Potential conflict between CSR and profit related activities: Can this conflict be resolved? -by Euroby Khyaguli

The concept of Corporate Social Responsibility (CSR) goes long back to 1953 when an American economist named Howard Bowen, often cited as the “father of CSR”, published a book called “Social Responsibilities of the Businessman”. His book connected the responsibility of corporations to society and advocated for business ethics and responsiveness to societal stakeholders. However, it was not until the 1970s, when in 1971 the Committee for Economic Development in the US introduced the term “social contract” between companies and the society (Accprof.org, n.d.). The idea behind the concept was based on the view that the business functions because of the “public consent” and thus has the responsibility to serve the needs of the society. The social contract basically focuses on the economic, social and the environmental aspects of the society, often referred to as the “triple bottom line”. As defined by the World Business Council, CSR is ‘the commitment of business to contribute to the sustainable economic development working with employees, their families, the local community and society at large to improve their quality of life’, (World Business Council 2005). In other words, CSR is an obligation that companies voluntary feel responsible towards as giving back to the society they operate in. The concept has been a topic of an emerging concern among the baby boomers generation due to the negative impacts on the environment as a result of unprecedented level of air and water pollution leading to climate change since the ‘Industrial Revolution’.

The development of 17 Sustainable Development Goals (SDGs) set by UNDP has been an another area that the modern corporations look up to and are interested to be involved in through their CSR activities. ‘Through the pledge to Leave No One Behind, countries have committed to fast-track progress for those furthest behind first. That is why the SDGs are designed to bring the world to several life-changing ‘zeros’, including zero poverty, hunger, AIDS and discrimination against women and girls’, (UNDP, n.d.). As the technological advancement and infrastructural facilities has developed, the world today faces developmental challenges such as climate change, rising inequalities and prolonged conflicts which cannot be dealt in isolation. Whilst there has been a number of discussions regarding the conflicts between CSR activities and the companies’ main motive of generating profit to its shareholders, this article critically explores the potential benefits and importance of the CSR activities and consequences of having a strict and well-developed regulatory regime supporting it, along with analyses whether the conflict between the stakeholder versus shareholders need is likely to be resolved in future or not.

Importance of Corporate Social Responsibility:

CSR activities are beneficial to both the company and the society that the company operates in. While, the company benefits from ‘brand recognition, positive business reputation, better financial performance, increased revenue and operational cost savings’ (nibusinessinfo.co.uk, 2020), the society benefits from the impact that the company made throughout its voluntary actions for the betterment of the environment either by donating to needy causes, supporting eco-friendly changes or developing agendas to support people from developing countries.

The concept of CSR is very versatile and every individual has their own understanding about it. Many businesses believe that CSR is just not something practiced by large organisations but every individual is responsible to their surrounding and one can help even in smaller scale by improving the lives of their employees through healthy initiatives or organizing fundraising events to benefit local charities (Poppulo, 2018). Any CSR initiative or program is as much impactful and can have a hugely positive effect on staff and local communities. As mentioned in the quotes provided, Item 1, summarizes with the manufacturing company believing that it has responsibilities towards not just shareholders but also its internal and external stakeholders such as its employees, investors, consumers, suppliers and the public in general. For example, as John Ditch field explained that ‘when an investment group or an insurance donates time or technical expertise to non-governmental organisation, it is doing this to promote wide social wellbeing and not just to further its own interests or the interests of its shareholders.’ (Kyriakou, 2018).

Item 2 highlights the importance of CSR activities for business to easier access to finance as ‘investors are more likely to back up a reputable business’, (nibusinessinfo.co.uk, 2020). Not only companies with reputable recognition have better financial performance and provide greater returns with reduced risks and volatility, they are more likely to avoid the risk of suffering from series of shocks and setbacks in their portfolio due to any mortification. A company with good CSR track records is likely to draw attention of many investors as the investors have high confidence in such business. Similarly, the CEO of UK FTSE 250 company believes that they are equally responsible for the environment they operate in and it is the company’s duty to look after the environment. The company’s CSR is an integral part for sustainable development for both the local environment and the company’s relationship with the local community. To summarise, CSR has been a topic of growing importance to firms all over the world, meaning that businesses are gradually understanding that the society is ‘inextricably linked’ with the growth and prosperity of the business and both profit generation and CSR should go hand-in-hand.

In addition to this, organisations’ also benefits from positive media attention, new business opportunities lessen regulatory burden and finding and retaining talented and motivated staffs, which are all important for the company’s growth and long term sustainability. According to a recent 2016 Cone Communications Millennial Employee Engagement Study , ‘64% [millennials] consider a company’s social and environmental commitments when deciding where to work and won’t take a job if a company doesn’t have strong corporate social responsibility (CSR) values.83% would be more loyal to a company that helps them contribute to social and environmental issues (vs. 70% U.S. average); 88% say their job is more fulfilling when they are provided opportunities to make a positive impact on social and environmental issue’, (Dailey and Dailey, 2016).

Nevertheless, the society and the environment also equally benefits form the activities carried out by the company such as clean environment, improvement in sanitation activities, waste management, social work and charity, improved health facilities and wellbeing, uplifted living standards fighting over hunger and extreme poverty and many more. It would not be wrong to state that CSR is an integral and interrelated part of the business and though it may seem to increase the cost of the business in the short term, it benefits both the company and society in the long run.

The Legitimacy of Corporate Social Responsibility:

CSR can be termed as an ethical obligation to the organization to promote the community’s financial growth by taking into consideration of the employees they work with, their families involved and the impact the production of goods and services have on the environmental norms. Juholin (2004) described (CSR) as ‘simple legal compliance and conducting business with a high regard morality.’ It is very necessary for businesses to understand that the resources they use to produce goods and services for the benefits of the shareholders and the economy as a whole, comes from natural resources and thus it is their prime responsibility to return back to not just shareholder but to the community as a whole. CSR in the recent era has become an important part of the organisation’s growth and increasingly crucial among the millennials of the generation. While there has been an increased demand of reputable business for better investment opportunities, being a responsible, sustainable business makes it easier for companies to recruit new employees and retain existing ones. Sustainable business also motivates employees to stay longer, thus reducing the costs and disruption of recruitment and retraining.

As the businesses tend to grow and the competition rises in the market, the budget allocated for the CSR activities also increases. While it is undebatable that the “Key Performing Indicators” on measuring the impact of the CSR activities depends on the outcome and the influence it has on the society, it is always better to have a regulatory body monitoring such issues. Many companies tend to allocate financial resources as a mandate to the CSR activities, increasingly produce reports promising or accomplished socially responsible conduct, however the actual outcome of is never measured and rather used as marketing or branding tactics at an organizational level, also sometimes leading the companies to use those conducts as a shell to protect them from tax avoidance issues. For example, the largest US energy company, ranked seventh on Fortune 500 list of country’s largest companies for 2001; Enron, drew the attention of the global economy after its demise due to the frauds by the senior management (Sikka, 2010a, p.15). While the company boasted a 64 page Code of Ethics stating that the company was “conducting business according to all the applicable local and international laws and regulations…with the highest professional and ethical standards… Employees of Enron Corp, its subsidiaries and its affiliated companies [collectively the Company] are charged with conducting their business affairs in accordance with the highest ethical standards….” (Werther Jr. and Chandler, 2005, p.70, 92) and also won a number of

awards along with being awarded as the Fortune Magazine’s “America’s Most Innovation Company” for six consecutive years from 1996 to 2001, the investigation performed by the US Senate Joint Committee on Taxation on 2003 established that the company had been manipulating its books since 1996 through its tax affairs. Moreover, even after profits and the US federal tax rebates, the company had been claiming tax losses brought forward and in 2002 alone the company paid an enormous amount of $282.7 million remuneration to its top five executives (Forbes, 22 March 2002). The demise of Enron was not just limited to its shareholders, investors and employees losing their jobs, but also its frequent acquaintances with its auditors; Arthur Andersons, one of the ‘Big 5 firms’, was globally collapsed leading to the loss of 28,000 jobs in US alone. The collapse of Enron hit the US market hard, as the stakeholders involved were not only financially detached but were also emotionally and socially devastated. Along with the process of bringing harmonization in the Financial Reporting, the collapse of Enron also raised the questions about the company’s so-claimed ‘CSR activities’.

In addition to this, there has been cases in the past such as WorldCom along with KPMG in collusion with major banks such as Deutsche Bank, HVB, UBS, and NatWest being involved in deceptive transactions ‘and facilitated potentially abusive or illegal tax shelters…’ (US Senate Permanent Subcommittee on Investigations, 2005, p.7). Ernst & Young being unethical and providing tax avoidance schemes to Walmart, while having a contradictory ‘Global Code of Conduct’ stating ‘professional commitment to do the right thing…’ (Sikka, 2010b, p.31). When the independent public practitioners themselves are involved in such irregularities, the trust and respect of the general public obviously tends to be shaken. Such cases raises the issues and the concerns of the general public, government and the global economy as a whole, regarding the effectiveness of the Corporate Social Responsibility and urges a conquest of having a stringent regulatory administration to support and monitor the CSR activities.

The Detrimental Effects of the Regulatory Regime:

As it is evident from the past that there had been misuse of the company’s resources while promising good conduct, the question here arises that even if there is strict and well developed, will it be followed stringently? Since CSR is a subjective and sensible issue, having a stern regulatory regime might not be enough until the impact of CSR has been measured and the socio-environmental impact has been assessed. For example, according to Nepal Industrial Enterprise Act 2016 translated by (Bpaca.com.np, 2016),‘companies with above NRS 150 million transactions annually are mandatorily required to contribute at least 1% of their annual profit to the CSR activities’ (IEA 2016, Sec 48). Though this act has been implemented in financial reports, there are no indication that the companies’ CSR allocated resources are actually benefiting the society. Moreover, there are no evidences if these activities are being properly monitored. In short, having a regulatory regime to protect the CSR activities is just not enough, rather strict monitoring, not only on the budget allocated but also to the social impact measurement should be in place if the council truly wants to promote and support CSR.

In addition to this, having an additional regime for companies to follow along with tax and other regulatory standards might also make them feel tedious. In order to get in aligned with the regulations, an economy can suffer from two major issues. Firstly, since CSR requires the corporations to take the interests of people into consideration, an organisation with the motive of gaining profits may not be able to fulfill its business objective due to its decision being based on the community welfare. This can eventually lead to clash in business objective and ultimately lead the business to close down impacting the economic activities. Secondly, companies on the other hand may not feel the need to actually benefit the society and rather allocate resources just for the sake of meeting the regulations. This can further lead the companies to involve in cost cutting and creative accounting by allocating resources in such a way that it seems as a CSR expense but is being used for other illegal purposes. For instance, companies operating in countries with unstable political situation, might involve in bribing and lobbying the government or the local authorities and account those costs as CSR expenses in their books of accounts. While, the company may seem to have been meeting the regulatory requirement, in reality, it may be deceiving the stakeholders as a whole impacting the whole country’s GDP. Either way, such cases will not only worsen the country’s economy but also will increase corruption and deception in the country. Therefore, the regulatory regime supporting and promoting CSR would not be sustainable or add value in the global market, until all the countries have stringent law enforcement monitoring policy. Rather it will increase more frauds and manipulation of books impacting the financial reporting hampering the economy.

Consequences of the Regulatory Regime:

By now, the article noticeably explored the importance of CSR and the pros and cons of having a well-developed and strict regulatory regime supporting it. While, there has been cases in the past which leads us to believe that it is important to have stringent policies to promote CSR and protect the environment, it is also clear that, regulatory regime itself will not solve the problem. If the regulations focus on only the financial impact over-shadowing the social and environmental impact, it is likely that the corporations will be involved in irregularities such as tax avoidance, money laundering or frauds.

Nevertheless, if the council promoting the regulatory administration is not farsighted, the restrictions to the companies will increase, making it difficult for small companies to operate and grow, which will ultimately affect the economy of the country as a whole and the economy will eventually move to slump. Thus, it would be rather beneficial to encourage organisations around the globe to promote and support sustainable development goal rather than imposing an additional legal requirement. As mentioned in “The Responsible Business Map”, ‘If every individual business strives to be the best it can be in all areas as a responsible business, there will be a positive multiplier effect. This will benefit society, the economy and the environment. If businesses collaborate they can have a greater impact upon key issues than if acting alone’ (Business in the Community, 2020).

CSR and profit related activities:

According to Milton Friedman, a corporation’s only social responsibility is the maximization of shareholder value as long as it operates using its resources without any deception or fraud. Conservatively, an organisation’s main aim was to maximize profit and provide dividend to its shareholders. The case of Dodge Vs Ford Motor Company 1919 is an evident example of this, where the court announced its decision in favor of the shareholders, for the company to provide dividend to its shareholders, against to employee more people and spread the benefits to the ‘greater possible number’. The court ruling its decision clearly stated that ‘A business organization is organized and carried on primarily for the profit of the stockholders. Directors cannot shape and conduct the affairs of a corporation for the mere incidental benefit of shareholders and for the primary purpose of benefitting others’ (Dodge vs Ford Motor Company 1919, cited in Regan 1998).

While it understandable that the primary responsibility of any profit motive organization is to maximize its shareholder’s wealth, in the recent years, the advancement of the Sustainable Development Goals set by UNDP have made modern corporations more responsible towards economy, society and the environment globally. Sustainable Development is ‘a process of change in which the exploitation of resources, direction of investments, orientation of technological development and institutional change are made consistent with future as well as present needs’ (WCED,1987:9). Organisations and people both understand the footprints they make in the environment and are involved in continuously trying to improve their surroundings being aligned with the seventeen Sustainable Development Goals. According to UNDP, ‘The 17 SDGs are integrated—that is, they recognize that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability’ (UNDP, n.d.).

The conflict between Corporate Social Responsibility and the company’s profit generating activities has been an ongoing discussion since a long time. While we have seen the revolution of CSR since the 1970s till date, it is clear that the modern corporations are taking a turn to be more responsible towards society they operate in and while this is still ongoing, the question of if or whether this issue will be resolved in future is still a concern to many economists and environmental activists.

Stakeholders versus Shareholders: Conflict Resolution?

The primary function of any profit making organisation is to provide return on investment to its shareholders and if the organisation shifts its primary function prioritizing more on the stakeholders such as consumers, society and the environment, it will turn out to be a charity. In other words, if the profit seeking corporations start focusing on the greater number of people, the clash in its business objective will not only be a competitive disadvantage but also the shareholders involved will lose their faith in the business. The business will basically be operating as an INGO working towards the betterment of the society, uplifting the living standards rather than making financial contribution to the economy. As quoted by Banerjee, S. B. (2008) in his journal- Corporate Social Responsibility: The Good, the Bad and the Ugly , ‘ What happens if environmental and social issues do not result in growth opportunities remains unclear, the assumption being that the global sustainability can be achieved only through market exchanges…Even national governments and international organizations like the United Nations promote sustainability as a business case of consequence of which is that business, not societal or ecological, interests define the parameters of sustainability.’

However, having said so, it is also equally important to understand that companies use natural resources for the production of goods and services and once the natural resources are depleted, no activity will be possible. For example, if a paper producing company keeps on cutting trees for the production of paper without giving considering the impact on the eco-system, it will gradually lead to deforestation and the company will have no resources in the future. Similarly, if the company focus more on planting trees and less on its primary function of producing and selling papers, the business will eventually close down. Either way, if there is no balance between the company and its CSR activities, it will be harmful for both the environment and the economy. Individuals and organisations need to understand the link between the resources they use and the footprints they leave in the environment along with considering the best possible way for the economic growth. So what could be the possible solution for this conflict resolution?

Companies need to understand that while the primary function of the business will always be achieving its business objectives, the society and the environment should not be neglected. They need to be aware of their duty they have towards the surrounding they operate in. Eventually, in the long run, the conflict between CSR and profit generation may be resolved, however as the harmonisation of financial reporting standards took decades, same goes for this conflict resolution. The involvement of large corporations such as the initiation of Bill & Melinda Gates foundation by Microsoft to work in areas of improving the health and wellbeing and uplifting people from hunger and extreme poverty, KPMG Foundation being involved in volunteering improving the community through their expertise and skills are some of the examples of the development of modern corporations with regards to CSR.

Corporations are gradually realizing that CSR is not a cost to the business but a long term gain in terms of reputation, recognition and sustainability. CSR is an integral part of the organisations growth and inter-related with sustainable development. And although, there are miles to go until this conflict resolves, the steady steps of the corporations like Microsoft, Walt Disney, Coca-Cola Google, BMW, KPMG, World Bank and many more have been making significance contribution towards the conflict resolution. As the old Chinese proverb goes by, “Persistence can grind and iron beam down into a needle”, the perseverance of the corporations and the encouragement around the globe will eventually someday resolve the encounter between CSR and the companies profit related activities.

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