CORPORATE SOCIAL RESPONSIBILITY:An Ethical Issue or Just a Regular Business Issue

MM 5001BUSINESS ETHIC AND BUSINESS LAW

MANDRA LAZUARDI29109058

MASTER OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS AND MANAGEMENT

INSTITUT TEKNOLOGI BANDUNG2010

Implementations of CSR by companies recently become a lively discussion topic we meet in

everyday life. Many companies around the world began to consider CSR as an integral part

of their business. Based on a growing trend of CSR implementation, arise some fundamental

questions about the implementation of CSR programs. Are CSR programs based on business

ethics issues, or whether these programs are only a mere fairness to the nature of company’s

main motive which is increasing its profit?

This paper will discuss problems related to the implementation of CSR viewed from several

different perspectives. Discussion of the topics by using several perspectives is a necessity

considering the publications that come from one party may result in reduced objectivity.

Before starting the discussion on CSR implementation, this paper will present some concepts

and theories related to CSR.

CORPORATE SOCIAL RESPONSIBILITY

The emergence of Corporate Social Responsibility (CSR) concept is almost always

associated with the two paradigms, namely good corporate governance and sustainable

development. CSR is basically a change in business outlook. CSR underlines that the

corporation could not act solely as an economic entity separate from the surrounding

environment anymore, but also must consider the interests of its stakeholders.

CSR programs requires the company’s full responsibility for the impact they caused by their

business activities to all stakeholders and environment. CSR is an ongoing activity and

should not only just the company’s action to strengthen the image (brand) and reduce the

pressure from other parties.

“Corporate Social Responsibility is the realization of business contributions to sustainable development goals. It refers to how business takes account of its economic, social and environmental impacts in the way it operates, maximizing the benefits and minimizing the downsides.” (World Bank, 2006)

“…companies are regarded as socially responsible if they can create good shareholder values, as well as affect positively on their stakeholders i.e. their customers, suppliers, employees, and the community at large. Companies are seeking to become sustainable by addressing their stakeholders’ welfare and environment protection. Ways of companies in addressing various social issues in their operating areas, individually or collectively, are known as Corporate Social Responsibility (CSR).” (Koestoer, 2007)

“Corporate Social Responsibility (CSR) has the explicit sense of voluntary, self interest driven policies program and strategies by corporations addressing issues perceived as being part of their social responsibility by the companies and/or its stakeholders. CSR is about management initiatives and systems, and about how companies manage the social impact of their activities.” (Debroux, 2008)

Basically, there are three types of CSR implementation which are the corporate charity,

corporate philanthropy, and corporate citizenship. The lowest grade of CSR is the corporate

charity. The examples of corporate charity program are grants or social assistance given by a

company to the society. Such activities not solve the root of a problem and there are almost

no impacts from the program on improving people's welfare.

The second grade of CSR is the corporate philanthropy which based on humanitarian impulse

and usually derived from a universal ethical norm. This type of CSR is still considered as a

moral obligation to distribute profits after the company takes advantages from the local

resources. Although better than the previous level, the impact of this activity is not

sustainable and even tends to increase the society’s dependence on the company.

The best model of CSR is the corporate citizenship where the company implements a CSR

program based on the citizenship motive to achieve prosperity for the common interest. This

program will provide long-term impact for companies and communities because it designed

to create community’s self-reliance. This kind of CSR programs are usually implemented in

the form of community development.

International Finance Corporation (IFC, 2006) applies the Performance Standards to manage

social and environmental risks and impacts and to enhance development opportunities in its

private sector financing in its member countries eligible for financing. The Performance

Standards may also be applied by other financial institutions electing to apply them to

projects in emerging markets. Together, the eight Performance Standards establish standards

to meet throughout the life of an investment by IFC or other relevant financial institutions.

The eight performance standard are then known and widely used as the Corporate Social

Responsibility standard. Those standards are:

Standard 1 : Social and Environmental Assessment and Management System

Standard 2 : Labor and Working Conditions

Standard 3 : Pollution Prevention and Abatement

Standard 4 : Community Health, Safety and Security

Standard 5 : Land Acquisition and Involuntary Resettlement

Standard 6 : Biodiversity Conservation and Sustainable Natural Resource Management

Standard 7 : Indigenous Peoples

Standard 8 : Cultural Heritage

In addition to some understanding and implementation of CSR models above, there are some

other paradigms of CSR activities. These views are generally questioned the purity of

purpose of CSR implementation programs.

“CSR undertakings are the voluntary actions that business can take, over and above compliance with minimum legal requirements, to address both its own competitive interests and the interests of wider society. Economic reasons are the predominant drivers for CSR. Increasingly, companies have recognized the business case behind CSR.” (World Bank, 2006)

“Although CSR activities have social aims, the private goals of corporations—such as expanding markets, strengthening business networks, and improving corporate reputation—often drive their design and implementation. These drivers, although valid in terms of firms’ operational purpose, can direct CSR funds toward investments that are not necessarily development priorities or preferred outcomes for intended beneficiaries.” (Soplop, J.C., Wetterberg, A., Indriartoto, I., De León Pellecer, M.J., Ligorría Goicolea, T., and Roman-Lacayo, M.A., 2009)

“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” (Friedman (1970) cited by Redman (2005))

From the discussion of the concept and implementation of CSR above, it can be seen that

there are two main paradigm of looking at CSR activities. The first paradigm states that CSR

activity is a pure action based on business ethics, where companies have the moral obligation

to improve the welfare of stakeholders associated with economic benefits that the companies

get from its stakeholders and environment. The second paradigm states that the company

activity, whatever it is, basically sticking to the company’s principles that are naturally

associated with the effort to increase profit. Any improvement in CSR activities undertaken

basically designed to enhance the corporate value, both in terms of brand, as well as other

interests.

To better understand those paradigms, the next discussion would involve some CSR case. In

the end of the paper, the conclusion would rely both on the theory and implementation.

CORPORATE SOCIAL RESPONSIBILITY IN TWO PARADIGMS

In order to understand the CSR activities as an ethical issue, in this section will be presented

some example of CSR activities undertaken by several company which had considered have

an ethical values. In this part of the paper, the cases would be observed from the first

paradigm of CRS, where the companies do the activity based on the ethical consideration. To

maintain objectivity, in the next part of the paper, the same cases would be analyzed from the

different point of view.

The First Case: Shell Environmental Program

The first case of CSR program implemented by companies is the Shell Environmental

Program. This program is basically a CO2 emission reduction program conducted by an oil

and gas company. The overview of the case is as follow:

“A Shell advert featuring a drawing of flower heads emerging from refinery chimneys, implying the oil company used its waste carbon dioxide to grow flowers, broke industry rules, a watchdog ruled today. The Advertising Standards Authority (ASA) upheld a complaint that the press advert, which featured the drawing misleadingly implied all CO2 emissions helped produce flowers and decided it breached industry code clauses on truthfulness and environmental claims. The image was used above text about the need to find creative ways to recycle and the words: “We use our waste CO2 to grow flowers, and our waste sulphur to make super-strong concrete.”

“Friends of the Earth complained to the ASA that the slogan implied Shell used all its waste CO2 to grow flowers, while it believed only 0.325% of the company's emissions were used for that purpose, and said the advert also misleadingly implied that all Shell's waste sulphur was used to make concrete. The ASA concluded that both claims were likely to mislead. The advert is no longer appearing and Shell told the ASA it would not be used again. But in its response to the investigation, Shell said it supplied 170,000 tones of CO2 to local greenhouse growers in 2005 and expected to supply 320,000 tones this year, saying this stopped the equivalent of the annual CO2 emissions from about 102,894 vehicles being release.” (CSR Indonesia Newsletter, 2007)

The case above has a negative perspective on the implementation of CSR in Shell. For more

objective analysis in analyzing Shell CSR activities in the environmental program, the

discussion will first be done by looking at the program as an ethics based program.

Basically, CSR program of environmental programs conducted by Shell is good program,

bringing a positive impact to the environment. Program implemented by Shell can help to

reduce CO2 emissions by a significant number every year. As an oil and gas company, Shell

brought many social problems related with its operations, especially a pollution hazard.

Unfortunately, the main motif of the company to implement the program was not purely an

ethical based program. It reflected on the controversial advertisement published by Shell

related with its environmental project. From the advertisement, they implied that their project

was a holistic project to reduce the company’s pollution rate. Actually, there was only little

part of their waste processed by its technology. Using a hyperbole advertisement, it can be

concluded that main objectives of Shell’s program was to develop their profitability through

build the company’s excellent brand and value.

From that analysis, it can be concluded that Shell has a dualism regarding its motifs, but from

the case above, the main motif / objective was about increasing company’s profitability

(shown that the company’s priority was to advertise its program without taking care the main

idea of its program).

The Second Case: Unocal Community Development Program

The second case would be about Unocal CSR program which considered as a community

development program. The case overview is as follow:

“Unocal is one of the largest US based independent oil, natural gas and geothermal exploration and production companies; 50% of its principal operations are in Asia (Bangladesh, Burma, Indonesia, Thailand, Vietnam). In Indonesia, Unocal has invested billions of dollars in energy exploration since 1968, including interests in more than 5.1 million acres offshore the island of East Kalimantan.”

“As a 111-year-old company in the oil industry, Unocal must put down roots in host countries as part of its core business. “We typically invest hundreds of millions of dollars in physical infrastructure that can’t be moved to another country,” Greg

Huger, Unocal’s Director of Corporate Responsibility, said. “We are there for 20, 30, 50 or more years.”

“Unocal views corporate responsibility as a core value in its global operations, and seeks working relationships with communities and local NGOs because it views these relationships as vital to the company’s performance and its ability to operate in a country. In 1997, it launched a new approach for community outreach in East Kalimantan (Santan) to reshape its role as a stakeholder in Indonesia. Today, at both local and regional levels, Unocal engages in extensive social mapping and develops partnerships with local NGOs to identify community stakeholders from unbiased sources, develop services, and evaluate project activities and needs.”

“In 2001, Santan farmers were able to double their rice output, producing one of the best rice crops ever and improving the local economy, benefiting 18,000 people. The protests, lacking community support, have now stopped. Farmers are not expected to need additional assistance next year, and the community council, together with Unocal, is now focusing on diversifying the farm economy to produce vegetables, corn, and melons.”

“Unocal has experienced first-hand the business repercussions of public protest against its activities. For example, human rights advocates have excoriated the company for its projects in Burma, where the military government has engaged in gross violations of human rights. Unocal has launched major initiatives through its outreach activities to make itself a stakeholder in all of its host communities, working closely with them to determine local investments that can best address local needs.” (Catalyst Consortium, 2002)

From the case overview about Unocal, it can be observed that Unocal has developed a great

CSR program. This program was basically triggered by the protest to their project in Burma.

Being aware that their activity are conducted in a local area, where the people is one of the

company’s stakeholder, a community development program then implemented to improve

society’s prosperity.

The community development program implemented by making the company itself as a

stakeholder in all of its host communities, working closely with the society to determine local

investments that can be address local needs would propose the community’s self-reliance.

The program then can be classified as a sustainable program.

In the other hand, analyzing the case with the second paradigm, the community development

programs conducted by Unocal in Burma and Kalimantan are based on economic motif. The

company implemented the program to ensure their investment security. They have invested a

large amount of money with high risk rate of operation. One of the risks is the local entity

acceptance. To minimize the risk, those companies then try to gives benefit to the

environment and society.

Many oil and gas company are the leader of CSR practice worldwide. Based on that analysis

above, it can be assumed that CSR implementation trend in oil and gas companies is related

directly with the investment amount and risk rate. The greater the risk and the capital

invested, companies are actively implemented CSR activities to minimize the risk.

CONCLUSION

There are two major opinions about the implementation of CSR. The first opinion said that

Corporate Social Responsibility is basically an ethical behavior done by a company as its

awareness to the environment and society improvement. This opinion assumed that this kind

of company behavior is caused by a deep understanding of the company to act as a citizen, so

that it has an obligation to develop its social environment.

The second opinion said that Corporate Social Responsibility is merely based on business

considerations. A company’s objectives implementing a CSR program is to gain more profit

by developing its brand image, minimizing its risk, and establishing a good relationship with

its stakeholders. This opinion assumed that the one and only responsibility for a company is

to generate profit and improve shareholders’ wealth.

From the case analysis provided in the previous part, it can be concluded that it is very hard

for the observer to determine whether the company observed is conducted a CSR program

based on its responsibility to the social environment or just a strategy to improve its profit.

This situation is caused by, just like a person, company’s motif is not always can be

interpreted from its behavior. The first case assumed to have a negative motif of CSR

activity. It was only an assumption since the company still has a positive reason to implement

its CSR program. In contrast, the second case assumed to have a very positive CSR activity.

Since it’s just an assumption, it can be assumed too that the company has a hidden agenda

behind its CSR program.

Since it was very hard to measure the real motif of a company conducted a CSR program, it

would be better to give more attention to the CSR implementation itself. No matter what the

company’s motif when it conducted a CSR program, the one really matter is the CSR

program itself. CSR program should give a very positive outcome and impact to the social

life.

Regarding three type of CSR implementations, which are corporate charity, corporate

philanthropy, and corporate citizenship, the key point is to have the best CSR type

implemented by all companies. The best CSR type is the corporate citizenship, which based

on a community development concept. CSR program based on corporate citizenship type and

community development concept emphasized the programs goals to be sustainable. The

sustainability of CSR program guarantees the achievement of society’s self-reliance. The

society then would have the ability to move on and improve themselves without any

dependency to the company. The CSR executor role is to guide and assist, not to direct the

society’s move.

If the CSR implementation type can be managed to be the third type of CSR, then it would

not be a big problem whether the company’s motif is purely ethical or just a business point of

view. To simplify the concept, the overall paper’s conclusion can be seen as a comprehensive

frame work in the following diagram:

CORPORATE SOCIAL RESPONSIBILITY FRAME WORK

Source: Analysis, 2010.

After generating the frame work above, the research question of this paper, which is whether

the Corporate Social Responsibility is an ethical issue or just a regular business issue, is

finally answered. No matter what the company’s motif to implement CSR, the very important

thing is the CSR implementation.

The company has to implement a sustainable program, so that the community, environment,

and the company itself could enjoy the long lasting benefit without any risk to be over

dependent. The next question is whether the CSR programs were implemented in the right

way (corporate citizenship) or not? The issue than has been shifted. There are many rooms

for improvement for the better future.

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