Case Project

Chapter 3 – Corporate Social Responsibility These lecture notes include comments and material for Chapter 3 concerning corporate social responsibility and corporate citizenship.

In Chapter 3 lecture notes, we cover the following topics:

Corporate social responsibility

How emigration to cities changed our economic system.

Implementing corporate citizenship strategies.

Corporate social performance audit.

The triple bottom line.

CORPORATE SOCIAL RESPONSIBILITY In these lecture notes, we will cover many topics that concern businesses. Let me again state (up front) what this course is and is not about. This course is not about telling students what businesses should do. Instead, this course is designed to cover important current topics in the social, political and ethical environment to give our MBA students the background and knowledge necessary to make successful business decisions. As this course progresses, I hope students become more aware of the many topics and issues in today’s business climate and begin formulating plans and procedures concerning how to make business decisions if confronted with these issues in real life. I hope that, as alumni, our students will look back on this course and feel they acquired a strong foundation that aided them in making sound decisions in their real lives. EMIGRATION TO CITIES CHANGED ECONOMIC SYSTEM I assume you have read Chapter 3 in the textbook and are now familiar with the material and concepts in this chapters. In Chapter 1 lecture notes, we covered the idea that people are motivated by self-interest. To continue with this concept, what role do people expect businesses (companies and corporations) to play in this self-interest

model? Self-motivated people (society) created the economic system we have and the business forms we use (e.g. corporations). So, what do we (people) want businesses to do to help us with our own self-interest? When people farm their own land, they are somewhat self-sufficient. They typically do not need major organizations to help with food and shelter. Neighbors trade with neighbors (often barter) so that attaining food and shelter is very possible. But, during the Industrial Revolution when labor specialization became more prominent and manufacturing grew, people left their farms and moved to cities. During this time, the United States population moved away from its food sources (in 1820 about 72% of workers were employed in farm occupations whereas today it is about 2.5%, The World Almanac) to industrial cities, away from rural areas into urban areas. This caused a great need for massive safe food shipments and storage in cities, local housing developments, and reliable work so that people had the resources (money) available to purchase the shipped-in food and local housing. (People living in cities do not have their own farms where they can grow their own crops to eat and chop their own wood to use for building shelter and as fuel for warmth. City dwellers need jobs that provide the wages (salaries) that allow them to buy the food, fuel, and shelter they need to survive.) Along with labor specialization, people moving away from farms, the creation of large cities, the need for basic goods and services in cities, and so on, society has developed new economic systems and business forms to provide what it needs. It turns out that, so far, the corporate form of business, on average, is one of the most reliable entities to provide safe products and stable jobs to city dwellers who need to survive away from farms. And, as people advance in their work, they tend to make higher wages (salaries) and this increases their ability to buy more products and increases their standard of living, which is the ability to buy goods and services. (Fact check -- Today, over 76% of the U.S. population lives in urban areas. Also, of the approximately 157 million jobs in the US (CIA World Factbook https://www.cia.gov/library/publications/the-world-factbook/geos/us.html over 150 million are what is designated as non-farm jobs.) This creates a massive need for someone or something to move enormous quantities of food, clothing and construction material to where people are living. From the above information and the realization that so many Americans live in cities (and away from farms and actual food sources), we find that society, in general, wants businesses and our economic system to:

1) help provide a safe environment for people 2) help create stable jobs for people (so they can buy food, clothing and shelter, etc) 3) help make and distribute goods and services to meet people’s basic needs

4) help increase people’s standard of living beyond basic needs In the US, one summary way of looking at public policy is to help people when they need it and leave people alone when they are doing fine. But, who defines when people need help and when they are doing fine? It is my belief that most economists agree that economic and business forms were created to help society achieve security, obtain stable jobs, acquire basic needs, and increase people’s standard of living. But, where economic thinking differs is in how this can best be accomplished. There are many different points of view on how businesses can best fulfill the above four objectives. Some believe that leaving business alone (Laissez-faire doctrine) will best accomplish these objectives. As businesses pursue maximum wealth creation for their owners, they will also tend to accomplish the above four objectives of what society needs and wants. But, others feel that there are times when businesses are not doing enough to help provide what society needs (security, stable jobs, basic needs, and an increased standard of living). There is also the concept of the long-run and short-run. Some economists believe that things should be viewed only from a long-term perspective. As companies pursue wealth creation for their owners, they will also accomplish the needs of society in the long-run. Other economists believe that we cannot wait for the long-run in instances where problems arise and people are suffering in the present. (During the Depression of the 1930s, economists debated whether the government should step in and help people who were literally starving. Some economists felt that the government should do nothing because, in the long-run, the economy would work through the problems. One economist, John Maynard Keynes, who believed in short-term policies of government intervention, stated that ‘In the long-run we are all dead.’) See reference: http://en.wikipedia.org/wiki/Keynesian. This is often referred to as Keynesian economics. The US government’s response to today’s ups and downs of the economy is greatly influenced by what happened during the Great Depression (1930-1940). Thus, it is in the details (not the major objectives) that we have most of the debate on what businesses should do in the area of society and social responsibility. Here is an example where the major objective is not disputed but how to accomplish the objective is disputed.

Major objective – Probably everyone would agree that U.S. public safety is a major goal and safe food is one of the most important aspects of keeping the public safe. The details – In the area of food packaging, many U.S. businesses have resisted labeling food packages to clearly identify what is in the package. About 10

million people in the U.S. suffer from severe food allergies and appropriate food labeling would be very helpful in keeping these people safer (since food labeling could help these people avoid foods that make them sick). Since most companies would not voluntarily label food packages with information that could help these people, the government stepped in and enacted the Nutrition Labeling and Education Act of 1990 and the Food Allergen Labeling and Consumer Protection Act (which went into effect in 2006) and updated food labeling in 2016 http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm502182.htm. Companies must supply specific information to consumers about what is in the food they are selling to the public.

In this example, we find that everyone agrees that our food should be safe, but how to make it safe for people is the issue (the detail). CORPORATE SOCIAL RESPONSIBILITY The textbook outlines some of the arguments for and against corporate social responsibility. To me, one of the most compelling arguments for corporate social responsibility is enlightened self-interest. As the authors of the text present, if businesses want to survive for the long-run, it may be in their own self-interest to be aware of social changes and craft effective strategies to best capitalize on these trends. CORPORATE CITIZENSHIP Now we begin discussing the thought process that businesses may want to adopt when making decisions that respond to multiple stakeholder issues. IMPLEMENTING CORPORATE CITIZENSHIP STRATEGIES Corporate citizenship is businesses acting responsibly toward their stakeholders. Here, the term corporate does not refer only to corporations (a special business form) but all businesses including sole proprietorships and partnerships. The implementation of the corporate citizenship strategic process includes five steps:

The Elementary stage – The company complies with the law but is uninvolved in social issues.

The Engaged stage – Company develops awareness of the surrounding stakeholder issues and expectations. The Innovation stage – As the company begins tackling the issue, it becomes aware of shortcomings in the company and begins the innovation process of solving the problem. The Integrated stage – Company implements the strategy by making it part of the normal operations of the organization and moves toward adopting triple bottom line measures and real partnerships with stakeholders. The Transforming stage – Company partners with external organizations to address broad social issues.

What is important to realize is that corporate citizenship strategies are similar to most other business strategies developed by the firm. They should be taken as seriously as other business strategies and should receive similar attention by top organizational officials and executives. CORPORATE SOCIAL PERFORMANCE AUDIT Auditing business operations to make sure that the business is actually doing what it says it is doing is a normal procedure in many organizations. So, why not audit social performance, how the organization is seen by its stakeholders? This audit can take several forms. Savvy business leaders need to know everything they can about their business, including how the organization stacks up concerning corporate citizenship. This audit should include an accurate portrayal of the organization’s dealings with all of its stakeholder groups. What the company perceives as reality and what stakeholders perceive as reality may not be the same. Any gaps in perceptions between the company and its stakeholders should be analyzed. As with most SWOT analyses, (Strengths, Weaknesses, Opportunities and Threats), companies should devise strategies that capitalize on strengths and opportunities and minimize the impact of (or correct) weaknesses and threats. A social audit should really be no different than any other corporate audit. Management needs to know what is really transpiring within and outside the business and plan strategies to deal with both the positives and negatives. TRIPLE BOTTOM LINE

What information do companies put in their annual report? By law, there are many rules for financial reporting in annual corporate reports. All companies that issue common stock have rules to follow to report the financial status of the company. But what about reporting areas of social performance? Many companies, as part of their reporting to shareholders, include summaries of charitable contributions, employee involvement in community activities, special company projects focusing on social issues such as cleaning up the environment, and so on. These companies report on the financial, social and environmental results of the past period and this constitutes the organization’s triple bottom line. Food for thought #1: Could it be that the lack of real corporate citizenship in the early days of the Industrial Revolution inspired the socialist movement? We do know that Karl Marx (1818 -1883) began his socialist thinking at least partly as a reaction to the squalor and misery that city dwellers (circa 1840) had to deal with because of the abuses of newly formed factories and other businesses. If early businesses had acted more responsibly to their employees and the public, is it possible that the socialist movement may never have caught hold and flourished in so many countries? Food for thought #2: I attended an International workshop recently. One of the presenters has done extensive research into corporate social responsibility and the bottom line. His research showed that the bottom line was not impacted, on average, when corporations were socially responsible. So, his conclusion was that corporations should only do the minimum activities concerning social responsibility. My conclusion was quite the opposite. I argued that if the cost to the firm of being socially responsible does not impact the bottom line, then why not be socially responsible? The major argument against being socially responsible is the cost to the firm. If the cost of being socially responsible does not impact the bottom line (in that there are benefits the company receives for being socially responsible that offset all the costs), then why not be socially responsible. In other words, there are three things that can happen to the bottom line when a firm is being socially responsible. The bottom line can be positively affected, negatively affected, or not affected at all. I argued that two outcomes, the time when the bottom line of a company is either positively affected or not affected at all, are favorable for the firm being socially responsible. Whereas, the conference presenter argued that firms should be socially responsible only when one bottom line condition is achieved, that being when the bottom line is positively affected.

Of course, some may argue that companies should be socially responsible regardless of the bottom line. But this example is specifically discussing the condition where the bottom line is not affected by the company being socially responsible. What is your conclusion and what would you recommend businesses do? Copyright © 2017 by Linda A. Hayes, Ph.D. All rights reserved. Portions of these notes are based on ‘Business and Society: Stakeholders, Ethics, Public Policy,’ Lawrence and Weber, 15th, McGraw-Hill, New York: 2017.