Business-Society Relations in Retail Value Chain (23E54000, 6cr)

17.9.2012Corporate social responsibility

Mika SkippariAalto University School of Economics

CSR: what does it mean?

• Different terms: Corporate (social) responsibility, corporate citizenship, corporate philantrophy…

• Wide definition (Steiner & Steiner 2009)– Covers firm’s market actions, externally mandated actions and

voluntary actions

• More narrow, generally accepted definition– Practices and actions of corporations that benefit society (e.g. improve

workplace conditions; environmental health) in ways that go above and beyond what companies are legally required to do

– Voluntary action of firms, seeking to adapt to values and norms of society

– Obying the law is not responsibilty action by definition!!

Changing views of CSR: towards a legitimate corporate activity

• In 1977, less than half the Fortune 500 firms even mentioned CSR in their annual reports.

• By the end of 1990s, close to 90% of Fortune 500 firms embraced CSR as an essential element in their organizational goal

• Since 2000 there has been a clear tendency towards activity-based thinking in CSR: Firms attempt to implement its CSR principles to all levels of its operations, ranging from sourcing to strategic planning and marketing

• CEO of HP-Compaq Carly Fiorina (2001): “New reality of business has emerged”

• CEO of General Electric Jeffrey Immelt (2004): “The world has changed”

Increasing attention towards CSR among top managers

• 70 per cent of CEOs in global firms thought CSR is vital to company’s survival (2002 survey of CEOs in global firms)

• 91 per cent of CEOs believe CSR creates shareholder value (2004)

• According to a survey targeted to CEOs of international firms (2007) only 4 per cent of the top managers perceive CSR as a waste of time and money.

• A survey targeted to Finnish CEOs (2007) shows the importance of social responsibility in their managerial work.– Motivating personnel was considered the most important task of

managers (83 per cent)

Increasing emphasis on CSR among global firms

Source: Economist 17.1.2008

Increasing public interest towards CSR

• Visibility in media has increased remarkably (Echo Research 2003): – Articles related to CSR increased from 377 to 2906

between 2000-2002 – Growth rate was 407 % in 2001-2002

• 30 000 sites and15 million internet pages that adressess CSR issues

• The number of social funds increased tenfold 1995-2005• However, CSR is not a totally new phenomenon!

Development of CSR in scientific discussion

• First signs of CSR issues in the 1950s– Howard Bowen (1953) ”Social responsibilities of the businessman”– Responsibility as a tool to fix the errors in liberal economic system

• Milton Friedman, New York Times 1970: “The social responsibility of business is to increase its profits”.

– Danger of managerial opportunism (greenwashing)– Managers are not capable of dealing with social issues – Opposed csr that is not related to economic benefits (business case for CSR)

• Enlightened self-interest (Baumol 1970, A new rationale for corporate social policy) in the 1970s

– Long-term interest of corporations is to advance societal welfare • Carroll (AMR, 1979): corporate social performance

– Expanded view on responsibility: economic, ethical and legal perspective • Strategic CSR in the 1990s: seeking for business case for CSR

– Integrating stakeholder management to csr (Clarkson 1995; Jones 1995)

CSR: Two approaches (David Vogel 2006, The Market for Virtue)

• Doing good to do good– Aims at charity and goodwill, corporatation does good because it feels it

is the right thing to do (socially)– Altruistic, ethical perspective: the aim is to enhance the well-fare of

society and communities, although it might not necessarily lead to improved economic performance

• Doing well by doing good– Strategic approach, in which firms engage in CSR in order to improve

societal well-being but also a firm’s competitive position– CSR has to create economic benefits and improve competitive

advantage

• Are these approaches contradictory? Is It possible for a firm to try to achieve both goals simultaneously?

The subjective nature of CSR

• Windsor (2006) refers to CSR as an‘embryonic and contestable concept.

• CSR is ‘appraisive or ‘valued, i.e. as few firms would claim to be ‘socially irresponsible the concept is not (just) an empirical one, but is inherently value-laden

– Contest within societies what is determined as responsible behavior– Legal boundaries are clear whereas informal norms and values are subject to

opposing views

• CSR is ‘internally complex entailing the balancing of economic, legal, ethical and social responsibilities

• Organizations are like human beings: selectively responsible (case by case)

CSR: a contradictory concept

• Critical view on CSR argues that moral and ethical issues should not be associated with business activities– Legal and economic responsibility of a firm is to make profits– There is constant and ongoing discussion among different

interest groups within societies what are the societal values and what is considered as responsible behaviour

• Firms are members of society, and they can’t survive in the long run if they contradict societal values

• But why there still exist tobacco firms or payday loan firms???

Different approaches to CSR among interest groups

• Perception of what is CSR varies across different actors. Thus, CSR is not easily codified or defined. Government, business, NGOs, consultants, shareholders, employees and consumers all tend to define CSR in different ways whether their intention is to endorse, encourage, manage or criticize it.

• Firms tend to emphasise the priority of economic responsibility• NGOs emphasise the role of social and environmental

responsibilities• Unions and politicians are worried about employment issues

• A key challenge for corporations: How much is enough? How responsible a firm has to be?

Whole Foods: is it responsible firm or not?

• Appriciated by markets– U.S. based grocery chain that has focused on selling natural and

organic food products– Fast growing, Fortune 500 company– Slogan: ”Whole Foods, Whole Planet, Whole People”

• BUT activists claim:– ”Only” one third of the products are organic– Aggressive growth has led many small organic stores to

bankrupcy

– Opposes fiercely unions

– Nick name ”Whole Paycheck”, ”Whole-Mart”

Wal-Mart: responsible or not?

• In early 1990s Wal-Mart was a small grocery retailer in US market. Market was dominated by established retailers such as (Albertsons, Safeway, Kroger, K-Mart).

• Wal-Mart started to develop the concept of Supercenters, which sold not only groceries but also many fast moving consumer goods (FMCG).

• Rapid expansion of supercenters: 9 supercenters in 1990, 888 supercenters in 2000.

• Wal-Mart revolutionized grocery markets in US, supercenters became the dominant business model, price competition increased.

• Wal-Mart was a vaunted example of economic responsibility: “most admired company in America” by Fortune, fast growing, biggest retailer in the world (1,8 million employees), over 7 bln customers in a year.

Wal-Mart: responsible or not?

• Increasing criticism towards W-M during the last decade– Over 30 local grocery chains went bankcrupt in US, complaining about

the hard competition by W-M • Critical discussion about Wal-Mart effect: huge effects on local,

national and global level– Wages below minimum level, misconduct of employees, aggressive

price competition towards suppliers, misuse of dominant market position, proactive political influence (e.g., election funding)

– Fishman, C. 2006. The Wal-Mart Effect and a Decent Society: Who Knew Shopping Was So Important? Academy of Management Perspectives, 20(3): 6-25.

– Freeman, R. E. 2006. The Wal-Mart Effect and Business, Ethics, and Society. Academy of Management Perspectives, 20 (3): 38-40.

• Recently W-M has tried to recover its reputation – See: Hemphill (2005), Rejuvenating Wal-Mart’s reputation. Business Horizons

(2005) 48, 11—21.

Social enterprise: Responsibility creates new forms of businesses and business models

• Social enterprise or a Non Profit Distributing Organisation (NPDO) is a form of business structure where, although profit is still sought, any profit is reinvested in services or business growth rather than being distributed to shareholders.

• The primary aim is to seek societal and environmental benefits• However, they are not charity organizations, they are run like

businesses

• Useful links– http://www.sosiaalinenyritys.fi/sofi_english– http://www.socialenterprise.org.uk/

Free-rider dilemma in conducting CSR

• Free-rider problem: as CSR has a character of ”public good”, a firm’s management might ponder, why their company should pay for the costs of producing social benefits (e.g., education to childen of developing countries), while their rivals might not necessarily do that, but enjoys the similar benefits

• One way to avoid this dilemma is to integrate CSR and political strategy

– E.g., Starbucks offers health security for all employees, and at the same time lobbies for national healthcare legislation that would require all firms to offer healt care to their employees

– Nike lobbies for international standards in employee policies, and has terminated its business relationships with all suppliers that use child labor

– The aim is to get rid off the disadvantage caused by their csr activities

Market forces of CSR: Civil regulation

• Various market forces, in the form of civil regulation, encourage and limit the practise of CSR

• Civil regulations = Consumer demand for responsibly made products, actual or threatened consumer boycotts, pressure from socially responsible investors, values held by managers / employees

• However, civil regulation cannot force companies to make unprofitable but socially responsible decisions, whereas government regulation can!

Key challenge to CSR: Contradiction between words and actions

Lähde: Just good business. Economist 17.1.2008

Contradiction between words and actions

Why there is ”Greenwashing”•Implementation of corporate values to all levels of organization is challenging and difficult

– Resistance to change: Established ways of conduct are difficult to change

•Market forces (e.g., cost pressures in sourcing) might be in contradiction with ideals of responsibility •Twisted logic of marketing: firms have incentive to provide an image as a responsible actor •And finally, subjective perceptions of values and csr in general lead to contradictions

Corporate reputation and csr

• Irresponsible activity or perceived contradiction between words and actions will harm corporate reputation

• Image is important in reputation-based issues: the balance between words and actions (in both positive and negative sense)

• It is not necessarily enough for a firm’s reputation that it perceives itself as a responsible actor: the opinion of key stakeholders is what counts!

Balance between words and actions

Promise little csr Promise a lot csr

Lots of csr activity

Little csractivity

+ + +

Ideal, balance

Dangerous - - -

Neutral, no threat + -

Underuse of potential + + -