What is Corporate Social Responsibility?

What is corporate social responsibility (CSR)? As with most business concepts, corporate social responsibility has several definitions, but these broadly coalesce around some core themes. Investopedia’s definition of corporate social responsibility is “a self-regulating business model that helps a company be socially accountable – to itself, its stakeholders, and the public.”

Harvard Business Review sees CSR’s primary goal as “to align a company’s social and environmental activities with its business purpose and values.” At the same time, the European Commission defines CSR as “the responsibility of enterprises for their impact on society.”

Diligent’s corporate social responsibility definition: CSR is an organization’s obligation to act ethically and to the benefit of the community it is a part of and depends on.

 

Why Have More Companies Become Concerned About Corporate Social Responsibility in Recent Years?

The importance of corporate social responsibility (CSR) has undoubtedly grown over the last decade. When looking at why CSR is increasingly important, one should consider the impact of CSR on all elements of corporate life.

Alongside the altruistic drivers – the growing recognition of the importance of corporate social responsibility to society – organizations acknowledge the importance of corporate social responsibility in business.

CSR’s impact on a brand’s image has been evident in recent years, with numerous examples of a company’s supply chain, employment practices and environmental performance having the potential to derail its reputation.

So, what is driving this increased significance of corporate social responsibility?

CSR encompasses many different strands: environmental governance, ethical concerns, community and employee relations – and the drivers can differ for each of these strands.

For instance, pressure from the media and investors in recent years has brought environmental sustainability to the top of the board’s agenda. A more proactive approach to corporate social purpose may have been driven by a desire to demonstrate a commitment to social purpose to shareholders and believe that this will impart a competitive edge. This can be cited as a key reason why companies engage in corporate social responsibility.

 

Importance of Corporate Social Responsibility

The growing public awareness of CSR issues has led to an expectation that the companies we spend money with are “doing the right thing” regarding their social citizenship. The value of corporate social responsibility (CSR) is demonstrated when businesses’ approaches mirror their customers’ priorities.

All too often, though, there remains a mismatch between public preferences and corporate performance. The Telegraph reports that in 2019, while 59% of consumers expected companies to take a stand on climate and environmental issues, only 16% of business leaders cited CSR as their top three business concerns.

When looking at the importance of corporate social responsibility, the other issue to consider is the breadth of CSR and whether, as a term and a concept, it’s specific enough to hone in on the core issues you should be considering. ESG – environmental, social and governance – is a term that is increasingly being used interchangeably with CSR. But strictly speaking, the two are different.

Stakeholder intelligence experts Alva sum this up nicely, noting that:

“Without CSR, there would be no ESG, but the two are far from interchangeable. While CSR aims to make a business accountable, ESG criteria make its efforts measurable.”

In some cases, the potential breadth of issues covered under CSR and the lack of tangible ways to measure CSR efforts have meant that companies’ corporate social responsibility initiatives have failed to achieve their potential. The number of projects that potentially fall under the CSR banner can make it difficult to manage or quantify value.

Enter ESG. While ESG encompasses CSR initiatives, it also provides a clear framework, with a growing number of regulatory imperatives – more of which below – around ESG performance and reporting. Will boards’ efforts in the future move away from CSR and towards ESG? We will have to wait and see.

 

History of Corporate Social Responsibility

Because it has attracted increasing attention in recent years, it might be assumed that corporate social responsibility is a relatively new concept – but the belief that corporations have a responsibility towards society is not new.

In fact, it’s possible to trace the history of corporate social responsibility (CSR) back through several centuries, and corporate social responsibility as a phrase has been in use since the 1950s. It’s generally accepted, though, that the basis of what we understand by corporate social responsibility today was created in 1979 when Archie B. Carroll published his “CSR pyramid,” which breaks CSR down into four areas:

  • Economic responsibility
  • Legal responsibility
  • Ethical responsibility
  • Philanthropic responsibility

Carroll’s corporate social responsibility theory is that CSR and business are not mutually exclusive but that companies must address their commercial obligations before seeking to meet ethical or philanthropic ones.

 

CSR Timeline

1953 Howard R Bowen publishes Social Responsibilities of the Businessman, widely viewed as the first book to comprehensively cover business ethics and social responsibility.

1970 American economist Milton Friedman publishes an article titled The Social Responsibility of Business is to Increase its Profits. The first Earth Day takes place.

1976 Founding members of the “Five Percent Club” – including Dayton Corporation (later Target) and General Mills – commit to using a proportion of their profits for philanthropy.

1984 R. Edward Freeman publishes Strategic Management: A Stakeholder Approach¸ often considered the point at which CSR became part of mainstream management theory.

1999 The first mainstream sustainable investment indices, The Dow Jones Sustainability Indices (DJSI), are launched.

2000 The United Nations Global Compact, a voluntary initiative based on CEO commitments to implement universal sustainability principles, is launched in front of 44 business CEOs and 20 heads of civil society organizations.

2000 The first full version of the Global Reporting Initiative’s Sustainability Reporting Guidelines is released.

2002 The Johannesburg Stock Exchange becomes the world’s first exchange for requiring listed companies to report on sustainability.

2011 The United Nations issues its Guiding Principles on Business and Human Rights, a global standard aimed at preventing and addressing human rights abuse risk linked to business activity.

2015 The Task Force on Climate-related Financial Disclosures (TCFD) is established to promote climate-related reporting in UK companies’ financial information.

2015 The UN’s Sustainable Development Goals are launched, emphasizing the role of business in achieving the global development agenda.

2017 Gender pay gap reporting becomes mandatory for all companies with more than 250 employees in the UK.

 

Role and Purpose of CSR

CSR is increasingly becoming embedded in management thinking and corporate practice.

This begs the question: what is the purpose of corporate social responsibility? Is it something that boards should adopt blindly, without questioning the role of corporate social responsibility within their business?

In 2015, Harvard Business Review surveyed 142 managers from Harvard Business School’s CSR executive education program. This research found that “most companies practice a multifaceted version of CSR that runs the gamut from pure philanthropy to environmental sustainability to the active pursuit of shared value.”

Therefore, the role and purpose of corporate social responsibility can be a broad concept. The scope of corporate social responsibility within your organization will depend somewhat on your business’s sector, objectives, and potential impact on the environment and society.

For your business, a CSR priority may be engaging with your local community and providing practical help or financial support to local causes. Or – particularly if your industry is a historic pollutant – you may prioritize environmental performance, reduce your carbon footprint, and minimize your impact. Or you may choose to focus on an issue that’s relevant to your business; diversity, inclusion, ethical supply chains – and channel your efforts into that.

The wide range of themes falling under the CSR umbrella means that you have no shortage of areas to focus your CSR activities.

 

Challenges Facing CSR

As with all business requirements, particularly those newly adopted or growing in complexity or focus, there are challenges inherent in corporate social responsibility (CSR) strategies. While we’re moving indubitably towards a more CSR-focused business landscape, that doesn’t mean that the road towards CSR is without its bumps.

 

Key Challenges of Corporate Social Responsibility

 

1) The Ability To Deliver Clear and Transparent Reporting

Transparency around CSR-related matters is key – whether that’s your D&I strategy, your environmental approach or your human rights policy. Shareholders and stakeholders expect you to act on CSR issues and evidence your achievements candidly. In some cases, as with The UK FCA’s requirements around TCFD, this is mandated in your formal financial reporting.

Increasing numbers of companies will face the challenge of delivering clear, comprehensive reporting on CSR (and wider ESG) objectives as pressure grows to document and communicate their performance.

 

2) A need To Define Clear Priorities and Goals

This is one of the key challenges facing corporate social responsibility strategies. Long before they can report on their successes, organizations need to identify what CSR means and how they will prioritize key actions. There are so many aspects of corporate social responsibility that this is very much an individual question for each business. There can be dissent over the focus of efforts, even within organizations.

 

3) Stakeholder Pressure

Sometimes, areas of focus are informed by pressure from investors and other stakeholders. Increasingly, a company’s position on CSR and ESG is a critical factor in investor decisions and customer choices.

As reporting grows ever-more comprehensive, mandated and publicized, it will become easier for potential investors and buyers to make decisions based on CSR performance. Companies will face growing pressure to meet and report on their objectives.

 

4) Measurement of CSR Activity

When CSR began as a “nice to do,” there was less imperative to have clear and comparable measures of performance. Today, boards need not only track their performance against the CSR objectives they have set but to compare themselves to their peers and competitors.

But accurate information on your own and others’ performance can be hard to pinpoint, especially in areas like executive pay, where companies can closely guard their data. Accessing centralized, consistent and reliable data can be a crucial challenge for companies wanting to measure and track their CSR efforts.

 

5) Making the Connection Between CSR, Value and Profitability

Businesses may adopt and expedite CSR strategies due to a genuine desire to improve their social purpose. Still, the ability to achieve “social capital” from their achievements cannot be overlooked.

Communicating your ESG strategy to investors and other stakeholders, from the value of current initiatives to the potential of new opportunities, will help to realize the advantages of corporate social responsibility strategies. The effort and cost of monitoring performance across business functions, and the work involved in translating this into business metrics, can be a challenge if you are operating without an integrated approach across all your CSR and ESG programs.

 

Advantages and Disadvantages of Corporate Social Responsibility

It would be easy to imagine that there are only positives associated with CSR; advocates of corporate social responsibility argue that it only has upsides.

But as with any business strategy, there are many aspects of corporate social responsibility. Each brings implications in terms of resource, cost and other considerations that companies should be alive to. There are arguments for and against corporate social responsibility adoption.

 

3 Benefits of Corporate Social Responsibility Strategies

 

1) Improved profitability and value

This should be one of the most welcome advantages of corporate social responsibility from the business’s perspective. Reducing waste and increasing energy efficiency doesn’t just improve the environment and your CSR credentials; it should also deliver a reduction in your costs. Therefore, there are direct benefits to CSR adoption in addition to the obvious altruistic and reputational ones.

As well as lower costs, there are opportunities for greater profits. Customers proactively support businesses that share positive CSR and ESG approaches – and are prepared to pay a premium for doing so. Research from Tilburg University in the Netherlands found that consumers are ready to pay an additional 10% for products they deem socially responsible; there are clear commercial benefits of a more socially responsible strategy.

 

2) Improved investor relations

As your CSR performance becomes known, you should enjoy improved access to capital, as investors are increasingly confident in your business. Shareholder pressure around companies and corporate social responsibility increase constantly; the expectation that corporates will adopt socially responsible policies is well-documented. It stands to reason that if you’re ahead of the game here, you will have a more harmonious relationship with all your stakeholders.

 

3) Ease of compliance with CSR-focused regulatory requirements

As we mentioned above, CSR and ESG are increasingly in the spotlight regarding corporate reporting. Compliance with the Task Force on Climate-related Financial Disclosures reporting requirements, for instance, will soon be mandatory in the UK and is encouraged elsewhere. A proactive CSR approach will give you a strong story to share and enable you to comply with requirements around CSR reporting.

But it’s important not to downplay the challenges of implementing a CSR strategy.

 

4 Common Arguments Against Corporate Social Responsibility

 

1) The cost and challenges of implementation

There’s no getting over that CSR costs money. CSR and wider ESG reporting require dedicated focus, demanding resources and budget. Risk-assessing your CSR approach takes time and can be a challenge. Many boards lack full oversight of the issues they need to consider – the risks faced, the board and senior team’s composition, any conflicts of interests.

Once organizations identify their priorities, they need to operationalize their CSR goals, turning insights into a roadmap for action. While there are tools that can make this easier, businesses shouldn’t underestimate the time and money that an effective CSR strategy entails. For smaller organizations particularly, the resources needed can be a barrier to CSR.

 

2) The Fear of Opening the Organization To Scrutiny

There can also be a fear of “opening the doors” on CSR, inviting inspection of the company’s ethics, supply chain, environmental performance and philanthropy. CSR is a bit of a double-edged sword, in the sense that organizations need to promote their CSR activity to gain public approbation for it – but in doing so, open themselves up to criticism of their approach. Any communication of your achievements on corporate social responsibility emphasizes the work yet to be done.

Companies may wonder whether the potential reputational damage from negative publicity around CSR is worth the work involved in devising and publicizing a corporate social responsibility strategy.

Amplifying this, shareholders, stakeholders and consumers are increasingly alive to the concept of “greenwashing,” the practice of overstating environmental or other ethical credentials. An organization needs to ensure its CSR reporting is comprehensive, honest and frank about any shortcomings to avoid it being questioned and discredited.

 

3) Conflicting Priorities and Objectives

We talked above about the cost of implementing new corporate social responsibility approaches. Any company with shareholders has a fiduciary duty to those shareholders to maximize the company’s profits, and the CEOs of commercial enterprises tend to be tasked with improving the company’s financial performance.

You could argue that corporate social responsibility and business objectives are diametrically opposed, that CSR conflicts with the fiduciary duty and CEO role by intentionally introducing costs into the business and reducing profits. Alongside the inherent costs of reporting, CSR can increase costs by requiring ethical supply chains, potentially putting companies that practice it at a commercial disadvantage. There is, then, an argument that CSR creates a conflict of interest between commercial and altruistic imperatives.

 

4) Limitations of CSR

As we mentioned above, CSR has limitations; its broad definition can make it difficult to put boundaries around what falls under the CSR remit. As a result, it can be hard to create a clear plan to tackle CSR: where do you focus? This can also make CSR achievements difficult to quantify.

These limitations may, for some organizations, provide an excuse to avoid CSR altogether; it falls into the “too difficult” or “too vague” pile and is overlooked in favor of more tangible strategies.

While it’s clear, then, that for boards, the benefits of pursuing a strategy of social responsibility and corporate citizenship are self-evident, there are considerations that need to be born in mind as well.

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How To Surpass the Limitations of CSR

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Corporate Social Responsibility Best Practices

For any organization aiming for good corporate social responsibility (CSR) practices, there are some recognized best practices to follow. Corporate social responsibility practices might vary from business to business, but some best practices should be universal.

 

Identify Your Corporate Values and Purpose

There are currently few regulatory imperatives specifically related to CSR. As a result, organizations are fairly free to decide on their own path and priorities based on their own views on the merits of corporate social responsibility.

A first step might be to set some priorities, ensuring that these are in line with the things that matter to your key stakeholders – investors, customers, employees and anyone impacted by your business operations.

In some cases, priorities might be obvious; if your company is a historic polluter, objectives relating to greener performance seem sensible. For other businesses, there isn’t such a direct link between CSR issues and their operations; these organizations have a freer rein when it comes to choosing issues or causes to align with.

 

Allocate Corporate Social Responsibility Roles and Responsibilities

It’s important to make people answerable for your CSR strategy; this will create accountability and focus attention on your aims. It’s important to make people answerable for your CSR strategy; this will create accountability and focus attention on your aims. Depending on your organization’s size, this might be a dedicated CSR team, or it might simply mean giving key members of your leadership team-specific CSR responsibilities. It’s essential that your board and senior executives have an overview of corporate social responsibility within the business, but equally vital that responsibility should disseminate throughout the organization.

Employees at all levels should have ownership of your approach to CSR and know that they play a key part. Creating a group of “champions” who can drive the CSR message throughout the organization can help here – but ultimately, the buck should stop with specific individuals who are given responsibility for achieving your goals.

 

Take a Business-Wide Approach

Ad-hoc or unfocused activity, while well-intentioned, won’t cut it when it comes to your corporate approach to social responsibility. One of the merits of corporate social responsibility is exactly that; that it’s corporate. You should focus on harnessing the scale of your organization to create an approach that delivers more than a series of disconnected initiatives.

 

Communicate Internally and Externally

Shouting about your approach is essential for CSR – both to engender internal buy-in and achieve the reputational benefits of tackling your social obligations. Communicate openly and honestly about your aims and, importantly, any room for improvement.

Equally important: celebrate your successes – don’t be afraid to share any achievements. And be generous with your learnings; CSR, by its very nature, should be for the greater good. If you can join any sector or cross-industry CSR groups to share approaches taken and lessons learned, do.

 

Benchmark Your Performance

It’s important to measure and compare your performance on CSR both internally between departments and externally with other organizations.

There are some external ratings – third-party ”risk scores,” particularly for the ESG elements of CSR – which investors use to assess a company’s initiatives. You will also want to put in place your own monitoring, something that can be a challenge if your CSR data isn’t on point.

 

Corporate Social Responsibility Plan/Strategy

We touched in the previous section on the need for strategic corporate social responsibility and an organized, orderly approach rather than one comprised of disparate initiatives.

What should make up this corporate social responsibility plan? CSR plans should encompass all the best practice steps outlined above, adapting them as needed to fit your organization’s circumstances.

Defining your values and purpose; creating a plan that fits with your business’s core competencies; identifying the issues of importance to your stakeholders; communicating your aims and progress, and measuring and reporting on the impact of your efforts – your plan will need to include all these elements.

Pursuing a strategy of social responsibility and good corporate practice needs to deliver evidence in terms of its ROI. The issue of reporting on your CSR progress deserves more exploration, so we look at that in more detail in the next section.

 

Reporting

What is a corporate social responsibility report? It’s a formal report that evaluates the impact of your company’s operations on the external community and environment.

The format of your corporate social responsibility reporting may vary depending on whether it’s being produced for internal use or external scrutiny. CSR reporting might include an assessment of your organization’s economic, environmental, and/or social impacts, depending on the company’s area of operations and areas of CSR focus.

Any corporate social responsibility audit you carry out will provide data on your performance against your stated objectives. The reporting is valuable internally in enabling you to measure the effectiveness of your CSR strategy and identify future priorities, and externally, in presenting your CSR credentials, aims and achievements to the world.

Increasingly, some elements of CSR reporting are mandated by regulation, as with the TCFD reporting requirements we detailed earlier. We are likely to see CSR and ESG reporting becoming more of a regulatory imperative and less of a “nice to have” over time.

 

Corporate Social Responsibility Policies

Your corporate social responsibility policy is where you set your stall out. Examples of corporate social responsibility policies will differ between organizations, but as a general rule of thumb, your CSR policy should include:

Your purpose: your CSR objectives and values.

The scope of your CSR strategy – what does it encompass?

The elements of your approach and the way you plan to tackle them. This might include a description of the social or environmental issue you are focusing on and the steps you will take. You may want to differentiate your regulatory obligations and any measures you choose to take proactively.

 

Corporate Social Responsibility Regulations and Compliance

Although it’s sometimes believed that the concept of corporate social responsibility is imposed on corporations by law, generally, this isn’t the case. Instead, it’s external pressures and the organization’s own ethical standards that set expectations around CSR.

Legislation and expectations around corporate social responsibility vary by jurisdiction. Still, there is a consensus that it should be self-policed, an approach proactively led by organizations themselves, rather than something prescribed by regulation. Corporate social responsibility compliance, therefore, is something self-imposed rather than externally mandated.

Investopedia describes CSR as “a self-regulating business model.” Similarly, the European Commission agrees that “it should be company led,” arguing that “EU citizens rightly expect that companies understand their positive and negative impacts on society and the environment. And, therefore, prevent, manage and mitigate any negative impact that they may cause.”

This expectation isn’t confined to Europe; Forbes, describing CSR in the US, says that while CSR ‘”is a form of soft law” and “not required by US statute or regulations,” it is nonetheless “seen as obligatory by most corporations because of consumer expectations and internal norms.”

The Task Force on Climate-Related Financial Disclosures encourages climate-focused reporting in companies’ financial filings, and in the UK, the financial regulator the FCA now requires that companies with premium listings on the London Stock Exchange include a statement in their annual financial report setting out whether their disclosures are consistent with TCFD recommendations and adding an explanation if they are not.

 

CSR Theories and Models

Many different theories underlie the development and concept of corporate social responsibility.

 

Milton Friedman

In 1970, American economist Milton Friedman published an essay, The Social Responsibility of Business Is To Increase Its Profits, in the New York Times. In it, Friedman set out his belief that profit must be a priority and a precursor to any social responsibility, stating that:

“there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Friedman’s belief, also known as the shareholder theory of corporate social responsibility, underpins many theories around corporate social responsibility.

 

Carroll and the Corporate Social Responsibility Pyramid

In 1979, Archie Carroll devised a four-part model of CSR: the pyramid of corporate social responsibility. The four components of the pyramid of corporate social responsibility are economic responsibility, legal responsibility, ethical responsibility and philanthropic responsibility.

True CSR, Carroll posits, requires satisfying all four parts consecutively, stating that “CSR encompasses the economic, legal, ethical and philanthropic expectations placed on organizations by society at a given point in time.”

Carroll believes that profit must come first; the base of the corporate social responsibility pyramid is concerned with economic success. Then comes the need to comply with relevant laws and regulations. The fourth layer of the pyramid is the need for an organization to meet its ethical duties. Then, after these three requirements are satisfied, a business can consider philanthropy.

 

Gray, Owens and Adams

In 1996, Carol Adams, Rob Gray and Dave Owen published Accounting & Accountability: Changes and Challenges in Corporate Social and Environmental Reporting. They present CSR approaches on a continuum, with “pristine capitalists” at one end and “deep ecologists” at the other, and all points in between representing the position of different stakeholders within an organization.

 

Benedict Sheehy

More recently, Sheehy, an associate professor at the University of Canberra, has become recognized as an expert on CSR, publishing research into the use of the law to “achieve long term environmental and social sustainability.”

 

When determining their organization’s approach to CSR, boards may want to consider any or all of these theories to arrive at a CSR strategy that fulfills their corporate obligations as well as their social responsibilities.

 

Limitations in CSR Approaches

When boards consider how to tackle corporate social responsibility, there’s clearly much to think about.

Among decisions on priorities and approaches, it’s important to consider both the importance of corporate social responsibility and its limits. We touched above on some of CSR’s limitations – particularly, the challenges of defining corporate social responsibility and finding tangible ways to measure any CSR strategy’s success.

The fact that social responsibility should be tailored to each business’s own activity and priorities is not only one of its strengths but can also be its weakness, making definitions and comparisons difficult.

Today’s boards really need to consider ESG – which includes CSR within its auspices – rather than CSR alone. By tackling CSR within an ESG framework, it can be easier to set strategies, pinpoint specific actions, and prescribe success measures.

But delivering on your ESG goals is not without its challenges. Data is the foundation on which your ESG approach is built, informing your objectives, providing the baseline for your achievements and enabling you to operationalize your ESG commitments.

Many businesses, though, struggle to capture this data, leaving them in the dark when it comes to setting goals, monitoring progress and quantifying the impact of their initiatives. As a result, they are unable to capitalize on their ESG strategies’ ability to drive long-term growth and profitability.

Diligent’s ESG Solutions are designed to help board members and executives establish clear ESG goals and operationalize them throughout the organization to ensure that every commitment leads to a measurable and enduring outcome. Take the next ESG step by creating a robust action plan to achieve and measure your goals.

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