Introduction
In recent years, firms have embraced the idea of aligning their operations to societal norms and values. Firms conduct their businesses in ways, which maximize profits within specified regulatory frameworks that address environmental and social concerns. Thus, corporations often implement strategies that support their business goals and address the interests of their stakeholders. Besides legal and financial responsibilities, corporations have developed ethical codes and principles that guide their social responsibilities.
Corporate social responsibility (CSR) represents one of the ways corporations achieve ideal ethical standards by addressing the social, economic, and environmental concerns of the stakeholders. However, the concept of CSR is an ambiguous one given that companies use different utilitarian and unilateral approaches in their interaction with stakeholders. As such, CSR is largely a private self-regulation affair. From a legal standpoint, a firm is required to adhere to specific ethical codes in its CSR activities.
However, since adhering to these ethical codes is voluntary, the CSR approaches used by companies differ in many respects. An effective CSR approach enhances customer satisfaction (healthy society), reduces turnover, improves a firm’s reputation, and avoids retaliatory lawsuits. In this report, the writer uses various examples to illustrate the different meanings of CSR, the effectiveness of self-regulation, and the ethical theories in business.
Definitions of CSR
CSR refers to the legal, ethical, and financial obligations of a firm in the societal context it operates. It is a firm’s societal role concerning adhering to the norms, values, and expectations of the society at a given time. There are four different CSR levels (Carroll’s CSR model): ethical, legal, economic, and philanthropic. The meaning of CSR is not universal. In other words, the meaning attached to each CSR level depends on a firm’s geographical location (country) or industry. Ethical responsibility depends on the local ethical values and expectations, which vary from one region to another.
About legal responsibility, stakeholders in Europe perceive the state as an important player in the enforcement of rules while in the U.S. state involvement is treated with much skepticism. Economic responsibility approaches also differ from one region to another. In the US, firms often focus on their shareholders while in France firms have a primary social responsibility to address the needs of their staff. Indian firms, on the other hand, focus more on local community development.
Moreover, in Europe, firms are required to give to the community (philanthropic responsibility) through established legal frameworks while in countries such as the U.S. and China the society expects companies to give to local charities. Most firms have established ethical codes and standards such as the FTSE 250, which underscores their commitment to CSR and quality practices. Although quality differs from one firm to another, establishing ethical codes ensures that a company embraces best CSR practices to avoid retaliatory lawsuits.
Besides publishing ethical codes, companies use several self-regulation approaches to promote transparency and accountability in their operations. Most firms have a designated compliance officer who addresses the concerns raised by each stakeholder group. Also, elaborate code enforcement procedures, offense response mechanisms, and monitoring systems help prevent unethical practices. Some firms provide guidelines for resolving investor/stakeholder conflicts. Corporations use these approaches to regulate behavior and define their ethical, legal, economic, and philanthropic responsibilities.
The Classical Theory of a Firm and the Friedman Doctrine
The classical theory of a firm holds that each stakeholder (the individual affected by a firm’s business operations) has a stake in the company. From a legal perspective, stakeholders have a stake in the company as enshrined in legal contracts. The management has a role of ensuring a company’s operations meet the interests of the stakeholders (managers, customers, the local community, and employees). To achieve this, the company must act responsibly in its operations. Moreover, stakeholders expect a company to take part in the resolution of relevant community issues. If it fails to take any action, stakeholders often respond negatively to its business operations. Conversely, responding appropriately to social and community issues creates a healthy society, which is essential in business.
Milton Friedman asserts that a firm always conducts its business in the interests of its owners. This implies that a company’s main objective is to increase its profits. Citibank, a financial service company, applies this doctrine in its expansion to overseas markets. However, the company has founded many charity initiatives through the Citi Foundation (philanthropic responsibility). Similarly, Total Oil/Gas Company embraces the principle of ‘good corporate citizenship’ in its business operations (ethical responsibility). Although these companies primarily aim to grow their revenues and profits, they have a social responsibility of promoting sustainable development of the communities in which they operate. Citibank uses a philanthropic responsibility approach while Total Gas Company uses the ethical approach in its CSR activities.
The two CSR approaches (philanthropic and ethical) reduce the negative effects of a company’s business operations on its stakeholders. CSR also helps these companies to be more responsive to the interests of their key stakeholders. For example, Citibank’s focus on philanthropy and public engagement allows the company to ensure that its activities have a positive impact on the society. On the other hand, Friedman’s doctrine helps companies to maximize benefits by investing in projects that have societal and economic benefits to the stakeholders.
In this case, the responsibility of the company relates to the maximization of profits for its shareholders. The two firms (Citibank and Total) consider the economic returns as part of their social responsibilities. Thus, the companies’ CSR activities are designed to help the firm achieve projected sales.
The consequentialist ethical approach states that a morally acceptable action is the one whose results are desirable. On the other hand, the utilitarian consequentialist approach considers an action to be morally acceptable if it brings pleasure to the greatest number of persons. Companies conduct a cost-benefit analysis of an action to determine whether it causes more pleasure or pain to the stakeholders. In this regard, a firm’s CSR activity must bring more pleasure to all stakeholders.
Citibank ensures that its business activities and philanthropic initiatives have a positive impact on the environment and the society. Additionally, through public engagement, Citibank ensures that its activities result in more benefits for the community. On its part, Total creates positive relationships with its stakeholders to promote greater acceptance of its activities. The firm also contributes to social and economic development of the community.
Rationalizing Unethical Behavior
Often, firms evaluate the morality of an act based on its outcome, not on the way it is conducted (consequentialist approach). Actions such as preferential treatment of stakeholders, misuse of power, negative advertising, sabotage, anti-competitive practices, and predatory pricing infringe on the rights of the stakeholders. Firms interact with many social forces, including investors, customers, and communities. These stakeholders create a positive environment for firms to conduct their businesses. Thus, unethical conduct or actions affect the way a company conducts its operations in any given society.
For instance, the BBC’s revelation of Nike’s child labor practices in the late 1990s led to widespread boycotts by customers. The BBC’s report revealed that some of the employees in Nike’s Cambodian factory were children. Although the company later increased the minimum age for new employees, its reputation was severely damaged by this revelation. To reclaim its image, the company spent huge sums of money in brand recovery and advertising.
Nevertheless, the new changes (better working conditions) benefitted the employees as the key stakeholders in the company. The decision by Shell Oil to drill an oil well in the North Sea also led to mass protests by environmental conservation agencies, including the Greenpeace movement. The protesters claimed that the excavation plan would have adverse effects on the environment. They called for a consumer boycott of the company’s oil products and services, which affected Shell’s reputation and revenue. Moreover, the negative media campaign against Shell’s plan eroded investor confidence, which resulted in a decline in its share price.
These two examples illustrate how good business ethics and CSR promote the brand image of a company. This shows that companies have a social responsibility to effect positive societal change, which allows them to make profits. On the other hand, unethical business conduct can negatively affect the society and the company. Social groups evaluate company operations and decry any unethical conduct by calling for protests and consumer boycotts to punish firms whose activities threaten sustainable social and economic development.