A Guide for Effective Adoption of CSR through the Clarification of Three Ambiguities
Corporate Social Responsibility (CSR), which enables theoretical justification for corporations to be socially and environmentally responsible, has been regarded as an essential part of business activities in recent years. Its prominence can be attributed to the intense backlash to the negative externalities corporations have incurred on both society and environment, such as abusive working environment and corporate frauds, pollution and excessive CO2 emission and so on. Nevertheless, majority of corporations still do not adopt CSR as one of their priorities. The essential reason of this dilemma is the theories of CSR are very diverse and most corporate managers do not fully capture their meaningfulness. Accordingly, they are unable to justify the cost of CSR adoption to their shareholders, who they think are the owners of the corporations as well as their internal stakeholders, such as supervisors, colleagues and CEOs. Naturally, corporations do not practice CSR. Even if they do, it is often poorly coordinated and practiced only for the sake of publicity, press release and improvement of employee morale, all of which are not on the point of CSR.
The complexity of CSR can be attributed to the following three ambiguities; what the word CSR really indicates, why they adopt CSR as well as the appropriate attitude to face it, and kinds of approaches to fulfill CSR. Simply put, corporate managers do not know what exactly CSR means, how to face it and what approaches they should implement. Actually, most corporate managers in Japan regard CSR as mere extension of corporate Philanthropy. The most common CSR initiative in Japan is donation. For example, Nanto Bank has conducted “Yoshino-Heart Project”, which provides monetary aids to the NPO protecting the forest in the Yoshino region. Through this project, the bank might produce positive social impact, namely protecting the forest, and be able to enhance corporate reputation as well as employee motivation. However, this is a shallow conception of CSR. Nanto Bank’s initiative to save the forest is neither effective nor efficient and has deviated from the essence of CSR. There are three reasons why this is so. First of all, it is not sustainable with the lack of a mechanism to generate profit, which is the engine of any corporate activities. Secondly, it does not attend to the interests of the bank’s shareholders because it is not the best way to increase its share price. Third, there would have been other alternative approaches that would create more social impacts with same amount of corporate fund only if they utilized their expertise and resources. Therefore, just by looking at the project, we are forced to say the bank does not have the clear understanding of what CSR is, why they adopt it, and how to approach to it. However, the impractical approach of Nanto Bank is not rare. We can see such approaches in majority of limited corporations in Japan. The essential reason is, as we said above, the theory of CSR is diverse. Moreover, there has been no practical guide for the right adoption of CSR. There have been several textbooks of CSR, but they are usually over 500 pages and written with tons of abstract jargon, which is not practical for busy corporate managers.
To make the situation worse, Creating Shared Value (CSV) was introduced in2011 on Harvard Business Review by Michael E. Porter and Mark Kramer, professors in Harvard Business School. CSV is the concept that argues corporations should look for the intersection of the mutual benefits between business and society, where they can create shared value for both sides. According to Porter (2011), business can attain the greatest corporate benefits and give the biggest social impact if they aim to create shared value on both business and society. While CSR encompasses the passive responsibility of business over society and environment, CSV seeks business cases from socially meaningful actions. The important remainder is the fact that CSR is indispensable when corporations practice CSV because practicing CSV at the cost of CSR may create negative externalities resulting from irresponsible behaviors even if it creates both social and economic value. Successful CSV initiative always entails CSR as its perk. However, the relationship between CSR and CSV is very complicated. So, many corporations are not only unable to comprehend what CSR means, have a proper attitudes to deal with it and how to approach to it, but also confuse it with CSV. Even some discredit CSR as an obsolete concept and practice only CSV while ignoring some important responsibility of business. Despite the current situation, the number of research that explains the relationship between CSR and CSV is considerably small.
This paper is a prescription for CSR practitioners to understand: what the word CSR really means, why they adopt it as well as the appropriate attitudes to face it, kinds of approaches to tackle on it, and the proper relationship between CSR and CSV. By clarifying these four points, corporate managers can get a grip on implementing effective and efficient CSR initiative.
Chapter one will introduce the most recognized theory of CSR, Three Domain Approach, which divides CSR into three components: economic responsibilities, legal responsibilities, and ethical responsibilities. We will explain ethical responsibilities in depth because they are often the hardest and most misunderstood responsibilities of business. Through chapter one, we will clarify what CSR really means.
Chapter two focuses on the motivations to adopt CSR and attitude to face it.We will review two types of corporate motivations to adopt CSR: egoistic motivation and altruistic motivation. After that, based on the corporate motivations to adopt CSR, we will introduce proper attitudes to deal with CSR. By doing so, we will clarify why corporations adopt CSR and how they should face it.
In Chapter three, we will classify types of corporate approaches and its relationship with CSV. Strategies always come from what to approach and why to approach. In previous chapters, we have clarified what (what CSR is) and why (why they approach), so this chapter will finally review approaches to CSR. Also, we will explain the theory of CSV and its relationship with CSR. This chapter will contribute to solve confusions around approaches to CSR and CSV.
Chapter One: Corporate Social Responsibility: Theories and Frameworks
The definition of CSR is extremely diverse. The textbook “Corporate SocialResponsibility”, introduces 20 definitions of CSR. Junge contends, “What is agreed in defining corporate social responsibility is that no agreed definition of corporate social responsibility exists”. This diversity of the definition of CSR has brought confusion among corporations. Some regard CSR as equivalent of corporate philanthropy. Others think CSR is a pure management tool only for serving its own interests. Or some may think CSR is just a part of decoration of their IR documents. Many corporations conceptualize CSR in very shallow manner and this can be attributed to the complex spectrum of its definitions. In this chapter, we will review what CSR really means by exploring one widely accepted definition and theory of CSR.
Theories of CSR: Three-Domain Approach
In the beginning of the theoretical development of CSR in 1950, several different CSR theories have emerged1. The theories of CSR could be categorized into two major groups2. One school of thought contends the only responsibility of corporation is maximizing profits for the shareholders within the boundary of law and minimal ethical obligations3. In this view, any corporate activity must be tied to profit generation, which will attend to the interest of shareholders, the true owner of the corporations, they argue. Thus, CSR initiative, especially those of philanthropy, like donation and volunteering, is not appropriate and should be left to government or NGOs.Other school of thought argues that corporations have broader range of responsibility toward society4. The reasoning of the later argument is diverse. For instance, Elisabet Carriga argues there are three more theoretical perspectives of CSR other than that of profit maximization: political perspective, integrative perspective, and ethical perspective5.
1 Archie B Carroll, “A history of Corporate Social Responsibility: Concepts andPractices” ResaerchGate Jan. 2008: 1.
2 Andrew Crane, “Corporate Social responsibility” Roughtledge July. 2013: 45.
3 Friedman, “The Social Responsibility of Business is to Increase its Profits”, New YorkTimes; Sep 13, 1970: 122-126.
To solve the complexity and unorganized spectrum of CSR theories, Archie B Carroll developed CSR Pyramid6, one of the most influential and recognized theories of CSR, by combining two different school of thoughts into one framework7. Later, he developed Three-Domain Approach, which is the evolutionary form of CSR Pyramid and complements some of CSR Pyramid’s shortcomings. According to theThree-Domain Approach, Corporate Social Responsibility can be divided into three categories: (1) Economic responsibility, which requires corporations to optimize positive economic impact to their own through the activities that will enhance either shareholder value or profits; (2) Legal responsibility, which requires corporations to abide by the law; (3) Ethical responsibility, which is the responsibilities expected by corporation’s stakeholders8.
4 Mark S. Schwartz and Archie B Carroll, “Corporate Social responsibility: AThree-Domain Approach”, Business Ethics Quarterly Volume 13, Jan 2013:1.
5 Elisabet Garriga and Domenec Mele, “Corporate Social Responsibility Theories:Mapping the Territory”, Journal of Business Ethics, 2004.
6 Archie B Carroll, “The Pyramid of Corporate Social Responsibility: Toward theMoral Moral Management of Organizational Stakeholders”, Business Horizons, 2004.7 Mark S. Schwartz and Archie B Carroll: 508.
8 Mark S. Schwartz and Archie B Carroll: 508-520.
Ethical Responsibility Explained
Although Economic and Legal responsibilities are obvious and easier to be accepted among corporations, ethical responsibility remains ambiguous and harder to be adopted because enforcement of ethical responsibility is not forcefully required in most cases. The main reason is unlike economic and legal responsibility, which have rather concrete entity pursuing responsibility to corporations with legitimate authority like shareholders and law, ethical responsibilities have no such entity9. NGOs or consumers may seem to have legitimate authority to impose responsibility on business, but it is still not the case for most corporations because of the lack of understanding of stakeholders’ influence on themselves10. Therefore, we believe unless the logic of ethical responsibility becomes clear and well understood, corporations will not adopt CSR activities well. We provide the basic theories and reasoning of ethical responsibility in this chapter because it will solve one of the complexities of CSR theories. Like the theories of CSR, corporate ethical responsibility, In other words, responsibility to be a good citizen in society, has numerous theories. Thus, we choose two widely accepted theories of ethical responsibilities: Normative Stakeholder Theory and UniversalHuman Rights.
9 Antonio Argantona, “Why it is hard to be ethical in business”, University of Navarra,September.2015<https://blog.iese.edu/ethics/2015/07/09/why-is-it-hard-to-be-ethical-in-business/>.
Normative Stakeholder theory expands the scope of fiduciary relationship of corporate managers from solely to their shareholders to equally including their stakeholders. Stakeholder, in this context, means “those groups who have stake in or claim on the firm (suppliers, customers, employee, stockholders, and local community)”11. Donaldson and Preston put it more precisely with two definitions: “(1) stakeholders are persons or groups with legitimate interests in procedural and/or substantive aspects of corporate activity (stakeholders are identified by their interests in the corporation, whether or not the corporation has any corresponding functional interest in them) and(2) the interests of all stakeholders are of intrinsic value (that is, each group of stakeholder merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the share owners)” 12. It gives corporation’s stakeholders more normative authority over corporations. Thus, corporate managers need to treat their stakeholders in the same manner as shareholders. One major theoretical grounding of Normative Stakeholder Theory is the Principle of Fair Play, which argues any person will bear duty to participate the mutually beneficial social cooperation if he or she receives the benefits resulted from it13. Therefore, according to The Principle of Fair Play, corporations have the duty to ethically contribute to the social good because they are receiving benefits generated from the cooperation among their stakeholders, such as employees who work for the corporations, consumers who purchase their products, shareholders who provide capital, and local community which provide area of activity …etc.
10 Kasturi Rangan, Lisa Chase, Sohel karim, “The Truth about CSR”, Harvard BusinessReview, Jan-Feb 2015: 2.
11 Freeman, “A Stakeholder Approach”, Cambridge University Press, 1984.
12 Elisabet Garriga, Domenec Mele: 60.
Universal Rights, commonly known as Human Rights, are often mentioned to justify corporate ethical responsibility14. The most prominent approach is UN GlobalCompact, which is formed by ten principles of how we do business15; 1. “Businesses should support and respect the protection of internationally proclaimed human rights”. 2.“Businesses should make sure that they are not complicit in human rights abuses”. 3.“Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining”. 4. “Businesses should uphold the elimination of all forms of forced and compulsory labor”. 5. “Businesses should uphold the effective abolition of child labor”. 6. “Businesses should uphold the elimination of discrimination in respect of employment and occupation”. 7. “Businesses should support a precautionary approach to environmental challenges”. 8. “Businesses should undertake initiatives to promote greater environmental responsibility”. 9. “Businesses should encourage the development and diffusion of environmentally friendly technologies. 10. “Businesses should work against corruption in all its forms, including extortion and bribery”. Since the presentation of UN Global Compact by the United Nations Secretary General, Kofi Annan, in The World Economic Forum in 1999, many companies have adopted this compact and it holds its Leaders Summit every three years, further increasing its legitimacy and influence on global commitment for ethically-oriented business initiatives.17. The major theoretical grounding of Universal Rights is the Natural LawTradition, which advocates for natural human rights18.
13 John Simmons, “The Principle of Fair Play”, Philosophy and Public Affair Vol.8 No.4, 1979.
14 Elisabet Garriga, Domenec Mele: 61.
15 United Nations, “The Ten Principle of The UN Global Compact”, United Nations,<https://www.unglobalcompact.org/what-is-gc/mission/principles/>.
We have reviewed two major theories of ethical responsibility. As we stated above, before the development of CSR theories, the sole objective of corporations had been profit maximization for their shareholders due to the influence of classical economists, like Milton Friedman. However, when we look at the status of global society, there are tremendous amount of social and environmental disasters resulting from irresponsible behaviors of corporations. So, it is natural for stakeholders to give backlash against such irresponsibility and it is worth mentioning that their influence over corporations has been amplifying because of the advent of new technologies, such as World-Wide-Web and Social Media19. For instance, when United Airlines had a scandal over the controversial removal of one passenger in 2017 due to an overbooking United Airlines mistakenly made, the scene of the violent removal of the passenger went viral on both web and social media and created gigantic backlash against United Airlines20. As a result, its share price lost $1.4 billion21. As the example of the drop of the share price of United Airlines showed, ethical responsibility is tightly intertwined into economic responsibility and corporate financial performance. Hence, it is fair to say commitment for ethical responsibility can contribute to fulfill economic responsibility and directly influence CFP (Corporate Financial Performance) in both negative and positive ways, even if the connection between CSR and CFP depends on the context22. Having said so, it is almost impossible for corporations to adopt CSR initiative that is not directly linked to profits since they need to run economically healthy business operations. Therefore, Corporate managers are required to understand the imperative necessity of CSR and its theoretical groundings, especially those of ethical responsibilities, to be able to convince their internal stakeholders, such as their colleagues, supervisors, or CEOs. We believe the understanding of Normative Stakeholder Theory and Human Rights Approach can be the good starting point for the right adoption of CSR initiative among corporate managers.
16 Paul Hohnen “Is the UN Global Leadership Summit an effective forum for change?”,The Guardian, September 2013<https://www.theguardian.com/sustainable-business/ungc-leaders-summit-forum-for-change>.
17 Elisabet Garriga, Domenec Mele: 61.
18 Tsuyoshi Fujii, 「CSV 時代のイノベーション戦略」, July 2014.
19 Tasneem Nashrulla, “United Passenger Suffered A ‘Significant Concussion’, ABroken Nose, And Lost Two Teeth”, Buzzfeed, April 17, 2017;<https://www.buzzfeednews.com/article/tasneemnashrulla/united-passenger#4ldqpgp>.
20 Lucinda Shen, “United Airline Stock Drops $1.4 billion After Passenger RemovalControversy”, FORTUNE, April 11, 2017;<http://fortune.com/2017/04/11/united-airlines-stock-drop/>.
21 Seungoo Oh, Ahreum Hong, Junseok Hwang “An Analysis of CSR on Firm FinancialPerformance in Stakeholder Perspectives”, MDPI, June. 2017.
Chapter Two: Attitudes to CSR and Stakeholder Theory
Even if corporate managers can identify what CSR really means, they still have difficulties to set a clear goal of their CSR initiative. Do they adopt CSR just for making profits or achieving more than that? Moreover, they do not know, under the current trend of business environment, what should be the appropriate attitude to tackle on the fulfillment of CSR. Is it acceptable for them to try to fulfill only economic responsibilities? Or Ethical responsibilities are the only prerequisite? Do they need to fulfill all of them? In chapter two, we will review two types of motivations and the appropriate attitude of corporations to deal with CSR.
Motivations to Adopt CSR: Egoistic, Altruistic, or Both?
As we discussed in chapter one, CSR can be divided into three domains:economic responsibilities, legal responsibilities, and ethical responsibilities23. When we discuss the corporate attitude to these three types of CSR, we first need to understand the corporate motivations to adopt CSR because it will greatly influence the objective of corporations and how corporations look at CSR. In chapter one, we explained there are mainly two distinctive theories of CSR, responsibility toward shareholders, which is egoistic in nature and responsibility toward society, which is more altruistic24. So, corporate motivation to the adoption of CSR can be deemed as either (1) profit maximization for shareholders and its survival (fulfillment of economic responsibility and egoistic goals), or (2) fulfillment of wider range of responsibilities, which might leave financial interests out of consideration (fulfillment of ethical responsibility and altruistic goals). In either case, we can say corporations still need to pursue all of three kinds of responsibilities. We say that because if you adopt CSR based on egoistic economic motivations, you still need to behave ethically in order to avoid stakeholder backlash as the case of United Airlines tells us, plus, you cannot forget that there are several well-grounded theories of corporate ethical responsibilities that require corporations to act ethically upon. Also, if you adopt CSR based on altruistic ethical motivation, you must strategically proceed to create profits, or you will lose sustainability in your operations and your shareholder will give you intense backlash.
22 Mark S. Schwartz and Archie B Carroll: 508.
23 Andrew Crane, “Corporate Social Responsibility”, Roughtkedge Jult. 2013:45.
In addition, both motivations are not always mutually exclusive. For example, Livesense Inc., a Japanese limited company, has succeeded to fulfill both motivations.Under the corporate philosophy, “Our aim is to find our own happiness by making our customers happy through our business.” 25, Livesense has launched several web services that tackle various kinds of social problems such as, rogue companies and digital divide. Through their business activities, they have succeeded both provision of social value, which fulfills ethical responsibilities, and healthy CFP, which fulfills economic responsibilities26. As indicated by the example of Livesense, we can say corporate excellence on ethics can lead to good financial performance and both responsibilities can co-exist.
24 Livesense, “Our Philosophy”, <https://en.livesense.co.jp/about/philosophy/>.
25 Livesense, “2Q FY2018 Presentation Material”, August 14, 2018.
Considering the table above, whatever motivations corporations have for adopting CSR, it is necessary for them to try to fulfill all three kinds of responsibilities with equal regard to each27. Such attitude will lead the fulfillment of the corporate objectives with less risks, more competitive advantage and innovation.
Trade-Off between Three Types of Responsibilities and Stakeholder Theory
However, while there are some successful cases where all three kinds of responsibilities; economic, legal, and ethical, are smoothly met, majority of business decision-making processes bear trade-offs. In many cases, they are not aligned and even mutually conflicting28. For instance, Grameen Bank, the first and biggest institute for micro finance, has suffered from the conflict of the economic responsibilities and ethical responsibilities.
26 Mark S. Schwartz and Archie B Carroll: 508.
27 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten, “Contesting the Valueof Shared Value”, California Management Review Vol56, 2014: 136.
Muhammad Yunus, the winner of Nobel prize in economics, launched Grameen Bank with the novel goal of achieving both poverty alleviation among impoverished villagers in a rural area through micro finance (fulfillment of ethical responsibilities) and economic sustainability of the bank itself through improving loan recovery rate (fulfillment of economic responsibilities)29. Its performance is outstanding in digits. The cumulative amount of loan lent is 1,723 million dollars by October 2017and its loan return rate is 99.17%30. In reality, however, Grameen Bank’s social impacts have been declining regarding the equality and there have been small advances in terms of poverty alleviation, regardless of the expansion in the number of clients and amount of funds being available31. Even if Grameen Bank sets a clear vision that equally integrates both economic and ethical responsibilities, it failed to fulfill it due to the difficulty to balance the interests of various kinds of stakeholders inside and outside of the corporation, such as clients, investors, employees, and suppliers. As a result, it now prioritizes the economic responsibilities (namely economic sustainability) rather than the ethical responsibilities as shown in digits. That would jolt the very meaning of bank’s existence because it has failed to achieve one of the corporate main goals; providing social impact through poverty alleviation. Such a case is not rare, rather we can see it on most cases in corporate decision making processes32.
28 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten:136.
29 Grameen Bank, “Monthly Report: 2017-10 Issue 454 in USD”, October 2017<http://www.grameen.com/monthly-report-2016/>.
30 M. Epstein and K. Yuthas, “Mission Imposible: Diffusion and Drift in theMicrofinance Industry”, Sustainability Accounting, Management and Policy Journal,1/2 (2010): 201-221.
31 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten:136.
32R Edward Freeman, “Stakeholder Management: Framework and Philosophy”,Cambridge University Press, 2010:2.
In the case of Grameen Bank, it failed to manage its stakeholders. As a result, it became unable to prioritize the value creation for the people at the bottom of the pyramid, who are the most important stakeholders of the bank. In other words, GrameenBank is failing to achieve its goal, that is attaining both economic and ethical responsibilities. Here, we need to pay the special attention to the fact that GrameenBank regarded the fulfillment of ethical responsibilities as one of its top two priorities along with economic responsibilities but still failed. Stakeholders have such power. If corporations cannot cope with their stakeholders, they will suffer from complex trade-off of multiple stakeholder interests, unable to prioritize their activities, and losing the sight of their goal. Therefore, to hedge such risks, corporations should constantly try to ,1) know who are the stakeholders of the corporation and what are the stakes they have, 2) organize the process to integrate the interests and stakes of the stakeholders into their decision-making process, 3) conduct bargain and transactions to optimize the balance of stakeholder’s interests to achieve the organization’s goal33. Such set of management process is called “Stakeholder Management”, notably advocated by R.Edward Freeman, a business professor from University of Virginia. StakeholderManagement is part of Stakeholder Theory, which is commonly said to be the single most influential theory in CSR34.
Stakeholder theory complements CSR’s ambiguity by specifying what ‘Society’ means in CSR, that is ‘stakeholder’; any group or individual who can affect or is affected by the achievement of the organization’s objectives35. So, Stakeholder Theory gives managerial frameworks to managers, which helps them define what and who exactly their CSR initiative will aim for and how to deal with them36. There are three constituencies inStakeholder Management: specifying who are the stakeholders of the corporations and what are the stakes they hold, organizing the process to integrate the interests and stakes of the stakeholders into their decision-making process, and conducting bargain and transactions to optimize the balance of stakeholder’s interests to achieve the organization’s goal37.
33 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten:135.
34 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten:135.33 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten:135.
Stakeholder Theory gives corporations tools to create concrete strategies to approach to CSR, which include how to effectively deal with trade-off of each responsibility, especially between economic and ethical responsibility. If Grameen Bank applied stakeholder management, it would have been able to gain the theoretical frameworks and firm understanding about their stakeholders that gives the bank capability to form better strategies to approach to their stakeholders, in other words, capability to fulfill their economic and ethical responsibilities more effectively. Thus, the bank might have been able to avoid losing its sight toward its goal because of the unsavory management to balance the interests of stakeholders.
In this chapter, we have seen: the corporate motivations to adopt CSR, how corporations should face the three kinds of responsibilities, and Stakeholder Theory as the key to approach to CSR. There are mainly two kinds of motivation to adopt CSR, egoistic motivation based on economic responsibilities and altruistic motivation based on ethical responsibilities. In both cases, corporations should try to have objective attitude to try to fulfill all of three responsibilities with equal regard to each. But, trade-off will always be entailed in most corporate decision-making. Then, Stakeholder Theory, which will give corporations more concrete conceptualization of what ‘S’means in CSR and how to deal with it, will be the key to effectively deal with such trade-off. Therefore, the ideal corporate attitude to CSR is; whatever motivations corporations hold to adopt CSR, they should pursue all three kinds of responsibilities with equal regard to each, by utilizing Stakeholder Theory as the tool to create rational strategies and decision-making process to deal with trade-off among these three responsibilities.
35 Andrew Crane, Guido Palazzo, Laura J Spence, Dirk Matten:135.
36 R Edward Freeman, “Stakeholder Management: Framework and Philosophy”,Cambridge University Press, 2010:2.
Chapter Three: Approaches to CSR and CSV’s Relationship with Them
The approaches to CSR are especially confused among corporate managers.There is no agreed definition of what CSR is and how managers should manage. So, it is natural for corporate managers to get lost when they approach to CSR. Also, there have been misunderstandings of the relationship between CSR and CSV. In chapter one and chapter two, we have clarified what CSR means and how corporate managers should conceptualize it. Therefore, as the final landing spot, we will explain two kinds of approaches to CSR and their relationship with CSV in this chapter.
Two Types of Approaches: Responsive and Strategic Approach
Upon to this thesis, we have discussed there are three kinds of CSR: economic responsibilities, legal responsibilities, and ethical responsibilities. Also, we have clarified the two types of corporate motivations to adopt CSR: egoistic motivation and altruistic motivation and the appropriate corporate attitude to pursue it: whatever motivations corporations hold to adopt CSR, they should pursue all three kinds of responsibilities with equal regard, by utilizing Stakeholder Theory as the tool to create rational strategies to approach them and decision-making process to deal with trade-off.Then, our next focus is the types of approaches to CSR. In order to approach CSR, managers first need to identify who are their stakeholders and what stake they hold38.Through this, managers can know “who” is demanding “what” to the corporation. After identifying who is holding what social issues, corporations can create concrete strategies to tackle on them. According to Porter and Kramer, there are two kinds of corporate approaches to CSR: responsive approach and strategic approach, so called responsive CSR and strategic CSR.
37 R Edward Freeman, “Stakeholder Management: Framework and Philosophy”,Cambridge University Press, 2010:2.
Before introducing the kinds of corporate approaches to CSR, we’ll sort out three kinds of stakeholder’s demands: Generic Social Issues, Value Chain SocialImpacts, and Social dimensions of competitive context39. Generic Social Issue is important to society but are neither significantly affected by the company’s operations nor influence the company’s long-term competitiveness”40. Value Chain Impacts are“those that are significantly affected by the company’s activities in the ordinary course of business.” 41. Social dimension of Competitive Contexts is “factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates”42. For example, greenhouse gas emission is a generic social issue for institutions in financial sector like Mitsubishi UFJ Capital, a negative value chain for transportation companies like Yamato Transport, or both value chain impact and competitive context issue for car manufactures like Nissan. Managers need to classify stakeholder’s demand into these three kinds of social issues and use appropriate approaches to tackle on them43.
Responsive approach is the most appropriate when corporations deal with generic social issues, which are widely required by society but have weak connection with corporations’ core business. According to Porter and Kramer, responsive approaches composed of two elements: “acting as a good corporate citizen, attuned to the evolving social concerns of stakeholders, and mitigating existing or anticipated adverse effects from business activities”44. The first elements, acting as good corporate citizen involves donations and corporate volunteer activities that are not closely tied to profit maximization. For example, if NTT Data gives donation to Greenhouse AssuranceAssociation in Japan, it would be considered as a CSR initiative of good corporate citizen because the relationship between the business of NTT Data and greenhouse emission is weak (greenhouse emission is a generic social issue for NTT Data). HenceNTT Data can neither improve its competitive context nor maximize its profits. The second element, mitigating existing or anticipated adverse effects from business activities, focuses on reducing the negative externalities corporations create against society. This is often conducted as the form of integration of negative externalities into decision-making process45. For instance, if Nike tries to prevent child labor in its factories in developing countries, it will prevent the occurrence of negative externalities, namely human-right abuse. Also, when SEKISUI, a Japanese chemical manufacture, develops a technology which purifies toxic factory waste, it prevents environmental destruction.
38 Porter and kramer, “Strategy and Society: The Link Between Competitive Advantageand Corporate Social Responsibility”, Harvard Business Review, 2006:6.
39 Porter and kramer: 6.
40 Porter and kramer: 6.
41 Porter and kramer: 6.42 Porter and kramer: 7.
If responsive approach is defensive, strategic approach is approach of enterprise. Strategic Approach has two elements: tackling on “both the social impact of a company and the impact society has in a company” 46. It contains three steps:identification of social issues that are closely related to the core business of the corporation, solving or, at least, contributing to the betterment of them, and improving corporation’s competitive context through that. Unlike responsive approach, which focuses on the friction between business and society, strategic approach focuses on intersection between them and creates shared value for both47. Thus, strategic approaches appropriate to deal with Value Chain Social Impacts and Social dimensions of competitive context. For example, Livesense launched Tenshoku-Kaigi, which aggregates reviews of Japanese corporations from the employees currently working at the companies and tries to help job-seekers get more transparent information about the companies they are looking at48. Through Tenshoku-kaigi, Livesense successfully approaches the growing social issues of Japanese working culture like rogue companies.As a result, it creates social value, namely helping people who are and would be suffering from mismatch resulting from job change. Moreover, it has gained competitive advantage, which stems from improved corporate reputation and barriers to entry of competitors. Note most strategic CSR emerges when corporations put social dimension on the core of their business49. For example, Whole Foods applied social dimension to every portion of its value chain by integrating environmental impact of their value chain into accountant management. Hence, stakeholders, especially those who care about environmental issues, puts favorable regard to their efforts and their efforts are much harder to mimic for competitors than only imitating their products, thus greater barrier to entry and more competitive advantage for Whole Foods.
43 Porter and kramer: 7.
44 Andrew Crane, “Corporate Social Responsibility”, Roughtkedge Jult. 2013:5.
45 José Paz Rendal, “How Creating Shared Value is Taking CSR One Step Further.Google as a Case Study”, University of A Coruña, 2015:14.
Speaking of the effect of these two approaches to corporate fulfillment of CSR, both responsive and strategic approaches are, when well executed, effective and even indispensable. For economic responsibility, responsive approach hedges risks by passively responding to generic social demand while strategic approach creates competitive advantage against competitors. For ethical responsibility, responsive approach prevents broader range of corporate negative impacts on both society and environment while strategic approach creates greater social impact through the utilization of corporate expertise and resources more effectively and efficiently in most cases than other entities like NGO or Government. We say both approaches are equally important and necessary.
46 Porter and kramer: 5.
47 Livesense, “Tenshoku-Kaigi”, Tenshoku-Kaigi, <https://jobtalk.jp/>.48 Porter and kramer: 7.
Creating Shared Value: Theories
We have reviewed two types of approaches to CSR: responsive and strategic approaches. Now we will review Creating Shared Value. According to Porter andKramer, some of the main advocators of CSV, shared value can be defined as:
policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress50
According to Porter and Kramer, CSV’s main focus is to find the intersection of the value between business and society. Through CSV, both corporations and society can gain mutual value, competitive advantage and social impact respectively. Porter andKramer also differentiated CSV from CSR. Table 1 summarizes the difference betweenCSR and CSV. Porter and Kramer contends CSV should supersede CSR because CSR is passive and the extent of its benefits on both corporations and society is significantly limited, or sometimes even negatively affecting to CFP51.
49 Porter and Kramer, “Creating Shared Value”, Harvard Business Review, February2011: 6.
Porter and Kramer argue there are three approaches corporations can take to create shared value: (1) reconceiving products and markets, (2) redefining productivity in the value chain, and (3) building supportive industry clusters at the company’s locations52. Through the first approach, “reconceiving products and markets”,corporations try to meet currently unmet social demand by developing new products or innovating existing products, instead of creating new needs that consumers have not yet been aware of53. Toyota’s new electronic cars, like Prius, are good example of the first approach. Toyota created electric cars by taking advantage of its expertise and resources, which are closely related to the new product. Electric cars successfully meet several social issues that were not addressed before that, such as greenhouse gas emission and energy scarcity. As a result, Toyota created shared value for both society and itself.
51 Porter and Kramer: 16.52 Porter and Kramer: 7.53 Porter and Kramer: 7.
We’ve already explained the second approach, “redefining productivity in the value chain”, in the last section with the example of Whole Foods. But, CSV went one step further by adding elaboration of where to focus. Porter and Kramer state that corporations can redefine productivity in the value chain by focusing on: energy use and logistics, resource use, procurement, distribution, employee productivity, and location54.Lastly, the third approach, “building supportive industry clusters at the company’s locations”, involves the improvement of framework logistics, such as suppliers, distribution channels, training, market organization, and educational institutions55.Through this approach, corporations can create friendly environment where they can get more productivity and innovation. Moreover, by partnering with other institutions likeNGO and local government, corporations can share the risk with them.
The Relationship between CSR and CSV
CSV has gained substantial advocators among business practitioners56. It has been translated into more than five languages, and cited by 2579 articles57. However, there is a tremendous amount of criticism as well58. One of the most controversial topic about CSV is whether CSV can supersede CSR or not. In the article “Creating SharedValue”, Porter and Kramer articulate “Creating shared value (CSV) should supersede corporate social responsibility (CSR)59”. Later, they added CSV takes CSR as its precondition.60. But their remarks regarding the relationship between CSV and CSR have created great confusion among corporations. Basically, the concept of CSV is quite similar to that of Strategic Approach to CSR (Strategic CSR), which focuses on the intersections of mutual benefits between business and society, rather than their differences61. That means CSV does not have the aspects of Responsive Approach(Responsive CSR), which responds to a broader range of social issues, including issues that are not closely related to corporation’s core business. Strategic Approach andResponsive Approach are both necessary. Without responsive approach, corporations will suffer from trade-off and the risk of backlash from stakeholders. Without strategic approach, corporations will miss the opportunity to create shared value which benefits both society and corporations. But CSV only contains the elements of strategic approach. Therefore, we predicate CSV cannot supersede CSR because it ignores responsive aspects of CSR. If we describe the relationship between CSR and CSV, CSV would be included inside of strategic approach.
54 Porter and Kramer: 8-11.
55 José Paz Rendal:21.
56 Andrew Crane, Crane Guido Palazzo, Laura J Spence, Dirk Matten:132.57 José Paz Rendal:27
58 Porter and Kramer: 16.
59 Andrew Crane, Crane Guido Palazzo, Laura J Spence, Dirk Matten:152.
In this chapter, we have classified two types of approaches to CSR: responsive approach and strategic approach. We say these two approaches are mutually complementary thus both necessary. Corporations are constantly required to care about the demand of stakeholders in order to hedge the backlash from them and avoid generating negative externalities to the society. Also, corporations need to look for the intersections of the benefits of both themselves and society because it will lead to more competitive advantages and sustainable and greater social impact. CSV is often confused as the substitute of CSR due to the remark of its originators. But, theories ofCSV are strikingly similar to those of strategic approach and CSV does not contain the elements of responsive approach, which is indispensable for corporations CSR initiative.Therefore, we conclude CSV cannot replace CSR.
60 Schumpeter, “Oh Mister Porter”, The Economist,March.2011<https://www.economist.com/business/2011/03/10/oh-mr-porter>.
Today, the importance of CSR for corporations is rapidly growing as stakeholders demand more responsibility to business due to the negative impacts corporations have created and transparency in business operations. However, most corporations do not adopt CSR with firm understanding of its theories due to its abstractness. To solve this, corporate managers need to clarify these three points: what CSR really indicates, why they should adopt CSR as well as the appropriate attitude to face it, and types of approaches to tackle on it. There have been a lot of academic papers and textbooks about CSR but nothing practical for CSR practitioners. Therefore, this paper intends to clarify the answers on these three points of abstractness which corporate managers may rely on when they try to adopt CSR.
Chapter one clarified the first point of ambiguity: what CSR really means. We introduced Three Domain Approach by Mark S. Schwartz and Archie B Carroll, who are the most recognized figures of CSR. In Three Domain Approach, CSR are divided into three elements: economic responsibilities, legal responsibilities, and ethical responsibilities. Economic responsibilities are the responsibility to optimize positive economic impact to their own through the activities that will enhance either shareholder value or profits; Legal responsibilities require corporations to abide law; Ethical responsibilities are the responsibilities expected by corporation’s stakeholders.Corporations should try to fulfill all three responsibilities with equal regards. We explained ethical responsibilities in depth because of its opacity understand. Ethical responsibilities can be reasoned by Normative Stakeholder Theory and UniversalHuman rights.
Chapter two explained two kinds of corporate motivations to adopt CSR:egoistic motivation based on economic responsibilities and altruistic motivation based on ethical responsibilities. We said whatever motivations corporations have, they should peruse all three kinds of responsibilities: economic, legal and ethical, because all three responsibilities have some overlaps and lacking one of responsibilities can lead to stakeholder backlash. However, even if each responsibility has overlaps, and generate synergy, they also have trade-off. Especially the fulfillment of both economic responsibilities and ethical responsibilities often create trade-off, which oftentimes end with the result where economic responsibilities are prioritized. Then, StakeholderTheory will solve it. Through Stakeholder Theory, corporations can specify who are the stakeholders of the corporations and what are the stakes they hold, organize the process to integrate the interests and stakes of the stakeholders into their decision-making process, and conduct bargaining and transactions to optimize the balance of stakeholder’s interests to achieve the organization’s goal. Hence, we concluded the appropriate corporate attitude to face CSR as: whatever motivations corporations hold to adopt CSR, they should pursue all three kinds of responsibilities with equal regard to each, by utilizing Stakeholder Theory as the tool to create rational strategies to approach them and decision-making process to deal with trade-off.
Chapter three reviewed types of approaches to CSR as well as CSV’s relationship with them. There are two types of approaches to CSR: responsive approach and strategic approach. Responsive approach has two elements: good citizenship and mitigation of existing negative impacts. Good citizenship involves things like donations and volunteering to social issues that have weak tie to corporations’ core business.Mitigation of existing negative impacts aims to passively answer broad range of stakeholders demands, which includes social issues that is not closely relevant to their corporations’ core activities. Responsive approaches are passive and defensive in nature and focusing on the friction between corporations and society. On the other hand, strategic approach focuses on the intersection between corporations and society.Through strategic approach, corporations can create mutual benefits for both society and themselves. It contains three steps: identification of social issues that are closely related to the core business of the corporation, solving or, at least, contributing to the betterment of them, and improving corporation’s competitive context through that. Both responsive approaches and strategic approaches are mutually complementary so both are equally necessary. It is required for corporations to pay attention to the demand of stakeholders in order to hedge the backlash from them and avoid the generation of negative externalities on society. To the same degree, corporations should look for the intersection where both corporations and society can gain mutual benefits. Finding the intersection and achieving its fulfillment will lead to corporations to attain competitive advantage and sustainable and bigger social impact. CSV is very similar to strategic approaches so we can say it can be included into strategic approaches. Corporate managers should not misunderstand CSV as the substitute of CSR. CSV cannot replaceCSR because it lacks normative aspects of responsibility.
Gradually, the imperative necessity of CSR started to be understood recent years on a global scale. Having said so, CSR is a young concept and its spectrum is still chaotic. We cannot say it is well understood and adopted in an appropriated way.However, as we see the now proceeding world problems in society and environment, such as global warming and air pollution, human right abuse and mass starvation, we need to organize the practical framework that will enforce proper responsibilities on business while simultaneously benefiting corporations as well. We hope this paper will contribute to further the understanding of CSR and increase the number of effective and efficient adoptions of CSR.
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