the important question here is how a company does decide which stakeholder has to be given the maximum value. Or is it that all stakeholders will be given equal importance. And if only some are being given critical importance what happens to the CSR philosophy. Does it become defunct for the organization or it still stands on its nimble feet. We will have a look at some answers as we go along.

Now let’s look at the question of why the companies are even talking of adopting CSR if they already have not yet. Some firms believe in CSR. And they have doing so even before the terms were coined. When we look at what the Tata’s have done in the city of Jamshedpur we can very well appreciate the fact that for some firms this entire discussion about CSR is utterly useless. They just do not how firms can ignore CSR. It is in their blood and they really do not know how to work without this. Hats off to them first.

Then there are some Companies that are making profits and also contribute to some, although obviously not all, aspects of social development. They believe that surely every company should not be expected to be involved in every aspect of social development. That would be ludicrous and unnecessarily restrictive. They believe that for a firm to be involved in some aspects; will make its products and services more attractive to consumers as a whole, therefore making the company more profitable. There will be increased costs to implement CSR, but the benefits are likely to far outweigh the costs.

Then there are the third types of companies which do not care and which do not intend to care about CSR. We are not really concerned about these kinds of companies since we know from very live and vivid examples of Enron, Tyco and WorldCom about how companies just disappear from the horizons when they do not do what is required of them. Let’s wish them the best of luck and continue.

We are interested in the second category of companies and to a lesser extent the first ones because they are into CSR and we want to know what makes them do what they are doing.

Some critics of CSR, such as the economist Milton Friedman, argue that a corporation's principal purpose is to maximize returns to its shareholders, while obeying the laws of the countries within which it works. Others argue that the only reason corporations put in place social projects is utilitarian; that they see a commercial benefit in raising their reputation with the public or with government. The key challenge here is the rule of corporate law3 that says that the organization should not do anything that decreases its profits. Because of this, it has become clear that a CSR activity generally can only be effective at achieving social or environmental outcomes to the extent that it maximizes profits. This requires that the resources applied to CSR activities must have a higher return than those resources could obtain if applied anywhere else. This means that the possible scope of CSR is drastically narrowed.

This means that the stakeholders are primarily shareholders and the employees and to a certain extent the market and the rest have to deal with the remaining few scraps. But is this a problem? Definitely not. When we look at the various advantages accrued by the initiatives to the organization and to the stakeholders we see that it is definitely a win-win situation, even if the firm gains more than the others. When we take the example of ITC e-Choupal and look at the advantages it has given to the Indian farmers, we can really overlook the issue that in essence ITC is only trying to gain the suppliers market and strengthen its own distribution network for getting raw materials smoothly. Proponents of pure CSR might argue that the purpose behind the initiative should be development and not profit. But I would argue that it is better that the companies are doing something and getting returns in exchange while making a important contribution than just keeping to their own and just sticking to the laws of the land while doing business.They are the ones with the best of talent at their disposal which can be used effectively for such purposes and if they are making profits in a socially responsible manner they should be lauded and made examples of. Let’s be happy that at least there is something that is making these firms do the work they are doing here.

Tata’s are a dream but these companies are also not exactly nightmares. Let’s at least support them in their endeavors.