Corporate social responsibility - a business case

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CSR  _                        

“The role of business has changed dramatically in the last 15 years. Discuss how and why there might be a business case for companies to change how they operate in todays’ world with regard to sustainability and corporate responsibility”

Introduction

What is CSR?

In the planet we live on today, demand is increasing while resources are decreasing. Earth is finite, and we have to live within these natural boundaries.

In order to have a better understanding of this paper let us agree on the three main pillars that CSR relies on: Social, Economical & Environmental. This is the holy trinity of CSR embracing the concept of “enough for all forever”.

Nowadays it is hard to find firms who disengage in CSR. Turning to the wide majority of MNC’s homepages will prove this point But why do companies care? What is the role of business in this?

Role of business

According to the well-known economist Friedman, “the role of business is to do business”. This view makes sense in a world where short-termism is valued and desired, and where managers face huge pressures to increase shareholders value. However, we have seen a shift from merely doing business, to helping society by caring for the wider community. This shift has in recent decades embraced a new level. The private sector has increasingly been replacing the role of the state in its attempt to cater for the needs of citizens.

Why have we seen a change?

Change can be achieved due to the significance of the power and impact that MNCs have had in recent decades.

The acronym CSR has also been defined as: Corporate Scandal Response (Vogel, 2009). Indeed, corporate scandals have been increasingly mediatized and criticized by NGOs and the public in recent years - Shell’s dumping in the sea, or Tesco’s horsemeat scandals are merely two examples. Additionally shareholders and stakeholders are demanding change and transparency. Big brands such as Nike, MacDonald’s, IBM, Coke, Levi’s and others all have the “CSR-related reputations”.

Today the technology allows for even quicker and stronger spreads of information. Big firms see themselves having to respond to criticisms and enhanced expectations. One of BP’s oil spill accidents in the Gulf of Mexico fostered a loss of $32 million in brand value within a day. This shows that if businesses want to protect their valuable brands then change is crucial. This leads to the emergence of a business case for CSR.

Why do we need a business case to be responsible?

Firms need to shift away from a patronising to a more holistic approach to CSR. Resources are scarce, population is growing and not every state has the power and means to implement good regulations. It is widely acknowledged that the environment requires protection but still advocate that markets should remain free. How can you achieve this without a strong government?

When states are either unwilling or unable to respond to major threats, firms see an opportunity, or even an obligation, to tackle these issues whilst still maximizing profit, as this remains businesses’ core goal. When there are no “rules of the game”, businesses have to take initiatives and include CSR as one of businesses’ key realms. IKEA’s CSO Steve Howard let us know that CSR has moved from something “nice-to-do” to a “must-do” (but still nice to do).

The Business Case

When the desire to do good is not enough – the normative case- let us see how firms can do well by doing good. Apparently there is a market for virtue, and it pays for firms to act responsibly (Vogel, 2009). By embracing the business case for CSR firms can help save the world while increasing their profits.

The traditional view sees CSR as a trade off for profits; a cost for the firm. But what CSR really is, is an investment. Once implemented it will arguably lead to increased value for firms and deliver visible business results.

The business case for CSR enlightens and reflects self-interest, while creating “Shared Values”; economical benefits and creates value for society. By combining and genuinely embracing the economy, the environment, and equity, this will affect firms’ bottom line, or more specifically; the triple bottom line.

Firms should have coherent CSR strategies and engage in issues that are aligned with their business values and identity; issues that make sense to them.

This is a new business-model that requires new leaders with a long-time focus, which is why CEOs should be value-driven. Implementing such systems takes time due to their novelty and complexity. Indeed, the business case is key both to the environment and to the well-being of a given firm. It is by saving the world that firms will make money.

Business guru M. Porter argues that because resources lie within businesses, they are the sole creators of wealth and thus the key drivers of change. Overall, instead of blaming firms for perpetuating social issues, we should rather see them as solutions, operating in a higher state of capitalism.

Let us turn to the main arguments for the business case laying out the means through which CSR can foster profit.

As we know CSR is an investment that is beneficial in the long-run. It does so by reducing costs and increasing revenue. It has been proven that Corporate Social Performance is positively correlated with Corporate Financial Performance. The International Energy Agency has also published numbers in favour of CSR; in 2014 for the first time emission had not dropped due to an economic downturn, on the contrary had flattened with an economic growth of 3%. This demonstrates that growth and emission diminution can go hand-in-hand.

Stakeholders’ involvement is key to a good sustainable business and can help businesses in several ways; Employees often represent the biggest part of businesses so it only makes sense that they would want to feel part of something bigger and hence increasing their job satisfaction. Satisfied employees tend to put more effort in work and thus increase firms’ productivity (Edman). It is shown that the new generations of employees are increasingly looking to work for responsible firms; the firm’s values have to be aligned with their own personal beliefs (Backhaus et al. 2002). CSR can help with employees’ attraction, retention and motivation. They will be proud of working for this responsible firm, and turnover will thus decrease. Indeed Starbucks has one of the lowest turnover worldwide arguably due to CSR. Employees are purpose-driven, rather than profit-maximizers like the traditional view puts it, and hence will work harder for a meaningful job, unleashing creativity and innovation (Ariely).

It has also been shown that responsible firms are more willing to disclose and report their activities. This reduces information-asymmetry between firms and investors, and in turn lessens agency-problems and hence cuts litigation costs for the firm. Investors are more willing to invest in a responsible and more transparent firm because it is seen as less risky. Scandals as we know can be extremely harmful for the firm’s stock price and for investors. Indeed, CSR creates an easier access to capital.

Consumers reward responsible firms, and firms can indeed charge premium prices. Consumers recompense values and are willing to pay up to 5-10% more for sustainably made products. It makes them feel part of something bigger too, as they engage in meaningful consumption. In economic downturns, responsible firm share prices dropped 1.3% less than irresponsible firms (Peloza).

Regarding relationships with suppliers, stronger ties can be built because suppliers are aware of firms’ long-term focus. Moreover, best practice can be shared, and common-goals set allowing them to reduce costs even more.

Implementing a CSR strategy will allow the firm to reduce all kind of costs; from energy saving, to waste reduction.

The business case helps improve a firm’s reputation, public relation and brand image.

CSR can be used as a tool for differentiation, and will lead firms into new-markets and great new-opportunities.

By implementing CSR firms can get ahead of regulations, and good-practices can leave out any third-party involvement such as trade unions, governments or the media. This allows the firm to rule its business independently without any additional regulation.

Ultimately firms with strong CSR strategies are better off because of reduced costs, increased efficiency, lower constraints on capital, better PR and overall the improving of firm value that can be reflected in its share price. “Sustainability is just smart business”! (Willard)

Firms successfully using the business case

Let us have a look at a few numbers and real-life cases of success.

The first company that comes to mind is of course Interface Carpets; leaders in CSR, Interface’s founder Ray Anderson was held as America’s greenest CEO back in 1999. Interface changed its business model and moved to a circular-economy producing carbon-neutral carpets. They are aiming for a zero-waste business by 2020. Interface has seen its profits triple since the introduction of its sustainable business. Some other companies have value-driven founders such as The Body Shop or Ben&Jerry’s. Pantagonia is also a value-driven firm with the mission of zero-waste. These firms are increasingly growing and earning higher profits over the years.