20/04/2017

Business Ethics:
Corporate Social Responsibility

Zuni Barokah
Master of Management
Faculty of Economic and Business Universitas Gadjah Mada
2017

Review: Corporate Governance

Definition: the system by which business corporations are directed
and controlled:
Distribution of rights and responsibilities
Stakeholder management
Spells out rules and procedures
Makes decisions
Objective setting
Means of attaining objectives
Monitors performance
Principles of corporate governance? Refer to OECD (2015)

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Principles of Corporate Governance (OECD, 2015)

1. Ensuring the basis for an effective corporate governance

framework
2. The rights and equitable treatment of shareholders and key
ownership functions
3. Institutional investors, stock markets, and other intermediaries
4. The role of stakeholders in corporate governance
5. Disclosure and transparency
6. The responsibilities of the board

Corporate Governance
Many Asian and continental European countries are insider systems
Ownership more concentrated
Shares owned by holding companies, families or banks
Rules and regulations differ among countries and regions
U.K. and U.S. systems are outsider systems
Dispersed ownership of equity
Large number of outside investors

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Self-Test Questions
1. What are the responsibilities of business in their corporate decisions?
2. Why does a company have to be ethical?
3. What is the relationship between CSR and corporate behaviour?
4. Is CSR a legal necessity? Why?

Social Responsibility
A businesss collective code of ethics towards its
stakeholders
the environment
its customers
its employees
its investors
its suppliers
its community

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Corporate Social Responsibility (CSR)

Closely related to ethics
CSR: Action of a firm to benefit society beyond the requirements of
the law and direct interests of the firm
Sustainability: Development that meets humanitys needs without
harming future generations

What is organizational social responsibility?

Arguments against social Arguments in favor of social

responsibility: responsibility:
Reduced business profits Adds long-run profits
Higher business costs Better public image
Dilution of business purpose Avoids more government regulation
Too much social power for business Businesses have resources and ethical
Lack of public accountability obligation
Better environment
Public wants it

Source: Schermerhorn - Chapter 6 8

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Stakeholder Approach
Stakeholders
Any groups that have a stake or a personal interest in the
performance and actions of an organization.
According to the Stakeholder Approach:
In defining or redefining the company mission, strategic managers
must recognize the legitimate rights of the firms claimants.
In addition to stockholders and employees, these include outside
stakeholders affected by the firms actions.
Perceived stakeholders of a corporation:
Customers | Government | Stockholders | Employees |Society

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Steps to Incorporate Stakeholders:

1. Identification of stakeholders
2. Understanding stakeholders
specific claims vis--vis the firm
3. Reconciliation of these claims
and assignment of priorities
4. Coordination of the claims with
other elements of the company
mission

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Areas of Social Responsibility

Responsibility
Towards
Environment

Responsibility Responsibility
Towards Towards
Customers Social Employees
Responsibility

Responsibility
Towards
Investors

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Dynamics of Social Responsibility

Inside vs. Outside Stakeholders

Duty to serve society plus duty to
serve stockholders
Flexibility is key
Firms differ along:
Competitive Position
Industry
Country
Environmental Pressures
Ecological Pressures

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Inputs to the Development of Company

Mission

3-14

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Types of Social Responsibility

Economic the duty of managers, as agents of
the company owners, to maximize stockholder
wealth
Legal the firms obligations to comply with the
laws that regulate business activities
Ethical the companys notion of right and
proper business behavior.
Discretionary voluntarily
assumed by a business
organization.

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Strategies/Approaches for Pursuing CSR

Obstructionistmeets economic responsibilities [lowest

level]
Defensivemeets economic and legal responsibilities.
Accommodativemeets economic, legal, and ethical
responsibilities.
Proactivemeets economic, legal, ethical, and
discretionary responsibilities [highest level]

Schermerhorn - Chapter 6 16

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CSR & Profitability

Corporate social responsibility (CSR),
is the idea that business has a duty to
serve society in general as well as the
financial interests of stockholders.

The dynamic between CSR and

success (profit) is complex. They are
not mutually exclusive, and they are
not prerequisites of each other.

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Factors Complicating a Cost-Benefit Analysis of CSR:

1. Some CSR activities incur no dollar costs at all. In

fact, the benefits from philanthropy can be
huge.
2. Socially responsible behavior does not come at a
prohibitive cost.
3. Socially responsible practices may create
savings, and, as a result, increase profits.
4. Proponents argues that CSR costs are more than
offset in the long run by an improved company
image and increased community goodwill.

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Sarbanes-Oxley Act of 2002

CEO and CFO must certify every report containing
companys financial statements
Restricted corporate control of executives, acting,
firms, auditing committees, and attorneys
Specifies duties of registered public acting firms
that conduct audits
Composition of the audit committee and specific
responsibilities
Rules for attorney conduct
Disclosure periods are stipulated
Stricter penalties for violations

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New Corporate Governance Structure

Restructuring governance structure in American
corporations
Heightened role of corporate internal auditors
Auditors now routinely deal directly with top
corporate officials
CEO information provided directly by the
companys chief compliance and chief
accounting officers

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The New Corporate Governance Structure

Social Responsibility

Social Audit

Managing Social
Appointment of a Responsibility
Director
Programs

Strategic Planning

Top Management
Support

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CSRs Effect on Mission Statement

The mission statement embodies what company

believes
Managers must identify all stakeholder groups and
weigh their relative rights and abilities to affect the
firms success

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Social Audit

A systematic evaluation of how well a firm is meeting its

ethics and social responsibility objectives.

how well the firm is using funds designated specifically

to fund its social initiatives?
Triple bottom line reporting: profit, people, planet
financial reports| social audits| sustainability reports|

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The Corporate Social Audit

Corporate audits should be extended to include the moral
health of the corporation.
Corporations that conduct social audits will be more apt to
prevent unethical and illegal conduct by managers,
employees, and agents.
The audit would examine how well:
Employees have adhered to the companys code of ethics; and
The corporation has met its duty of social responsibility.

The Corporate Social Audit (continued)

Such audits would focus on the corporations efforts to:
Promote employment opportunities for members of protected classes
Worker safety
Environmental and consumer protection
An independent outside firm should be hired to conduct the audit.
This will ensure autonomy and objectivity.
The auditing firm should report its findings directly to the companys
BOD.
The results of the audit should be reviewed by the companys board
of directors who will need to ensure follow-up actions are in place.

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Continuum of Corporate Social Responsibility

Commitments

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The Future of CSR

CSR is firmly and irreversibly part of the
corporate fabric
Corporations will face growing demands for
social responsibility contributions far beyond
simple cash or in-kind donations
Even when groups agree on what constitutes
human welfare, the means they choose to
achieve it may differ

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NGOs, MNCs and Ethical Balance

NGO: Non-governmental organization; private, not-for-profit organization that

seeks to serve societys interests by focusing on social, political, and economic
issues such as poverty, social justice, education, health and the environment.
NGOs have urged MNCs to be more responsive to range of social needs in
developing countries
NGOs have grown in number, power, influence
NGO activism has caused major changes in corporate behavior
NGO leaders are the most trusted of eight leadership categories (see slide to
follow)
International NGO:
Save the Children | Oxfam | CARE | World Wildlife Fund | Conservation International

Rise of Civil Society and NGOs

Major criticisms
Exploitation of low-wage workers
Environmental abuses
Intolerable workplace standards
Response to social obligations:
Agreements and codes of conduct
Maintenance of standards in domestic and global operations
Cooperation with NGOs regarding certain social issues
Corporations receiving heavy criticism
Nike
Levis
Chiquita

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Trust in Leaders

Ecocentric management
Creation of sustainable economic development and
improvement of quality of life worldwide for all
organizational stakeholders.

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Ecocentric Management

Sustainable growth
Economic growth and development that meet present needs without
harming the needs of future generations
Life-cycle analysis (LCA)
A process of analyzing all inputs and outputs, though the entire cradle-to-
grave life of a product, to determine total environmental impact

Pyramid of Global Corporate Social

Responsibility and Performance

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Source: Our Company, Our Credo, Johnson & Johnson Web site

Theories of Social Responsibility

Theory Social Responsibility

Maximizing profits To maximize profits for stockholders.

Moral minimum To avoid causing harm and to compensate

for harm caused.
Stakeholder To consider the interests of all
interest stakeholders, including stockholders,
employees, customers, suppliers,
creditors, and local community.
Corporate To do good and solve social problems
citizenship

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Maximizing Profits
A theory of social responsibility that says a corporation
owes a duty to take actions that maximize profits for
shareholders.

The interests of other constituencies are not important in

and of themselves.

Moral Minimum
A theory of social responsibility that says a corporations duty is to
make a profit while avoiding harm to others.
As long as business avoids or corrects the social injury it causes, it has
met its duty of social responsibility.
The legislative and judicial branches of government have established
laws that enforce the moral minimum of social responsibility on
corporations.
e.g., Occupational safety laws
e.g., Consumer protection laws for product safety

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Stakeholder Interest
A theory of social responsibility that says a corporation must consider
the effects its actions have on persons other than its stockholders.
This theory is criticized because it is difficult to harmonize the
conflicting interests of stakeholders.

Corporate Citizenship
A theory of responsibility that says a business has a responsibility to
do good.
Business is responsible for helping to solve social problems.
Corporations owe a duty to promote the same social goals as do
individual members of society.
This theory argues that corporations owe a debt to society to make it
a better place.
This duty arises because of the social power bestowed on corporations.
A major criticism of this theory is that the duty of a corporation to do
good cannot be expanded beyond certain limits.

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