Edition 50, Strategy

The Problem of Corporate Social Responsibility

By: Antonio Lloret
Instituto Tecnológico Autónomo de México

Corporate social responsibility is in decadence. Despite being an attractive and fashionable topic, it is not a sustainable trend, and it is destined to disappear if it is superficially adopted, by way of certifications or seals of endorsement and without the actions of responsibility permeating the interior of the firm.

For a firm’s behavior to really be maintained and changed, it is necessary to institutionalize it and link it to the firm’s strategy.

Corporate social responsibility is attractive because it is seen as an active and voluntary contribution by the firm towards the solution of complex problems and toward social, economic and environmental improvements. In Mexico in recent years there is a growing number of companies that have become socially responsible. If one takes into account the public data and indicators that are relevant to the matter, there has been an extraordinary increase in the number of companies that have obtained the seal of a Socially Responsible Business (ESR® in Spanish) that is granted by the Mexican Center for Philanthropy (CEMEFI). From the year 2000 until the last report in March of 2014, the number went from 10 businesses in 2000 to more than 900 in 2013.i

Also, there has been significant growth in the Global Reporting Initiative (GRI®), which is the worldwide standard that is used to report practices of social responsibility by businesses. Created in 1999, to date it has logged 18,488 reports around the globe. In Mexico, the number of companies reporting to GRI® went from one (Industrias Peñoles was the first) in 2005 to 33 in 2013.

Several of the companies reporting, but not all, are public companies on the stock exchange and are part of the Sustainability Index of the Mexican Stock Exchange. This index comprises only those public companies that are on the stock exchange and have been graded on the environmental, social and corporate governance topics as companies with social responsibility.

Compared with the Mexican Stock Exchange’s Index (IPC, for Índice de Precios y Cotizaciones), the Sustainability Index has given, on average, a simple average yieldii of 33%, compared to the average annual yield of the IPC, which, in the same period, rendered 19.8%. It is a fairly attractive return if one considers that the CETES rate (Govenrment bonds), in the best of cases, is around 3% annually.iii However, there is a reasonable doubt as to whether the extraordinary returns are the result of firms in this index being “super companies” or because they are socially responsible companies. Let’s give the benefit of the doubt to the second reason.

So the data seem to suggest that the adoption of a social responsibility is a growing trend and even a source of competitive advantage. If this is the case, then it is worth asking if this trend is sustainable over time, if it is a long-term phenomenon, if it goes beyond a series of good intentions, and if it is here to stay.

From my point of view, the answer is no.

Corporate social responsibility is not sustainable over time, and it is not so because it is sold and seen as an attractive idea, a trend in which adoption occurs due to pressure exerted by actors such as the media, universities, civil society organizations and even governments, and one in which sometimes the main goal is to obtain a seal, an emblem, a registration, an accreditation or a certification. The intentions are laudable, but they do not always permeate the firm and thus they end up only on the surface.

Moreover, corporate social responsibility has a problem with its origin. While it is understood as the active and voluntary contribution of the firm toward social, economic and environmental improvement, the firm, which is composed of people, cannot be personified but by those individuals who run it, and thus it is the individual, not the firm that can be socially responsible. This argument had been put forth before in 1970 by Milton Friedmaniv, who suggested that the firm’s only social responsibility is to increase its profits and that the economic impact of its activities, at the end of the day, would generate economic, social and environmental improvement.

Thus the challenges are twofold: First, that given the depersonalization of the firm, the individuals who compose it opt for the institutionalization of the actions of responsibility; otherwise, if the actions are developed and approved by the same people who generate them, there is a vacuum in their application. Second, that the actions of responsibility be linked to the company’s mission, and, as a result, be aligned with the firm’s strategy.

So, if the superficial version of corporate social responsibility is destined to disappear, how is it possible to permeate the firm with responsible actions that will last and be linked to the strategy?

One possible answer is that there is an underlying model of business management that incorporates, within the firm, business strategies with formal and institutionalized processes that are able to address the complexity and limits imposed by the social, economic and environmental systems and that allow the firm to generate value over time. But first let us understand the topic within a national context, so we can then describe the model at hand.

According with the Business Information System (known as SIEM) within Mexico’s Secretariat of Economy, 681,723 companies in the country are registeredv, and of these, 5.7% are companies with more than 50 employees that account for about 65% of total gross production and employ just over 25% of the labor force (INEGI, 2010).

If it were the case that small businesses individually have less impact compared to large businesses (although as a whole it can be significant), or that they lack the economic resourcesvi to adopt social responsibility systems or that they are simply unaware of the issue, their incentives are smaller than those of the large companies.

As for the large companies, based on a studyvii conducted in the ITAM in 2012 of the 500 most important companies in Mexico and according to the list published by Expansión magazine between 2009 and 2011, it appears that only about 50% of the firms have some kind of social responsibility system, while the rest are not sure what the topic means or simply are not interested. Of the 50% that do carry out socially responsible actions, only 53% have institutionalized it by adopting some sort of a formal management system.

If we extrapolate the results, we could conclude that, in the best of cases, only one out of every four firms of the most important companies of Mexico have a clear social responsibility strategy. The reason why many have not adopted one could very well be because companies do not consider its use beyond that of good intentions, or because, once incorporated, eventually they become disenchanted since they expect immediate returns.

The study also found three main incentives for which the companies have adopted actions of responsibility. These are: (1) because it is beneficial to comply with national or international regulation, as it facilitates the implementation of current standards; (2) because there is leadership in the firm that directs them to do so; and (3) to open new markets.

The results help to show that there are specific incentives that firms follow and that these are not isolated efforts but actions that respond to a management model that suggests that actions of social responsibility are characteristic of the firm, without the need for them to be “socially responsible,” at least not in the company etiquette.

Those three incentives show, besides, that they are not products of a trend, but they are part of the “guts” of the firm and that they comply with at least two characteristics: (1) they are linked to the strategy and (2) they are institutionalized. This management model is called the “corporate sustainability model.”viii

The corporate sustainability model also has a characteristic that functions if and only if its cornerstone is the long-term view. And here it makes sense to think that actions of social responsibility or its variants generate value, for they are linked to competitiveness, which is a long-term phenomenon. However, it is an indispensable requirement to have a strategyix that allows the company to meet its objectives.

The connotation of long-term is important. Competitiveness understood “as once in a while” is just an illusion. Thinking that way implies generalizing that a good business deal will recur forever, which is a fallacy that is alien to the concept of competitiveness. In fact, the long-term competitive advantage is known as the “supportable or sustainable competitive advantage.”

Now then, let us think for a moment about the theme of sustainability. Of the many definitions of sustainabilityx, the most classic one refers to the ability to live within limits imposed by the environment, taking into account the interconnection between the economic, social and environmental systems, and maintaining the equity of the resources and opportunities for future generations.

This means that the firm must generate value over time, considering the restrictions imposed by the economic, social and environmental systems, which make the business decisions subject to the limits imposed by said systems.

For example, one economic limit is the plant’s production capacity. In the social environment, individual preferences for goods and services are a restriction, and in the environmental system, the scarcity of a basic component such as energy. These restrictions limit the level of competitiveness that a business can attain, and therefore, its permanence. To ignore their existence is like thinking that business decisions are lineal. Thus, the integration of sustainability practices in the business is key for its survival, for such practices, when well established in the strategy, are a source of competitive advantages.

To summarize, a firm’s competitiveness only makes sense in the long term and is subject to limits imposed by the economic, social and environmental systems. Sustainability aligned with strategy is the key to making the business more competitive. Let’s see how we can bring together these ideas to develop a business model as shown in Figure 1.

Figure 1. Model of Corporate Sustainability

The model of corporate sustainability is composed of three elements: the first, in the lower part, where one finds the restrictions and limits imposed by the economic, social and environmental systems; the second, at the far left, which represents the firm’s leadership based on having a corporate governance and leadership that allows it to make important decisions to lead the firm to generate value; and third, in the center, showing the company’s strategy. We are particularly interested in the company’s strategy, for that is where the actions of responsibility are located.

As to strategy, the model of corporate sustainability is supported by three views: the market view, the resources based view, and the institutional view. These elements that support the company strategy are the ones that lead to the achievement of competitiveness.

The first element, the market view, is based on the classic argument of a competitive advantage based on leadership in costs and on leadership in differentiation or in benefits (Porter, 1985). On the one hand, this support is the catalyst for the preferences of individuals and, on the other, the generator of operating margins. A company that generates greater perceived profits compared to the competition will be able to generate greater value, while, if it is able to reduce costs through strategic actions, it will obtain a greater operating margin.

From the point of view of differentiation, sustainability is an element that increases the company’s attributes and can increase the differentiation and increment the capture of value, while, on the cost side, Porter and Van der Linde (1995) propose that it is through the optimization of resources that an increase in productivity is possible, and, as a result, a reduction in costs.

The idea, in reality, is that actions of responsibility are geared toward increasing differentiation and reducing operating costs, and these do not necessarily derive from social responsibility but from the commitment of management that allows the firm to address the challenges inherent in seeking alternatives that yield more value to the client at a lesser cost.

The second model of corporate sustainability is based on the view of resources and capabilities (Barney, 1991; Hart, 1995; Russo and Fouts, 1997). According to this idea, the company proposes to use and exploit strategic assets, resources and capabilities bases on tangible and intangible assets that enable it to continue being competitive. This position considers that the resources and capabilities of a company create value when they are valuable, rare, inimitable and adaptable to the organization in a purely business context or as an expansion of natural resources (Hart, 1995) while considering that the strategic assets are subject to biophysical limits set by the environment itself.

In addition, Hart argues that the biophysical limits that are imposed can be a source of competitive advantage. One way to obtain new capabilities and resources based on the limits of natural resources is to develop the view of a sustainable company. Companies can gain advantages through waste reduction, the design of new products and technologies, the integration of stakeholders in the decision-making process and, most importantly, by having a long-term view (Hart, 1995). This is definitely the way that results in the key link with ecology, the environment and the company.

Finally, the third element, the institutional theory, or the new institutionalism, has been considered recently in the literature of management by Peng et al. (2009), among others.

Peng suggests that the source of competitive advantage is found within the institutional limits established inside and outside of the company. However, it is necessary to go beyond the limits and establish the institutional view as an essential factor to understand corporate sustainability. If one considers classical definitions, the institutions are the precepts, laws, rules, codes, customs and traditions that determine our behavior. Thus, boundaries are established between which individuals, businesses and governments take actions. Their main attribute is to provide certainty to business operations and reduce transaction costs.

In this sense, the view of the company’s institutional theory of the company indicates that the normative or cognitive framework establishes limits along which the organization moves, formally or informally. For sustainability to exist, it is essential to have an institutional view, because the company is subject to regional, national and international regulations, as well as internal self-regulatory mechanisms that determine its behavior. The ability to adapt to the institutional conditions gives the company the ability to generate long-term strategies that help it create, capture and generate value.

In summary, the business model of corporate sustainability is subject to the limits imposed by the economic, environmental and social systems. The company’s strategy should be long-term, so that it can assure competitiveness. For that, it is necessary to incorporate the concept of sustainability into the business model, which is achieved with three elements: (1) the market view, (2) the view of natural resources, and (3) the institutional view.

A strategy akin to the three elements can adapt and react more quickly to changes in the environment, thereby reducing risk exposure, since the three elements allow the company to adopt a longer-term perspective to create, generate and capture value.

In conclusion, unless corporate social responsibility is modified to move from something superficial to a management model based on its institutionalization and linkage to strategy, so that it becomes a model of corporate sustainability, there is a great risk of missing a golden opportunity. It is important to take advantage of the power that the business sector has to change the behavior of businesses, governments and society, and to not waste the opportunity that social responsibility offers to do things right. That opportunity may not be seen again.

References

  • Aigner, D.J., and A. Lloret, “Competitiveness and Sustainability in Mexico,” Management Research Review, Volume 36, Issue 12, pp. 1252-1271, 2013.
  • Barney, J.B., “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17(1), pp. 99-120, 1991.
  • Clarkson, P.M., Li, Y., Richardson, G.D., and F.P. Vasvari, “Does it really pay to be green? Determinants and consequences of proactive environmental strategies,” Journal of Accounting and Public Policy 30(2), pp. 122-144, 2011.
  • Hart, S.L., “A Natural-Resource-Based View of the Firm”, The Academy of Management Review 20(4), pp. 986-1014, 1995. Available at http://www.jstor.org/stable/258963
  • King, A., and M.J. Lenox, “Does It Really Pay to Be Green? Accounting for Strategy Selection in the Relationship Between Environmental and Financial Performance,” Journal of Industrial Ecology 5(1), pp. 105-116, 2001.
  • Russo, M., and A. Fouts, “A Resource Based Perspective on Corporate Environmental Performance and Profitability,” Academy of Management Review, 40, pp. 534-559, 1997.
  • Orlitzky, M., Schimdt, F.L., and S.L. Rynes, “Corporate Social and Financial Performance: A Meta-analysis,” Organization Studies 24(3), pp. 403-441, 2003.
  • Peng, M., “The Institution-Based View as a Third Leg for a Strategy Tripod,” Academy of Management Perspectives, Vol. (23), Number 3, pp. 63-81, 2009.
  • Porter, M.E., and C. van der Linde, “Toward a New Conception of the Environment-Competitiveness Relationship,” The Journal of Economic Perspectives, 9(4), pp. 97-118, 1995.
  • Thompson, Strickland and Gamble, Crafting and Executing Strategy, McGraw-Hill/Irwin, 2008.

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i CEMEFI grants the ESR® seal annually, and while there are companies that have obtained it for as long as 14 years, there are firms that have left and have not continued to report to CEMEFI and may not be continuing to carry out social responsibility actions.

ii The calculation was made by BMV for the period from November 2008 to February 2014, although the sustainability index starts trading in December 2011. Information available at http://www.bmv.com.mx. Date of page view: June 10, 2014.

iii Current CETES rate at 182 days is 3.05%. Source Bank of Mexico. Information available at http://www.banxico.org.mx. Date of page view: June 10, 2014.

iv In fact, his position was misinterpreted by the media, since Friedman, as a good libertarian immersed in the Cold War climax, aimed his criticism particularly at the fact that the government was passing on responsibilities to the firm, dictating what it should do in the way of Social Responsibility.

v SIEM only evaluates companies registered voluntarily in its database. INEGI, meanwhile, has a database from the National Statistical Directory of Economic Units (DENUE), which ranges from businesses, micro and small businesses to large corporations, including subsidiaries, factories or establishments incorporated with other firms. In the latest update of DENUE 2013, INEGI reported 4.4 million economic units, of which 47,388 are economic units with more than 50 employees, or 1.07%. Date of page views for INEGI and SIEM: June 10, 2014.

vi According to Expok, a consultant on Social Responsibility topics, the ESR® certification can range from 12,000 to 50,000 pesos, plus the cost of the consultation and the investment to implement social responsibility systems. Source: Expoknews of December 11, 2013, in http://www.expoknews.com/cuanto-cuesta-obtener-el-distintivo-esr/. Page View Date: June 10, 2014.

vii The results of the study, supported by the Mexican Association of Culture A.C., and funded by UCMEXUS-CONACYT are published in Aigner and Lloret, 2013, Management Research Review (36) 12 and can be requested from antonio.lloret@itam.mx.

viii The link between competitiveness and corporate sustainability is found in the literature on financial performance and environmental and social performance (for example, Clarkson et al, 2011; King and Lenox, 2001; Orlitzky et al., 2003). The results indicate that a company that strives to improve its environmental and social performance also achieves, over time, a positive financial performance.

ix According to Thompson et al. (2009), the strategy consists of the competitive moves and business management that administrators employ to grow the business, attract and satisfy consumers and compete successfully through operations with which organizational goals are achieved.

x Which by the way is a word borrowed from English and has it no translation into Spanish despite the fact that its use in business is already accepted and it has been adopted.

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