Undergraduate Business Essay

Title: The illusion of seeking growth in profitability through corporate social responsibility

Contents

Introduction. 2

Justifications for CSR. 3

Indirect, intangible, long-term benefits of CSR. 5

The case against CSR. 6

The causation problem: Does CSR lead to the creation of higher profits?. 8

Conclusion. 9

References. 11

Introduction

Corporate social responsibility (CSR) is one of the topical issues in business circles today. CSR is generally assumed to increase the profits of companies. For this reason, many companies are increasingly engaging in it. However, not many managers and executives are aware of  findings of research on this matter. Research shows that although CSR may lead to growth in profit, this is not always the case (Orlitzky, 2003). This business editorial sets out to demonstrate that in most cases, the quest for growth in profitability through CSR is largely an illusion. The thesis of this paper is that companies can derive profitability from CSR but this is not always the case.

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This business editorial discusses both cases for and against CSR. The first reason to support CSR is that it is ethically and altruistically justifiable. However, even in this context, firms must respond to the highly competitive world of business by taking into consideration their business needs. The second reason is that CSR has many benefits, only that they are indirect, intangible, and long-term. In contrast, there are three reasons why a business case against CSR is possible. First, the idea that a business enterprise has a duty to address the ills of society is fundamentally flawed. It is nothing more than an illusion. Secondly, many problems relating to causation in CSR are yet to be addressed. Thirdly, most firms continue to struggle to show return on investment in CSR. This business editorial sets out to use these arguments to show why the quest for growth in profitability through corporate social responsibility among businesses is largely an illusion.

Justifications for CSR

In recent years, many companies have discovered new reasons for paying attention to CSR. Some of these reasons include reduction in risk and cost, efforts to maintain legitimacy, the need to gain competitive advantage, and the achievement of win-win outcomes for society and business in the value creation process.  Above all these reasons, many companies are increasingly adopting CSR because it is the right thing to do. They are simply being driven by ethical and altruistic reasons.

This popularity of CSR has led to the emergence of related concepts, including corporate citizenship, stakeholder management, business, ethics, sustainability, corporate social performance, and corporate responsibility. All these concepts are used to refer to the investments and practices being put in place by business enterprises in efforts to promote socially responsible causes. The businesses that engage in these activities hope to derive certain tangible benefits from their investments.

Many business scholars continue with efforts to determine whether a business case for CSR is plausible (Orlitzky, 2003). In many cases, philosophical questions tend to dominate in this research. It is assumed that the primary reason for engaging in CSR is that it is the right thing for a business to do. It is a demonstration of ethical practice and altruism. Controversy relating to this notion is often triggered by assertion by some economists that the corporation should have no business pursuing any interests other the economic interests of the shareholders (Godfrey, 2007). Opponents of this view argue that the corporation should put into consideration the interests of different stakeholders, including suppliers, customers, employees, and local community. This suggestion is based on the view that the goal of durable value creation for shareholders cannot be achieved if the interests of different stakeholders are not put into consideration.

Support for CSR has also been rendered from a more pragmatic perspective, in which case the rationale is to make up for the negative effects of the corporation’s business activities on local communities. However, this has not stopped critics from raising the all-important question of whether CSR makes any business sense. This question is of utmost importance to senior executives of corporations that spend millions on CSR projects. Ultimately, these senior executives, must be ready to bear the responsibility as far as the effect of corporate social responsibility on the bottom line is concerned.

            In this debate, efforts are being made to determine whether a positive relationship exists between corporate financial performance (CFP) and corporate social performance (CSP). In many cases a positive relationship has been said to exist. This provides a crucial justification for CSR. It also provides a lot of inspiration to the investment community, who become keen to invest in the so-called Socially Responsible Investment funds (SRI). These efforts are also being viewed in light of new business trends whereby one of the best ways of raising capital is by promoting the belief that there is a strong correlation between financial performance and social performance.

            Prior to the emergence of the notion of SRI, focus was primarily on ethical and altruistic rationales.  As market trends keep changing, emphasis is shifting towards performance-driven arguments aimed at justifying the need for CSR. In other words, focus has gradually been shifting from purely social considerations to economic factors. Nevertheless, corporations continue to face immense pressure from their peers to behave more philanthropically. However, no research findings have indicated that the profitability of a corporation can increase simply because it is more generous than its competitors. Such claims would easily be viewed as being fundamentally flawed.

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            Although many efforts have been made to prove a business case for social performance, no single study has demonstrated a positive relationship between CSR activities and improvement in bottom line. However, claims about CSR being a viable business choice have continued to persist. The claims are based on the argument that CSR is an ideal tool for implementing cost and reducing risk. It is also viewed as a tool for enabling businesses gain competitive advantage. Other benefits of CSR include value creation, and the development of corporate legitimacy.

Indirect, intangible, long-term benefits of CSR

            The claim that CSR brings about indirect, intangible, long-term benefits to the corporation tends to stir less controversy. This explains why the notion of corporate citizenship has become widely acceptable in business and academic circles alike. In the subject of corporate citizenship, emphasis is on the long-term wellbeing of companies. The assumption is that although most of the companies may struggle to demonstrate a return on investment from CSR projects, they are destined to derive numerous long-term benefits.

            In corporate citizenship, the scope of discussion covers economic, environmental, and social impacts that extend beyond compliance and philanthropy. This extended discussion reaches out to indirect and intangible benefits. Sometimes, a distinction is made between the direct benefits that businesses gain from making improvements in environment-related activities such as waste reduction, and increasing the level of energy efficiency.

            Four successful companies, Qualcomm, HP, Cisco, and SAS sponsored a study aimed at examining the impact of corporate citizenship on companies’ bottom line (Salzmann, 2005). Some 566 respondents in the U.S were surveyed, and the findings were supplemented by interview responses from 16 experts in corporate citizenship and company executives (Salzmann, 2005). The findings of this study showed that intangible benefits tend to be greater compared to tangible ones (Salzmann, 2005). However, some exceptions were identified, whereby certain foundations may need to be put in place before a corporation can achieve profitability by engaging in corporate citizenship.

            The uncertainty relating to the ability by corporate citizenship to contribute to growth in profitability makes CSR a risky undertaking. This is especially true given that the most companies derive motivation to engage in corporate citizenship from the need to save costs, increase profits, and grow revenue. The risk further increases because companies must make significant investments in CSR to achieve meaningful, tangible benefits. Moreover, due to the competing demands faced by senior executives with regard to resource allocation, most companies find themselves adopting a fringe, reactive approach to CSR. This further limits their likelihood of attaining meaningful bottom-line gains from their CSR activities.

The case against CSR

            The primary objective of companies is to make profit and create greater value for shareholders. The notion that the companies are responsible for addressing social ills seems fundamentally flawed. This view is enhanced by fact that direct, tangible, and short-term benefits of CSR are not easily recognizable. In such a situation, businesses that pursue CSR objectives face the risk of ignoring the real solutions to the problems being faced by society.  

            It may not be entirely agreeable for companies to claim that they are in business not just for profits but also for a greater social purpose. This is because the primary responsibility for a company is to sustain its operations and continue growing in an increasingly competitive environment. Pressure from shareholders is likely to drive business managers into adopting those CSR projects that are compatible with the overall business strategy. The solutions provided by such companies may not necessarily serve the best interests of society. This explains why CSR efforts face the risk of imposing the wrong solutions to problems in society.

            Although the idea of a greater social purpose is very appealing, it is also illusory. CSR seems like an illusion since it takes the place of a better solution. The solution in this case is that of aligning companies’ profits with public interests. When this alignment occurs, companies simply need to work hard at increasing their profits and social welfare will automatically be increased. Conversely, many companies operate in an environment of antagonism between social welfare and the quest for profitability. In such situations, proponents of CSR act under the illusion that businesses will voluntarily act in the interest of the public. This essentially means that the businesses would also be acting against the interests of shareholders. Even if no competing needs of business strategy existed, a manager of a company would find himself in an awkward position by trying to promote society’s interests at the expense of shareholders’ interest. Such an undertaking is bound to be shroud in ineffectiveness, whereby inappropriate solutions to social problems are suggested.

The causation problem: Does CSR lead to the creation of higher profits?

            The causation question remains  unanswered. It is unclear whether high profits facilitate greater spending on CSR or CSR itself leads to higher profits. The most commonly held view is that it increases the profits of the company. However, these claims are not based on findings of empirical studies. What research shows is that CSR may improve profits. This means that certain conditions have to be met before the goal of growth profitability can be achieved.

            The indirect connection between CSR and profitability is normally based on the view that respect for local communities will lead to higher sales. Similarly, it is assumed that efforts to promote employee welfare will lead to employee loyalty and retention of the most talented personnel. By addressing sustainability issues, companies are also confident on improving inefficiencies in addition to lowering costs.

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            Manescu (2010) argues that although CSR does not have a negative impact on profitability, there are only a few cases where it tends to have a positive effect. Manescu adds that even in such cases, the effect tends to be rather small and insignificant. Baron (2011) expresses a different view, which suggests that the impact of CSR on profitability varies from one industry to the other. According to Baron (2011), consumer industries tend to derive greater profitability because of engaging in CSR compared to “industrial industries”. Carroll & Shabana (2010) observe that on the overall, the available empirical studies have produced mixed results. It should also be noted correlation between CSR and profitability in these studies is positive but weak (Carroll & Shabana, 2010).

            According to Orlitzky’s (2003), social responsibility efforts are likely to pay off in terms of profitability. This study is unique because it employed statistical methods to establish the relationship between corporate social performance and corporate financial performance. Although this relationship was established, the issue of causation remained unresolved. The study did  not answer question of whether higher profits enable companies to spend more on CSR or CSR is the one that creates higher profits in the first place. As long as the issue of causation remains unresolved, CSR efforts will continue to be perceived by a section of the scholarly world as an illusion.

            Some rich companies spend huge sums of money on CSR simply because they can afford it. Others do so simply because it is the latest business trend. These are two different scenarios that should be examined from different perspectives by business scholars. This will greatly contribute to the resolution of the causation problem. The researchers may also want to examine the tendency by many companies to engage in CSR rhetoric instead of addressing core issues affecting local communities.

Conclusion

            This business editorial has analyzed the relationship between CSR and profitability. Virtually all businesses want to be associated with social responsibility efforts. However, no clear relationship between CSR and profitability has been established. The paper concludes that the quest for profitability through CSR is illusory for several reasons, one of them being that the ethical and altruistic justifications, though possible, are not compelling. This is simply because companies must first consider their own business needs to survive in today’s competitive world. This struggle to survival compels them to align their CSR activities with overall business strategies. In such situations, the companies are likely to impose irrelevant solutions to problems of society.

            The illusion of engaging in CSR is further perpetuated by lack of clarity regarding the direction of causation as far as the effect on profitability is concerned. In studies where a positive impact has been found to exist, the correlation has been weak. Therefore, it is not clear whether high profits facilitate greater spending in CSR of CSR is the one that first and foremost leads to the creation of higher profits. In the meantime, many firms continue to struggle to show return on investment from corporate social responsibility. In cases where such a return is shown, the benefits tend to be indirect, intangible, and long-term.

References

Baron, D. (2011). The Economics and Politics of Corporate Social Performance. Business and Politics, 13(2), 115-138.

Carroll, A & Shabana, K (2010). The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice. International Journal of Management Reviews, 12(1), pp. 85–105.

Godfrey, P (2007). Researching Corporate Social Responsibility: An Agenda for the 21st Century. Journal of Business Ethics, 70(1), 87-98.

Manescu, C. (2010). Economic implications of corporate social responsibility and responsible investments. New York: McGraw-Hill.

Orlitzky, M (2003). Corporate Social and Financial Performance: A Meta-Analysis. Organization Studies, 24(3), 403-441.

Salzmann, O (2005). The Business Case for Corporate Sustainability: Literature Review and Research Options. European Management Journal, 23(1), 27–36.

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