Imprimer
Affichages : 5435

Corporate Social Responsibility and Profitability: Which Causes Which?

 

Pr Cherif Guermat

Centre for Global Finance

Bristol Business School

University of the West of England

 

 

 

1. Introduction.

 Corporate social responsibility, henceforth CSR, has been an issue that raised a great deal of controversy. This is not surprising given both its economic importance and its social and political implications. Many surveys have now shown that consumers in the industrialized world have preferences for companies that contribute to social well being and have good track record in environmental performance. CSR has grown in such a scale that nowadays large corporations issue reports detailing their contribution to society as well as to other socially preferred activities.

There is certainly a great deal of advocacy in favor of corporations taking up responsibility for CSR. In particular, management journals are abundant with pro-CSR research. Yet, economist see no reason for (real) CSR. We emphasize the word ‘real’ because many companies talk a great deal about social responsibility but do nothing about it. This is a well known tactic called green washing. By real CSR we mean the CSR that gives no actual benefit to the corporation.

Since the early 1970s, there has been a surge of social and environmental awareness, especially in western societies. This appears to have coincided with substantial rises in the standards of living, greater technological advancement, and increasing pressure from scientists following the discovery of the deterioration of the ozone layer and an apparent rise in the average temperature. This also coincided with high levels of emissions by industrialized countries. As Figure 1 shows, high income countries, such as the USA, have by far greater emissions than middle and low income countries such as Algeria. But as can be inferred from the trends, the high income economies have been lowering their emissions, while the low and middle income countries appear to continue growing their emission.

Poverty alleviation as well as other social goals, such as child labour, have also been high in national and international agendas. While governments have acted to help tackle famines across the world, corporations have claimed to do good by raising employees well being and helping the local population through donation and through establishing public or social projects.

This paper takes the economic stance, and argues that most CSR we observe is actually a marketing activity that actually helps boost profits and market share. Some claimed CSR does improve social well being, but social well being was not the reason for its existence. True CSR is neither feasible nor desirable, for it is the task of the government, not the individual or the corporation.

The paper proceeds as follows. Section 2 discusses the environment as a market failure. We discuss how property rights might alleviate environmental problems. The thid section expands the question to Corporate Social Responsibility. Section 4 attempts to answer whether corporations can increase financial performance through CSR. The final section concludes.

 

Figure 1. CO2 emissions (metric tons per capita)

 

(Source: World Bank,  http://data.worldbank.org/topic/environment)

 

2. The Environment as a Market Failure: A Property Rights Perspective.

 Natural Resources Depletion.

Since the late 18th century, scientists have been concerned about natural resources not being sufficient to sustain an ever growing population. In 1798, the economist Thomas Malthus noted that the population was growing at a rate that was too fast to be able to feed itself. Although he was not perfectly correct, humanity has indeed seen many cases of resource shortages and famines. Today we can readily observe declines in fish stocks, deforestation, energy shortages are all too obvious to ignore. Erratic climate behavior across the world has all but confirmed scientists and social scientists’ concerns. Many of these scientists turned into activists putting pressure on their respective governments to take the issue more seriously. For example, Lester R. Brown has been writing annual State of the World reports since 1984. Each of these reports focused on the resource depletion that cast a shadow on our generation.

There is no doubt, scientists are adamant that the future is indeed gloomy. Yet, this is not what we observe in the real world. Living standards have risen dramatically during the last century. Scientific progress and technological advancements have ensured that enough goods and services reach the more than 7 billion individuals living on earth. However, economists wonder how long will minerals, water and other natural resources last for future generations. Given that natural resources are finite, economists ask: how wisely should we ‘spend’ the remaining natural resources?

 

Natural Resources Markets.

Economists believe that, in most cases, wise use of resources is regulated naturally by market forces. The price of a good or service determines the quantities used. Higher price of one good reduce quantities used of that good because other substitutes become more attractive. For example, if the price of wood becomes too high, people might use alternatives, including holding on to their existing furniture for longer. When plastic carrier bags become expensive, consumers will tend to recycle them.

Even those goods and services that appear not to have substitutes can be influenced by the price mechanism. Water, for example, is used for domestic purposes, irrigation, and industrial processes. Although there is not direct substitute, users can still ‘substitute’ by using less water or using it more efficiently (less waste, drip irrigation, recycling). For example, in the 1980s a drought in California, USA, pushed water prices up. Fearing rising cost and possible interruption of water supply, companies installed water recycling facilities and changed production process in order to conserve water. The result was a reduction of water consumption by almost 50% on average.[i]

In general, economists have observed that many natural resources are subject to the same market forces. The decision to use water, petroleum products, wilderness recreation, and other natural resources is sensitive to the price level. For example, when the price of fuel rises, consumers use smaller cars, make fewer trips or use public transport. Overall, the view is that natural resources are just like other goods and services. Consumers use less quantities when prices rise, and this seems to be a natural mechanism to limit the abuse of these resources and ensure a ‘wise’ exploitation.

Just like price induces lower demand, it also induces higher supply. More valuable resources motivate producers to search and recover more deposits of the resource. In the oil industry, for example, high oil price drove exploration to the deep seas, drillers to dig deeper, and extractors to use water flooding and other techniques to recover more oil from existing wells.

So far, all is well because the market works. But the market works in the above mentioned cases simply because we are talking about private goods, and these entail property rights.

 

Property Rights and Natural Resources.

The presence of property rights are crucial for the conservation of natural resources. A classic example of the absence of property rights in the communist countries’ lack of energy conservation. Bernstam (1991) found that the market based industrialized economies use only 37% of the energy used by the Eastern European socialist countries. The socialist industries used 3 times more steel per unit of output than those in market-based economies.

Conservation of land and natural endowments is also encouraged by property rights. Farmers and land owners ensure that their land remains productive given sufficient profit incentives to adopt appropriate technologies. In addition, property rights ensure greater efficiency of the same acre. For example, in 1993 land was five times more productive than in 1910. Had property rights not worked, we would have needed five times more land to survive. This means that for every acre we have today, four more acres of natural habitat would have had to disappear if we were to survive. Where farmland is not privately owned, productivity is generally very low, hence requiring more land for farming and putting pressure on natural habitat, wildlife and environmental quality.

Property rights are nicely summarized in a World Bank report:

“When people have open access to forests, pasture land, or fishing grounds, they tend to overuse them. Providing land titles to farmers in Thailand has helped reduce damage to forests. The assignment of property titles to slim dwellers in Bandung, Indonesia, has tripled household investment in sanitation facilities. Providing security of tenure to hill farmers in Kenya has reduced soil erosion. Formalizing community rights to land in Burkina Faso is sharply improving land management. And allocating transferable rights to fishery resources has checked the tendency to overfish in New Zealand.” (World Bank, 1992, p.12).

 

In summary, private ownership of resources is important because it provides four functions that encourage resource conservation and, hence, the quality of the environment:

  1. Property rights provide owners with the incentive to sell resources. The fact that these resources are valuable in a direct way to the owner makes him consider the opportunity cost of alternative uses of the resources. Conservation, implementation of new technologies are two main means of conserving these valuable resources.
  2. An owner of a natural resource has strong incentive to take care of his property. If the resource is well cared for, it will become more valuable, and offer a better prospect of the owner’s wealth. Farmers would not allow their land to be polluted because they have a vested interest. Without such a vest interest, the farmer would have no incentive to ‘defend’ the natural resource.
  3. The owner has legal rights to defend his property against externalities. Property rights give the owner legal power to repel possible harm from anyone who might invade his property (physically or by pollution). For example, in the USA, mining companies have been forced to compensate farmers for damage from sculpture dioxide. The effect of this is to set an example for other industrial companies who would then be forced to invest in cleaner industrial processes. When resources are not privately owned, no-one has an incentive to take legal action against polluters. In the USA for example, rivers are damaged by pollutants because rivers are not privately owned. In contrast, in the UK, fishing rights are privately owned. These owners jealously defend the quality of the water of these rivers.
  4. Long-term value preservation or value enhancements are strong incentives for owners to look after their natural resources and  even if they are short term investors. Investors naturally care about the value of their assets because the return on their investment is realised when they sell their assets. So, whether private persons or corporations, there is an incentive to take good care of their natural resources.

Economic Development and the Environment.

Intuitively, we are often tempted to think that economic and human development, led by large corporations will mean more pollution and a higher demand on nature’s fixed supply of resources. However, this intuition is not perfectly correct. The forces that drive economic growth are also factors that reduce pressure on the environment. Market institutions, financial markets, and technology are associated with better educated and more aware population. But they are also associated with higher per capita income. Rising education and income encourage the will and ability to pay for cleaner, safer, pleasant, and even ethical environment. Better environment entails a positive cost. When people have low, any additional cost is proportionately important and affect their ability to obtain necessities (such as food). When their income rises, their ability to pay extra for the environment becomes is strengthened as the cost represents a small proportion of their income. Economist Donald Coursey has estimated that, in the industrialized nations, an increase of 10% in income leads to an increase of 25% in the people’s willingness to pay for environmental measures. Strangely, this elasticity of demand is very similar to the elasticity of the demand for luxury cars.

The above argument is also valid for corporations and governments. This is why we observe individuals in the industrialized world willing to spend extra for environmentally friendly and ethical goods and services. We also find that these developed countries’ corporations and governments willing to bear substantial cost to reduce pollution and improve the environment.

Technological developments have also contributed to improving the environment by making cleaning processes more accessible and cheaper. Thus, the combination of economic growth, rising income and technical discoveries has led to an increase in the demand for better environmental quality.

 

Weaker Property Rights.

The above argument is mainly valid when the interests of the owner are aligned with the conservation of the natural resources. Basically, natural resources are either private goods or means for production of private goods. What happens when these natural resources become detrimental to the interest of private owners?

For example, if a farmer is faced with a nest of an endangered bird hampering production, a conflict of interest is created. The drive for profit or survival will tempt him to destroy the nest and hence putting at risk the survival of that particular species.

In these particular circumstances, property rights work on the opposite direction. So, the government may decide to take these property rights off the owner. For example, farmers might be prevented from farming or cutting trees. Clearly this will be beneficial for the environment, but it does create a free riding problem (why should an unlucky farmer bear the cost of preserving a species for the benefit of others), as well as a moral hazard problem (the farmer might be tempted to violate the law in an endeavor to avoid such a cost). For example, economists found that landowners located close to some colonies of endangered species in the USA cut their trees sooner compared with landowners who were far away from these colonies, the reason being that once the birds make a nest on that tree, the tree cannot be cut for several years. However, it was also found that when the government offered help and assistance, such that landowners did not fear the loss of (part of) their property rights, they willingly cooperated with the authorities and voluntary organizations.

Inexistent Property Rights.

When property rights are lacking, the problem of public goods become at its most severe. Resources that do not belong to a private owner, or, to a lesser extent, to a public owner, is subject to abuse. Overfishing in the oceans is a good example. Each fisher has no incentive to ‘under’ fish because other fishers will catch most of what he leaves on the ‘table’. When the government owns the rights, regulation can limit the damage. For example, the European Union and the USA have been regulating fishing in their territorial waters since the 1970s. This, however, has had only a limited success. An experience in New Zealand a new system of individual transferable quotas (ITQs) seems to be working. This system gives fishers ownership of a proportion of the annual allowed catch. These have become genuine rights, with the right to sell and transfer across fishers. This encouraged cooperation among owners to protect the long-run health of the fishing stocks. Knowing that they can catch a certain amount, fishers changed their behaviour and adopted a slower and more careful fishing. Fresher and bigger fish became available in the market, giving fishers a healthier profit. This contrasts vividly with the rushed and dangerous behaviour of fishers before the system was implemented.

Given the right popular incentives, society can cooperate to at least alleviate some of the damage on the environment. For example, popular pressure can lead governments to increase investment and impose regulation to reduce pollution. However, awareness is not enough. Sometimes, financial incentives help change attitudes. In the 1980s, when the US authority compensated farmers for loss of livestock, the farmers did not object to the re-introduction of the wolf back to Yellowstone Park.

 

2.2. The Environment.

In the last 30 years or so, people have become more aware of the environmental challenges that face humanity. Throughout the world, pollution and its impact on our future health and well being is given a great importance. As with natural resources, we also find ourselves comtemplating property rights as a core explanation of environmental market failure. Indeed, Shaw (1988, p.55) explains that “In nearly every case, environmental problems stem from insecure, un-enforceable, or nonexistent property rights”.

The market failure in environmental matters are more serious than those affecting natural resources. This is because, while market mechanisms can be employed to help people choices regarding natural resources decisions, there is no such a market for environmental decisions. One cannot price clean air, clean water or the survival of an endangered species. In the absence of well defined and properly enforced property rights lead to economic externalities such as pollution.

To sum up, property rights are fundamental to curb environmental problems. Weaker or inexistent property rights require the intervention of governments to regulate the use and abuse of natural resources. Certain schemes and incentives can, sometimes, lead to second best solutions to the environmental problem. However, all of the above discussion centers around one thing: aligning the environmental interest with the individual or the corporation’s interest.

A more general encompassing concept is that of social interest, which includes the environment, but goes beyond environmental issues to include social and ethical issues. This is often called Corporate Social Responsibility (CSR), but individuals can be easily included in this definition given that they are themselves ‘small’ corporations.

Thus, being socially responsible (whether environmentally or otherwise) often comes at a cost. What happens when the social interest entails a cost? Should the individual or the corporation intervene, altruistically? Or should another institution intervene? This, question has also been addressed by economists.

 

3. The Economics of Corporate Social Responsibility.

Commonly, the virtues of individuals and corporations doing ‘good’ are undeniable. After all, that’s exactly what religious teachings and education emphasize throughout individuals’ lives. It may, therefore, sound strange, that economists contemplate the possibility that there is no merit for an individual or a corporation to incur cost purely to achieve social ends. However, the truth of the matter is that this question is central in economics. Going back to Adam Smith, the view has been that private enterprises are the main source of wealth creation. The social responsibility of an individual is to create wealth for himself and his family, while the social responsibility of a corporation is to create wealth for its shareholders. Of course, economic and social activities give rise to public goods and externalities problems. But these can be more efficiently tackled by government and non-profit organizations. The rationalization of this separation of tasks is comparative institutional advantage, whereby each side is able to carry out certain tasks more efficiently. For example, it is more efficient for the government to hire a street cleaner than for, say, an engineer to clean the street. It would be better if the engineer produces wealth, pays a proportion in tax to the government, and the government pays the cleaner to do the task. Individuals and corporations, in their search for profit, end up realizing one social end (maximizing wealth) while government and non-profit organizations, in their benevolent role, deal with the remaining social ends.

However, this view has been attacked on the basis that governments and other non-governmental organizations (NGOs) are sometimes wasteful, corrupt and incompetent. Some, therefore, question their ability to efficiently carry out such benevolent tasks. Since the 1970s, there has been a growing support for the view that private corporations should have a broader social role via corporate social responsibility (CSR). Under this view, individuals and corporations should pay attention to a broader range of stakeholders, including the environment.

CSR is now a popular topic of discussion in western societies. Citizens take into account CSR when deciding where to shop. In a poll organized by MORI, 70% of consumers were found to be willing to pay more for an ethically superior product.[1] The ‘Fairtrade’ logo has grown significantly in the recent years. Investors are more supportive of CSR-friendly corporations. Socially responsible funds  (funds that invests in firms that are considered socially and environmentally responsible) commended roughly 12% of total assets under management in the US (Geczy, Stambaugh, and Levin, 2003).

Despite social support, however, economists have generally been skeptical about CSR. First, CSR is infeasible in a competitive economy. As Baumol (1991) argues, CSR requires sacrifice of profits and this is hard to bear when competition is intense. When one corporation bears additional cost for, say, helping the poor, other corporations may gain competitive advantage and the benevolent firm may not survive. Second, as mentioned earlier, the question is not whether social responsibility is important. It is rather, whether the private corporation should shoulder that burden. Famously, Friedman (1970) argued that it is the duty of the private corporations to get on with the business of making profits while governments has the duty to deal with public goods and externalities.

4. Can corporations increase financial performance through CSR?

An obvious answer that might come to mind is yes. Given that CSR improves the firm’s reputation, given that many consumers are willing to pay additional cost for CSR-friendly goods, and given that many investors are willing to invest in ‘responsible’ firms, it should obvious that CSR offers financial advantage.

Many international large companies routinely claim that one of their main objectives is to serve some social purpose (in addition to serving their shareholders of course). They advertise their success stories (healthier foods, fuel-efficiency, lower emission) and claim that they help make the world a better place. Thus, corporations’ main claim is that they can act in the public interest and will profit from doing so. Despite its appeal, economists find this claim fundamentally flawed.

However, there are two kinds of CSR. The first is customer oriented and visible. This is the case where private profits and public interests are aligned. Companies that simply do everything they can to boost profits (including being socially responsibly) do not intend to be socially beneficial directly, although they might end up increasing social welfare. Here, CSR is the same as marketing. The cost of doing this kind of CSR is no different from the cost of, say, advertising. Thus, in this case, the idea of corporate social responsibility is irrelevant. 

It is the second kind that is most relevant. This is the kind of CSR that attracts no comparative advantage business wise. It is the activity that costs the firm but does not benefit it. When profits and social welfare are in direct opposition, (true) corporate social responsibility will likely be ineffective. Rationality ensures that individuals will not act against their own interests. In case of corporations, the executives will not act voluntarily in the interest of society and against shareholder interests.

The irrelevant CSR.

Let us take quick look at the case where the firm ‘appears’ to do good. Here social welfare and profits are aligned. For example, there has been a rise in the market for healthier food. Fast-food companies have increased their products to include salads and other healthier options. Low fat, whole grain, diet and organic products have seen growing demand and hence offered new sources of income for many corporations. True, there is some social benefit out of this, but the main driver has been and remains profit. Auto makers have responded to consumer demand for more fuel-efficient vehicles, again, driven by the pursuit of profit (even if it is a plus for the environment).

Thus, social welfare isn't the driving force behind these trends. The companies that appear to be CSR didn't become so common until it became profitable to be CSR. It is simply a coincidence that by acting in their own interests they realized some level of social improvement.

Are we to dismiss such experiences? Of course not. At least these companies have benefited society albeit without intending to do so. Even for the economist, this is an ideal situation where there is no need for state intervention. However, the above cases are not the norm. It is hard to find such a win-win situation. The reality is that social and economic activities create many social and economic externalities. The idealist may think that the corporation, through CSR, should deal with these externalities? The economist, on the other hand, is aware that doing (true) CSR means sacrificing profits.

 

The relevant CSR.

Societies have pervasive and persistent problems. Such problems have not so far been solved by profit maximizing corporations for the obvious reason that they (the problems) are still with us. Pollution and poverty are among the most immediate concerns nowadays. Reducing (voluntarily) pollution or fighting poverty would be costly to the manufacturers. Companies could donate to the poor or pay their workers higher wages. But, then, their profits would suffer.

Should executives do CSR and lower shareholders’ returns? Perhaps, ethically, they should. But would we expect them to do so? Suppose they did, would they be in breach of their contracts? Executives are employed to maximize shareholders’ profits. So, in principle, executives would be acting socially responsibly only if they acted in the interest of their shareholders. In practice, they might lose their job if they tried to do CSR without the consent of their shareholder. Managers who sacrifice profit for social welfare implicitly act as a tax authority. Rather than arbitrarily deciding how that money should be spent, shareholders prefer to decide on their own.

It is worth noting that economists do not deny philanthropy and charitable acts. Indeed, economic agents do to use some of their wealth for charitable purposes. This both admirable and desirable. Private companies (with, say, a single owner) may accept lower profit for a better world. But this is a different story because the equity owner who makes such a decision, rather than an executive making the decision on behalf of the shareholders.

It is also worth noting that economists do not believe that companies should be allowed to seek the profits without regard for social or environmental consequences. They simply assert that it is not the corporation’s job to take responsibility for society and the environment. That is the job of the government and regulators. Appealing for companies to adopt (true) CSR is not an effective way to strike a balance between profits and the social welfare.

 

The Role of the Government.

If the corporation does not take on CSR, how can we ensure social welfare and protection of the environment? The ultimate and well known solution is government. The government has the power to enforce regulation, and enjoys economies of scale. Although it is not perfect, and despite possibilities of corruption and incompetence, the government remains the most effective way to implement social responsibility than any group of corporations.

Taxation is the main social tool, while regulation is the main environmental tool. The advantage is that the government can impose these rules rather than letting corporations decide on a voluntary contribution.

Thus, the danger of focusing on CSR is that it would delay or discourage more-effective measures to enhance social welfare and protect the environment. A society that looks to companies to help with social or environmental problems, is actually asking a disorganised, inefficient, and possibly unwilling entity; while, at the same time, letting the relevant authority that has the ability to deal with these problems off the hook. The real solutions are simply ignored.

Of course there is no reason why we should not rely on NGOs and other organizations such as watchdogs and pressure groups. These can be of great help in providing pressure against both corporations and the government.

 

5. Conclusion.

In this paper we have argued that, corporate social responsibility is a financial calculation for executives of corporations (and individuals), similar to any other activity of their business. To ensure that corporations and individuals act in harmony with social and environmental goals, there are only two effective ways. The first is to ensure some level of property rights. These are particularly important for environmental concerns. Weaker property rights can be compensated by promoting incentives. The second effective tool is regulation imposed by the government, possibly complemented by social pressure from NGOs and other pressure groups.

Pleas for (apparent) CSR will only be embraced by individuals and executives if doing so would increase profit or competitiveness. Individuals as well as corporations might well claim that they are doing CSR purely altruistically. But the evidence is weak for the obvious reason that doing good, such as charity and voluntary contributions, as a normal behavior of citizens, but an abnormal behavior for corporations. Pleading for true CSR is therefore pointless.

 

 References.



[1] http://www.mori.com/polls/2003/mori-csr.shtml.


 

[i] Cost of Industrial Water Shortage, California Urban Water Agencies, 1991; Executive Summary.

Baumol, William J., (1991), Perfect Markets and Easy Virtue: Business Ethics and the Invisible Hand, Oxford: Basil Blackwell.

Bernstam, Mikhail (1991), The Wealth of Nations and the Environment. London: Institute of Economic Affairs.

Friedman, Milton, (1970), “The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 13, 1970 available at http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html

Geczy, C., R. Stambaugh, and D. Levin (2003): "Investing in Socially Responsible Mutual Funds", Wharton School Finance Working Paper. http://ssrn.com/abstract=416380

Shaw, Jane, S. (1988), “Private Property Rights: Hope for the Environment,” Liberty, vol.2, No.2.

World Bank (1992), World Development Report. New York: World Bank.

 

 

 Télécharger l'article: