Corporate Social Responsibility: Profit or Ethics

Introduction

Attaining success in today’s highly globalized and volatile business environment requires corporations and organizations to apply strategies that guarantee stability, large customer bases, societal approval, and acceptance as well as attainment of competitive advantage. Corporate social responsibility (CSR) is one of the most common strategies applied by corporations to attain the aforementioned objectives. CSR refers to the process of assessing and taking responsibility for a corporation’s effect on the environment and the social wellbeing of its employees as well as the people it serves and affects through its operations (Hsieh 2015).

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In today’s business environment, CSR has become controversial. The main concern is whether it is done for profits or ethics reasons. Different companies have different reasons and objectives for participating in CSR. However, the underlying objective is increased profits and a large customer base. CSR activities involve costs that have negative short-term but positive long-term implications on a corporation’s bottom line (Pacek & Thorniley 2007). However, its long-term effects include positive social change, environmental conservation, and enhanced financial prosperity.

Corporate social responsibility

Large companies wield great power and influence because of the effect of their operations on the economies of countries and the lives of people. Therefore, they implement CSR policies as self-regulatory mechanisms in order to comply with the law and maintain high ethical standards that contribute to societal wellbeing (Pacek & Thorniley 2007). CSR’s scope goes beyond compliance with the law and incorporates activities that promote social good. In essence, these activities put the interests of the people before the interests of corporations. Despite this, many corporations use these activities to increase long-term organizational profits by creating positive public relations, impacting people’s lives, protecting and conserving the environment, and taking responsibility for the effects of their business actions, decisions, and activities (Oeyono et al. 2011).

Corporations use CSR policies and initiatives to boost long-term profits while at the same time creating positive social change. This fact is supported by Chernev and Blair (2015) who argue that in addition to improving public relations and enhancing customer goodwill, CSR has a great role to play with regard to how customers view a company’s product. Research has shown that the products of companies that engage in CSR activities perform better than the products of companies that do not because customers evaluate their products positively (Oeyono et al. 2011).

CSR activities are beneficial to corporations because they “enhance a corporation’s reputation and brand, lower consumers’ sensitivity to product price, and improve brand loyalty.” (Chernev and Blair 2015). Increased profits emanate from positive customer reviews, decreased product criticisms, increased sales, and customer loyalty due to the moral satisfaction that customers get from the realization that a certain corporation engages in positive social activities that enhance societal wellbeing.

Corporate social responsibility is highly valued by investors and organizational stakeholders who use it to shield companies from the negative effects of earnings management (EM) (Martinez-Ferrero et al. 2016). In that regard, it enhances the reputation of organizations and decreases the cost of capital. Many organizations use CSR to shield against EM because studies have shown that it is very difficult to know when a company uses CSR activities to conceal their earnings management practices.

Maintaining good accounting practices has a direct effect on the financial performance of corporations. Therefore, any initiative that contributes towards masking unethical accounting practices is embraced and implemented hence the application of CSR to mask EM. Both CSR and EM affect many organizational stakeholders and an organization’s corporate reputation and market value. “CSR is used to mask EM because certain accounting practices can lower the value of a company, deteriorate its brand, and negatively affect the relationship with stakeholders” (Martinez-Ferrero et al. 2016).

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The factors affect the financial performance of a company due to poor corporate image and product performance. Another reason why CSR is embraced by many companies is its role n influencing product market competition and lowering the cost of capital (Martinez-Ferrero et al. 2016).

Corporate social responsibility is primarily a strategy to increase profits rather than enhance ethical business operations and behavior. CSR activities make a company more appealing to customers who in return become loyal and develop positive perceptions toward them (Abdul Alim & Manwani 2013).

The benefits of CSR contribute toward the attainment of certain desirable organizational outcomes such as customer loyalty, insensitivity to product prices, and an increase in sales. According to Habel et al. (2016), CSR activities influence aspects that determine a company’s financial performance such as cost perceptions, price fairness, and behavioral pricing. “Customers view high prices as inclusive of additional charges that are used to fund the CSR activities the corporation engages in” (Habel et al. 2016).

Therefore, they are willing to pay high prices for certain products. In order to increase profits, companies apply strategies that target customer loyalty, willingness to pay high prices for products, and positive product reviews. CSR activities are aimed at convincing customers that a corporation values them highly and therefore engages in social activities to improve the quality of their lives. Increased customer loyalty and a willingness to pay certain prices for products translate to increased sales and higher profits (Branco & Rodrigues 2006).

Many companies take responsibility for the effects of their business operations on the environment and society. However, their main objective of engaging in CSR activities is to increase their profit margins by appealing to more customers.

A study conducted by Mishra and Modi (2016) revealed that CSR activities have financial benefits for companies that possess marketing capability. The study involved a sample of 1,725 firms and was conducted between the years 2000 and 2009. The results showed that CSR activities have positive effects on stock returns and idiosyncratic risk only in companies that possess marketing capability. CSR efforts have positive financial implications when they interact with processes that target the environment, products, corporate governance, diversity, and employee welfare (Mishra & Modi 2016).

In today’s business world, CSR is mainly aimed at improving peoples’ lives ad conserving the environment. CSR activities affect the welfare of employees, society, business associates, shareholders, clients, and other stakeholders such as suppliers. Corporations are using CSR to increase profits by using certain activities to mitigate the effects of their operations and activities on the environment, society, and stakeholders (Husted et al. 2015).

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Businesses are economic entities that primarily aim to make profits rather than fulfill philanthropic objectives (Kim & van Dam 2003). Therefore any activity incorporated into an organization’s business processes and operations should be profitable otherwise it is not appropriate for the attainment of organizational objectives and goals (Kim & van Dam 2003). Implementation of CSR activities involves costs that cannot be retrieved directly from beneficiaries. However, the outcomes of such programs have an indirect positive effect on organizational performance. The major benefit of CSR is the value it creates for the company by endearing its products and services to customers, improving organizational brand and profile, as well as enhancing customer loyalty. These outcomes have a direct positive impact on the financial performance of companies (Husted et al. 2015).

The ethics of CSR encompasses activities that promote moral business operations and societal welfare (Branco & Rodrigues 2006). Many corporations argue that they engage in CSR for the sole objective of enhancing business ethics, openness, and organizational responsibility. This argument disregards the perception that many companies use CSR as a profit-increasing strategy. This argument is flawed. Many corporations engage in CSR activities that are of low standards because their main focus is increasing profits. This is evident from the implementation of organizational strategies such as downsizing in order to keep the costs of operation low.

The financial recession of 2007-2009 had devastating effects on the lives of many people. Many employees were fired because companies wanted to lower costs of operation and raise profit margins. Firing employees was a good strategy for the financial wellbeing of companies. However, it had negative consequences with regard to the social welfare of employees. If these companies engaged in CSR for the sole purpose of enhancing ethical business activities, then firing employees would have been replaced by alternative solutions to increase revenues. Many companies choose strategies that have positive financial effects in addition to social benefits.

Firing employees is considered unethical. However, many companies do not hesitate to implement such strategies when their profit margins are at risk of decreasing. Corporations have been shown to sacrifice the wellbeing of their employees in favor of high profits, which is contradictory to the principles of responsible CSR (D’Amato et al. 2009).

Business entities comprise a critical component of society. Successful companies operate based on the premise that their success is hinged on the improved welfare of their customers and society in general. Therefore, they participate in activities that make communities more successful. Consumers have high expectations with regard to how businesses behave and operate (Davidson 2008). For instance, they expect corporations to make products that enhance the quality of their lives and protect the environment. On the other hand, they expect to receive affordable products and services. “Lofty expectations from customers, investors, and other stakeholders compel companies to engage in responsible and ethical behavior such as environmental conservation in order to win their hearts” (Branco & Rodrigues 2006).

In today’s society, environmental conservation is a major issue that has dominated political, social, religious, and academic discourses. Therefore, businesses have embraced it as an important factor to consider in determining the effects of their activities on societal wellbeing. Companies that engage in CSR activities are considered responsible and models of business excellence and commitment (D’Amato et al. 2009).

An argument that has been pervasive in business is a claim of the neutral effect of CSR on organizational profitability. This argument was supported by a study conducted by Taghian et al. (2015) that found out that even though CSR improves a company’s reputation, it does not increase its profitability. According to the results of the study, there is a positive relationship between CSR and organizational reputation as well as market share (Taghian et al 2015).

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However, these constructs do not have any influence on profitability. The findings are misleading because if a company’s market share increases, then its revenues and profit margin increase as well. The findings of this study were invalidated by another study conducted by Ekatah et al. (2011) that studied the relationship between CSR and profitability at Royal Dutch Shell Plc. The findings of the study revealed that “there is a constructive relationship between CSR and organizational profitability because of lowered risk, increased reputation, and high performance” (Ekatah et al. 2011). These outcomes were attained through activities such as proper treatment of employees, development of high-quality and affordable products, environmental conservation, the establishment of mutual relationships with different stakeholders, and strict observance of laws (Ekatah et al. 2011).

Many companies do not engage in CSR for ethical purposes. Rather, they implement CSR programs for financial gains. A study conducted by Petrenko et al. (2016) revealed that some CEOs use CSR to address their personal needs, reinforce their image, improve company profile, and enhance performance. These objectives fail to meet the requirements of the ethical role that CSR should play in organizations. Survival and attainment of the competitive edge are two of the most important outcomes that companies in today’s volatile and unpredictable business environment pursue (He 2013).

CSR is used as a means to enhance business survival and gain a competitive advantage by improving an organizational image and acceptance among customers. Many organizations aim for customer loyalty that emanates from increased acceptance of a company’s products and services (Hsieh 2015). This acceptance is earned and enhanced through participation in activities that contribute to the social wellbeing of society and stakeholders.

Conclusion

Corporate social responsibility (CSR) is the act of organizations embracing accountability for the social effects of their business activities. Businesses are not philanthropic institutions whose sole objective is to enhance the quality of people’s lives only. They are economic entities that aim to provide quality products and services and make a profit at the same time. Therefore, the activities that they engage in should have some sort of financial benefit. Activities such as environmental conservation, employee health and safety, and positive relations with communities and stakeholders are considered components of CSR. Maintenance of ethical standards is included in the numerous social activities that companies participate in. However, their main objective is to increase their profits. They shun these activities whenever they realize that they lower their profits.

References

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Branco, M & Rodrigues, L 2006 ‘Corporate Social Responsibility and Resource-Based Perspectives’, Journal of Business Ethics, vol. 69, no. 2, pp. 111-132. Web.

Chernev A & Blair, S 2015, ‘Doing Well by Doing Good: The Benevolent Halo of Corporate Social Responsibility’, Journal of Consumer Research vol. 41, no. 6, pp. 1412-1425. Web.

D’Amato, A, Henderson, S & Florence, S 2009, Corporate Social Responsibility and Sustainable Business: A Guide to Their Leadership Tasks and Functions, Center for Creative Leadership, New York. Web.

Davidson, T 2008, ‘Societal expectations have changed: corporate social responsibility. What role do businesses play in the grand scheme of things, or in its community?’ ProQuest. Web.

Ekatah, I, Samy, M, Bampton, R & Halabi, A 2011, ‘The Relationship Between Corporate social Responsibility and Profitability: The Case of Royal Dutch Shell Plc’, Corporate Reputation Review, vol. 14, no. 4, pp. 249-261. Web.

Habel, J, Schons, L, Alavi, S & Wieseke, J 2016, ‘Warm Glow or Extra Charge? The Ambivalent Effect of Corporate Social Responsibility Activities on Customers’ Perceived price Fairness’, Journal of Marketing vol. 80, no. 1, pp. 84-105. Web.

He, A 2013, ‘Corporate social responsibility in focus’, ProQuest. Web.

Hsieh, N 2015 ‘The Social Contract Model of Corporate Social Responsibility’, Business Ethics Quarterly, vol. 25, no. 4, pp. 433-460. Web.

Husted, B. W., Allen, D. B., & Kock, N 2015, ‘Value Creation through Social Strategy’, Business & Society, vol. 54. No. 2, pp. 147-186. Web.

Kim, R & van Dam, E 2003, Learning About Corporate Social Responsibility, IOAS Press, New York. Web.

Martinez-Ferrero, J, Banerjee, S, & Garcia-Sanchez, I 2016, ‘Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices’, Journal of Business Ethics, vol. 133, no. 20, pp. 305-324. Web.

Mishra, S & Modi, S 2016, ‘Corporate Social Responsibility and shareholder Wealth: The Role of Marketing Capability’, Journal of Marketing vol. 80, no. 1, pp. 26-46. Web.

Oeyono, J, Martin, S & Bampton, R 2011, ‘An Examination of Corporate Social Responsibility and Financial Performance, Journal of Global Responsibility’, vol. 2, no. 1, pp 100-112. Web.

Pacek, N & Thorniley, D 2007, Emerging Mrakets: Lessons for Business Success and the Outlook for Different Markets, New York, John Wiley & Sons. Web.

Petrenko, O, Aime, F, Ridge, J & Hill, A 2016, ‘Corporate Social Responsibility or CEO Narcissism? CSR Motivations and Organizational Performance’, Strategic Management Journal, vol. 37, no. 2, pp. 262-279. Web.

Taghian, M, D’Souza, C & Polonsky M 2015, ‘A Stakeholder Approach to Corporate Social Responsibility, Reputation and Business Performance’, Social Responsibility Journal, vol. 11, no. 2, pp. 340-363. Web.

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