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Essay on CSR - A Modern Business Model

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5.0 Literature review

This chapter will review all the relevant literature on the topic. Discussing the history and the recent increase in interest in the topic, and how organisations operate their CSR. The main source of literature for this chapter is current journal articles.

5.1 What is CSR?

Organisations play a major (and increasing) role in all our lives, especially with the growth of large scale businesses. The decisions and the actions of the management in organisations have an impact on individuals, other organisations and the community. When striving to achieve its objectives the organisation cannot act in isolation from the environment that surrounds it. The organisation economic efficiency is affected by governmental, social, technical and cultural variables. The survival of the organisation is dependant on series of exchanges between the organisation and the environment (Mullins, L. 2005).

There is a contract between the organisation and the community. Cannon (1994) discussed this stating "whether implicit or explicit there is a contract between business and the community that it operates. Business is expected to create wealth, supply markets, generate employment ...and produce sufficient surplus to improve competitiveness, whilst contributing to the maintenance of the community. The interdependence between society and business cannot and should not be understated" (Cannon, T. 1994:32).

With this increasing attention to the community and environment that organisations operate within, an emerging new work ethic of CSR has developed. This gauges the organisation not as an individual entity, but interlinked and coexisting with the community that surrounds it. The actions of both the community and the organisation have an affect on each other. This interest can be gauged in the amount coverage to CRS in the annual accounts of most major organisations (Mullins, L. 2005).

The term CSR, refers to the voluntary commitment of companies to contribute to social and environmental goals The OECD (1999) has identified the following factors as drivers of CSR, (1) concerns and expectations from citizens, consumers, public authorities, and investors in the context of globalisation (2) social criteria increasingly influencing the investment decisions of individuals and institutions both as consumers and investors (3) increased concern about the damage caused by economic activity to the environment (4) transparency of business activities brought about by the media and modern information technologies (OECD 1999).

At the Macro level there are issues about the role of organisations in national and international society. The expectations on the organisations range from the Laissez-faire free enterprise as one extreme to the organisation as a shaper of society. Within this Macro framework lays CSR, with specific ethical issues facing corporate entities. This relates to the extent in which organisation should move beyond the minimum obligations that are created by legislation and corporate governance. To increase the CSR the organisations must reconcile the conflicting demands of their stakeholders (Johnson, G & Scholes J 2004).

There is a widespread hypothesis that CSR originated in North America in the 1900s, this is based on the idea that affluent companies will make donations to those less well-off in society, demonstrating their good intentions and responsibility. In fact the development of CSR goes back to the 1800s and is not based on religion or charity but on business ideology and entrepreneurship. In order to recruit and retain their workforce, factory owners arranged and paid for their employees' accommodation, schooling and health care, and even religious services. Although this was motivated by self-interest, it also included a genuine desire to improve people's living conditions (Juholin, E.2004).

The EU, in its recent white paper, has defined CSR as "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis" (Hockerts, K and Moir, L. 2004:85).In a significant political move, the European Commission has designated 2005 as the year of corporate social responsibility in European Union countries. Similarly, individual EU member states have taken steps, such as the UK appointing a Minister for CSR within the Department for Trade and Industry, France legally requiring companies to include social and environmental impact in their annual reports, the Netherlands linking financial support schemes for large companies to compliance with the OECD Guidelines (Luetkenhorst, W. 2004).

5.2 Theoretical frameworks

Social responsibility of corporations is principally based on two contrasting theoretical frameworks. The traditional theory of CSR is based on the classical thought of 'business of business is business". This theory is embedded in the traditional perception of the one dimensional entity of business organisations. This is that businesses have the sole responsibility to make adequate provisions of goods and services for society at a profit under an authoritarian framework. This theory over emphasises the cost of social involvement of businesses, therefore it can either underestimates or fail to see the potential benefits of CSR. These benefits can be in terms of cost savings, resource productivity and product differentiation. Friedman (1989), a Noble Laureate, is one of the strongest advocates of this theory of CSR (Friedman (1989) cited in Quazi, A. 2003:822).

Another theory is stakeholder theory, also known as contemporary or modern theory of CSR. This theory is based on the concept of the social contract; this upholds that CSR is a function of terms of general agreement between business and society. These terms have undergone basic changes in recently, involving a wider corporate commitment to the surrounding community. This theory reaches beyond the narrow angle of cost considerations, profit making and compliance (Dunfee et al., 1999).

This theory assumes that organisations are not only responsible to their shareholders; they are also accountable to a variety of groups in the society who have stakes in the corporate behaviour and decisions that affect societal interests. Therefore this theory assumes that corporations have an enormous power base in society, both in financial and political terms. If organisations neglect their social responsibility they will have to pay a price in terms of increased regulatory compliance, fines, lost business and corporate image in the long term. The theory takes into account the possible profit potential arising out of social commitments in the long run, in terms of increased market share, positive customer ratings and loyalty (Quazi, A. 2003).

5.3 Rationale for CSR

With the advances in technology, HR practices, the well informed and trained work force, there is very little left to differentiate organisations. Being seen to go further than the minimum required on social issues can attract and retain customers. This green cleansing attracts attention to the organisation; they are viewed as caring and social responsible (Mullins, L. 2005).

Multinational companies are coming under the scrutiny of different audiences. Globalisation has led to a growing number of special interest groups, which make demands on companies and their public relations practitioners. In the future it is predicted that organisations will be judged more by their social policies than on their delivery of products and services, and that key audiences will become more influential. However, now global inequality has raised the issues of morality and responsibility onto the public agenda. This new world order has put pressure on global companies to act in word and deed in order to earn their legitimacy (Juholin, E.2004).

While business profits is what makes society, many firms are engaged in activities that go beyond their traditionally defined business roles as a way of giving back to the communities in which they operate. Such engagements are often approved by the board as a means of meeting the wide array of stakeholder and shareholder interests that are beyond generating and protecting their capital investments. Companies have also realised that improving the communities they operate in helps them gain legitimacy, both with the government and the consumers. It is not unique today to find firms engaged in and with budgets set aside for social costs of doing business (Oketch, M. 2004)

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