TERM PAPER

CORPORATE SOCIAL RESPONSIBILITY

Submitted to,

Professor Abhilash G N

On

August 22, 2014

In partial fulfillment of the requirements of the course

Principles of Management

By

Nivin Vinoi

P14199

PGDM-B

RBS

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TABLE OF CONTENTS

EXECUTIVE SUMMARY…………………………………………..3

ANALYSIS……...……………………………………………………4

INTRODUCTION...…….....……………………………………...4

CSR THEORETICAL FRAMEWORK………………………………….4

CSR STANDARDS……………………………………………………...5

NGOs AND CSR………………………………………………………...6

CUSTOMERS AND CSR………………………………………………..6

CSR AND SOCIAL CHANGE…………………………………………..8

ENVIRONMENTAL CSR…………………………………………….....9

CONCLUSION……………………………………………………...10

REFERENCES……………………………………………………...10

Exhibit 1……………………………………………………………..11

Exhibit 2……..………………………………………………………12

Exhibit 3……………………………………………………………..13

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EXECUTIVE SUMMARY

This term paper deals with the evolution of Corporate Social Responsibility CSR). A topic which has much interest within the managerial world is CSR. CSR refers to “firm’s consideration and response to, issues beyond economical, legal and technical requirements of the firm to accomplish legal and social benefits along with economic gain which firm seeks”. To attain sustainable development will be its ultimate goal. Sustainable development means equal development in social, economic and environment. All corporates are profit motive and so their CSR activities will be also in a way to achieve it. The framework of CSR and relationships between CSR and customers, NGOs are all explained below. There are lot of actors working for the progress of CSR throughout the world, like employees, stakeholders, government, NGOs etc. Customers has an attitude to do business with company who do right. Due to this trend majority of companies are using CSR as their marketing strategy. NGOs are also doing a great job in protecting our environmental resources by preventing its overexploitation especially in developing and under developed countries. The attention of all business Medias, investors, business community, customers are all in CSR. Inter-governmental Institutions like International Finance Corporation (IFC) and UN Global Compact are all trying to encourage CSR among corporates all over the world. ISO 26000 is a standard which provides guidance on how businesses and organizations can operate in a socially responsible way. All these factors shows companies should work in an ethical and transparent way encouraging and contributing to the welfare of society.

(Word count: 255)

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ANALYSIS

INTRODUCTION

CSR is the art of doing well by doing good. For ensuring a secure and safer mode of living and to irradiate poverty, it is necessary to have a steady economic progress. The benefit of this progress should reach all sectors of all countries. Corporate Social Responsibility (CSR) is now an important part in the global business strategy in which companies operate in a social friendly way where ever they do business. Corporate Social Responsibility also called as corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible business aims to embrace responsibility for the company’s action and encourage a positive impact through its activities on the environment, employees, consumers, communities, stakeholders and all other members of the public who may also considered as stakeholders. CSR initiatives are classified into two, actions within the firm and actions outside the firm. Action within the firm includes changing labour relationships and changing production methods to reduce environmental impact. Action outside the firm includes developing philanthropic community initiatives and making infrastructure investments in local communities. Now a days it is considered that the reputation of the company and thereby stockholders wealth maximization depends on CSR. Organizations usually take social responsibilities according to the willingness of consumers. For example consumers buy products of companies which supports charitable programs, they buy products of charitable organizations at very high prices avoiding their usual brands. In 1999 within 250 largest companies in the world only 30 percent supported CSR initiatives. But by 2011 almost 95 percent started CSR activities.

CSR THEORETICAL FRAMEWORK

The three main motives for pressuring firms to engage in CSR is, (1) Instrumental, (2) Relational, (3) Moral (Exibit-1). Instrumental motives is self-interest driven. Relational motives concerned with relationships among group members. Moral motives are concerned with ethical standards and moral principles. At each level of analysis like (individual employee, organizational, national, and transnational) actors and interest groups pressures these firms for CSR. We can expand and refine multiple needs theory into two important ways. First we are looking at intentional actions taken by firm in the name of social responsibility and impact of these actions on employees. Second, the model is more expansive. We should always think beyond employees perceptions so we can theorize the needs and motives of top management, consumers, national

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governments, and transnational entities so that they can be encouraged for CSR initiatives. This model makes several contributions to CSR literature. CSR literature consists of (1) the field of organizational justice which resided exclusively in the micro organizational behaviour literature and organizational psychology literature, has much to offer CSR in considering the responsibilities of firms, how firms treat people, both externally and internally, affects a variety of actors, the degree of firms’ accountability. This analysis allows for a more socially centered CSR. (2) The organizational justice literature experiences a shift from socioeconomic models to models, instrumental that consider principled moral obligations of organizational actors. With the help of this multiple needs theory instrumental, relational and morality based motives put pressure on firms to engage in CSR. This approach provides a powerful framework that leads organizations to be more socially responsible and successful to impart social change. (3) This model takes a different approach from existing CSR models. It gives a unique treatment of CSR when majority of existing models look at the consequences of CSR. Finally we add values to the model.

Actors consists of employees, Stakeholders (both internal and external), governments (both domestic and IGOs) and NGOs. Each actors have different mechanisms to influence social change (Exibit-2). Each actors have multiple motives and relationships like instrumental, relational, moral, interactions. According to the employees perceptions of distributive, procedural, interactional relationships it can divided into two. First is through the pressure to increase the level of CSR through employee participation and leadership. Second is through organizational commitment, job satisfaction, employee citizenship, performance. Internal stakeholders’ uses direct strategic decision mechanism where external or outside stakeholders uses exercising voice through collective action. Domestic governments’ mechanism will be law enactment, law enforcement, “bully pupit,” education on best practices. IGos will do Bully pulpit policy. NGos mechanisms will be campaigns, boycotts and multiparty dialogues. All these actors’ mechanisms will be targeted to make social change through CSR.

CSR STANDARDS

From 1990 to 2004 Domini 400 Social Index was recognized as CSR benchmark. In Domini 400 index CSR criteria is analysed based on 8 categories: 1. community, 2. diversity, 3. corporate governance, 4. environment, 5. employee relations, 6. controversial business issues, 7. product quality, and 8. human rights. In 2010 ISO 26000 the standard for CSR was launched by

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International Standards Organization (ISO). ISO defines CSR as “both the philosophy and practice of for-profit organizations voluntarily acting to positively assist society in ways beyond that required to obtain profit objectives”. Numerous intergovernmental organizations are also working for the promotion of CSR. Some examples are The International Finance Corporation (IFC), which is the World Bank’s private lending Division and UN Global Compact, an initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies like anti-corruption, human rights, labour, and environment then to implement it.

NGOs AND CSR

There are a lot of nongovernmental organizations (NGOs) and networks of cooperating organizations all around the world working and encouraging the spread of CSR initiatives. According to Companies Act (2013) CSR is mandatory for companies with net worth of 500 crore or more, turnover of at least ‘1,000 crore and net profit of at least’ 5 crore. Each company should spend at least 2 percent of their profits on CSR. In April 2013 this law was implemented and India is the only country with legislated CSR. In India about 20 lakh NGOs are operating across the country. To do Corporate Social Responsibility (CSR) about 67 percent of domestic companies have chosen non-government organizations (NGOs) as partners while 58 percent prefer government departments. There are lot of trade unions and consumer groups which works for the elimination of child labour and sweatshops.

CUSTOMERS AND CSR

Many customers have a mind-set that they will do business with companies which do right things. Corporates doesn’t want to lose their reputation. They always want to keep their positive corporate image and to be in the favourite list of customers. So corporates give great publicity to the social welfare things they do. Even companies such as the tobacco and oil companies which have less social respect are trying to change their negative image by implementing CSR campaigns. For example, ITC is one of India’s leading FMCG (Fast Moving Consumer Goods) company. They are top in country producing cigarettes. This product gave them a bad image. For building a good image they started a rural development initiative. When buying one ITC Classmate notebook, ITC will contribute Rs.1 to its rural development initiative that supports primary education in villages. Another example is Phillips 66 Oil Company. This Houston-based 2011 spin-off of oil giant Conoco-Phillips, was ranked No.1 in socially responsible companies.

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Accountability has become main problem within international development policies and researches. In different nations the government is not capable of planning and developing there economy. Especially in developing countries government is poorly handling different development programs and usually the money spend for the economic development go waste. This often results in maldevelopment. Extractive industries is an example. Bureaucratic leaders and politicians are only interested in money. They don’t care about these extractive industries and don’t know how to manage them. Usually these extractive industries will try to over exploit the natural resources of developing countries which adversely affect the balance of ecosystem and people living nearby. An example is the Coca-Cola Plachimada issue. Water in India is literally free of cost. Due to the access of cheap ground water and low labour cost Coca-Cola started a 40 acre bottling plant in 2000 at Plachimada which is in Palakkad district. Ever since they opened the plant people started to face chronic drought and polluted water. Coco-Cola draws up to 1.5 million litres of ground water daily through bore wells to bottle Coke, Fanta, Sprite and Thumps Up. Due to this extraction of ground water nearly free of charge the company reaped enormous profit. Making the situation worse the company was producing thousands of gallons of toxic sludge reducing the fertility of soil resulting in poor agricultural production. These all factors led the residents and farmers to unite together for campaign in 2004 to evict Coca-Cola from their land which led to fierce battle with the authorities and at last succeeded in closing the factory. It’s a trend in CSR initiative to make companies responsible for the outcomes of their business wherever they do business. NGOs have played an important role in bringing all these environmental issues and maldevelopment issues to the discussion table. Due to this many companies are now working together with NGOs to develop policies and to study about the impact of their companies in local societies.

Always corporates will be profit motive. There all activities including CSR will be aimed for it. So care should be taken to make all these activity realistic. If customer feel suspicious towards company’s activities and find out that these CSR activities are all for improving their positive image, it will backfire them, actually giving them a negative image. Some examples are (e.g., Avon, Philip, Morris, etc.). Consumers and critics started to criticize CSR campaign based on youth smoking prevention by Philip Morris, they became surprised. The result they got was somewhat contrary to what they expected. Consumers will be keenly watching every movements of the company and there sincerity is based on the reasoning results in the following hypotheses:

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H1a: When a company supports a CSR activity which give high benefit to them and consumer learn about it through company source, consumer will likely evaluate company more negatively than without the CSR activity.

H1b: When a company supports a CSR activity which give high benefit to them and consumer learn about it through a neutral source, consumer will maintain their existing evaluations.

H2a: When a company supports a CSR activity which give low benefit to them and consumers learn about it through a neutral region, consumers are likely to maintain existing evaluation.

H2b: When a company supports a CSR activity which give low benefit to them and consumers learn about through neutral source, consumers evaluate them more positively.

H3a: CSR activities that have high (vs. low) benefit results in lower sincerity.

H3b: Consumers will have only less sincerity when CSR activities of company is learned by them from company’s source rather than neutral source.

H3c: The influence of information source on company’s evaluation is mediated by sincerity of motives.

H3d: The influence of benefit on company’s evaluation is mediated by sincerity of motives.

CSR AND SOCIAL CHANGE

CSR will be always aimed with social change. Over half of the Fortune Global 500 MNCs publishes separate reports on CSR annually and most of the responsibilities of CSR activities are assigned to senior executives. All CSR activities focuses on corporate social responsibility and public’s reaction to it. For example, in 1996, it was alleged that the execution of writer Ken Saro-Wiwa and a number of other Ogoni community members by Nigerian military was supported by Royal Dutch Shell, for organizing against them. The public outcry and other environmental problems over Shell’s decision to discard the Brent Spar oil drilling platform in the North Sea, caused Shell a bad image among public and it made a relationship gap between the consumers and host countries. Due to this Shell re-engineered and re-evaluated their policies and operating principles for regaining their image. For this they established clearer human rights guidelines and issued its first social report. This is also an example for reactive social change. Corporate engaged in “triple bottom line” thinking is an example of proactive social change. Triple bottom line shows that the organization’s success is attached to its social performance, economic

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profitability and environmental sustainability giving higher visibility to CSR ranking. In both reactive and proactive CSR initiatives corporations are being pressured by external and internal actors to engage in these social activities to meet the changing scenarios of social and business responsibilities. Some companies CSR practices at a superficial level for window-dressing purposes whereas other companies embed CSR into their core company strategy. Chiquita Company is an example for company’s CSR initiative which lead to social change. They implemented living wage standards for all their farm workers in every country in which it harvests fruit, and also they introduced state-of-the-art environmental activities throughout its supply chain. The initiative taken by Chiquita Company is replicated by a lot of companies from apparel to pharmaceuticals to extractives to auto motives and other heavy industries.

ENVIRONMENTAL CSR

Environmental CSR is the new trend in CSR and plays an important role in corporate landscape. Environmental CSR has a great influence in the stock market’s reaction. The most prominent example is the British Petroleum’s (BP) oil spill incident in April 2010. It is the biggest off-shore oil spill in US history and it contaminated a large marine environment area along the Gulf of Mexico. Due to this disaster the stock price of BP dropped from $59.5 to $28.9. Companies are trying to be more concerned on environmental activities. Introduction of recycling programs, preventing release of hazardous waste to environment are all the examples for eco-friendly corporate initiatives. Environment-as-a-resource depends on both external norms of environmental CSR and internal levels of environmental CSR. External norms means the external pressure to become green. For e.g., environmental regulations, customers sensitivity to environment related issues, media attention to the environment etc. In the internal perspective environmental CSR is a resource where marginal returns decreases. If the “stock” of resource is high, additional investment in environmental CSR will be low and hence lower the shareholders reward for eco-friendly initiatives. Similarly if environmental CSR is done in a very high rate the punishment for the eco-harmful behaviour will be low. For a company having large stock of environmental resources is like “insurance”. They will not worry until it deplete fully.

CSR efforts are potentially instrumental in obtaining resources and stakeholders support. For example installation of a new recycling plant. It’s very expensive for a firm to buy the machinery, practice employees for it etc. But in the long run the reputation of company will increase and due to this corporate social

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responsibility and financial performance will increase. Profitability and pollution are interconnected. Pollution means wastage of resources (e.g., material, energy). By reducing pollution it will reduce company’s environmental issues but also increases competitiveness. Companies should become sustainable (i.e., “green”), and this greening initiative will influence financial performance of the company. One of the visible example for sustainability program is Walmart. Walmart took the initiative that (1) they will be powered by 100 percent renewable energy, (2) create zero waste, (3) sell product that sustain people and the environment.

Now a days Media’s and shareholders are also concerned about the environmental CSR. By looking at the graph (Exibit-3) we can know that there is a substantial increase in the articles based on CSR over years. In 1980s the average number of articles was only 20. But by 2000s it was about six times higher (117). In the graph the dashed line shows the fraction of proposals done by shareholders on environmental CSR. The fraction of proposals has increased substantially. By the end of 2009 it became roughly four times greater than in 1997. One reason for the increase of environmental consciousness is the rise of “green consumers”. Green consumers are consumers who are supportive of environmental causes. Due to this consciousness in environment “Green Marketing” was also introduced.

CONCLUSION

CSR principles are becoming a new trend among the intergovernmental organizations. Now both United Nations and World Bank is involved in spreading CSR initiatives. But still there are certain people who believes that CSR agendas are not good for society. They believe that human services should only be supported by individuals, not by corporations. Now CSR is the part of corporations’ arsenal of advertising and public relations strategy. This also force companies to do right things since customers have a strong desire to do right by doing business with those companies that do right.

REFERENCES

1. Corporate Social Responsibility by Michael Erbschloe.

2. Corporate Social Responsibility and Shareholder’s Value: An Event Study Analysis by Leonardo Becchetti, Rocco Ciciretti, and Iftekhar Hasan.

3. The Effect of Corporate Social Responsibility (CSR) Activities on Companies With Bad Reputations by Yeosun Yoon (Ewha Womans University), Zeynep Gurhan-Canli (Koc University) and Norbert Schwarz (University of Michigan).

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4. Corporate Social Responsibility and Shareholder reaction: The Environmental Awareness of Investors by Caroline Flammer (University of Western Ontario).

5. Putting the S back in Corporate Social Responsibility: A multilevel theory of social change in organizations by Ruth V Aguilera, Deborah E. Rupp, Cynthia A. Williams, Jyoti Ganapathi (University of Illinois at Urbana-Champaign).

Exibit-1

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Exibit-2

12

Exibit-3

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