CSR & Corporate Accountability

CSR & Corporate Accountability

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CSR-Corporate-Accountability-through-Social-Vigilance

Corporate Accountability through Social Vigilance

If you were a newcomer in the field of business and social issues and you started browsing academic literature, surely you would be bewildered by a number of different terms and definitions that imply similar or identical meanings: corporate social responsibility, public responsibility, corporate social responsibilities, corporate societal responsibility, corporate social responsiveness, corporate social performance, corporate citizenship, business citizenship, stake holding company, business ethics, sustainable company, and triple bottom line approach. Even the same author uses different terms throughout his or her papers1 or in the same paper.2 You will probably wonder whether historical and geographic reasons explain the preference for a particular name (e.g., until the 1990s, the term corporate social responsibility was more widely used; the use of corporate citizenship is preferred in Anglo Saxon countries3) or whether academics, out of the need to present original contributions, make up new names, and merely add nuances to past concepts.

This work is an attempt to analyze the similarities and differences between two of the most recurrent terms used in the literature: corporate social responsibility (CSR) and corporate citizenship (CC). As some authors have highlighted, since the 1990s CC started to compete and replace the other concept in the realms of management theory and practice. To explore this competition between terminology and concepts, the criterion which one(s) is improving corporate accountability will be used. The question of corporate accountability seems crucial today. Corporations have been acquiring increasing power, in certain cases, even more power than some states, without engaging in the advancement of the common good.5 The situation presented by several authorsthe growth of truly global companies, the environmental damage, the race to the bottom in labor, environmental and welfare standards, the over commercialization of culture, and moral valueshas inflamed the debate on the control of corporations.

This cover story is structured in a way, where, the first section reviews the history of each term and analyzes the similarities and differences between these two concepts. The second section explores the first condition for improving accountability (changes in the system), its outcomes and limitations. The third section presents the second necessary condition that may overcome these limitations (a system change). The role that these concepts play in fostering each of these conditions will also be highlighted.

ANALYSIS OF CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE CITIZENSHIP

The CSR originated in 1937 with the publication of Bowens book Social Responsibilities of Businessmen. At this time, the emphasis was placed on business peoples social conscience, rather than on the company itself. The managerial revolution and the growing hostility of the publicwho, after experiencing increasing social problems, demanded changes in businessled to a shift in the focus. Most of the responsibilities mentioned in the literature (which coincided essentially with the publics demands) were incorporated into regulation, giving rise to a new approach: the public policy approach. The concept then became clear: companies have to abide by the law. However, the debate about CSR continued. Complying with the legal requirements did not seem enough, partly because not all the publics demands were protected by laws, and partly because CSR was favored as it was believed to overcome the inefficiencies derived from regulation. The CSR positioned itself as a challenge to the neoclassical business model that, at that time, began becoming a paradigm. Two other terms were used in the 1970s: corporate social responsiveness and corporate social performance. The first emphasized the proactive approach required from companies and was used to link CSR with strategic managemen the second was an attempt to offer a managerial framework to deal with the CSR and simultaneously, an attempt to measure CSR.

In the 1980s, the concept of stakeholders was coined. Although older references to the same concept have been found, it was Freemans landmark book that triggered the thinking around stakeholders. Originally defined in a Stanford Research Institute Internal Report (1963) as those groups without whose support an organization would cease to exist, Freeman extended the scope by proposing the following definition: any group or individual who can affect or is affected by the achievement of the organizations objectives. The term proved to be useful as more than 200 theoretical papers have been written about stakeholders. The CSR and the concept of stakeholders complement and reinforce each other.

In the late 1990s, practitioners coined a new term: corporate citizenship (CC). The term CC is used to connect business activity to broader social accountability and service for mutual benefit, reinforcing the view that a corporation is an entity with status equivalent to a person. The CC also coexists with and draws on existing literature on stakeholders.

These two concepts have been criticized for a number of reasons. A review of these criticisms may clarify similarities and differences between these concepts. Moreover, it will establish the basis for the subsequent discussion regarding their contribution in improving corporate accountability.

5-Fields-of-CSR-based-Management

The CSR has been used as an umbrella concept to introduce a large number of ideas, concepts, and techniques. Nonetheless, the principle that companies must not only be concerned about profits and economic performance underlies all of them. The CC advocates have pointed out some flaws in the CSR concept. Before the notion of CC appeared, some of these criticisms had already been mentioned, namely the lack of a single and clear definition of CSR and the large number of different proposals of responsibilities. Besides, CSR has been criticized because of (1) its narrow content (the concept has been articulated more as management of externalities than as holistic criteria in comprehensively redefining an organization internally); (2) its broad content; (3) its academic origin; (4) the difficulties to operationalize CSR; and (5) the potential to bias its content towards specific interests. In addition, CSR was further criticized by neoclassical proponents who regarded it as subversive, as an attack to property rights, and, in general, as a threat to free society.

Some counterarguments may be offered to these criticisms. Against the lack of clarity of the concept and its contents, it may be argued that this is inherent in the concept of CSR. The CSR makes reference to a relative concept; social demands vary in time and space and even within the same group of stakeholders (e.g., employees). Therefore, there will always be some ambiguity in the concept. This counterargument also helps to explain the difficulties in operationalizing the concept: CSR has to be specified in each company, taking into account its changing environment. It is not easy to provide managers with rules of thumb as evidence shows that social demands change in every society. Nonetheless, a number of operational models surged from the concept of CSR: standards (e.g., Sullivan Principles) and theoretical models (e.g., European Unions Green Paper).

The criticism regarding the academic origin of CSR is not entirely valid. The CSR has been developed by academics, trying to systematize actual social demands. Simultaneously, their conceptual models were used by social movements to support their claims (e.g., Ralph Naders Corporate Social Responsibility Project).31 Hence, CSR has had both a bottom‐up origin and a top‐down development.

Although CSR has been criticized for its focus on externalities, this approach is consistent with the neoclassical paradigm of the firm. It has been widely used to persuade managers to take into account the social side effects of their policies. Profits lose their capacity to measure performance when in their computation and externalities have not been taken into account. To some extent, developments in the measurement of intangible assets (e.g., corporate reputation) and the inclusion of social and environmental performance in risk management try to capture these positive and negative externalities. Besides, it is not clear why companies are demanded to go beyond the management of externalities. When some firms do not even comply with the existing regulation, one may well wonder if they are ready to make the next step. Finally, several counterarguments have been advanced against those who reject CSR altogether.

The main criticism of CSR applies to CC as well: the ambiguity of the concept. Different from CSR, CC is a term coined by practitioners who regard it as more positive than CSR The CC advocates also believe that this term overcomes the difficulties of operationalization and implementation found in CSR by integrating previous concepts: It may arguably serve to integrate corporate social responsibility and stakeholder management within a corporate social performance framework. Nonetheless, they do not offer any evidence to support this arguable advantage. Other authors do not seem to think that CC integrates CSR per se and propose other models to merge both concepts.

The definition of CC is not clear in the literature. In a recent paper, Matter and colleagues explain that three visions underlie the label corporate citizenship: a limited view that equates CC with philanthropy or community involvement; the equivalent view that equates CC with CSR; and the extended view, according to which CC implies a reconceptualization of businesssociety relations. It is the meaning conveyed in citizenship that makes this term more desirable. It clarifies its content, because it is easy for companies to derive what society demands, from the shared portrayal of the individual good citizen. However, evidence shows that managers are still confused about what corporate citizenship means.

In addition, corporate citizenship emphasizes the idea that corporations have rights and duties. However, because these rights are not equal to those of a real citizen, some authors argue that CC is a fictional concept. Yet, the aim of CC is to highlight that firms are public powerful actors, which have a responsibility to respect those real citizens rights in society this will eventually lead companies to take over those unserved governmental functions that were the result of a cutback in social rights two decades ago, but also protecting civil and political rights. Again, it is difficult to find in the literature any evidence backing the posited effects on corporate behavior that would derive from this new theoretical concept. Moreover, some authors argue that the use of the term corporate citizenship adds to the confusion between NGOs or civil society organizations (CSOs) and BINGOs (transnational corporation and business NGOs); on the grounds that they are also citizens, companies present themselves in a number of instances as NGOs and attempt to take part in regulation (or deregulation according to this researcher). Richter denounces the risks of this approach, while stating that corporations are not citizens but legal entities entitled to carry out profit‐making activities as long as they fulfil certain social obligations. Corporate rights are a contractual arrangement with society that can be taken away if corporations do not behave responsibly.

Finally, some scholars argue that CC should be defined as understanding and managing companys wider influences on the society for the benefit of the company and the society as a whole. The argument that CC has made virtue a necessity and turned this necessity into strategic advantage had already been advanced under the CSR debate and the theory of the stakeholders. Hence, it is not original with the CC concept. It is worth noting that, in contrast to CSR, neoclassical proponents have not rejected the notion of CC. This could be explained by two reasons: first, the concept of CC has watered down the requirements encapsulated in the concept of CSR; therefore, it is no longer perceived as a threat to the neoclassical orthodoxy; second, by the 1990s managers were already convinced that a certain degree of social embeddedness was desirable and necessary.

DEFINITION-of-ACCOUNTABILITY

The previous analysis shows that CSR and CC have more in common than proponents of CC seem to acknowledge. As explained in the introduction, this story will analyze which of them has proved to be effective in improving accountability. Few definitions of corporate accountability have been found in the literature on CSR/CC, even in those papers addressing specifically the issue of corporate accountability. Drawing on the literature on political accountability, corporate accountability could be understood as corporate control; that is, the establishment of clear means for sanctioning failure.

Both CSR and CC propose that firms should be controlled by society and not only by shareholders. When authors mention the principle of neighbor of choice or the license to operate, they acknowledge that society should be conferred clear means for sanctioning corporate failure. These concepts reject the neoclassical vision of corporate accountability (i.e., companies should be accountable only to shareholders, as they are the legitimate owners of the firm). By claiming that companies are accountable for the creation of organizational wealth for its multiple constituents, these concepts oppose the neoclassical notion of shareholders as the only legitimate agent to sanction corporate results. Therefore, accountability should be understood as social corporate control.

This story does not attempt to discuss whether this social control of companies is morally sound or technically correct. This aims to clarify whether these concepts have provided society with the means for choosing their companies and sanctioning corporate failure (i.e., the conditions for this social control of companies).

THE FIRST CONDITION FOR ACCOUNTABILITY: CHANGES IN THE SYSTEM

Under the current neoclassical paradigm, where corporate control by society can only occur through the market, it may be evident that none of these concepts helps to improve corporate accountability, unless they are accompanied by real direct pressure on companies. Under the neoclassical paradigm, the only means for sanctioning failure is the market. As Sternberg puts it, if individuals have views as to how business should be conducted, they should ensure that their individual choices accurately reflect those views. When each potential stakeholderotherwise known as every member of societyacts conscientiously in his personal capacity, and strategically bestows or withholds its economic support on the basis of its moral values, then the operation of market forces will automatically lead business to reflect those values.

Therefore, it would be the stakeholders themselves that bring about changes in corporate practices by incorporating their ethical values in their economic decisions, not any socioeconomic theory such as CSR or CC. The first condition for accountability is that individuals incorporate their moral values into their economic decisions. Only when values change at the bottom of society and are incorporated into economic decisions will companies change their behavior to reflect these social values. This condition has also been suggested by other scholars. For instance, Marsden and Andrioff use the term social competition, which is analogous to market competition, to explain the same idea. According to them, social competition is necessary because any powerful organization needs effective countervailing power to keep them performing effectively for their own benefit as well as that of wider society.

This condition is achieved in certain cultural contexts. Research in certain Western countries evidences that individuals are showing their interest in social performance in every one of the three markets where firms compete: product, capital, and labor markets. The incorporation of social values in the capital market, through the socially responsible investments (SRI), is particularly significant because under the neoclassical paradigm, it is precisely the stockholders who are the most legitimate actor to sanction failure and demand transparency. The impact of the SRI on financial markets, combined with shareholder activism, has led to changes in business practices and to the creation of ethical indexes (e.g., Dow Jones sustainability index, FTSE4Good, and KLD social index). In Spain, a recent work showed that the urge to be listed in ethical indexes has led some of the largest listed companies to disclose social and environmental information and to include social issues as part of their strategic goals and plans. Therefore, these indexes have achieved more regarding transparency and changes in corporate behavior in two years than has the 30 years of the CSR/CC debate.

As previously mentioned, these concepts have successfully brought changes in the system, by raising awareness among consumers, investors, and employees. The body of literature around these issues has helped understand and reinforce the market forces that some scholars deemed crucial for the development of a corporate social conscience.

To the extent that CSR/CC have simultaneously reflected social claims and reinforced the social movements demands, by developing theoretical models they have helped improve social control of companies.

Hence, stakeholders are putting pressure on companies. Yet, despite the continuous societal demands for corporate change, [Companies] are likely to fulfill their responsibility in a minimalist and fragmented fashion. Why is that so? First, it is important to highlight that citizens are reflecting their moral values in their economic decisions only to a limited extent. The SRI volume is relatively small compared to the total value of market transactions. Empirical evidence about the influence of social issues on consumers decisions shows that consumers seem to be selectively ethical and do not regularly use social criteria in their purchase decisions. Yet, research also shows that investors do not know the existing offer of ethical investment products, that they do not have enough information about the ethical and social behavior of companies, or that consumers are willing to acquire ethical products (i.e., fair trade) but they simply cannot afford them.

10-reasons-to-implement-CSR

Therefore, Sterbergs statement that social demands should be embodied in economic decisions assumes that certain circumstances concur. These circumstances have hardly ever proved to be true in practice (e.g., perfect information, stakeholders as utterly free and rational, perfect independence between stakeholders and companies, no imbalance of power between a firm and its constituents, and enough availability of options to choose from). Likewise, Smith71 points out that these two conditions for consumer pressure are rarely found: highly competitive markets and information about the social and ethical performance of companies. Regarding NGOs, it has been highlighted that they need to have access to a free and broadly sympathetic press. Some authors have argued that the current ownership structures of mass media prevents this free access; or worse, it may even result in a true censorship of news reports denouncing corporations.

The second reason for the limited ability of CSR/CC to improve corporate accountability is that the discourse on CSR/CC has been incorporated in the neoclassical model of the firm without changing the aims and features of the latter. Thus, the contribution of CSR/CC is just the reminder that certain social constraints should be managed in order to increase corporate profits. Social and environmental performances are not seen as an end in themselves but as a source of competitive advantage or a condition to be competitive. Hence, it seems that the neoclassical model of corporate control remains untouched: companies should create value mostly for shareholders because they are the only or most legitimate agent for sanctioning failure.

This stance has led to the situation described as managerial capture: the potential for management to take control of the whole process (including the degree of stakeholders inclusion) by strategically collecting and disseminating only the information it deems appropriate to advance corporate image. Empirical evidence supports the existence of managerial capture. For instance, the aforementioned study of Spanish multinational companies showed that companies were only undertaking the projects poorly rated by ethical index managers in order to succeed in being listed in them, without engaging in any process of dialogue with their actual stakeholders to find out their demands. In a detailed case analysis of the baby infant formula issue, Richter shows how companies have tried to resist stakeholders pressure by denying, ignoring, or minimizing their claims; at the root of their reaction lies their reluctance to make any trade‐off between profits and the common good. A recent report of Christian Aid also shows that CSR/CC is used as a means to campaign against environmental and human rights regulations and in some cases, corporate social statements are mere PR exercises. Likewise, other authors have strongly criticized the existing business‐led associations for the promotion of sustainable development, arguing that, at most, they attempt to reconcile the traditional business model with limited social performance. In the worst cases, they also try to resist regulation, shape the policy agenda, and prevent the development of sustainability.

This tendency to managerial capture may have been aggravated by the propensity of justifying CSR/CC on instrumental grounds. CSR/CC has been justified on the grounds that it will help advance corporate goals, by showing that doing good leads to do well, or by trying to prove that doing good does not prevent from doing well. This reductioad economicsalbeit well intentioned, driven by the need for pragmatismhas not helped to promote the social control of companies. Encouraging managers to take into account the social dimension of their decisions solely because it increases profits leaves promoters without arguments when a decision does not increase profits, despite being perceived as the right thing to do. Alternatively, the right thing to do may be distorted so that it does not clash with the objective of profits growth, as happened in the case of the baby formula reported by Richter. As some authors have pointed out, evidence shows that it is problematic to argue the view that a socially responsible company is necessarily a more profitable business model.

Therefore, these concepts have negatively contributed to the goal of social control when they present an enlightened version of the neoclassical model. This enlightened version reinforces the ownership model of the firm; therefore, it does not provide society with means for sanctioning corporate failure.

To the extent that proponents of these concepts present an instrumental orientation, arguing that social demands are a constraint to achieving the objective of profits maximization, they have fouled their own nest, favoring managerial capture and helping little in improving social control of companies.

THE SECOND CONDITION FOR ACCOUNTABILITY: A SYSTEM CHANGE

Together with pressure from the changes in the system (citizens incorporating social concerns in their economic decisions), there is a second necessary condition for the social control of companies. Several authors have argued that there is a need for a system or a paradigm change in order to solve the problem of accountability. Although each of them justifies their proposal on different grounds (e.g., a revision of the theory of property, the agency theory, or the social contract), they all suggest that companies must convince themselves that the rival theory to CSR/CC, the neoclassical orthodoxy, is morally untenable. Profits are not an end per se; they must be compatible with other social needs. As Donaldson and Preston stated, companies must acknowledge that the interests of stakeholders are of intrinsic value and should behave accordingly. Companies must advance the common good or their license to operate must be removed.

This change of system should permeate every sphere of activity in human society: civil society, economic/business, and especially the government/political. As Peter Utting, coordinator of the United Nations Research Institute for Social Development (UNRISD) Project on Business Responsibility for Sustainable Development, explains, progress associated with corporate social and environmental responsibilities has been driven … by state regulation, collective bargaining, and civil society activism. Regulation should provide citizens with the necessary rules to correct companies failure, a requirement for the advancement of the common good. Leaving corporate control in the hands of the market is a political decision that could be reversed, and should be reversed when evidence shows that markets are not successfully changing corporate practices.

Regulators should provide citizens with political mechanisms to control firms, because these political means would complement and overcome the flaws of the economic mechanisms consumers can resort to. In some countries, these political means have been awarded to control relationships based on contracts (e.g., employeesfirm, consumersfirm, and suppliersfirm). However, other relationships stemming from an unclear, ill‐defined contract (e.g., societyfirm, environmentfirm, and population in other countriesfirm) have not been introduced into the corporate law. It is in these cases where citizens are unprotected, having no political means to pass their demands to companies.

Actually, this call for a change in regulation does not imply a radical novelty: different examples of this embeddedness existed in the past and contemporary examples can be found in non‐Anglo‐Saxon countries (e.g., Germany and the dual corporate board is a political option to ensure that citizens views are taken into account by managers). In some countries such as Spain, it is clearly stated in the Charter that the common good will be favored over particular interests, especially property rights (art. 128.1). However, this principle has not been included in the corporate law.

More recently, global and supra-regional institutions (e.g., UN or OECD) have launched guidelines fostering social and environmental concern among companies. Nevertheless, nation‐states have not incorporated these guidelines in their regulatory frameworks, impeding their enforcement. Certain governments (e.g., Belgium, Germany, and the United Kingdom) have approved laws improving transparency in social issues, but disclosures of social and environmental performances are required by law in few countries (e.g., France and South Africa). The enforcement of social and environmental disclosure is, however, coherent with the neoclassical paradigm, as perfect information is one of the requirements for the adequate functioning of markets. Besides, regulators do not provide specific, strong, and effective measures to impose sanctions on companies failing to show good levels of social, environmental, and economic performance either in the territory where the company has its headquarters or in other countries.

Without a minimum regulatory framework enforcing disclosure of such performance, stakeholders can only show their preference for social and environmental performances to a limited extent. Yet, regulators should go beyond that: they should impose certain levels of social embeddedness on companies, giving citizens the means to claim the enforcement of this regulation. Besides, this change of system should be accepted by managers. They have to believe that social embeddedness is morally sound and the legitimate alternative to the neoclassical orthodoxy. In fact, it is not that all managers have adopted a neoclassical mindset. As Zadek remarks, there are many managers committed to improving the social and environmental footprint of the companies where they work.

The system change cannot take place unless the first condition is met. Companies reflect the values of the societies where they operate (although they also try to shape these values). It is pointless to argue for the need of a new paradigm when financial markets (in the end, individual investors) keep demanding profitability and growth rates that may only be achieved by trading off social and environmental performances. Therefore, this system change should be adopted by civil society.

These concepts will therefore help advance corporate accountability when they are grounded in a normative orientation. Yet, this normative orientation is absent from the discourse on CC. Therefore, the concept of CSR presents greater advantages to advancing the social control of corporations.

To the extent that these concepts are defined and articulated with a normative aim, positioning them as a challenge to the neoclassical orthodoxy will help advance the necessary system change.

Because the concept of CC has not embraced this normative orientation, the concept of CSR is superior to that of CC. Exploring and spreading the normative basis for CSR will help achieve the social control of corporations.

The following figure summarizes the main thesis of the present story.

social-control-of-corporations

This cover story has analyzed similarities and differences between two of the most recurrent terms used in the literature, corporate social responsibility (CSR) and corporate citizenship (CC), using the question of which one is advancing the social control of companies as the key criterion. From a theoretical point of view, the two concepts analyzed here have few differences. Both concepts have been criticized for the same reasons. Proponents of corporate citizenship, who usually argue that this concept would overcome the limitations of the CSR concept, have not been able to provide a clear definition of the concept or to demonstrate the posited advantages of using the term corporate citizenship.

ROI-of-Social-ResponsibilityThere are two conditions for the advancement of the social control of companies. First is the stakeholders pressure through their economic decisions. Companies will only incorporate social and environmental objectives in their agenda when economic agents show that they also seek these values by incorporating them into their economic decisions. Both concepts have fostered this pressure to the extent that these theoretical developments have reflected and reinforced social movements, demanding a higher degree of social embeddedness from companies.

However, stakeholders have incorporated ethical values in their economic decisions only partially and selectively. In addition, even in those cases, when stakeholders have made it clear that companies must achieve social and environmental performances, managers have shown their reluctance to sacrifice profits in favor of the common good. This reluctance, labeled as managerial capture, has turned the discourse of CSR/CC into PR exercises rather than endeavouring to rethink and reshape corporate internal management, which is usually a more difficult task to accept and tackle. The risk of managerial capture may have been aggravated by the tendency of justifying CSR/CC on economic grounds. This instrumental vision of these concepts has helped little in improving the social control of companies.

The risk of managerial capture and the fact that consumer views are not always incorporated into their market decisions, due to external constraints, and the risk of managerial capture demand a second condition to ensure corporate accountability: a system change. To put it in a nutshell, this change implies accepting that the common good is more important than the right to receive a dividend, and that social and environmental performance must be balanced with economic performance. This paradigm of the firm should be adopted by economic agents (especially shareholders), by managers, and by regulators. Regulation should provide citizens with political means to sanction corporate social and environmental failure.

When these concepts are presented with a normative aim, they support this change of paradigm. However, CC has rarely been oriented by this normative aim. Hence, CSR presents more advantages to advancing the social control of companies and should be considered a superior theory vis‐‐vis achieving social control of companies. By exploring and spreading the normative basis for CSR, a system change will be achieved.

About the author

CSR VISION
CSR VISION is India's (probably World's) first monthly magazine in print devoted to CSR and Sustainable Development for bringing together all stakeholders of SUSTAINABLE DEVELOPMENT at a global and local levels and act as a platform for promoting strategic CSR and sustainable development practices through dissemination of information and knowledge.