Corporate Social Responsibility: Potential and Challenges
September 2, 2014
In this brief essay, I would like to discuss the growth of CSR first more generally and then in Japan, provide some suggestions to enable firms to improve the effectiveness of their CSR efforts, and offer some general reflects as to what CSR can and cannot accomplish.
The Growth of CSR
In recent decades, public expectations of business have steadily increased. While investors still expect firms to maximize profits, the public has become increasingly aware of the importance of the social and environmental impact of businesses. Firms are now expected to make every reasonable effort to reduce their negative externalities—or such harms as pollution that they cause while pursuing their business activities—and to increase their positive externalities, or their impact on addressing important social and environmental problems, such as poverty reduction.
The expansion of economic globalization has created a political backlash: Many citizens regard its benefits as insufficient and its social and environmental costs too great. It has been associated with increased inequality, economic insecurity, human rights abuses, and environmental degradation. In addition, many governments, particularly in developing countries, appear either unable or unwilling to control the conduct of global firms and their complex global supply and distribution networks. This has created a marked imbalance between the power of large global firms and national government regulations: The former frequently appears to be overwhelming or undermining the latter. CSR has emerged as a way to fill in this “governance gap,” or to create a public domain between states and markets.
There is considerable evidence that business norms have changed: CSR is now widely regarded as a legitimate dimension of global corporate decision making. Survey evidence reveals that CSR has become a more important priority for managers and that its importance and legitimacy have steadily increased. Evidence of the increased importance of CSR includes:
— A substantial increase in the number of global firms that produce annual reports on their CSR activities.
— A substantial increase in the number of global firms that have a CSR program.
— A substantial increase in the number of CSR reports that are independently audited.
— A steady increase in the number of corporate codes of conduct. Industry codes now exist for firms in virtually every global sector including chemicals, finance, mining and minerals, tea and coffee, toys, textiles, diamonds, sporting goods, and electronics. These codes have established standards for responsible corporate behavior, primarily with respect to employee rights, working conditions, and environmental impact. Some are governed by the firms themselves, while others, such as Fair Trade International and the Forest Stewardship Council, involve partnerships with nongovernmental organizations. In some sectors, such as forestry and clothing, there are multiple industry codes.
— An increase in the number of countries whose home companies have embraced CSR. Thus the United Nations Global Compact now has more than 7,000 corporate signatures from 130 countries. Likewise the Equator Principles, which established social and environmental criteria for project finance, have become a global standard, endorsed by nearly every bank that engages in this kind of lending.
— An increase in the number of social or ethical investment funds or indices; they now exist in virtually every capital market. In short, CSR has become globalized.
CSR in Japan
Since it was originally developed as a Western concept, primarily in the United States and Britain, CSR came relatively late to Japan. The year 2003 is often referred to as CSR gannen —or the first year of the “CSR era.” It is clear, however, from the results of the Tokyo Foundation’s CSR Survey, as well as other sources, that major Japanese firms have now embraced global CSR norms and practices. For example:
— 75% of major Japanese firms have CSR committees.
— 88% of the largest Japanese firms issue reports on their CSR activities.
— More firms in Japan have been certified as ISO 14000 compliant than in any other country. (ISO 14000 is an environmental process standard which is used by many large firms, especially in Western Europe, to select their suppliers.)
— Japan is home to more socially or ethically responsible investment funds than any other Asian country.
— 132 Japanese firms have subscribed to the United Nations Global Compact.
— Keizai Doyukai has issued several reports on CSR practices in Japan while Keidanren has issued a Charter of Corporate Behavior.
Improving CSR Performance
While there has been a considerable growth of CSR, both globally and in Japan, many firms are still struggling to better manage their CSR policies and practices. What, then, can firms do to improve their CSR performance?
It is important to recognize that notwithstanding the importance of the 10 principles of the UN Global Compact and the widespread embrace of ISO 26000, a comprehensive CSR guideline, it is clearly not the case that “one size fits all.” Rather it is critical that companies tailor their CSR practices to their own distinctive business operations and core competence. Clearly, the CSR agenda of a financial institution will differ from that of an oil company or a clothing manufacturer. But even within the same industry, a firm’s CSR strategies are likely to vary, depending, for example, on such factors as the location of their business operations, strategies, size, and financial performance. Thus the challenge for every firm is to formulate their own CSR strategies.
How then should a firm go about developing its CSR strategies? The following is not meant to list action items in order of importance but rather in sequence: they are intended to enable managers to further develop their CSR initiatives.
One way to begin is to focus on the defensive aspects of CSR. These involve the reputation or, in some cases, the financial risks faced by a firm by being perceived as not sufficiently responsible. Firms need to identify and anticipate their CSR-related business risks. What aspects of your firm’s operations might result in it becoming the focus of a media exposé or an attack by an NGO? Who is likely to criticize your firm and for what reasons? What damage to your firm are they likely to cause? In other words, how, where, and for what is your business likely to be vulnerable?
Investments in CSR can be usefully understood as a form of reputation risk insurance. An important goal of a firm’s CSR initiatives should be to reduce the likelihood that its reputation will be damaged. In this context, managers should carefully monitor similar firms that are currently being criticized, since this may provide them with advance notice of the challenges their firm will be facing.
Another useful proactive strategy is to develop informal relationships with reporters, investigators, and activist groups, as these can help you anticipate future media and NGO activities. Finally, a firm’s CSR’s strategies should be linked to its approaches for dealing with crisis management in general. Firms need to develop advance procedures for responding to CSR-related crises. The key objective should be to avoid being surprised or caught unaware.
A second approach for developing a CSR strategy is to carefully and comprehensively assess your firm’s social and environmental impact. If an important dimension of CSR involves reducing a firm’s negative externalities, then it is vitally important that a firm’s managers first learn and understand what they are. This is not only an important exercise but a challenging one: It requires a firm to engage in a comprehensive life cycle analysis of its products or services that includes a focus on where and how they are sourced, how they are transported, how they are processed, how they are sold, how they are consumed, and how they are disposed of.
This exercise is particularly important for a firm that wishes to reduce its negative environmental impact or its “carbon footprint.” Many firms have found such assessments extremely valuable as they have uncovered dimensions of the social or environment impacts of their supply and distribution chains about which they were previously unaware. Such an exercise can then inform a firm’s CSR agenda by highlighting areas which it then has the potential to change.
The third exercise that should inform a firm’s CSR strategy involves thinking very broadly about the social and environmental problems faced by society in general or in the countries where it does business. After identifying these problems, the next step is to figure out what role your firm might be able to play in addressing or ameliorating one or more of them. This important exercise requires you to think beyond your company to the broader society in which it is embedded. It may turn out that there is little overlap between many of these problems or ills and your business operations, in which case, there is little or nothing for your firm to do. Alternatively, it might well be the case that your firm has some unique competences that overlap the social or environmental problems you have identified and which your firm can then play a role in addressing.
The fourth approach to developing a CSR strategy is to examine it from the perspective of your business operations. Given your business goals and strategies, in what ways can CSR help you achieve them? It might be the case, for example, that you need to attract better trained and highly motivated employees. Or you might be interested in extending your business operations into another country, either by making it a part of your supply chain or as a source of new customers. There might be an important constituency whose support your business needs. How can CSR assist you in achieving these business objectives?
Each of these four steps—identifying your CSR risks, identifying your overall CSR impact, identifying the broader social problems that need addressing, and identifying which business objectives CSR can assist you in meeting—are designed to accomplish a similar goal: their purpose is to help your firm establish its CSR agenda, to assist it in deciding its CSR priorities. Thus the more a proposed CSR initiative can reduce a reputation risk, reduce a negative externality, address a pressing social need, and assist in the achievement of the firm’s business objectives, the more it makes sense for a firm to pursue it.
Taking Specific Steps
After formulating your CSR priorities, the next challenge is to determine what specifically your firm should do. It is important to think creatively and broadly about this, for there are many ways in which a firm can improve its CSR performance and thus net its positive social impact. These include philanthropy—the most traditional form of CSR—permitting or encouraging employees to actively participate in various community initiatives, changing your product mix, changing the criteria by which you select contractors or suppliers, improving the monitoring of your supply chain, and improving the environmental efficiency of your own operations.
In undertaking these efforts, managers need to think beyond their own organization. The large and growing number of industry codes represents an important resource for companies. Many of these codes have already developed specific standards for corporate conduct as well as specific strategies and policies for implementing them. These codes also provide important sources of information for industry “best practices.”
Another possible advantage of participating in an industry code is that their formation and in some cases their governance frequently involves the participation of nongovernmental or activist organizations—precisely those constituencies whose activities and priorities may represent a reputation risk for your firm. In this context, an important way for a firm to leverage its core competences is to directly partner with nongovernmental, nonprofit organizations. These partnerships need to be carefully managed, but there is considerable evidence that cross-sector partnerships can provide a firm with significant benefits: They can often result in better results than a company can achieve on its own.
Many firms experience shortcomings in their CSR programs because they are insufficiently clear about their goals. You need to clearly define what you hope to accomplish by your CSR initiatives and then develop clear metrics or measurements for these goals. These metrics are an extremely important business tool: they signal what CSR commitments are important to your firm and enable you to clearly assess the progress you have made in meeting them. They also represent an important way of communicating to the public about what you want to and can accomplish, and how well you are achieving the goals you have set for yourself. Moreover, developing clear CSR goals and publicly reporting on your progress in meeting them represents a critical—even essential—vehicle for establishing the legitimacy of your CSR initiatives.
Such objectives should not be written in stone. On the contrary, they should be periodically reviewed. It might be the case that you need to revise them either upward or downward or abandon some and/or add others.
In fact, the process of reviewing or possibly revising your firm’s CSR objectives is also very important. It provides a way of making sure they are realistic and achievable. Alternatively it may alert you to shortcomings in your CSR performance which you can then address.
Finally, firms need to think comprehensively, strategically, and creatively about the business benefits of CSR. In some cases, the business benefits of CSR can readily be measured. They may, for example, help to develop new markets for your existing products and services or even lead to new or revised products or services. Likewise, they may improve the efficiency of your operations by reducing energy use. (One reason why environmental initiatives have become so popular among firms is that they often result in reduced operating costs, which can be readily measured.) But more typically, measuring the business benefits of CSR is much more difficult.
But the fact that some of the business benefits of CSR may be difficult to quantify does not make them unimportant; they may still be valuable. The hard-to-measure benefits of CSR can include a better corporate reputation, improved employee morale or the reputation risks to which you firm was not exposed. It is also important not to overlook the personal value of a firm’s CSR efforts to its senior managers. Employing a firm’s resources to help ameliorate pressing social or environmental problems can be appropriately viewed as a form of nonwage compensation for senior mangers: they enable them to broaden the contribution of their firm beyond creating shareholder value.
CSR and the Market for Virtue
Both the accomplishments and shortcomings of CSR fundamentally stem from the same factor: the strengths and limitations of the business benefits of corporate social responsibility. There is a “market for virtue”: There are business benefits for acting more responsibly. They include a better corporate reputation, improved employee morale, better relations with stakeholders, more efficient use of resources, and more effective and innovative marketing.
Moreover to the extent that CSR is viewed as a form of public relations risk insurance, then investments in it certainly make business sense—even if these benefits are not always easier to measure. It is these benefits that explain why so many global firms have expanded their CSR programs and initiatives.
But while the good news is that more responsible firms do not perform any worse financially than less responsible ones, the discouraging news is that neither do they perform any better . The reason is that the relative importance of CSR to a typical firm’s profit margins, return on investment, or market share is often modest. The financial impact of a firm’s CSR efforts or the lack thereof is typically overshadowed by other competitive events, pressures, and opportunities. This, in turn, reduces the amount of resources many firms may be able or willing to devote to improving its CSR performance. There certainly is potential for firms to improve their effectiveness of their CSR efforts, but we must also recognize the extent to which a highly competitive global marketplace constrains those efforts.
We need both to acknowledge and applaud all that CSR has accomplished while at the same time also recognizing its limitations. Many important global problems, such as reducing corruption or coping with the risks of global climate change, are simply beyond the scope of profit-seeking firms to effectively ameliorate. They can only be adequately addressed with the support and cooperation of governments.