CSR: Does it make economic sense?. Bala Ramasamy Professor of Economics China Europe International Business School Shanghai. P.R. China. The business of business is business. - PowerPoint PPT Presentation
CSR: Does it make economic sense?
CSR: Does it make economic sense?Bala RamasamyProfessor of EconomicsChina Europe International Business SchoolShanghai. P.R. ChinaThe business of business is businessThe businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades. In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical customMilton Friedman, The New York Times Magazine, September 13, 19702More recently, Karnani (2010)Companies have a responsibility to their shareholders to do well; individual people as citizens have a responsibility to do goodBerkshire Hathaway does well; Warren Buffet does good, Microsoft does well; Gates does goodKarnani, A. 2010. Doing well by doing good: The grand illusion, University of Michigan, Ross School of Business working paper No. 1141.
3CSR: Good or Bad from a welfare perspectiveCSR can be effective social policy instrument:Companies with most acceptable practices will have more satisfied customers, employees, owners, and will hence thriveCompanies have more expertise than individuals and governments to tailor products and services to serve particular aimsThey have a better understanding of trade-offs, technologies and trends in society, and can act in a more rational and realistic way than governmentThey can more easily engage in experimentation than government and NGOs (entrepreneurship/ innovation)
CSR not socially optimal, firms have a different role:CSR is not the purpose of firms; they should optimize their business; any rents should go to individuals who can then decide about the purposeCompanies may skew societal standards to their own needs (regulatory capture, direct/indirect political influence & CSR used as barrier to entry)Companies tend to be socially conservative by nature, will only experiment if there is a clear profitThey are not democratically elected, it should be up to government to delivery social services and be accountable for thisCompanies are not experienced in evaluating social benefits; they may not choose the best approach
Kolk, A., Multinationals and CSR, Politeia, forthcomingWhat is Corporate Social Responsibility (CSR)?EUs Definition:a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis as they are increasingly aware that responsible behavior leads to sustainable business success.
Business for Social Responsibilitys Definition:operating a business in a manner that meets or exceeds the ethical, legal, commercial, and public expectations that society has of business.
CSR is about how you earn your money and NOT about how you spend your money (As a social investment)
55The Responsibility Pyramid (Carroll)6Legal ResponsibilitiesEthical ResponsibilitiesPhilanthropic ResponsibilitiesEconomic ResponsibilitiesIt is important to perform in a mannerconsistent with expectations of societalmores and ethical norms.It is important to perform in a mannerconsistent with the philanthropic andcharitable expectations of society.It is important to perform in a mannerconsistent with maximizing earnings pershareIt is important to perform in a mannerconsistent with expectations of governmentand law.make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom MF6CSR in Developing Countries
7CSR in Developing Countries
8CSR and National Competitive AdvantageNational competitive advantage is based on firms competitive advantage (Porter 1980, 1985).CSR and positioning strategies (cost reduction and/or differentiation). CSR embedded in a cost leadership strategy can be used at the national level in ways that lead to cost reductions, and thus directly affect national productivity. Eg. more efficient and effective utilization of resources, such as raw materials and energy, or even more productive use of labor can lead to cost reductions.CSR practices that promote open communications with stakeholders and transparency which can lead to greater trust in business and increase social capital; hence facilitate the self regulation of industry. Self-regulation significantly reduces the costs of state-enforced.CSR embedded in a national differentiation strategy can be used to enhance the reputation of the country, boost exports and attract investments. Countries can leverage CSR to promote a responsible reputation, hence engender and improve competitive advantages. Nations can employ a niche strategy and focus on increasing their market share in specific market opportunities (e.g.low carbon technologies). CSR and entry deterrence strategies. CSR might be used as a strategic trade policy and create non-tariff-barriers to trade. For example, countries promoting a responsible reputation might raise their businesses CSR levels so high that they act as non-tariff-barriers to trade with other countries. 9Porter (1980, 1985) examined numerous strategies employed by firms to appropriate value such as positioning (cost-leadership, differentiation, niche) and entry deterrence strategies. Such ideas are relevant for nations too. Here we do so, by focusing in particular on the role of CSR-basedstrategies.
CSR and positioning strategies. CSR embedded in a cost leadership strategy can be used at the national level in ways that lead to cost reductions, and thus directly affect national productivity. For example, many CSR practices contribute to a more efficient and effective utilization of resources, such as raw materials and energy, or even more productive use of labor, and hence contribute directly to cost reductions (Esty et al., 2005; Porter & van der Linde, 1995).
Also, CSR practices that promote open communications with stakeholders and transparency, can help society enhance trust in business and increase social capital; hence facilitate the self regulation of industry. Self-regulation significantly reduces the costs of state-enforced regulation (EC, 2008; Zadek, 2006). Finally, CSR policies can foster unit cost economies by promoting a more flexible macroeconomic and institutional structure through partnerships with stakeholders, or new forms of joint governance (e.g. the UN Global Compact), and by contributing to the wider societal education and learning (Zadek, 2006).
Another positioning strategy is differentiation. CSR embedded in a national differentiation strategy can be used to enhance the reputation of the country, boost exports and attract investments. Countries can leverage CSR to promote a responsible reputation, hence engender and improve competitive advantages. Finally, nations can employ a niche strategy and focus on increasing their market share in specific market opportunities (e.g.low carbon technologies).
CSR and entry deterrence strategies. MacGillivray et al. (2003) argue that CSR might be used as a strategic trade policy and create non-tariff-barriers to trade. For example, countries promoting a responsible reputation might raise their businesses CSR levels so high that they act as non-tariff-barriers to trade with other countries. Although this might be beneficial for many responsible countries, it might not be the case for others that cannot keep up with the markets CSR standards.
On the basis of our discussion so far, we propose that CSR processes embedded in the value appropriation strategies of firms and nations, can have a positive impact on national competitiveness, after controlling for other drivers of competitiveness. Therefore: Hypothesis: CSR has a positive impact on national competitiveness.
9Why CSR?GratitudeSociety provides the company with its resources human capital, legal systems, infrastructure, health facilities etc. In many cases, the tax they pay does not match the benefits they get from the resources offered to them. As a matter of gratitude, a company needs to share its bounties with the rest of society.CitizenshipEven if it pays a considerable amount of corporate tax, it is duty bound to play its role as a corporate citizen since it is a legal entity within the community. After all, business and organizations have a privilege denied to ordinary mortals they dont have to die this makes them especially responsible. (Handy)Responsibility to powerCompanies are larger than individuals, with greater access to the resources and power that they wield in the community. With power comes responsibility. In this regard, companies act as stewards of world resources, utilizing them in a way that will benefit both this and latter generations.Firms report that they are socially responsible because:Managers think its the right thing to doManagers believe that it enhances financial performanceStakeholders pressure firms to behave socially1010A more pressing need for CSR:For the survival of CapitalismHow much confidence do you have in:the Government? Major Companies?
Trust in GovernmentTrust in Major CompaniesHow much confidence do you have in:the Government? Major Companies?
The Great Recession and the surge in public antagonism have exacerbated the friction between business and society.Governments feel compelled to reach ever deeper inside businesses to exert control and prevent another crisis.
For Capitalism to survive:Dominick Barton, MD McKinsey, HBR March 2011Business and finance must jettison their short term orientation and revamp incentives and structures in order to focus their organizations on the long term.Managers must infuse their organizations with the perspective that serving the interests of all stakeholders(employees, suppliers, customers, creditors, communities, the planet) is not at odds with the goal of maximizing corporate value.Public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards ability to govern like owners.1414++RisksCustomer de-selectionPreemptive regulationLoss of market shareReputation damageFines, penaltiesOpportunitiesEnhanced reputationProduct differentiationMotivated employeesReduced costsEntry into new marketsShareholder ValueStakeholder ValueUnsustainable(Value Transfer)SustainableValueUnsustainable(Lose/Lose)Unsustainable(Value Transfer)Managing in two dimensions represents a fundamental shift in how managers must think about business performanceExampleLeaded paintToxic additives in toysRace to the bottom activities(Environment, Worker exploitation) ExampleGenetically modified products RisksValue is destroyed for both shareholders and stakeholdersRisksViability of the company is questioned ExampleAvoiding offshore outsourcing like Keep Jobs in America Campaign Unfocused philanthropyExampleMengniu and cattle farmersReliance and mobile services1515SummaryThe assumptions of Friedman and Karnani are from reality markets are not completely free, markets do fail, resources are in the hands of a few, governments are incapable to tackling social issues.CSR is not merely philanthropy. It is how you go about making your profits.In developing countries, legal and ethical responsibilities are lacking.Businesses need to earn their license to operate, failing which, more regulations would emerge.16HappinessBASE=15431Satisfaction with lifeCountryCountryTotalFranceGreat BritainUnited StatesJapanAustraliaIndiaChinaCEIBSTaiwanHong KongMalaysiaGermanyTotalFranceGreat BritainUnited StatesJapanAustraliaChinaCEIBSTaiwanHong KongMalaysiaGermanyVery happy28.00%36.40%50.80%34.40%29.20%35.40%29.00%21.20%25.00%21.60%6.90%36.50%19.90%Dissatisfied1.90%1.30%0.80%0.50%0.90%1.20%3.70%10.00%2.80%1.80%1.40%0.70%Quite happy57.80%54.00%42.80%58.80%60.50%56.70%46.60%55.50%25.00%63.50%77.10%58.30%63.90%21.30%0.90%0.20%0.90%1.10%1.30%3.70%10.00%1.50%1.80%0.80%1.10%Not very happy12.40%7.60%5.20%6.40%9.20%7.20%21.70%19.30%25.00%11.90%15.50%5.10%14.60%34.70%3.90%1.00%2.00%3.80%2.10%4.40%10.00%3.40%3.90%2.30%3.20%Not at all happy1.70%1.90%1.20%0.40%1.10%0.80%2.80%4.00%25.00%2.90%0.50%0.20%1.60%43.40%4.10%1.70%3.90%3.50%2.80%4.30%10.00%4.20%6.20%3.40%4.40%Total15431 (100%)998 (100%)1039 (100%)1248 (100%)1066 (100%)1413 (100%)1995 (100%)2001 (100%)1001227 (100%)1245 (100%)1201 (100%)1998 (100%)515.00%13.20%6.60%7.30%8.50%8.10%11.30%10.00%17.30%15.40%12.10%11.10%611.70%10.60%9.40%9.70%15.80%8.60%14.20%10.00%16.80%21.90%19.20%9.70%719.80%21.90%20.60%23.10%20.30%21.90%12.50%10.00%17.70%19.00%23.90%18.90%822.60%26.60%33.30%28.30%27.90%32.40%21.80%10.00%21.40%17.80%22.10%28.20%910.30%10.80%15.50%17.60%13.50%13.40%10.10%10.00%5.70%6.80%7.70%15.80%Satisfied9.30%6.70%10.90%6.70%4.60%8.20%14.00%10.00%9.10%5.40%7.20%6.90%Total15401 (100%)1000 (100%)1038 (100%)1240 (100%)1080 (100%)1411 (100%)1959 (100%)1227 (100%)1244 (100%)1200 (100%)2048 (100%)Base for mean154011000103812401080141119591227124412002048Mean184.108.40.206.3220.127.116.11.46.87.1Standard Deviation2.051.91.611.721.811.822.42.061.931.791.87
TotalFranceGreat BritainUnited StatesJapanAustraliaChinaCEIBSTaiwanHong KongMalaysiaGermanyLess satisfied7.90%6.10%2.00%3.40%5.80%4.60%11.80%30.00%7.70%7.50%4.50%5.00%More satisfied42.20%44.10%59.70%52.60%46.00%54.00%45.90%30.00%36.20%30.00%37.00%50.90%
EthicalityCountryCountryGrand MeanTotalFranceGreat BritainUnited StatesJapanAustraliaIndiaChinaTaiwanHong KongMalaysiaGermanyturkey1.5196114367Justifiable: claiming government benefitsNever justifiable53.90%41.60%63.60%65.50%63.60%74.40%60.00%41.10%48.30%49.10%18.40%60.80%georgia1.6539450833210.30%12.90%11.00%8.20%10.20%9.10%-16.60%12.40%9.90%13.40%11.60%japan1.664877483138.00%11.20%7.00%5.30%9.80%5.70%-8.90%11.40%12.30%11.30%8.60%indonesia1.677284829546.60%5.30%3.80%2.00%4.00%2.00%16.70%4.30%6.20%6.80%11.80%6.20%egypt1.705940048456.90%11.60%5.60%9.50%5.00%3.90%-5.40%9.70%7.40%17.80%5.10%switzerland1.747523532865.00%3.90%2.20%2.50%3.00%1.50%11.10%6.30%3.60%4.60%10.80%3.10%ethiopia1.756802042372.80%4.80%2.40%1.70%1.40%0.90%-4.30%3.10%3.10%7.90%2.50%jordan1.798660662682.50%3.70%1.80%1.50%1.10%0.60%4.40%3.40%2.60%3.10%5.20%0.80%italy1.801500146891.00%1.60%0.60%1.10%0.70%0.20%-2.80%0.30%1.20%1.90%0.70%morocco1.84...