I MPORTANCE OF THE DEFINITION - LITERATURE REVIEW

II. LITERATURE REVIEW

2.3 I MPORTANCE OF THE DEFINITION

The mixture of these definitions was chosen because of the focus on having a

―continuing commitment‖ for a firm to ―behave ethically.‖ This implies that CSR should be directly implemented into the business model and should be the foundation of a company. In addition, a firm should ―contribute to economic development‖ and the wellbeing of all stakeholders. Furthermore, Bowen‘s definition focuses on the leadership aspect of CSR.

Therefore, a company should balance profitability with societal needs. It should be noted, that even though commitment to improving the environment is not mentioned in this definition, it is still inherently embedded into this definition. That is because if a firm is focused on making the quality of life better for all stakeholders in society; it automatically makes efforts to improve the stakeholders‘ environment.

2.4 CSR and the Triple Bottom Line

The 1990s is when businesses truly began to recognize the power that many of these stakeholders, which were before ignored, held. As companies became more global and media and consumer power grew stronger, every good dead or mistake that a company performed could become public knowledge in the blink of an eye. Unethical or inappropriate business practices could wreak havoc on an organization that was exposed by the media, and the media was increasingly eager to expose such ―unethical‖ companies. However, many companies were still only focused on only profitability, as Friedman would suggest, and were beginning to receive backlash from the public. One example, Nike Inc., one of the global athletic shoes production leaders, discovered that a CSR strategy was essential for a company‘s sales and image. With cheap labor to be found abroad, in the 1970s, Nike moved most of its factories abroad. Although initially there was criticism, Nike Inc. avoided and ignored most of it for years. But, in the 1990s, with media and public concern growing, the effect on their brand image and sales became a phenomenon that Nike Inc. could no longer ignore. ―The Nike product has become synonymous with slave wages, forced overtime, and

arbitrary abuse.‖¹ Nike had to spend millions of dollars to reshape consumer opinion of their products, and even to this day, many associate Nike with Sweatshop labor. (Nisen, 2013)

This and other examples forced companies to realize that CSR had a place in every corner of a business. Porter said that ―proponents of CSR have used four arguments to make their case: moral obligation, sustainability, license to operate and reputation.‖ (Porter &

Kramer, 2006). In Nike‘s case, company each of these four factors was adversely affected and the company was put in a state of jeopardy due to the lack of a proactive CSR strategy.

Due to many already stated factors, the 1990s and 2000s became the era of global corporate citizenship (Frederick, 2008). Retailers such as, Nike Inc., and Wal-Mart became highly criticized for their lack of responsibility with their manufactures abroad, and companies such WorldCom and Enron cost tax payers and stockholders millions from financial fraud and corruption. The general public was losing patience and trust for big business, and stockholders began demanding of companies to adopt better code of ethics and CSR. Companies, as well, began realizing that they must pay more attention to their impact on the community, and their business decisions‘ effect on multiple groups of stakeholders.

Failure to do so meant an inability to compete or even survive. This new demand brought about the focus for CSR as a competitive advantage and sustainability. Caroll and Shabana said, ―In the early 2000s, the business community became fascinated with the notion of sustainability, or sustainable development, and this theme became an integral part of all CSR discussions.‖ (2010). With Corporate Sustainability (CS) as the new focus, definitions for CSR, such as the triple bottom line began to arise. The triple bottom line, seen in figure 4, is a popular definition for CSR. The triple bottom line seeks to create balance between society, the environment and the profitability of an organization through CSR (Marrewijk, 2003) (Wempe, 2002). Figure 4 shows the perfect balance of these three variables, and through that balance of CSR, so a business could achieve true sustainability. Due to theories like this, CS and CSR became interrelated, and many large companies began adopting a CSR and Sustainability strategies. Also in the past decade, ‗the focus of CSR theories has shifted away from an ethics orientation to a performance orientation. (Carroll & Shabana , 2010)

1 Speech made by Phil Knight, CEO of Nike Inc.

Companies no longer saw CSR as a way of doing good deeds for its stakeholders, but as a necessity to compete and survive.

Figure 2- Triple Bottom Line

2.5 The Evolution of CSR and Birth of the Stakeholder Theory

By the 1980s that CSR was already on its way to becoming a well-known concept.

Many newspapers, journals and magazines in many countries around the world began addressing and debating the topic. This is because the 80s marked the beginning of the

‗corporate/business ethics‘ stage, where business ethics and focus on stakeholders became the agenda (Frederick, 2008). The general public became more aware of corporations‘ ability to make an impact on society, either good or bad, and its responsibility to its stockholders and stakeholders. With this gradual sense of public awareness gaining strength, and the need for a new, more dynamic management style, the stakeholders‘ approach of CSR was born.

Although not exactly a new term in the business world, and initially unrelated to CSR, the ‗stakeholders‘ approach‘ was best redefined by R. Edward Freeman in the mid-1980s, in

his book Strategic Management: A Stakeholders‟ Approach. Stakeholders were defined as

―any group or individual who is affected by or can affect the achievement of an organization‘s objectives.‖ (Freeman, 1984, 2001). The goal of this approach was to broaden the responsibility of management from not only the stockholder, but also the ―stakeholder.‖

Basically, any group or individual can, at some point, affect an organization‘s performance . Likewise, an organization‘s effect on the individuals and groups around it grows and the size of the organization grows. This concept is best described with use of figure 3 below. In this illustration it is easy to see that these connections between firm and stakeholders. Freeman stated that he created this model because ―current theories are inconsistent with both the quantity and kinds of change that are occurring in the business environment of the 1980‘s‖

and that ―a new conceptual framework [was] needed.‖[Freeman, 1984, pg. 5].

Figure 3- Stakeholder Theory (Freeman, 1984)

Although stakeholder theory‘s definition and classification of ―stakeholders‖ are both still widely debated, it is an approach and theory that has had a lot of exposure in the business field. (Miles, 2012) For this reason, in this paper we will focus on the use Freeman‘s original definition as the definition and model of ―stakeholder theory.‖

2.6 CSR as a competitive advantage

Implementing CSR into the Business Model to Create a Sustainable Competitive Advantage

So what variables will make a company want to pay more attention to its stakeholders?

Also, what will motivate leaders to initiate these CSR strategies? It has already been established at in certain cases CSR can create a competitive advantage. This is an important aspect of our topic and it is essentially the core of CSR. In In Van Marrewijk‘s paper, he introduced a new framework which explained the psychology behind a firms‘ adoption a CSR strategy/CS (corporate sustainability) strategy. These strategies are stakeholder focused and can be driven by one of the following objectives: compliance, profit, caring, synergistic or holistic (2003). In his paper, Marrewijk also made reference to Maslow‘s hierarchy. (Maslow, 1943). There seems to be a link between the psychologies of these two theories. Maslow believed that when a person achieved one goal in the hierarchy, he would then strive to achieve the next. In Marrewijk‘s paper he introduced the five types of CSR for companies as

―motives‖ for CSR, and they are independent from each other; however if we look closer we can see that these motives actually, in some cases, build on one another. In order for a company to implement caring or synergetic strategies the company should first complied with government regulations and the law, which then implies that the company already has a

―compliance‖ strategy and has chosen, and is able to implement a more caring, synergetic based stakeholder CSR strategy. (Figure 5) In 2010, Heikkurinen added an improved approach by labeling the factors: unresponsive, responsive and beyond‐responsive strategic corporate responsibility (CR) actions. (Figure 6) With these terms established, we can easily identify how a firm can choose its stance for CSR/CR. By comparing this model with the same comparison of Maslow‘s hierarchy, which was discussed in Marrewijik‘s paper, we can see the connection even clearer. While a firm is developing, it can allot resources into CSR policies, which it can use to develop sustainable competitive advantages. As Porter and Kramer suggest, a firm is unable to address every social problem. On the contrary, it should use all available resources and choose and address the most important issues. (2006) By doing so, a company can develop a competitive advantage in the market. However, Porter and Kramer‘s main focus was Philanthropic activities, whereas Heikkurinen (2010) and Marrewijk‘s (2003) paper were focused on CSR initiatives implemented into the business model in order to create value for the company and reduce risk factors.

Figure 4- Comparison of Maslow‘s Hierarchy (1943) and Marrewijk‘s motivations of CSR (2003)

Figure 5- Maslow's Hierarchy and Heikkurinen‘s Model compared

Examples of How CSR Positioning Can Affect Performance

Some examples of such strategies can be found in Munilla‘s paper, (2005), he listed Exxon-Mobile, BP, GE and Pfizer as examples of large companies with different CSR positionings. The US petroleum giant Exxon-Mobile was listed a firm with a compliance focused CSR strategy. In the US regulations were very lax; and, due to this, profitability was up and public scrutiny was down: due to less active public addressing of CSR strategies.

However, as time went on, Exxon‘s the lack of proactive CSR strategies resulted in NGOs putting force on the company and requiring changes in CSR. Munilla stated that this ―forced position on the CSR continuum [is] a much less useful approach in building and sustaining competitive advantage.‖ (2005 Pg 386). It can be said that a proactive or at least ―dynamic‖

CSR strategy is required to maintain profitability in the long run. In another example, on the other hand, BP implemented a much more proactive CSR strategy and the public placed them on the ―moral high ground‖ and, even though, BP had to spend more to update the CSR strategy, the results were favorable. This of course also has its limits. After the BP spill in the Gulf of Mexico, one of the most costly and environmentally destructive oil spills in the history of drilling, investigators found that BPs rig explosion was the fault of management‘s attention to cost reduction as well as their carelessness in terms of following safety protocols (Rushe, 2013; Rushe, 2013). Due to BP‘s lack of strictly adhering to their safety protocols and health and safety regulations, and implementing passive CSR at the time, BP had to face the consequences economically by being forced to clean up a potentially avoidable calamity.

(Rushe, 2013). That being said, ―Proactive corporations will tend to move toward a strategic CSR perspective, leveraging CSR to more efficiently or effectively create and renew competitive advantage.‖ (Munilla, 2005, pg 385), Furthermore, corporations must be vigilant and responsible to all stakeholders that it affects the most. To avoid any public backlash, as

well as to understand all of its stakeholders, leadership of these corporations must strive to develop holistic CSR strategies that benefit the majority, if not all stakeholders, while being dynamic and ready for change, and not be focused on short term goals or losses, but focus on the potential future.

So what is a company like BP to do after such a damaged reputation? In a recent article in Forbes magazine, Why CSR Can't Help BP Now, the author stated:

“Once your name is tarnished, high-fit CSR tends to produce only skepticism. In other words, it backfires… CSR appears to work best for companies with already good reputations...

a CSR program can‟t cut it alone. Reputation comes first–and is everything.”

(Ferguson, 2010)

This is why organizations must be prudent, and implement CSR strategies into the business model. Doing so will create new competitive advantages and protect by not only protecting the company brand reputation, but also by improving efficiency by improving the relationship with a multitude of stakeholders. But, in the end, many companies do not implement proactive CSR techniques because they feel that it doesn‘t benefit them financially.

CSR as a Competitive Advantage and how it affects Corporate Financial Performance

As stated many companies are afraid to implement proactive CSR strategies due to fear of losing profit. However, more and more companies are realizing the potential benefits to having a strong CSR strategy. Many researchers believe that, even though companies and economists focus on profits, Friedman‘s ‗profitability‘ responsibility is losing grounds in the debate. Margolis and Walsh stated it best by saying that ‗a simple compilation of the findings suggests there is a positive association, and certainly very little evidence of a negative association, between a company‘s social performance and its financial performance.

(Margolis, 2003). But, to this day, the academic community still debates how CSR can affect Corporate Financial Performance (CFP) and how strong the correlation is. However, little attention has been given to SMEs and how their CSR strategies can be implemented to create a competitive advantage. Also, many large companies still use their CSR strategies as a preventative or counteractive measure for dealing public disappointment, instead of actually taking interested in social needs and the greater good or implementing ethical practices into the business model. This has made the public skeptical of large companies‘ CSR objectives and fear that they are using ―green washed‖ tactics to increase the company‘s goodwill and improve stock performance.

2.7 Responsible Leadership

Importance of Responsible Leadership

In order to truly understand CSR‘s efficiency and role in modern society, one must also understand the leaders that develop the strategies. Currently, Stakeholders and stakeholder theory has already taken a new role in the modern business. Stakeholders can put a lot of pressure on businesses and essentially change the way a company conducts its CSR strategies.

(Porter and Kramer, 2006). With this added pressure, leadership has also taken a new role in organizations. Leadership is an essential requirement for every organization, company or group. Without leadership, a company will lack specific goals and direction needed for the organization‘s operation and success. With globalization and an ever-changing market, the responsibilities and expectations of leadership has changed and evolved. Leaders are no longer only responsible for the performance of the company, but are also responsible for their organization‘s impact on society and the environment around it. (Freeman, 1984; Maak and Pless, 2006). These added responsibilities for leaders have changed the roles of leaders. Maak and Pless state that the responsibilities of leaders have ―become more complex and multi-faceted, [expanding] from an internal leadership perspective to a broader world view, from a shareholder mindset to a stakeholder orientation with respect to the leadership mandate.‖ (2006)

A responsible leader should always be aware of his organization‘s impact on society both internal and external, not only out of moral obligation, legal reasons or reputation, but also for the sustainability of the company. (Porter and Kramer, 2006) Leaders should be aware of their impact on customers, employees, suppliers and every stakeholder, even competitors.

This should not be limited only to the present, but also to future generations. Therefore a leader should not be focused on just one goal-- the company—but should be able to develop multiple roles, in order to ensure the sustainability of the company (Maak, 2006). These roles can be seen below in the ―Roles Theory of Leadership‖ figure. (Figure 6) Sustainability and focus on intergenerational equity should be a priority for the present in order to improve the future. This has been a major agenda for the past few decades. Rules and regulations pointing out basic human rights and organizational responsibilities have been establish by many conventions, one of the most famous being the United Nations Commission on Environment and Development held in Rio. (UNCED, 1992). Also, it appears that this not just a trend. This is the agenda and will be the agenda for the next decades to come. Leadership must be ready to rise for the ever growing demand of proactive corporate social responsibility.

Figure 6- Roles theory of Leaders

CSR’s Role in Choosing CSR Strategies

This is very true in the short run; however, in the long run, a good CSR strategy can redefine a company‘s reputation. One example is when Wal-Mart‘s CEO Lee Scott made a choice to redefine Wal-Mart by focusing on CSR and responsible leadership. The multi-billion dollar, world retail giant, was suffering from a backlash of bad publicity due to its poor CSR practices linked to the environment and outsourcing problems. One case study that was conducted by Stanford University said that due to its poor reputation, 2%-8% of consumers

had stopped shopping at the retail giant. (Denend & Plambeck, 2004). Due to these, and other such figures, in 2005 Lee Scott made his 21^st century leadership speech for Wal-Mart, which would implement a new ―sustainability‖ project that was focused on limiting waste products and energy, improving the quality of products improving employee conditions and leading the way for sustainability. (Scott, 2005) Wal-Mart‘s goal was to improve sustainability and become more ―green.‖ Skeptics initially claimed that it was ―green washed‖ tactics and that Wal-Mart was eager to improve its reputation and earn some goodwill from this strategy.

Wal-Mart knew that the results would not be seen right away. This was because after years of maintaining an ―unresponsive" CSR strategy, it would take some time to change the public opinion of the firm. At first, skeptics believed that Wal-Mart‘s decisions were based upon selfish goals. This was because many knew that due to Wal-Mart‘s scale, reducing waste and being more efficient reduces cost for its company, so it was actually using CSR as a way to cut cost. In this case, Heikkurinen would suggest that Wal-Mart was on the right track since company‘s should be willing and proactive in creating ―integrated and innovative approaches‖

in CSR (2010). So, regardless of Wal-Mart‘s reasons for change, they were on the right track, and in some cases CSR should be able to create ―win-win‖ situation for company and stakeholders. In the end Wal-Mart did benefit and the public opinion of Wal-Mart did change.

According to YouGov BrandIndex and the New York Times:

“In mid-2007, the earliest data available, Wal-Mart‟s score was about a negative 5 on a scale of negative 100 to positive 100, but it rose to the 20s in 2009.”

(brandindex) (Clifford, 2013)

This being said, it is important to understand that the larger a company is, the larger the impact of any action it takes. This is why Wal-Mart is a great example of how CSR can work

for a company. Wal-Mart is the largest retail company in the world, so the actions it takes will have a much more noticeable effect on stakeholders and the environment. However this also means that leadership has a more difficult position. This is because as a firm grows, so does its impact on more stakeholders. For any business efficient resource management and the balancing the demands of shareholder/stakeholder is critical (Mehra, Smith , Dixon, &

Robertson, 2006), but for Wal-Mart this importance is magnified. With profit margins from 3-4% Wal-Mart has to use scale and efficiency resource management in order to make a profit.

However, SMEs also have the same problem. Being small and lacking available resources, proper resource management and weighing of stakeholder importance is crucial.

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