Adam Smith, in his book ‘An Inquiry into the Nature and Causes of Wealth of Nations’ wrote “It it not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (emphasis mine). That was in 1776 at the height of mercantilism marked by small scale producers using traditional means of production. Thus each man’s self interest manifest in the invisible hand of the market advanced public interest. Corporations, as we know them now, did not exist then.
However beginning from the late eighteenth century, the invisible hand of the market was tamed by “visible hand” of managers who came to work for large corporations. Today, many business corporations are larger than many nation states economies. They have assumed a dominant position in society. Instances of power abuse by corporations as seen in cases ranging from Enron to British Petroleum’s oil spill and not forgetting the “too big to fail” financial institutions, have created a negative image of corporations among members of society .
In light of such negativity surrounding business corporations, Corporate Social Responsibility (CSR) is seen by people as an attempt by corporations to prevent backlash from governments at best and to create barriers to entry for new players at worst. (The latter part can be explained by an example of a big organisation lobbying for strict environmental stipulations so as to prevent smaller organisations from entering the business due to high capital costs of buying eco friendly machines). There are also those who feel CSR is nothing but a waste of money. They argue that the purpose of business is business. A corporation’s aim is to maximise shareholder value and any attempt to indulge in CSR is a symptom of the principal- agent problem as defined in agency theory (managers undertake CSR using shareholder money to further their own social and political interests).
The above views (one that sees CSR as nothing but a façade and the other as an agency theory problem) do have some merit. This is largely due to the fact that CSR is seen as a residual activity-something that is done after profits are earned and shareholders are rewarded; or as a Public Relations (PR) tool. Until organisations understand that CSR can become a source of sustained competitive advantage, and incorporate it in their business processes, the above views will continue to hold merit.
In light of above arguments, it is pertinent to ask, “What is CSR?” CSR can be defined as actions that appear to further some social good, beyond the interests of the firm and that which is required by law. Companies that are able to leverage this “social good” will earn higher profits when CSR is incorporated in the business strategy.
This requires a fundamental shift in how businesses view “business” and also how they perceive “CSR”. Business is not only about shareholders. The exclusive focus on shareholders has been criticised in management literature. In fact the view of CSR being a principal-agent problem has been negated by the stakeholder theory which views that firms have relationships with many constituent groups (society, employees, suppliers, customers) and that these stakeholders affect and are affected by the firm’s actions.
So how does CSR make an effective business strategy? If seen from the stakeholder theory, the ethical behaviour of firms will enable them to achieve a competitive advantage, because they will develop lasting, productive relationships with these stakeholders. Management researchers have argued that Corporate Social Performance (CSP) (CSP is wider term than CSR and also includes social responsiveness and social issues) can constitute a source of competitive advantage especially in high growth industries.
Reputation building is an integral part of strategy formulation. CSR helps companies build reputation. The success of the Tata group , Body Shop, Health Valley confirm the importance of CSR in reputation building which leads to sustained competitive advantage.
Also, CSR allows a firm to follow the differentiation strategy route to high profits. A firm can create a certain level of CSR by embodying its products with CSR attributes (such as pesticide free fruits) or by using CSR-related resources in its production process (using organic fertilizers).Thus CSR becomes a mechanism for differentiation. Firms are already doing it. In India, Fab India and Jaipur Rugs are doing it in the traditional crafts business. Globally, Body Shop follows CSR-related resources in its production process (no animal tests). These firms have been able to differentiate their product and charge premium prices.
The case of ITC e-choupal which eliminates middlemen and allows ITC to procure agricultural commodities directly from farmers is an example of CSR which is benefiting both-the farmer through high price realisation and ITC through consistent quality and reduced procurement costs. Thus CSR can also be used and in fact is being used as low cost strategy for competitive advantage.
In the labour market, it has been proved that firms in industries with skilled labour shortages have used CSR as a means to recruit and retain workers. Also CSR allows firms to build a good reputation in the eyes of government and regulators thus leading to a positive correlation between government contracts and the provision of CSR.
Thus it is evident that CSR when undertaken as part of business process creates value. Self enlightened managers will realise that business models like ITC e- choupal where ITC’s need for creating shareholder value is enmeshed with that of local communities in a mutually supportive, interlocking and interdependent partnership are the business models for the future. Merely paying lip service and writing a check has attracted severe criticism. It would therefore be correct to state that corporate philanthropy is bad CSR, making profits is good CSR. Models that enmesh business & community interests is the best CSR!