Why should companies care about social responsibility?

Corporate social responsibility initiatives and the idea of the triple bottom line have grown in popularity among business circles. But where do the boundaries of a company’s social responsibility lie, and who determines it?

Shibuya's busy crossing in Tokyo, Japan
A busy crossing in Tokyo. What does a company owe to the society and environment it operates in? Image: StockSnap, Pixabay

Over time, the relationship between business and society has evolved. Business has had a significant impact on the way we travel, homes we inhabit, foods we eat, and conveniences we enjoy. Every product and service we enjoy is a testament to the positive differences businesses have made in our everyday lives. But has this improved quality of life come at a price? Who is responsible when a consumer uses some of its products or services resulting in harm to to others and/or the environment?

The relationship to the society and environment in which businesses operate is “a critical factor in their ability to continue to operate effectively. It is also increasingly being used as a measure of their overall performance.” But what are the boundaries of the social responsibility of a company? Who determines such boundaries?

Social responsibility means that individuals and companies have a duty to act in the best interests of their environments and society as a whole. In the past few years, business has translated this idea into the concept of corporate social responsibility (CSR) and have developed sustainability strategies where social responsibility is an integral part of their business model.

The idea and practice of CSR has existed for many years. Business giving and business involvement in community issues was familiar to many leading companies in the first half of the 20th century. 

 Who determines what is good for society?

Social responsibility is a concept that indicates that companies should embrace their responsibilities to society and not be solely focused on maximising profits. But who determines what is good or bad for society or the environment?

Recently I made a presentation in Vienna to over 300 executives of the chemical and plastic industry, addressing these questions. I asked them: “Which water container is more sustainable for society, and why?” The audience was asked to choose one of the following as an answer: plastic bottles, glass bottles or aluminum cans. 

The response of the audience was divided. About 30 per cent of people said plastic was the most sustainable product because it can be recycled, about 15 per cent said glass, because it can be recycled many times. Twenty per cent said aluminum cans because there is an economy for recycling aluminum. The remaining 30 per cent were not able to answer. They didn’t know what was more sustainable and by implication “good” or “better” for society because they have heard contradicting arguments about the three types of containers.

This suggested to me that there is a challenge for society in making choices on what is good and a challenge for business in determining the meaning of social responsibility.

Social responsibility is one of the most important issues that business is facing today. Those who follow the way in which companies engage in social problems have noted that social responsibility has a strategic importance for two reasons:

1) A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a company to produce only goods and services which strengthen the health of society

2) If the company wants to succeed in the long term it needs to have the acceptance—or licence to operate—from social actors affected by the company’s’ operations.

Take the case of Nike in Pakistan, where the sporting goods giant has been accused of using child labour in the production of its soccer balls. While Pakistan has laws against child labour and slavery, the government has taken very little action to combat it. What was the social responsibility of Nike in this case? To whom should Nike have addressed its socially responsible practices?

Some cynics expressed that Nike was indeed contributing to alleviate poverty in Pakistan (where per capita income of $1,900 per year indicates that a typical person survives barely on $5 per day. And moreover, Pakistan has a traditional culture where the earning of one person goes towards feeding 10 mouths).

However, the fact is that many stakeholders felt affected by the actions of Nike, including consumers of Nike products in the industrialised world, international organisations, the US government, and the entire human rights community.

While the triple bottom line and other frameworks suggest that firms can make up for negative performance through positive outcomes, this is simply not accurate. Social responsibility is not a zero-sum game.

Furthermore, the US constitution states that child labour is an illegal and inhumane practice and any US company found guilty practicing and encouraging it will be prosecuted. General Agreement on Tariffs and Trade (GATT) and the World Trade Organization prohibit member nations, like the United States, from discriminating against the importation of goods made by children.

Therefore, how a company handles its social responsibility has become a key success factor for global companies because they are more visible to the public than small and medium size companies, and because public exposure affects their competitiveness. 

Consequently, large companies invest significant economic and human resources to develop strong and sustainable relationships with customers, employees, suppliers, government authorities, academics and other stakeholders.

Social responsibility is not about reducing harm, but maximising positive outcomes

But the response of business to society’s social demands has not always been well received. On the one hand, many corporations have used their CSR initiatives to “look good and feel good”. And on the other hand, there is lack of clarity as to what exactly is social responsibility, how far does it go, and which would be the most appropriate way for all social actors to address this rather complex challenge.

The question that companies have to ask themselves is how they positively and negatively impact all stakeholder groups in the short and long term.

All too often, the sustainability strategies of companies are entrenched in activities focused on diminishing the negative externalities of the firm such as reducing harm or minimising negative externalities on stakeholder groups.

A socially responsible company, however, is one that not only minimises harm but makes sure to maximise positive outcomes. While the triple bottom line and other frameworks suggest that firms can make up for negative performance through positive outcomes, this is simply not accurate. Social responsibility is not a zero-sum game. If a company pollutes the environment, does it actually reverse its impact by paying for CO2 offsets?

Similarly, if a company pays its producers below minimum wage, will donating a portion of its profits toward a non-profit ameliorate the situation?

In short, social responsibility should not be an afterthought or public relations manoeuvre; instead, it should be integrated from the outset into the core strategy and business model of a company.

 Francisco Szekely Ph.D., Professor of Sustainability Leadership. IMD Business School in Singapore and Switzerland. This article was written for Eco-Business.

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