2.1 Foundations of Corporate Social Responsibility Corporate social responsibility can encompass a variety of different activities, which may be described as good neighborliness or good citizenship. Socially responsive firms actively seek to do no harm, for example by providing a safe working environment or adopting clean production processes. Corporate social responsibility also obliges companies to create initiatives for solving broad social problems such as urban decay, substance abuse, and poverty. There is no consensus on a single definition of corporate social responsibility. Modern perceptions of corporate social responsibility have evolved from initially focusing on individual manager responsibility for social consequences of actions in the 1950s to a firm’s responsibility to multiple stakeholders today. Regardless, a socially responsive firm monitors and assesses environmental conditions, attends to stakeholder demands, and designs policies to respond to changing conditions (Ackerman, 1975). Social Responsibility and Ethics The premise of corporate social responsibility is the ethical duty of businesses to accept responsibility for the consequences of their actions beyond financial performance. Howard Bowen’s 1953 book Social Responsibilities of the Businessman describes social responsibility as “the obligation of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society” (p. 60). According to DiMaggio and Powell (1983), companies operate within a social framework of norms, values, and assumptions about what constitutes acceptable behavior, and they fear losing the freedom to conduct business independently if they are found to be unresponsive to social pressures for responsible business. If powerful stakeholders in society do not accept a company’s actions, they may increase regulation or revoke a company’s legitimacy to conduct business. For example, Canadian mining companies have been under mounting pressure from African countries to address negative social and environmental impacts and human rights violations (Campbell, 2008). The companies could lose public support for mining operations within the region if they do not comply with international standards. A business’s relationship with societal expectations is a social contract, or a basic agreement that defines the broad duties of a business required to retain society’s support. Laws and regulations express the formal part of this contract. The tacit part of the social contract encompasses stakeholders’ expectations based on their values and norms. Through legal or stakeholder action, companies recognize that violations can seriously harm the reputation and financial well-being of their businesses. Therefore, one view of social responsibility is primarily a risk management strategy. Since there is no consensus on how corporate social responsibility guides firm behavior, there are many terms to describe company initiatives for meeting societal expectations: corporate responsibility, corporate citizenship, sustainability, strategic philanthropy, and creating shared value. Regardless of the terminology, companies adopting a responsible approach to business tend to stress ethical behavior and responsiveness to multiple stakeholders. Three common approaches to corporate social responsibility are based on obligations, citizenship, and sustainability. Social Responsibility as Obligation Many companies view corporate social responsibility as the obligation to meet society’s economic, legal, ethical, and discretionary expectations for the organization (see Figure 2.1). The economic and legal components refer to a business’s obligation to produce goods and services at a profit while obeying laws. Economic and legal obligations are an inherent part of corporate responsibility, as businesses contribute to social welfare in the form of jobs, products, and innovation. The ethical component refers to the behaviors and norms that a society expects, and the discretionary component encompasses voluntary and philanthropic activities of contributions of money, time, and talent. Consensus is lacking on the degree of responsibility that businesses have for each of the components and often varies worldwide. Figure 2.1: Pyramid of social responsibility The economic, legal, ethical, and philanthropic obligations that a business must meet are viewed as corporate social responsibility. Source: Adapted from The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, by A. B. Carroll, 1991, Business Horizons, 34(4), p. 42. A company’s economic responsibilities relate to profits realized in the production of goods and services. A business needs to be financially viable in order to employ workers, pay taxes, and award dividends to investors. The fulfillment of economic obligations of a business is the basis for the company’s annual reports for the shareholders. For example, the annual report for Harley-Davidson Inc. begins with a letter to shareholders highlighting revenue, sales growth, and market share (Harley-Davidson, 2012). Economic obligations can focus on internal stakeholders, such as the company’s responsibility to create shareholder value, or external stakeholders, such as providing products for consumers, creating employment, and stimulating an industry (Chabowski, Mena, & Gonzalez-Padron, 2011). Legal responsibilities entail a company’s obligations to obey local, regional, national, or international laws. Regulations seek to create a fair and competitive environment for businesses, safeguard natural resources, protect consumers, and ensure safe workplaces. Consequences for not meeting legal obligations include fines, imprisonment of company executives, and revoking of business permits. Companies have legal obligations toward many stakeholders. Compliance with regulations includes protecting employees through a safe workplace free of harassment and fair compensation. Legal obligations to customers require companies to meet product safety requirements, pricing policies, and advertising regulations. Regulations enforcing accurate financial records and reporting protect company investors. Environmental laws protect natural resources. Companies have ethical obligations beyond those required by law. Ethical responsibilities include concern for employees by creating a fair and equitable work culture. Ethical norms that guide the business’s responsibility for ethical behavior can change as new issues emerge. Shifting political and economic environments can also influence a business’s ethical obligations. For example, Chinese executives consider ethical obligations to include safeguarding social order and creating a harmonious society; these obligations come from the Chinese government’s emphasis on socially responsible businesses (Gonzalez-Padron, Fan, & Zhou, 2014). Discretionary responsibilities often include voluntary and charitable activities that benefit others and derive from society’s expectations to contribute to the well-being of the community. Voluntary programs such as on-site child care, fitness and wellness services, and company picnics improve the quality of employees’ work-life balance. Some companies refer to discretionary activities toward external stakeholders as philanthropic responsibilities. Philanthropic activities include donations of money or talents to charities, employee volunteer programs for community projects, cause-related marketing, and collaborations with nonprofit organizations to address social issues. Social Responsibility as Corporate Citizenship Corporate citizenship refers to a managerial approach to commit to responsible business policies and practices with a strategic focus on serving communities. Business managers use the term corporate citizenship interchangeably with corporate social responsibility with two distinctions. First, corporate citizenship primarily describes organizational initiatives that are not required by law, which support local communities (Gardberg & Fombrun, 2006). These activities often relate to philanthropic initiatives such as corporate volunteerism, charitable contributions, support for community education and healthcare initiatives, and programs to improve the environment. These ideals are often reflected in corporate citizenship statements, such as that of The Boeing Company: “The enduring strength of our business depends on healthy and vibrant communities. Giving back to communities is important to our employees and a core value of The Boeing Company” (Boeing, 2012, p. 2); and Microsoft: “Our citizenship mission is to serve globally the needs of communities and fulfill our responsibilities to the public” (Microsoft, 2013, p. 4). Second, many company statements of corporate citizenship refer to business conduct, ethical standards, and responsible business practices (Matten & Crane, 2005). Headquartered in Geneva, Switzerland, the World Economic Forum is an international institution that strives to improve the state of the world by engaging business, political, academic, and other leaders of society to address responses to economic, social, and political changes (World Economic Forum, 2014a). It offers the Framework for Action for organizations that strive to exemplify global corporate citizenship: PROVIDE LEADERSHIP: Set the strategic direction for corporate citizenship in your company and engage in the wider debate on globalization and the role of business in development. Articulate purpose, principles, and values internally and externally Promote the business case internally Engage the financial sector Enter the debate on globalization and the role of business in development DEFINE WHAT IT MEANS FOR YOUR COMPANY: Define the key issues, stakeholders and spheres of influence that are relevant for corporate citizenship in your company and industry. Define the issues Agree on company’s spheres of influence Identify key stakeholders MAKE IT HAPPEN: Establish and implement appropriate policies and procedures, and engage in dialogue and partnership with key stakeholders to embed corporate citizenship into the company’s strategy and operations. Put corporate citizenship on the board agenda Establish internal performance, communication, incentive and measurement systems Engage in dialogue and partnership Encourage innovation and creativity Build the next generation of business leaders BE TRANSPARENT ABOUT IT: Build confidence by communicating consistently with different stakeholders about the company’s principles, policies and practices in a transparent manner, within the bounds of commercial confidentiality. Agree what and how to measure Develop a graduated programme for external reporting Be realistic about what is possible in a given timeframe and when building expectations (World Economic Forum, 2002/2013, p. 6) The Center for Corporate Citizenship at Boston College publishes a Corporate Social Responsibility Index that ranks companies based on public perceptions of their citizenship, governance, and workplace culture (Boston College Center for Corporate Citizenship, 2011). The citizenship dimension relates to how the company contributes positively to its surrounding community in a socially and environmentally responsible fashion. Governance refers to the degree that the company manages its business fairly and transparently with high ethical business standards. The workplace dimension focuses on fair treatment of employees through wages and training. Table 2.1 lists the top 20 companies ranked by Boston College’s Corporate Social Responsibility Index in 2011. Table 2.1: Boston College Center for Corporate Citizenship’s Top 20 Ranked Companies Rank Company Corporate Social Responsibility Index (CSRI) 1 Publix Super Markets Inc. 80.59 2 Google 77.10 3 UPS 76.16 4 Kellogg’s 76.16 5 Amazon.com 75.93 6 Berkshire Hathaway 75.78 7 FedEx 75.73 8 Campbell Soup Company 75.40 9 Baxter International 75.18 10 3M 75.03 11 Johnson & Johnson 74.49 12 The Walt Disney Company 74.35 Rank Company Corporate Social Responsibility Index (CSRI) 13 Coca-Cola Bottlers 74.14 14 Hershey Company 74.06 15 Texas Instruments 74.05 16 Green Mountain Coffee Roasters 73.89 17 Clorox 73.88 18 Microsoft 73.87 19 Caterpillar 73.70 20 Harris Bank 73.61 Source: Boston College Center for Corporate Citizenship, 2014, retrieved from www.BCCorporateCitizenship.org. Social Responsibility as Sustainability In recent decades, it has become increasingly common for businesses to frame their social responsibilities in terms of sustainability. The concept of sustainability reflects the recognition of the finite limits of nature, propagating the need for businesses to optimize the economic, environmental, and social components of society. Because of environmental issues of the 1980s, such as the 1984 Bhopal chemical release and droughts in Africa, the United Nations formed the Brundtland Commission to recommend solutions to the decline in global natural resources. Their report, “Our Common Future,” highlights that “economic and ecology can interact destructively” and calls for businesses, governments, and nonprofits to consider sustainable development, or “meeting the needs of the present generation without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development, 1987, p. 43). In response, companies have begun adopting sustainable business practices to look beyond financial profit and consider its impact on social, economic, and ecological resources of the community. Read Business Best: Blue Star Recyclers for an example of a company with a strategic focus on sustainable business. Business Best: Blue Star Recyclers Blue Star Recyclers of Colorado Springs competes in an electronics recycling industry that reclaims components or usable materials from used electronic products. In the United States, the electronics recycling industry generates more than $5 billion in revenue and employs approximately 30,000 to 45,000 people (2010 estimates) (Daoud, 2011). Electronic recyclers prevent the toxic substances in televisions, computers, computer peripherals, facsimile machines, DVD players, and videocassette recorders from contaminating landfills. Blue Star Recyclers provides electronic waste (e-waste) pickup and hard drive/data destruction services to over 400 businesses, organizations, and government entities in Colorado. It collects nearly 40% of ewaste from residential sources, which is much higher than the industry average of 25% (Daoud, 2011). To encourage residents to recycle, Blue Star Recyclers has established seven drop-off locations in southern Colorado where residents can recycle their e-waste conveniently. The business claims to have ethically recycled over 5 million pounds of e-waste since 2009. The company’s mission is to recycle electronics and other materials and create local jobs for people with autism and other disabilities. Blue Star Recyclers has 17 employees: six in management and office positions, and 11 workers with disabilities. The company has reported zero turnover, zero accidents, zero theft, and minimal employee absences amongst its workforce with disabilities. Prior to finding employment at Blue Star Recyclers, all of the workers with developmental disabilities were unemployed and spent their time participating in day programs paid for by the state. By creating a vocational path for people with developmental disabilities, the company saves taxpayers and the government approximately $100,000 per year in Social Security benefits. Blue Star Recyclers donates hundreds of hours of service to supporting the community, advocating for their workforce, and creating government relations to help support both their recycling and job creation effort. The Colorado Association for Recycling recognized Blue Star Recyclers with the Outstanding Outreach Award for 2012. As a result, the company continues to grow. Questions to Consider How does the business model of Blue Star Recyclers incorporate economic, environmental, and social dimensions of a sustainable business? How might the employees with disabilities benefit from these employment opportunities? How do you think the company has been able to achieve such exceptional outcomes? Evaluate Blue Star Recyclers against the five elements of a responsible company established by Patagonia’s leadership. Would Blue Star Recyclers be considered a responsible company? Sustainable companies view their responsibilities through a triple bottom line, which incorporates economic, environmental, and social dimensions in reporting performance (see Figure 2.2) (Elkington, 1998). Each of the dimensions includes responsibilities to company stakeholders. The economic dimension represents the financial impact of the organization in the economic viability of the surrounding community through the sales of products and services, profits paid to investors or reinvested into the firm, and taxes paid. The environmental dimension centers on the company stewardship of natural resources and includes reducing waste that ends up in landfills and pollutes waterways, reducing energy use and carbon emissions, and complying with environmental regulations. Finally, the social dimension focuses on the influence the company has on people and includes encouraging an inclusive approach to employees, customers, and suppliers; respecting the human dignity of the workforce; and supporting community projects for addressing social issues. Figure 2.2: Triple bottom line dimensions Economic, environmental, and social dimensions make up the triple bottom line of sustainable companies; companies can achieve the greatest competitive advantage at the points where the dimensions overlap. Companies can achieve the greatest competitive advantage in the areas where the dimensions overlap (Gonzalez-Padron, 2013). Companies that meet responsibilities in the economic and social dimensions create wealth for communities and meet its responsibilities to employees and customers. Activities that contribute to solutions of social issues include creating jobs, employee development programs, and marketing campaigns. Companies collaborate with nonprofit organizations to address social issues for which they have no special competence. For example, Procter and Gamble Co. partners with UNICEF to combat fatal maternal and neonatal tetanus by donating the cost of one tetanus vaccine for every purchase of specially-marked Pampers diapers and wipes. The program also offers employees a threemonth paid sabbatical to volunteer with UNICEF, increasing employee commitment and retention while providing valuable knowledge to a nonprofit organization. At the intersection of the environmental and economic dimensions of the triple bottom line, organizations realize savings from greater resource efficiency, lower regulatory costs, and revenue from innovative energy efficient products. Programs may involve changes that are as simple as turning off computers nightly and using motion detectors to turn off lights in offices. The chemical company Ecolab reduced material and waste disposal costs by $320,000 annually by reusing product scraps and saved $260,000 annually by better controlling chemical use in production. Hewlett-Packard developed an innovative soldering process that eliminated lead well before a 2006 European Union’s Restriction of Hazardous Substances Directive regulating the use of lead in electronics products. Procter and Gamble offers cold-water specialty detergents to address the energy costs of heating water for laundry (Nidumolu, Prahalad, & Rangaswami, 2009). Finally, at the intersection of social environmental dimensions, companies focus on stakeholder groups of employees, customers, and suppliers. Employee health and safety is at risk when toxic materials are present in product manufacturing. The community can experience detrimental effects from chemical use from production and product disposal. Residents worry about clean drinking water in areas where manufacturing facilities discharge wastes into the ground. Energy companies struggle to provide society with fuel while minimizing environmental damage. Natural gas as an energy source is extracted through the process of hydraulic fracturing, also known as fracking, which involves injecting pressurized liquid into the earth to break up shale and release the gas contained within. However, residents near fracking sites express concerns about the impact on the community’s water and air quality (Gold, 2013; “Public express concerns over fracking in their communities,” 2014; “Water industry sets out concerns over fracking,” 2013). An Internet search yields many videos of people who live near fracking sites lighting the water running out of their faucets on fire. There may be some truth to the concerns. A 2013 study of the drinking water wells in an area of hydraulic fracking in northeastern Pennsylvania found that methane was present in 82% of the water, with concentrations six times higher for homes within one kilometer of the gas wells (Jackson et al., 2013). Customers care about the responsiveness of a company’s supply chain to social and environmental responsibility. Apple Inc. customers became concerned when reports of 137 workers at a Chinese supplier sustained injuries from a toxic chemical used in making the slick glass screens of the iPhone (Barboza, 2011). When Mattel, Inc. discovered unapproved leaded paint in its supply chain, the company recalled over 2 million toys from customers in 2007 (Becker, Edwards, & Massey, 2010). In reaction to parental concern over the safety for their children, Walmart set strict product safety requirements for its toy suppliers that went beyond regulations for lead and other chemical content in toys (Pereira & Stecklow, 2008). As a result of Walmart’s stringent criteria, other retailers will be able to access a safe and reliable supply of toys. Customer safety is a concern for companies as health risks such as cancers, developmental disorders, and obesity are linked to chemical exposures from household, personal care, and food products. Companies have to redesign products to remove banned toxins from their production, while consumers are becoming more educated on the dangers of continuous exposure to the accepted levels of chemicals in daily product use. Consumers cannot rely on industry regulations alone to feel secure about the products they purchase; they must sort through the myriad claims of natural, healthy, and organic product features on labels. There are no regulations on what the term natural means on product labels. For example, Kraft Foods Group, Inc. markets a natural lemonade flavor of Crystal Light, a low-calorie drink mix. The consumer advocacy group, Center for Science in the Public Interest (CSPI) has threatened a lawsuit if Kraft Foods continues claiming natural flavor. According to the CSPI, “the products contain several decidedly unnatural ingredients, including the artificial sweeteners aspartame and acesulfamepotassium, artificial colors such as Red 40, Yellow 5, and Blue 1, the factory-produced texturizer maltodextrin, and the controversial synthetic preservative butylated hydroxyanisole, or BHA” (Center for Science in the Public Interest, 2014, para. 4). To help customers recognize legitimate natural products, companies may seek certification by thirdparty associations such as the Natural Products Association (NPA). This nonprofit organization offers certifications for natural ingredients in foods, dietary supplements, home care products, and health/beauty aids. Certification allows product labels to include the recognized NPA Natural Seal so that consumers have confidence that marketing claims are legitimate. Standards focus on four dimensions—natural ingredients, safety, responsibility, and sustainability: Natural Ingredients: A product labeled ‘natural’ should be made up of only, or at least almost only, natural ingredients and be manufactured with appropriate processes. Safety: A product labeled ‘natural’ should avoid any ingredient that has peer-reviewed, scientific research showing human health or environmental risk. Responsibility: A product labeled ‘natural’ should use no animal testing in its development except where required by law. Sustainability: A product labeled ‘natural’ should use biodegradable ingredients and the most environmentally sensitive packaging. (Natural Products Association, n.d., para. 4–7) Strategic Philanthropy Businesses and organizations that stress philanthropy and charity as part of their approach to social responsibility go beyond economic and legal obligations. The focus of this approach is on activities unrelated to the core business, such as donations or encouraging employee engagement in volunteer work. Strategic philanthropy combines a company’s business mission with its charitable mission by linking social initiatives that support commercial objectives. Companies that adopt a strategic view of their philanthropic activities use their organization’s core competencies and resources to address broader social, customer, employee, and supplier problems and needs. Strategic philanthropy includes monetary donations, employee volunteerism, and sharing of specialized talent with a nonprofit organization. Addressing Social Issues Companies that engage in strategic philanthropy will often select a social issue that resonates with stakeholders and then initiate a relationship with a reputable nonprofit organization connected to that issue. For example, the pharmaceutical leader, Merck & Co., Inc. uses its expertise in developing and producing drugs to eliminate river blindness, one of the leading causes of preventable blindness worldwide. For the past 25 years, Merck has donated millions of doses to poor countries where river blindness is most prevalent (Merck, 2012). The benefits accrue to both the company and beneficiary organizations. The charitable activities generate greater customer recognition that increases the company’s reputation as a responsible business. The nonprofit organization gains a higher level of awareness for its cause that creates incremental support by the community. Many companies support Junior Achievement, a nonprofit organization that teaches K-12 students about entrepreneurship, workforce readiness, and financial literacy by sponsoring business education in classrooms. Participation includes financial support for class materials and providing an employee as the instructor. The company benefits from involvement in the community, providing employees an opportunity to share their business experiences, and increasing the future labor force’s understanding of business concepts. Some companies create their own charitable initiative to address a social issue related to their industry. In 2009, AT&T Inc. began a campaign to deter text messaging while driving that receives support from consumer safety organizations, law enforcement, educators, national retailers, regulatory agencies, and legislators. Since then, three other wireless service providers joined the initiative. The program includes voluntary commitments to avoid text messaging while driving, education programs, mobile applications for blocking text messages if driving, and employee involvement in spreading the message to customers. Cause Marketing Cause marketing is a form of strategic philanthropy in which charitable contributions are based on purchases of a product. It entails forming an alliance with a nonprofit charity in an effort to raise funds and awareness for the cause while building sales and awareness of the company. This type of strategic philanthropy ties an organization’s product(s) directly to a social concern. Communications include the company’s commitment to the cause, which enhances the image that the customer has of the brand. A cause-related marketing campaign may affect consumer attitude toward the product, purchasing behavior, and customer loyalty. Offers tied to a particular product or charity may occur for a specific period of time or become an integral part of the product or brand. For example, Newman’s Own donates all profits from the sale of products to charity. TOMS donates a pair of shoes for each pair purchased. The success of the TOMS’s business model prompted the company to offer eyewear in 2011. For every purchase of sunglasses, the company is able to restore the sight of visually impaired individuals through prescription glasses, surgery, and medical treatments. Customers must be willing to purchase the specified products of a cause-related marketing campaign to meet company and nonprofit financial expectations. Therefore, companies strive to understand customer motivations for paying more for a product or service to contribute to a social cause. Cause marketing offers appear to work best for luxury goods, for which donating to a well-known charitable cause may help offset consumers’ feelings of guilt associated with the purchase (Boenigk & Schuchardt, 2013). The social issue must also resonate with the target consumer. According to the International Agency for Research on Cancer (2012), the specialized cancer agency of the World Health Organization, breast cancer is the most common cancer in women worldwide, with an estimation of more than 1.7 million new cases occurring among women worldwide in a year. One customer from the United Kingdom expressed support for this cause-related marketing campaign by donating to breast cancer research and saying: . . . . it is primarily due to the fact that my mum supports it and also because it is a cause which I am in interested in. Because being a woman, I feel that a cause such as Breast Cancer does interest women in particular because so many of us are affected by it. (Broderick, Jogi, & Garry, 2003, p. 594) In the United States, General Mills, Inc. sponsors a campaign for consumers to help in the fight against breast cancer when purchasing products such as Yoplait, Cheerios, Cinnamon Toast Crunch, Nature Valley, Green Giant, Betty Crocker, and Pillsbury. Since women are the primary purchasers of household groceries, the cure for this disease prompts consumers to participate in this cause-related marketing campaign. Consumers support cause-related marketing offers depending on the geographic scope of the issue or campaign. Studies show that customers are more likely to support organizations or causes that have local or regional benefits, but consider programs that have an international reach to be more impressive (Grau & Folse, 2007; Vanhamme, Lindgreen, Reast, & Popering, 2012). Short-term initiatives that provide local disaster relief can also generate positive reputational and brand loyalty effects. Denverbased Frontier Airlines donated a portion of its buy-on-board sales over four months to help people affected by the Colorado wildfires in 2013 (Frontier Airlines, 2013). Some companies affiliate their products with a social issue that is not local nor a natural disaster by supporting co-branding programs like (RED) (Ponte, Richey, & Baab, 2009). (RED) is a nonprofit organization that encourages companies to donate a portion of the profits of specified products to a fund that strives to eradicate HIV/AIDS from African nations where the disease is most prevalent. Companies that participate in the (RED) program include Apple, Starbucks Corporation, Coca-Cola, SAP AG, Shazam, The Girl Skateboard Co. Inc., Nanda Home, Fatboy USA, and Bed Bath & Beyond. For example, Apple offers a (PRODUCT)RED iPhone 5s leather case that retails for $39. The company prominently displays that the portion of the purchase price donated to the Global Fund to fight AIDS provides for 7.5 days of life-saving pills. Creating Shared Value The concept of shared value combines social responsibilities with the profit-making motive of business. Creating shared value resonates with companies rather than obligatory or philanthropic views of corporate social responsibility. Porter and Kramer (2011) promote creating shared value in recognition of the close interdependence of a healthy economy and the competitiveness of a company. Companies that publish shared value reports include Nestlé, De Beers, and Novo Nordisk A/S. Shared value reports differ from corporate social responsibility reports. Reports on shared value expand on company sustainability reports that focus on business impacts to the environment, economy, and society, while corporate social responsibility reports focus on compliance and meeting obligations. In its 2013 Shared Value Report, the electric and gas provider Avista Corp. summarized the shared value approach best: “In our report, we shift to a new perspective that demonstrates how our strategic business interests, including philanthropy and community involvement, create the opportunity to bring value to our stakeholders—shared value” (Avista, 2013, p. 3). As depicted in Figure 2.3, Nestlé structures its social responsibility initiatives with a shared value approach, building on the foundations of sustainability and compliance. Figure 2.3: Nestlé in society For Nestlé, creating shared value builds on compliance and sustainability to mitigate business risks, protect company reputation, and reduce costs. Nestlé creates shared value in three areas: nutrition, water, and rural development. Source: Reprinted with permission from Nestlé. Nestlé in society: Creating shared value and meeting our commitments 2012. Global Perspectives of Social Responsibility The Economist article “Going Global” (2008) highlights the necessity for multinational corporations to balance the needs and expectations of local communities in developing a business strategy in other countries. The article references a survey in which executives in five countries outlined the issues they expected to be of particular importance to their communities over the course of five years. The top five important global issues ranked by executives from the United States, Britain, Germany, China, and Brazil for the years 2009 to 2014 included the environment, safer products, retirement benefits, healthcare benefits, and affordable products. However, rankings varied by country; for example, human rights issues were in the top five only for Brazil and job losses from outsourcing were a concern mainly for the United States and Germany. Global companies recognize that not all countries view corporate social responsibility in the same way. In most Anglo countries such as those in Western Europe, Australia, and the United States, businesses recognize corporate social responsibility as a distinct concept. However, in some regions of the world, treating CSR as a separate strategy is an unfamiliar concept to business leadership because prioritizing the needs of society is already inherent in commerce. Based on Confucianism values, Japanese managers have a strong sense of the spirit of social responsibility as a way of doing business (shobaido). In interviews of Japanese executives, one study found that CSR is understood to describe those corporate principles or policies [keieirinen] which have long been influencing corporate activities. Japanese managers describe the principles as “to put utmost priority on respecting human dignity, safety, and legal compliance,” and “to contribute to society via our business or mono zukuri [making things].” (Fukukawa & Teramoto, 2009, p. 138). Adopting universal norms such as human rights may conflict with ingrained Confucianism beliefs of collectivism, paternalism, and harmony, all of which stress organizational welfare over individual achievements (Ip, 2009). The business responsibilities to engage in charity and philanthropy are viewed differently across economic systems and cultural dimensions such as ethnicity and religion. Whether managers view the profit motive as the primary role of business can influence their views of the social responsibility of their company. The level of charitable donations for disaster relief by Asian firms varies significantly from that of European or U.S. firms (Muller & Whiteman, 2009). One study found that managers from Singapore and Malaysia, particularly the Malay Muslims, are more oriented toward profit than other business priorities such as employee and environmental welfare (Yong, 2008). Chinese companies expect the government, rather than businesses, to address social and environmental issues, a sentiment reinforced by the Chinese government’s “unwillingness to provide tax incentives for companies’ charitable actions” (Lam, 2009, p. 143). In one study, Chinese managers of subsidiaries of multinational corporations perceived that “the responsibility of enterprises was to pay taxes, follow laws, provide employment, and develop capital for future growth” (Lam, 2009, p. 139). Finland has a strong social system dating from the 19th century when improving living conditions became the responsibility of the state and municipalities. Therefore, Finnish executives have said, “charitable work is neither necessary nor even appropriate for companies paying taxes and fulfilling their obligations to society” (Elisa, 2004, p. 20). Countries experiencing a transition from a planned economy (e.g., communism) to a free market have ambiguous views of ethics and social responsibility. An extensive survey of Hungarian managers found that more than half of the participants felt that business ethics and social responsibility are not as much of a concern as company survival. One respondent stated: “ . . . if others did not take [corporate social responsibility] into consideration, then we would do the same and not put ethics very high” (Fulop & Hisrich, 2000, p. 12). A later study of the Central Eastern European countries revealed that the majority of residents consider the profit motive of business to be less ethical than residents in the United States do, yet have a more positive outlook of ethical business than a similar sample in the United States (Padelford & White, 2010). One explanation may be that publicized ethical lapses of companies in the United States have generated a cynicism of business in the American public. To address the global challenges of ethics and responsibility, companies can find many opportunities to help communities through a global corporate citizenship strategy. For companies that intend to conduct business responsibly within the international marketplace, Logsdon and Wood (2002) recommend the following steps: Embed a set of fundamental values that reflect universal ethical standards in the corporate code of conduct and in corporate policies; Encourage thoughtful awareness throughout the organization regarding where the code and policies fit well and where they might not align with stakeholder expectations; Analyze and experiment to deal with problem cases; and Establish systematic learning processes to communicate the results of implementation and experiments internally and externally. A company should consider the social responsibility approach that fits with their organizational culture, mission, and goals. Industry leaders have shifted from focusing solely on charitable activities and are incorporating their social responsibility approach with company strategy. Strategic corporate social responsibility connects the company’s business objectives with its social initiatives, thereby generating benefits for both the company and society. The next section will take a closer look at the competitive advantage that strategic social responsibility can bring to a company. 2.2 The Advantages of Social Responsibility A company that prioritizes social responsibility in its business strategies fosters both competitiveness and growth (see Table 2.2 for industry examples for each category). Social responsibility can strengthen company competitiveness by enhancing its position in the industry through developing a talented workforce, achieving a reliable supply of high-quality materials for production, and facilitating rules and incentives that govern competition. Second, socially responsible companies foster growth by increasing innovation through new products and services, and providing access to new market segments and increasing demand for products and services (Gonzalez-Padron & Nason, 2009; Porter & Kramer, 2006). Table 2.2: Competitive advantages of social responsibility Outcomes Examples Competitive Environment Talented workforce Develop skilled labor pool Reduce costs generated by employee attraction and turnover Honeywell partners with the National Aeronautics and Space Administration (NASA) in a middle school science education program to promote future supply of scientists, engineers, and technologists. Apache Footwear reduced labor turnover by building one-story, red-brick buildings for staff, organizing Saturday night movies and dances, and hiring its employees’ relatives. Reliable supply chain Secure consistent, long-term, and sustainable access to safe, high-quality raw materials and products Pepsi shares its expertise about potato farming under desert conditions with the Chinese Ministry of Agriculture to ensure materials for snack foods marketed in China. Favorable rules and incentives Reduce costs and regulations within the industry Reduce local resistance to entry in new markets General Electric, Cinergy, and Bechtel developed solutions to reduce coal emissions in energy plants, meeting environmental regulations and at a lower cost than traditional practices. Altria Group works with governments to secure fair excise tax structures in many of its key markets. Growth New product and services innovation Create products to reach unmet social needs and increase differentiation Develop cutting edge technology for unmet social or environmental needs Heinz partners with advisory groups from around the world to guide development of healthier foods meeting diverse dietary needs. Ecolab developed a new washing process for hotel and healthcare laundries using an innovative process to conserve energy and water. New markets and customers Gain access to new markets Increase demand through education and infrastructure development Hindustan Unilever Ltd. is improving health conditions in rural India through its education programs on hygiene while creating demand for soap products. Cisco, Hewlett-Packard, and Nokia Oyj are partner organizations in the United Nations Information and Communication Technologies Task Force to encourage universal access to information technology. Source: Social Responsibility as a Strategy, by T. L. Gonzalez-Padron, 2011, in B. Keillor and T. Wilkinson (Eds.), International Business in the 21st Century (Vol. 3), pp. 117–147. Socially responsible companies also achieve a sustainable competitive advantage by implementing differentiating strategies that other firms cannot duplicate (Barney, 1991). Socially responsive strategies may be difficult for competitors to imitate for three reasons. First, corporate responsiveness policies develop over a period of years, creating a reputational advantage. Second, the mechanisms by which the corporate responsiveness policies interact to generate value can be complex. Third, competitors would have difficulty replicating social aspects such as company culture and interpersonal relationships that contribute to social responsiveness. Each of these advantages will be explored in the sections that follow. Competitiveness Business organizations with a strategic approach to social responsibility can enhance their competitiveness within an industry through attention to employees, suppliers, and regulatory stakeholders. First, companies with an integrated social responsibility program are more likely to attract, develop, and inspire a talented workforce. Second, focusing on the supply chain can provide for a reliable supply of products and raw materials for production. Third, the competitive environment can change through facilitating favorable rules and regulations within the industry. Talented Workforce A talented workforce gives a company an advantage that competitors may not easily replicate. Patagonia stresses that employee commitment and productivity comes from a feeling of making a difference and doing the right thing (Chouinard & Stanley, 2012). Volunteer programs help employees make a difference by sharing their expertise to improve the world. Patagonia offers various volunteer programs for employees to support global environmental work. Employees of International Business Machines Corporation (IBM) have opportunities to engage in solving social problems in emerging and developing markets. IBM feels that the program benefits employees by enhancing their global leadership skills that help communities and the company (Guamieri & Kao, 2008). Companies that engage in education projects that benefit society can create a talent pool for their industry. Honeywell International, Inc. sponsors a middle school science program in the United States with the National Aeronautics and Space Administration (NASA) in order to encourage children to pursue careers in science, engineering, and technology. Hewlett-Packard supports technology centers at 12 Russian universities to focus on building practical information technology-related business skills, with top performers hired as interns at the company’s labs. Attracting and keeping employees is a time-consuming and expensive process for businesses. Companies can spend up to 150% of an employee’s salary to search and select a replacement for a vacant position (Palanski, Avey, & Jiraporn, 2014). Turnover is lower when employees perceive a company to be ethical and responsible (Stewart, Volpone, Avery, & McKay, 2011). In China, migrants from rural areas provide much of the factory labor. However, as the demand for labor has increased, the number of workers willing to work for low wages and crowded living conditions has declined. In response to the 10% employee turnover rate in their Chinese manufacturing locations, Apache Footwear India Pvt. Ltd. offers incentives to factory workers such as private living quarters, Saturday night movies and dances, and hiring preference for its employees’ relatives (Roberts, 2005). Reliable Supply Chain Secure, consistent, long-term, and sustainable access to safe, high-quality raw materials and products strengthens a company’s competitiveness. Suppliers seek buyers who will treat them with respect and integrity. Key ethical issues influencing supplier relationships include a) demonstrating partiality toward suppliers preferred by upper management; b) allowing personalities to improperly influence the buying decision; and c) failing to provide prompt, honest responses to inquiries and requests (Cooper, Frank, & Kemp, 2000). As supply chains and markets become more global, companies are more likely to accept responsibility for the actions of their suppliers. Social issues in global supply chains include unsafe work environments, harmful environmental outputs, and poor product quality or output. Responsible businesses select and evaluate suppliers on their social and environmental performance; pay more for vendors with good social policies, thereby helping competent vendors become socially responsive; and help socially responsive vendors to become competent (Drumwright, 1994). There are many examples of how socially responsible initiatives ensure a reliable supply chain. Companies may share agricultural expertise to ensure a sufficient supply of quality raw materials. In the United States, Patagonia worked with cotton growers, ginners, and spinners to establish a reliable supply of organic cotton. As its supply chain expanded to Asia, Patagonia gave the same support to cotton growers in Thailand (Chouinard & Stanley, 2012). Starbucks helps coffee bean farmers to implement new and sustainable farming techniques in many countries. The Hershey Company collaborates with the World Cocoa Foundation to encourage responsible cocoa farming and to support income improvement for cocoa-growing families. Pepsi shares its expertise about potato farming with the Chinese Ministry of Agriculture to increase quality materials for snack foods marketed in China. Another way to ensure a reliable supply chain is for companies to engage in projects to protect scarce natural resources that are necessary for manufacturing their products. Water is a key ingredient in beverages, resulting in strategic social responsibility projects by Pepsi and Coca-Cola to preserve and conserve water. For example, by 2020, Coca-Cola’s goal is to “safely return to communities and nature an amount of water equal to what we use in our finished beverages and their production” (“Collaborating to replenish the water we use,” 2013). Favorable Rules and Incentives The competitive environment of a firm may improve because of social responsibility activities. Responsible companies experience lower local resistance to entry in new markets and reduced costs and regulations within the industry. Government administrative rules, laws, and policies shape the competitive environment. The costs of compliance with regulations increase the cost of doing business and reduce company resources available for new product development or capital investments (see Going Global: Doing Business Around the World). Companies that engage in proactive social responsibility gain a competitive advantage by looking beyond the costs of compliance to seek innovative solutions to regulatory pressures. Going Global: Doing Business Around The World The World Bank issues an annual report on the rules and regulations that shape the business environment. The 2014 report examines 11 indicators of regulations relevant to business in 189 countries (World Bank, 2013). The costs and complexity of conducting business vary by country. For example, starting a company in New Zealand takes half a day with almost no fees, but a new business takes 208 days in Suriname and 144 days in Venezuela. Business regulations affect a company’s ability to advance from start-up to daily operations (see Figure 2.4). Figure 2.4: Regulations as measured by Doing Business affect firms throughout their life cycle The World Bank identifies 11 indicators of regulations and legal infrastructure that relate to a firm’s life cycle. The diagram consists of four boxes in a circular flow with one box in the middle. Each box reflects a stage in the life cycle of a firm. At start-up: starting a business, employing workers. In getting a location: dealing with construction permits, getting electricity, registering property. In getting financing: getting credit, protecting investors. In daily operations: paying taxes, trading across borders. When things go wrong: enforcing contracts, resolving insolvency. Source: Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises (11th ed.), by World Bank, 2013. Ethical and responsible businesses can alleviate some costs by avoiding legal disputes, as the costs can be high to enforce contracts or handle conflicts with customers and suppliers. Companies can spend an average of 622 days in court to resolve a dispute and incur costs up to 35% of the value of the claim (World Bank, 2013). Careful attention to the interests of customers, employees, and suppliers creates a competitive advantage through reliable revenue and supply of labor and materials. The World Bank report (2013) found a high correlation between a country’s regulatory environment and its competitive environment. A stable regulatory environment that supports business and preserves a level playing field allows companies to prosper. Figure 2.5 shows a graphic illustration of the correlation between the Doing Business and World Economic Forum rankings on global competitiveness that measure economic stability, public institution reliability, and business sophistication. The World Economic Forum’s Global Competitiveness Index includes the business community’s perception of the business environment. Variations among the company responses within a country indicate that companies’ experiences with regulations differ. Perhaps the engagement of local governments allows for ease in doing business. Figure 2.5: Relationship between Doing Business and World Economic Forum rankings on global competitiveness A high correlation (0.84) between the Doing Business and the World Economic Forum’s Global Competitiveness Index’s rankings demonstrates the relationship between transparent and efficient regulation on the propensity for entrepreneurs to innovate and expand. Graph showing a high correlation (.84) between the Doing Business rankings and the rankings on the World Economic Forum’s Global Competitiveness Index. The x-axis is the 2014 Doing Business ranking from 0 to 180. The y-axis is the 2013 World Economic Forum’s Global Competitiveness Index from 0 to 140. The relationship is shown by a red regression line and is significant at the 1% level after controlling for income per capita. Source: Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises (11th ed.), by World Bank, 2013, p. 24. Questions to Consider 1.What methods could a multinational corporation use to navigate through business regulations in other countries? 2.How can a company lobby for favorable business conditions in a country in a responsible manner? 3.How should a manager handle a request to pay a fee to expedite business approvals in order to compete with the local companies? Some business requirements create entry barriers that protect local industries. The escalation of a global economic crisis beginning in 2008 created a public movement for protecting domestic companies through increased tariff and non-tariff barriers (Bussière, Pérez-Barreiro, Straub, & Taglioni, 2011). In 2009, the Chinese government stipulated that only Chinese companies should receive contracts for government stimulus projects. Meanwhile, the United States reinforced its Buy American requirements in the American Recovery and Reinvestment Act (ARRA) of 2009. To respond to a public backlash against foreign companies, wind turbine companies from China and Spain have invested in community projects in the United States to generate goodwill and a reputation for quality (Fletcher, 2010). There are ample examples of companies gaining competitive advantage through proactive social responsibility to address regulatory concerns. When conducting business internationally, collaboration with the government and regulatory agencies provides for a favorable business environment. The tobacco company Altria Group, Inc. works with governments “to secure fair excise tax structures in many of its key markets, with numerous countries adopting minimum excise taxes and several considering the adoption of minimum reference prices” (Altria Group, Inc., 2004, p. 6). The energy industry adopted a proactive approach that reduced costs of compliance. General Electric, Cinergy Corp., and Bechtel Corporation joined forces to develop solutions to reduce coal emissions in energy plants. By working together, the companies discovered innovative approaches for meeting environmental regulations at a lower cost than traditional practices. Growth Socially responsible companies can achieve a competitive advantage by developing innovative products and services and accessing new market segments for existing products and services. However, to obtain this benefit, companies require a full understanding of customer needs, competitors’ actions, and technological development (Calantone, Cavusgil, & Zhao, 2002). Companies with a broad base of stakeholders can utilize stakeholders’ knowledge and expertise to generate new ideas. For example, E. I. du Pont de Nemours and Company (DuPont) includes a diverse set of stakeholders from India, Africa, and Latin America in developing a strategy for biotechnology development, and has even invited environmental proponents such as the former head of Greenpeace International to provide divergent views on the issue (Hart & Sharma, 2004). Product development and new market development provide for a sustainable growth of the business. New Product and Services Innovation A firm can gain a competitive advantage in its industry by creating products to fulfill unmet social needs. Leading companies in the packaged foods industry recognize the effect their products have on the health and wellness of consumers, as obesity has created health and productivity concerns for society. The United States has one of the highest obesity rates of developed countries. The World Health Organization (2010) estimated that over 48% of adult women and over 44% of adult men in the United States are obese when measured by a body mass index (BMI) over 30. The costs of obesity in the United States have reached $450 billion annually, including costs to individuals, taxpayers, employers, and other industries (Aglgazy, Gipstein, Riahi, & Tryon, 2010). Obesity-related costs include direct medical costs and indirect costs; direct medical costs related to obesity reach $160 billion annually (Aglgazy, Gipstein, Riahi, & Tryon, 2010). The individual bears out-of-pocket expenses, taxpayers pay for Medicaid/Medicare costs, and hospitals have to invest in equipment to accommodate obese patients. Through a voluntary industry initiative, food and beverage companies are reducing caloric content by offering new lower calorie products, reducing sodium and sugar content of existing products, and providing packages with smaller portions. Nestlé developed new technology to make ice cream with half the fat and one third of the calories. Food and beverage companies addressing the social concerns of health and nutrition have experienced stronger sales growth and financial returns (Strom, 2014). Working with a wide variety of stakeholders has generated innovative approaches in attaining goals of offering healthier food options. For example, Heinz sponsors studies and symposiums with leading nutritionists, dieticians, and physicians from around the world for bolstering nutrient content and reducing sodium and fats in ketchup, soups, sauces, and frozen foods. Companies can also achieve a competitive advantage from developing technology for addressing concerns for the conservation of natural resources. Ecolab has become a global industry leader in offering cleaning, sanitizing, and food safety products that consider the total impact on the environment. One innovative product, a waterless lubricant called DryExx, addressed concerns of their food and beverage clients wanting to reduce the costs and reputational damage of high water usage in the bottling process. Along with improved production efficiencies, one large bottling plant reduced water use by 1.5 million gallons annually (Milliman, Gonzalez-Padron, & Ferguson, 2012). Ecolab offers another innovative cleaning product that addresses environmental and social issues for companies. Traditionally, floor cleaning requires strong chemicals and rinsing with water that creates unsafe and slippery surfaces. Ecolab leveraged technology from laundry detergents to develop a new enzyme-based floor cleaning formula (Wash ‘n Walk) that negated the need for rinsing with water. This allows Ecolab’s customers to purchase a product that reduces slips and falls, provides for a hygienic environment, and reduces water usage. Through a focus on product solutions that meet social and environmental issues, Ecolab maintains growth even during softening industry demand (MarketLine, 2011). New Markets and Customers Companies may realize competitive advantages by acquiring new customers through increasing demand for products because of their socially responsible activities. There are two general approaches to developing future demand: promoting product usage and enabling capacity. Consumer companies target educational programs to access populations that could become a viable market for their products and services. Students worldwide achieve computer literacy through computer firms’ support for education programs and donations of personal laptops. The personal care divisions of Unilever drive demand for products through educational initiatives. The company collaborates with the FDI World Dental Federation to fund oral health projects in 38 countries, including mobile dental vans in developing nations. Hindustan Unilever, the Indian subsidiary of Unilever, is improving health conditions in India through its education programs on hygiene that benefit not only the company, but also the quality of life for rural Indians. “It’s not enough for the company to look at market-share increase,” says Anand Kripalu, 42, the company’s head of detergents and a creative thinker behind many of the company’s rural-outreach strategies. “We want to spread the message of hygiene and really use the Lifebuoy brand to deliver that benefit to consumers. This isn’t just good for us as a brand; it’s good for the country.” (Balu, 2001, p. 120) Strategic philanthropic projects enable capacity by developing the infrastructure and capabilities to support future demand for products and services. Computer and information industries recognize that collaboration with government and other industry partners will foster growth for hardware and software in new markets. Hewlett-Packard, Microsoft Corporation, and Cisco joined forces with Jordanian companies to strengthen the country’s information technology industry. In 2001, SecretaryGeneral Kofi Annan established a United Nations Information and Communication Technologies (UNICT) Task Force that included industry leaders, government agencies, nongovernmental agencies, and educational institutions to increase access to information technology. Task force members from the private sector included representatives from Cisco, Siemens AG, SAP, Nokia, Microsoft, Hewlett-Packard, Infosys, and Sun Microsystems, Inc. While the task force ended in 2004, the member companies continue to create the infrastructure to allow greater access to information through the Internet and phone. Gonzalez-Padron, T. (2015). Business ethics and social responsibility for managers [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.) 
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