Conventionally, businesses are primarily created as profit-making entities, thus the majority of decisions seek to maximize the shareholders’ investment. However, the assumption that organizations exist solely to make money has changed over time with the emergence of the idea that such entities have some responsibilities to society. This premise birthed the concept of corporate social responsibility (CSR), which has continued to grow in popularity and significance.
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At the center of CSR is the belief that business enterprises should have social and ethical responsibility on top of their economic missions of creating wealth for shareholders or owners. On the one hand, the economic responsibilities of a business involve producing goods and services at a price that can support its competitive existence to satisfy its obligations to shareholders. On the other hand, ethical responsibilities are the activities or behaviors expected from businesses by other stakeholders, such as social and employees.
Ethical and legal compliance of organizations are inseparable, and they provide significant advantages for businesses. By adhering to laws and ethical standards, a company represents itself as a responsible corporate citizen. As mentioned by Nicolaides, organizational ethical behaviors as part of the Corporate Social Responsibility (CSR) strategy allow businesses to reduce reputational risks and increase competitiveness through positive impacts of stakeholders’ perceptions (288). The concept of CSR, its relations with business ethics, and potential favorable influences on organizational performance will be discussed in this paper.
CSR and Business Ethics
Ethics determines the standards that are used to determine what is good or bad when making organizational decisions to shape the conduct of executing day-to-day operations. According to Adda et al., “Ethics are codes of values and principles that govern the action of a person or a group of people regarding what is right versus what is wrong” (27). Ethics encompasses the internal values that form part of corporate culture to shape the decision-making process when dealing with the external environment, which underlines social responsibility.
Therefore, in the context of the corporate world, business ethics are the principles of fairness and honesty that should be applied when dealing with stakeholders including customers, employees, society, and the environment.
In other words, business or corporate ethics is the umbrella term that covers all matters related to moral issues arising when conducting business affairs. Adda et al. define business ethics as “the rules, standards, codes, or principles that provide guidance for morally appropriate behavior in managerial decisions relating to the operations of the corporation, and business relationship with the society” (27). Therefore, the growth of any business entity is subject to the degree to which it adheres to the established code of ethics in its day-to-day dealings with its stakeholders.
However, in the capitalist environment, firms and their managers may pursue their own financial interests and forget about the negative impacts of their operations on external stakeholders. Sometimes in this pursuit, they may engage in illegal activities and implement inadequate governance practices. However, unethical and illegal behaviors usually result in serious damages to organizations when the public learns about them. It is valid to say that CSR aims to prevent such consequences. Overall, CSR “encompasses the conduct of a business that makes it economically lucrative, ethical, law-abiding, and caring socially” (Nicolaides 286).
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It means that as part of the CSR strategy realization, companies use ethical and legal compliance in order to increase their attractiveness to consumers and other stakeholders and establish greater trust. In this way, firms can create competitive advantages and differentiate themselves from rivals.
In other words, scholars, critics, and proponents of CSR increasingly view it as a business opportunity to increase competitiveness to survive or thrive in the marketplace as opposed to being an obligation to society. Consequently, to business enterprises, CSR is a long-term strategic approach weaved into the agenda of profit-making. Lőrinczy and Sroka argue that companies are thus compelled to behave responsibly in their quest to maximize shareholders’ value and create wealth (201). Corporate entities have to show goodwill in promoting ethical practices to be seen as reliable business partners that care about the welfare of all stakeholders.
The interplay between CSR and business ethics stands out clearly in the so-called controversial sectors of an economy. According to Sroka and Szanto, “It is expected that firms in controversial sectors exhibit their ethical behavior and engage in corporate responsibility practices very intensively since they seek for organizational legitimacy” (113). Controversial sectors in this context may be taken to mean entities that produce goods and services that cause significant harm to consumers, such as players in the tobacco, alcohol, and pharmaceutical industries among other related companies.
A good example to explore this topic is the pharmaceutical sector given the complicated nature of operations, benefits, and potential harms caused to society. On the one hand, pharmaceutical products play a significant role in ensuring a healthy population and saving lives. In essence, humanity would have been wiped out by plagues if this industry did not expect. The average life expectancy of billions of people around the globe has increased significantly due to the innovative nature of the pharmaceutical sector.
On the other hand, the same industry has drawn criticisms from different quarters due to the practices involved in the process of conducting business. This industry has been faulted for employing ethically questionable practices when carrying out clinical trials. In addition, critics blame players in this sector for using immoral marketing practices to promote their products whereby the need to make profits overshadows the desire to have people leading healthy lifestyles. Another questionable practice bedeviling this industry is the fact that billions of people in poor nations are dying for lack of proper drugs because companies charge exorbitant prices for their medical products.
In response, pharmaceutical companies address these accusations by branding themselves as socially responsible entities that care about business ethics. They focus on the triple bottom line (people, profit, and the planet) involving social, economic, and environmental aspects of doing business. Different strategies are employed to achieve the objectives of CSR within the framework of business ethics.
For example, companies communicate the nature of their procedures and operations transparently for all stakeholders to understand. They also develop comprehensive HR strategies, such as diversity and attractive remuneration together with creating an enabling environment for employees to engage in charity work. Environmental issues are also addressed in terms of procurement philosophy, waste management, and efficiency in using natural resources, such as water. The views of stakeholders are considered during decision-making to address unmet needs where possible.
However, these CSR activities are executed within the framework of ethical standards governed by law, organizational policies, and procedures, and moral stand. In this context, the law indicates the minimum standards of conduct that businesses should observe in their operations. Consequently, while some legal practices may be unethical, and thus companies are required to make sound decisions on how they carry out their operations and relate to all stakeholders.
Organizational policies and procedures are the specific guidelines that have to be used in the day-to-day decision-making in businesses. Finally, employees of any given company are required to make a moral judgment when dealing with scenarios not captured by law and organizational procedures. Ultimately, businesses engage in practices that are economically lucrative, legally binding, ethical, and socially responsible thus creating a nexus between CSR and business ethics.
CSR and Philanthropy
It is worth noting that while the concept of CSR involves the component of business ethics, it also implies a more active approach to the improvement of communities and society. CSR strategies often comprise volunteering, charity, and philanthropic endeavors (Nicolaides 286). Compliance with ethical standards and laws may be viewed as a preventative measure. However, the active contribution of organizations to the betterment of the life of external stakeholders is what actually makes them good corporate citizens. A firm’s active approach to CSR demonstrates that it indeed strives to be accountable for others’ interests.
Not only does it help to minimize reputational and economic risks but it also fosters a better corporate image, greater profitability, and business longevity. Companies operate within societies and stakeholders within that environment expect such entities to show some aspects of social responsibility in return. It would border immorality for businesses to excel and prosper economically with shareholders growing their wealth portfolios if stakeholders within the immediate and extended environment of operation do not benefit from the profits made therein.
Consequently, companies have embarked on concerted efforts to ensure that part of monetary proceedings made from conducting business goes back to serve societies by supporting various initiatives. According to Adda et al., CSR in this context refers to a “business system that enables the production and distribution of wealth for the betterment of stakeholders through the implementation and integration of ethical systems and sustainable management practices” (30).
Stakeholders fall into five major categories including shareholders, local communities, customers, employees, and society at large. However, for the purposes of understanding philanthropy as a component of CSR and the relationship between the two, this paper narrows the definition of stakeholders to cover local communities and society. The concepts of CSR and philanthropy overlap to form a multifaceted model made up of corporate philanthropy, strategic corporate philanthropy, and strategic social investments.
The central idea of philanthropy is the active and voluntary, normally non-reciprocal efforts by a given entity geared towards the advancement of humanity by fulfilling specified needs within a particular area of society. In other words, this concept is needs-oriented without political, economic, or legal motivations, and thus it could be termed as purely ethical (Leisinger and Schmitt 4). However, corporate philanthropy should not be confused with charity, which is the categorical support of poor or needy people.
On the contrary, philanthropy in this context means directing corporate funds based on the principles of good governance to address the roots of a certain problem as opposed to dealing with its symptoms. For instance, company A could partner with local agencies to donate drugs to eliminate certain diseases, such as polio, and promote practices that prevent the disease.
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However, despite the focus of corporate philanthropy being altruistic in nature, moral and social capital could be generated in the process. Leisinger and Schmitt define this capital as the “accumulated outcome of the process of assessment, evaluation, and imputation by stakeholders and communities of a firm’s philanthropic activities” (5). For example, employees could be proud of working with organizations perceived as socially responsible, and through their commitment, increased profitability is realized. IN the process of engaging in philanthropic activities, businesses gain some form of insurance protection and goodwill from stakeholders.
Therefore, in cases where accidents occur, they are not seen as a result of irresponsible motivations to save money at the expense of safety. In other words, accidents are seen for what they are as opposed to being deliberate human errors associated with greed. Ultimately, through corporate philanthropy, organizations experience improved employee commitment, increased profitability, and support from society among other benefits.
Strategic Corporate Philanthropy
This concept hinges on the understanding that companies exist primarily to make profits by maximizing the shareholders’ value. Consequently, organizations adopt strategic corporate philanthropy to ensure that business operations are supported while creating social value at the same time. In the process, a company’s financial performance is improved by focusing on practices of strategic interest to strike a balance between community needs and business economic endeavors.
For instance, a computer company may donate thousands of computers to students from poor backgrounds. While such students could not have accessed such products without the intervention of the involved company, a ready future market for computers is also created.
In other words, the company pre-invests in the beneficiaries of the donated computers as a way of doing good to the community. According to Leisinger and Schmitt, “In this situation, the business case is obvious: it is the creation of better brand recognition and loyalty, reputational capital, higher employee morale, deeper customer commitment and strategic benefits for the company” (6).
However, this approach to corporate philanthropy as part of CSR contradicts the altruistic nature of giving and the intrinsic value of philanthropy thus devaluing the associated benefits. Nevertheless, companies involved in such practices counter these claims by arguing that as long as the beneficiaries of such products derive desirable social value, the motivation of the donor does not matter in the end. Ultimately, strategic corporate philanthropy is not oriented on the needs of the poor in society, but on the benefits that the donor may derive in the long term.
Strategic Social Investments
Social investments could be considered as part of CSR efforts by companies to help poor communities. However, when investigated closely, such activities seek to develop future markets by creating preconditions for expansion. For instance, a pharmaceutical company could invest in strategic social investment by giving basic health education and training health practitioners in poor neighborhoods. Ultimately, a population that is educated about the benefits of essential health will require products associated with the same, which means the involved company experiences increased demand for its goods. Such a CSR approach is weaved into strategic market positioning for the company to strengthen its brand image while at the same time helping poor communities to access better healthcare services.
However, similar to criticisms leveled against strategic corporate philanthropy, strategic social investments have been accused of violating the fundamental principles of philanthropy. While these approaches create social value to beneficiaries, the underlying drivers of such actions are motivated by the need to create a superior reputation and strengthen relationships for profiteering. Nevertheless, regardless of the motives behind any form of philanthropy as a function of CSR, in the end, stakeholders benefit from various initiatives undertaken by the involved companies. However, businesses should state clearly the nature of philanthropy that they seek to engage in to avoid unnecessary criticisms, which might be counterproductive especially where profiteering is one of the objectives.
CSR Influence on Organizational Performance
As mentioned earlier, companies could derive value for themselves by engaging in various forms of CSR. The first benefit is the development of customer loyalty in the process of implementing CSR initiatives. A business’s reputation for being socially responsible could potentially attract loyal customers. According to Sindhu and Arif, customers are becoming conscious and they would want to be associated with brands that promote social good and environment-friendly practices (6).
Client loyalty and trust are important keys to long-term business success in any industry. A business without support from its customers will eventually collapse under the weight of competition in the marketplace.
Companies could also reap the benefits associated with employees’ commitment due to engaging in CSR initiatives. Competent and valuable workers want to be associated with organizations that add value to humanity. Therefore, such companies are likely to retain a talented workforce due to reasons associated with activities taking place outside the workplace. In addition, good remuneration packages are also part of CSR, especially in the context that employees are key stakeholders in businesses. Ultimately, by retaining talented employees, businesses are likely to remain relevant, survive, and thrive in an increasingly competitive marketplace.
Brand recognition is another important benefit that could be realized from engaging in CSR activities. Companies perceived to be champions of socially responsible initiatives are likely to expose their brand to potential customers, hence improved profitability. Such organizations can also access credit easily because even venture capitalists and other lenders are seeking to be associated with socially responsible and ethical businesses. Positive media coverage associated with CSR activities could also benefit businesses when leveraged as a marketing tool for goods and services.
Finally, engaging in CSR could help organizations to avoid legal problems. For instance, driven by greed and quest for profits, management could violate environmental regulations. However, such an attribute is not consistent with the principles of CSR, and thus socially responsible entities are likely to operate within the provisions of law and set procedures. As such, this compliance, instigated by the spirit of CSR would ensure that the management acts in ways that do not attract legal suits. In addition, as noted under corporate philanthropy, CSR creates a form of insurance for businesses from the local community, and thus when accidents occur, legal redress might not be sought given the good relationship between the involved parties.
The concept of CSR has become common in the modern business environment with the realization that companies can do more than make profits and maximize shareholders’ value. This concept goes hand in hand with business ethics because organizations are expected to conduct their operations within acceptable principles without violating rules, regulations, and moral code. In addition, philanthropy is part of CSR with businesses seeking to be part of solutions to the many problems affecting local communities and society at large.
However, the idea of philanthropy in the context of CSR is multifaceted, and it could be divided into three broad categories – corporate philanthropy, strategic corporate philanthropy, and strategic social investments. Ultimately, in the process of engaging in CSR initiatives, companies are bound to gain significant benefits including improved brand recognition, customer and employees’ loyalty, and avoidance of legal suits.
Adda, Godfrey, et al. “Business Ethics and Corporate Social Responsibility.” European Journal of Business and Innovation Research, vol. 4, no. 6, 2016, pp. 26-42.
Leisinger, Klaus, and Karin Schmitt. Corporate Responsibility and Corporate Philanthropy, n.d. Web.
Lőrinczy, Marketa, and Włodzimierz Sroka. “Theoretical Assumptions of the Ethical Business Model.” New Approaches and Tendencies in Entrepreneurial Management. International Conference Proceedings, edited by Ovidiu Nicolescu et al., Cambridge Scholars Publishing, 2017, pp. 198-215.
Nicolaides, Angelo. “Corporate Social Responsibility as an Ethical Imperative.” Athens Journal of Law, vol. 4, no. 4, 2018, pp. 285-300.
Sindhu, Muzammal, and Muhammad Arif. “Corporate Social Responsibility and Loyalty: Intervening Influence of Customer Satisfaction and Trust.” Cogent Business & Management, vol. 4, no. 1, 2017, pp. 1-10.
Sroka, Włodzimierz, and Richard Szanto. “Corporate Social Responsibility and Business Ethics in Controversial Sectors: Analysis of Research Results.” Journal of Entrepreneurship, Management, and Innovation, vol. 14, no. 3, 2018, pp. 111-126.