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Corporate Social Responsibility and Business Law Essay

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Introduction

Our assigned topic deals with a phenomenon that has taken the corporate world by storm rather recently, particularly in Pakistan. It entails the dilemma that every corporation faces when they have to make decisions regarding the firm’s profitability and their corporation’s social responsibility. The term “corporate social responsibility” came into common use in the late 1960s and early 1970s after many multinational corporations formed the term stakeholder, meaning those on whom an organization’s activities have an impact.

It was used to describe corporate owners beyond shareholders.

The field of corporate social responsibility (CSR) has developed exponentially in the last decade. Nevertheless, there remains a lingering debate about the legitimacy and value of corporate reaction to CSR concerns. There are different views of the function of the firm in society and disagreement as to whether wealth maximization should be the sole goal of a corporation.

An escalating number of shareholders, analysts, regulators, activists, labor unions, employees, community organizations, and news media are asking companies to be accountable for an ever-changing set of CSR issues.

There is rising demand for transparency and growing expectations that corporations measure, report, and continuously improve their social, environmental, and economic performance.

According to Business for Social Responsibility (BSR), corporate social responsibility is defined as “achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment.”

Each company is at variance in how it implements corporate social responsibility, if it does so at all. The differences depend on such factors as any particular company’s size, the particular industry involved, the firm’s business culture, stakeholder demands, and how historically progressive the company is in engaging CSR. Some companies focus on a single area, which is regarded as the most important for them or where they have the highest impact or vulnerability—human rights or the environment, for example—while there are others who endeavor to incorporate CSR in each and every one facet of their operations. For successful execution, it is fundamental that the CSR principles are part of the corporations’ values and strategic planning, and that the management and employees, both are committed to them. Furthermore, it is important that the CSR strategy is aligned with the company’s specific corporate objectives and core competencies.

As CSR comes into contact with many of the problems conventionally addressed by government, like human rights and community investing, there is strong censure that societal problems are best solved by freely elected government bodies as the resources of a corporation are poorly matched for addressing those social problems, and therefore, it is argued, they should not be misallocated.

According to Friedman (1970), in a free society, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The idea is that the state should address social problems, supported by the argument that an executive, by taking money and resources that would otherwise go to owners, employees, and costumers, and allocating them according to the will of the minority, and will fail to serve the interests of her or his principal. In this way, the executive imposes a tax and spends the proceeds for “social” purposes, which is insupportable, since she or he has neither the skills nor the jurisdiction to do so.

On the other hand, there are many demands by others for corporate adoption of the CSR principles. Although the government is chiefly responsible for addressing those issues, the contribution of private firms can be substantial. There is also the argument of the shifting balance of power. According to the Organization of Economic Co-operation and Development (OECD), of the 100 largest global economies, as indicated by their respective GDP, 51 of them are US corporations, and only 49 are nation states. So economic supremacy has shifted to the corporations; they, therefore, should have an increasing role in and accountability for addressing social problems.

For example, the government sets the regulations and the minimum standards for the workplace, but a company can further improve the work environment and the quality of living of its employees. A firm cannot stay oblivious to the problems of the environment in which it functions. The poverty of a nation state’s citizens, political unrest, and the exhaustion of natural resources can have destructive effects for a corporation. For example, resources that are inputs in the production process and which, at the foundation of the industrial revolution, were plentiful are now scarce, polluted, or diminishing in many regions of the entire planet.

As one would expect, this imposes an extra cost to the corporations and may force them to reposition or to cease operations. From one perspective, companies may be poorly equipped to address some of the social or environmental problems, but from another perspective, no matter how poorly equipped, companies may still be best positioned to improve the problems. Undoubtedly, adopting the CSR principles involves costs. These costs might be short term in nature or continuous outflows.

They may involve the purchase of new environmentally friendly equipment, the change of management structures, or the implementation of stricter quality controls. Since being socially responsible involves incurring costs, it should generate benefits as well in order to be a sustainable business practice. A corporation could not continue a policy that constantly generates negative cash flows. The shareholders invest their money in a corporation, expecting the highest possible risk adjusted return. Therefore, being socially responsible should have bottom-line benefits in order to be sustainable.

Socially responsible corporate performance can be associated with a series of benefits with the final outcome. But in a lot of cases, it seems that the time frame of the costs and benefits can be out of alignment—the costs are in the near future, whereas the benefits are not often realized until long periods of time have lapsed. Nevertheless, many benefits can be identified. Firstly, socially responsible companies have enhanced brand image and reputation. Consumers are often attracted towards brands and companies with good reputations in CSR related issues.

Therefore, a corporation’s brand equity is automatically enhanced. A company regarded as socially responsible can also benefit from its reputation within the business community by having increased ability to attract capital and trading partners. However, reputation is hard to quantify and measure; it is even harder to measure how much it increases a company’s value. But since companies have developed methods to measure the benefits of their advertisement campaigns, similar methods can and should be able to be applied in the case of corporate reputation. Socially responsible companies also have less risk of negative rare events.

Furthermore, companies that adopt the CSR principles are more transparent and have less risk of bribery and corruption. In addition, they may execute stricter and, thus, more costly quality and environmental controls, but they run less risk of having to bear in mind defective product lines and pay heavy fines for excessive polluting. They also have less risk of negative social events which damage their reputation and cost millions of dollars in information and advertising campaigns. The scandals about child–labor and sweatshops that affect the clothing industry are two fine examples. Thus, socially responsible businesses should have more stable earnings growth and less downside volatility. Since companies that adopt the CSR principles carry less risk, when valuing those companies, a lower discount rate should be used. In the company valuation this lower tail risk should be taken into account.

There are also other cases in which doing what is good and responsible converges with doing the best for the particular business. Some CSR initiatives can dramatically reduce operating costs. For example, reducing packaging material or planning the optimum route for delivery trucks not only reduces the environmental impact of a company’s operation, but it also reduces the cost. The process of adopting the CSR principles induces executives to reconsider their business practices and to seek more efficient ways of operating.

Companies perceived to have a strong CSR commitment often have an improved ability to attract and to retain employees (Turban & Greening 1997), which leads to reduced turnover, recruitment, and training costs. Employees, too, often evaluate their companies CSR performance to determine if their personal values conflict with those of the businesses at which they work. There are many known cases in which employees were asked, under pressure of their supervisors, to overlook written or moral laws in order to achieve higher profits. These practices create a culture of fear in the workplace and harm the employees’ trust, loyalty, and commitment to the company.

Companies that improve working conditions and labor practices also experience increased productivity and reduced error rates. Regular controls in the production facilities throughout the world ensure that all the employees work under good conditions and earn living wages. These practices are costly, but the increased productivity of the workers and improved quality of the products generate positive cash flows that cover the associated costs. Thus, firms may actually benefit from socially responsible actions in terms of employee morale and productivity (Moskowitz, 1972).

Literature review

CSP is a global concept that encompasses those of Corporate Social Responsibility and Corporate Social Responsiveness. It provides a coherent framework to explore business-society relationships by looking at the social impact of corporations with business criteria of performance measurement, such as quality, efficacy, effectiveness, innovation (Carroll, 1991; Wood, 1991). The challenge for corporate social responsibility (CSR) in developing countries is framed by a vision that was distilled in 2000 into the Millennium Development Goals—‘a world with less poverty, hunger and disease, greater survival prospects for mothers and their infants, better educated children, equal opportunities for women, and a healthier environment’ (UN, 2006: 3). The penetration of the social realm into corporate strategy has gathered momentum in the last years. The movement for CSR has “won the battle of ideas” (Crook 2005). By now, most well managed companies have adopted the practices and certifications mandatory in their industries, having gone through what Zadek (2004) calls the “defensive” and the “compliance” stages of CSR.

Managing the social and environmental footprint of economic activity is generally accepted as part of the cost of doing business. But much remains to be done. If companies are to move their CSR activities from satisfying behavior and take their commitment to society and the environment to the next level, they will need to rethink their current approaches to CSR, tapping into the creativity of every individual. CSE, like all entrepreneurship, is not about managing existing operations or CSR programs; it is about creating disruptive change in the pursuit of new opportunities. It combines the willingness and desire to create joint economic and social value with the entrepreneurial redesign, systems development, and action necessary to carry it out. Accelerated organizational transformation faces a host of obstacles well-documented in the change management literature. Some people argue that media pressures the corporate managers and directors to behave in ways that are “socially acceptable”. Sometimes this coincides with shareholders’ value maximization, others not (Zinagales, 2002).

Although there are several contested notions of what CSR should be and how it should work, there is some agreement upon what it broadly entails. A number of concepts and issues are subsumed under the heading of CSR, including human rights, environmental responsibility, diversity management, sustainability, and philanthropy (Amaeshi & Adi, 2006), meaning that it is a complex area with an interdisciplinary focus. It is generally agreed that CSR involves corporations voluntarily exceeding their legal duties to take account of social, economic and environmental impacts of their operations. Consideration of the social, economic and political context demonstrates how CSR forms part of a wider strategic direction being taken internationally with regard to market relations and the pursuit of a range of objectives and goals.

The context is in part provided by concerns about the numerous examples of irresponsible behavior on the part of corporations, ranging from colluding with oppressive regimes and in the overthrowing of governments (Alston, 2005) to issues relating to working conditions and the impact of unethical marketing practices (Richter, 2001). Such examples have demonstrated the need for the worst excesses of business to be curbed. The globalised economy is understood to raise important issues for businesses and governments due to changes in patterns of production and consumption. In particular it is noted that the manufacturing of goods is “highly mobile” (Cassell, 2001:263) and that supply chains are often dispersed in various countries, creating difficulties in terms of legislation and regulation. Moreover, economic globalization presents challenges to the ability of states to protect people’s rights (Cassell, 2001).

The notion of corporate social responsibility is part of the ‘third way’ (Gond & Matten, 2007), where the role of the state is now to provide “steering for the promotion of social development and social justice” (Giddens, 2001: 6). There is increased involvement of the private sector in traditionally statutory provision through privatization and public/private partnerships (Meehan, 2003). Economic policies have created a need for markets and business to self-regulate in order to continue to pursue an international free market economy, but also to ensure sustainability of economic, human and other resources, and of the environment. CSR is seen as a solution to these problems of regulation. The private sector is increasingly seen as a key player in the achievement of many national and international strategic objectives for governments, which is also enabled by CSR.

Methodology

To gather information, we used secondary research as our main source of information. Various academic journals and internet sources were pursued to cater to the important aspects of the given topic. Moreover, since we thoroughly researched this topic, personal opinions were formed and using those and logic, we justified our opinions accordingly.

How can business persons act in an ethically and socially responsible manner and at the same time make profits?

Suppose clear-cutting is profitable and legal, but is nonetheless regarded as environmentally irresponsible under prevailing social norms. Can management of a timber corporation decline to clear-cut its timberland even though that sacrifices profits? One might be tempted to evade the question by claiming that being environmentally responsible is profitable in the long run, either because it preserves the forest for future harvesting or because it maintains a public goodwill that aids future sales. But suppose, in an incautious moment, management admits that the present value of those future profits from not clear cutting cannot hope to match the large current profits that clear-cutting would produce. Or, more realistically, suppose a takeover bid by a firm known to clear-cut establishes precisely that proposition by offering far more than the stock price that reflects the current stream of profits.

Can management reject the profitable takeover bid on the grounds that it will lead to socially undesirable clear-cutting? The answers to these questions will challenge the canonical law and economics account on corporate social responsibility, which goes something like this. Unless modified by statute, traditional fiduciary duties require corporate managers to further the interests of shareholders, and thus require them to maximize corporate profits subject to the obligation to comply with independent legal constraints. Ethics and social responsibility are very important values in business ventures.

This is particularly essential in decision making process. Ethical conscience reminds business persons to make trustworthy and profitable business decisions. Likewise, the social responsibility component requires business persons to make entrepreneurial decisions that can enhance benefits and repelling harms to the stakeholders. The canonical law and economics view holds that corporate managers do and should have a duty to profit-maximize because such conduct is socially efficient given that general legal sanctions do or can redress any harm that corporate or non-corporate businesses inflict on others.

If certain conduct imposes excessive harm on others or merits taxation, then an independent law should regulate and impose liability or taxes whether or not the actor is a corporation, and if the conduct does not impose any impermissible harm or merit taxation, then the most socially desirable thing for corporations to do is maximize profits. Other stakeholders could either legally protect themselves by contract with the corporation or have their legal protection provided by judicial gap-filling of such contracts. Part of what makes this account canonical is that it helps define the boundaries of the corporate law field. It leaves corporate law scholars free to ignore issues about any effects the corporation may have on the external world as topics best addressed by other legal fields, and to focus on more tractable models about which corporate rules would maximize shareholder value.

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