Corporate Social Responsibility and Sustainability

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Dec 12, 2014 - Business operation works within the environmental system. The resources .... New approaches like planning water, energy, transportation, buildings and .... stored on land as ice sheet especially in Northern Hemisphere. ...... Follett. (1995) argued that if a standard is induced externally, independent think-.
Professor Ishak Ismail Universiti Sains Malaysia (USM) “I commend this book to all who have a current interest and understanding of CSR; to those wishing to improve their theoretical and practical understanding of CSR and to those contemplating the implementation of CSR to benefit from the many advantages of its adoption.”

Associate Professor Wayne Binney Deakin University, Australia “The content of this book is timely as the structure of the book will provide additional insights into the concepts of CSR and the strategic implications of embedding CSR into corporate strategies.”

Associate Professor Faizah Darus Head Asia-Pacific Centre for Sustainability (APCeS) Universiti Teknologi MARA (UiTM), Malaysia

Corporate Social Responsibility and Sustainability

“Businesses bottom line is not only about dollars and cents. It is giving back to the society and preserving the environment for the sake of tomorrow. This book says it all.”

Corporate Social Responsibility and Sustainability Contemporary Perspectives

Mehran Nejati Ali Quazi Azlan Amran

Mehran Nejati

Ali Quazi

Azlan Amran

Corporate Social Responsibility and Sustainability Contemporary Perspectives

Edited by Mehran Nejati Ali Quazi & Azlan Amran

Singapore London New York Toronto Sydney Tokyo Madrid Mexico City Munich Paris Cape Town Hong Kong Montréal

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Published by Pearson Malaysia Sdn Bhd Level 1, Tower 2A, Avenue 5 Bangsar South No. 8 Jalan Kerinchi 59200 Kuala Lumpur Malaysia

Custom Solutions and Delivery Director: Ang Teck Chuan Custom Solutions Manager: Lucy Cook Content Development Manager: Esther Yap

Pearson Asia Pacific offices: Bangkok, Beijing, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Seoul, Singapore, Taipei, Tokyo

Printed in Malaysia

4 3 2 1 17 16 15 14

ISBN

978-967-349-67​2-3

Cover Art:

Copyright © Pearson Malaysia Sdn Bhd 2015. All rights reserved. This publication is protected by Copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department.

www.pearson.my

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Dedicated to our wives: — Azadeh, Meherun and Norhana- for all their continuing support and compassion.

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All chapters in this book have been subject to peer review. The authors are solely responsible for the contents of their respective chapters and the editors do not take any responsibility for the ideas, comments and opinions presented in the chapters published in this book.

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Foreword This book is a very useful addition to the growing literature on corporate social responsibility and sustainability management. It is a direct response to the needs of private and public sector managers at all levels to engage directly in managing sustainability as part of an overall drive to increase levels of corporate social responsibility. The chapters in this book cite examples from a number of business sectors including banking and energy, discuss issues facing both large and small organisations, and in many countries including those from the EU, Japan, and Australasia with a particular focus on Malaysia where many of the authors are located. Community engagement is highlighted, an issue often overlooked, but one that matters increasingly as sustainability limits are approached. The authors come from many countries and bring to their writing a wide range of backgrounds in both scholarly research and direct management. I welcome the initiatives that brought this book to a timely fruition. Roger A. Layton AM Emeritus Professor Australian School of Business University of New South Wales Australia

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Foreword One of the major contributions of this timely book is that it exposes the myth that Corporate Social Responsibility (CSR) is only the concern of the ‘corporates’. CSR has matured to influence the activities of a wide range of stakeholders including business, consumers and the entire community. The book also clearly demonstrates the multidisciplinary nature of CSR and this is achieved by drawing together a comprehensive team of contributors who possess the breadth and depth of CSR knowledge to cover this complex task. The chapter structure guides the reader through the development of CSR and provides a solid understanding of the distinctive phases that provide the basis for current understanding of CSR. This provides in the first series of chapters an introduction to those who are new to the topic and a reminder for those who are more conversant with it. The next series of chapters discuss the managerial aspects of CSR with particular emphasis on the strategic and tactical applications of the paradigm. Following this, the chapters provide examples and guidelines for the possible widespread implementation of CSR through stakeholder engagement. The final section of this book addresses some of the contemporary issues surrounding CSR and the financial implications of its adoption. The final chapter provides discussion to offset the criticisms by those who believe that benefits derived from CSR adoption are a cost burden for business. I would like to congratulate the authors for their vision for this book and on their achievement of bringing this vision into reality. I commend this book to all who have a current interest and understanding of CSR; to those wishing to improve their theoretical and practical understanding of CSR and to those contemplating the implementation of CSR to benefit from the many advantages of its adoption. Finally, my best wishes to the authors on the ­success of this publication. Wayne Binney Associate Professor and Associate Head Deakin Graduate School of Business Deakin University, Melbourne, Australia

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About Editors Dr. Mehran Nejati is a Senior Lecturer at Graduate School of Business, Universiti Sains Malaysia (USM). He received his PhD degree from USM, for which he was awarded the Vice-Chancellor Award. His main areas of research expertise include social responsibility, sustainability and busi­ ness ethics. He demonstrated further research excellence by successfully completing a one-year post-doctoral fellowship in CSR and sustainability field. He has published numerous papers in International peer-reviewed journals and is currently serving on editorial board of several indexed journals. He has also worked as an industrial engineer and process improvement consultant in the Middle East. He holds a Certified Six Sigma Green Belt by ­American ­Society for Quality (ASQ), and is a Certified Sustainability ­Reporting ­Specialist (CSRS). Dr. Ali Quazi is a Professor of Marketing within the School of Management at the University of Canberra, Australia. He received his PhD degree from the University of New South Wales, Australia. Internationally known for his research on CSR, Professor Quazi has published 112 articles in the leading international journals and conference proceedings including the Journal of Business Ethics, Social responsibility Journal, Journal of Corporate Citizenship, Business and Professional Ethics Journal, Journal of Environmental Management, European Journal of Marketing and the Journal of Marketing Management. He is on the editorial boards of six refereed international journals. His work has been cited (over 1,000 to date) globally including the Oxford Handbook of Corporate Social Responsibility. He has received a number of awards for his academic excellence including the Australian National Award for Citation for Outstanding Contributions to Student Learning, Vice-Chancellors Teaching Excellence Award, Dean’s Best Researcher Award and Best PhD Advisor (supervisor) Award by the International Consortium for Electronic Business. Dr. Azlan Amran is currently an Associate Professor at Graduate School of Business, Universiti Sains Malaysia. His key research interests include corporate social reporting, corporate social responsibility and sustainability issues. He has published a significant number of articles in the area of CSR in both local and international journals. He is currently supervising PhD, MBA, and Masters candidates in CSR. At present, he holds the position of Deputy Dean (Academic and Student Affairs) at the Graduate School of Business. In terms of practical experience, he has been involved in several training

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x  About Editors

and consultancy projects in Accounting-related issues and Corporate Social Reporting. He is currently holding several grants to support his research on CSR-related issues. He is also a member of the editorial board for several international journals. At the national level, he is a Technical Committee member for ISO 26000.

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About Contributors Dr. Rute Abreu is an Accounting and Finance Professor and Chair of the scientific area at the Instituto Politécnico da Guarda, Portugal, since 1990. She earned the PhD Degree in Accounting and Finance from the Universidad de Salamanca, Spain and teaches financial analysis, corporate finance, schedule and appraisal investment, auditing, financial accounting, taxation, firm valuation and social responsibility management. She develops activities with Social Responsibility Research Network and Global Corporate Governance Institute. Her research focuses on CSR, corporate governance, accounting and firm valuation and has published in several international journals. She regularly participates in scientific activities all over the world as well as organises conferences and SR meetings. Dr. Giacomo Boesso is an Associate Professor of Business Administration at the University of Padova (Italy). His research interests cover non-profit governance, corporate sustainability and stakeholder management. He teaches introduction to Business Administration and Strategic Planning both at undergraduate and graduate levels. His papers have appeared in Accounting, Auditing & Accountability Journal, Corporate Social Responsibility and Environmental Management, Accounting Forum and others. Dr. Boesso is the director of the Master in Business and Management, a joint program of UNIPD with ISIPCA and Paris Chamber of Commerce (France) and the director of the International Summer Program in Management – US segment, a joint program of UNIPD with University of Michigan-Dearborn (USA). Dr. Bao-Guang Chang is a Professor of Department of Accounting at Tamkang University in Taiwan and teaches Managerial Accounting and Financial Statement Analysis. He completed his PhD degree at Department of Accounting, National Chengchi University, Taiwan. His research areas include managerial accounting, issues in firms’ ethics and efficiency analysis. Dr. Don Clifton holds an academic position in the University of South Australia Business School. He lectures in ethics, governance and sustainable business in the UniSA MBA Program. His areas of expertise and interest include Ecological Footprint, Global warming (in particular, the political environment in which it is being played out and initiatives to address the issue), Government and business initiatives to address (or not address) environmental issues, Corporate Social Responsibility and the role of business

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xii  About Contributors

in society in addressing environmental and social justice issues, and Population policy and its implications for a sustainable future. Dr. Fátima David is an Accounting and Finance Professor in the Business and Economics Scientific and Technical Unit, since 1991 within the Technology and Business Higher School at the Instituto Politécnico da Guarda, Portugal. She teaches several courses in the Accounting and Management degrees, such as financial analysis, corporate finance, financial accounting and taxation. She also teaches master degree programs, such as Taxation, Firm Valuation and Social Responsibility Management. She received her PhD Degree in 2007 in Accounting and Taxation from the Universidad de Salamanca, Spain. She is the Accounting Degree Director and is responsible for developing activities with social responsibility research network. Her research has been published in several journals. She also organises and participates in conferences. Dr. Robyn Eversole is the Director of the Institute for Regional Development (IRD) at the University of Tasmania, Australia. She is an anthropologist of development who has worked extensively with local communities and organisations in Australia and Latin America over the past 18 years. A tenured Associate Professor, Robyn supervises numerous PhD research projects on local development issues across Australia, Africa and Latin America. She is the author of over 50 scholarly and practice-focused articles on local and community development, as well as three edited collections including, Participation and Governance in Regional Development (2005) and Indigenous Peoples and Poverty in International Perspective (2005). Her most recent book is Knowledge Partnering for Community Development (Routledge, October 2014). Ms. Adeline Goemans has a Master in Human Resources from the University of Liege. She took part in research studies on Corporate Social Responsibility in companies and Expatriation. After an experience in recruitment in an international company, she is currently the HR manager in a small business organisation. Dr. Dessy Irawati gained her PhD in International Business Strategy and Economic Geography from Newcastle University Business School, UK. In 2011, she was awarded the FeRSA title, from the Regional Studies Association. Her disciplinary background lies in International Business Strategy, Economic Geography, and Regional Studies. She has researched and taught international business management, entrepreneurship, investigating overlaps with the fields of strategy, organisation and learning. Additionally, she researches on innovation and regional development in the knowledge economy, in areas such as agglomeration, industries and networks. Her extended research

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About Contributors  xiii

expertise include international business strategy, multinational enterprises (MNEs), small and medium-sized enterprises (SMEs) and entrepreneurship, innovation and technology management, globalisation and development studies, cluster-based policy and networks, industrial dynamics and knowledge transfer. Dr. Irawati is currently an executive consultant and business representative to the Bank Negara Indonesia (BNI) in the Netherlands. Dr. Kamalesh Kumar is a Professor of Business Strategy in the College of Business of the University of Michigan-Dearborn, where he has been teaching graduate courses in Business Strategy and Managing Strategic Innovation and Change since 1993. He is also a visiting faculty at the William Davidson Institute, of the University of Michigan, Ann Arbor, at the University of Padua, Italy. Although Prof. Kumar’s research interests are interdisciplinary, in recent years, his research activities have focused on stakeholder management and its implications for strategic performance of a company. His research works have appeared in Academy of Management Journal, Journal of Applied Psychology, Journal of the Academy of Marketing Sciences, Journal of Management, Journal of Health Care Marketing and Health Care Management Review. Prof. Kumar is actively involved in management education and executive training programs, in the US and abroad. Dr. Lopin Kuo is a Professor of Accounting at Tamkang University in Taiwan. Kuo’s current research involves activity-based costing (ABC), corporate governance (CG), environmental disclosure and carbon management in Japan, corporate social responsibility (CSR) in China, and education for sustainability. Dr. Giovanna Michelon is an Associate Professor of Accounting at the University of Exeter Business School (UK), which she joined in May 2013. She holds a PhD in Economics and Management (Accounting Track) from the University of Padova (Italy), where she formerly had a position as Assistant Professor. Her research interests include social and environmental accounting, corporate social responsibility and governance. Her research papers have been published in the Journal of Business Ethics, Accounting, Auditing & Accountability Journal, Accounting and Business Research, Corporate Social Responsibility and Environmental Management and others. Dr. Monir Mir is a Professor of Accounting in the School of Information Systems and Accounting, University of Canberra, Australia. He holds a PhD in Public Sector Reform and Accounting from the University of Wollongong, Australia. Earlier, he received an MBA from the Catholic University of Leuven, Belgium. He has published extensively on public sector, not-for-profit and voluntary organisations and supervised PhD students to completion

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including publishing and supervising in the areas of corporate social responsibility. He has extensive consultancy experience including experience in overseeing large projects funded by the World Bank. He is currently on the board of a number of not-for-profit voluntary organisations. He is a Fellow of CPA Australia (FCPA), a Chartered Accountant (CA), a Fellow of Cost and Management Accountants (FCMA) and a former bank executive. Dr. Abu Mollik is an Assistant Professor in the School of Information Systems and Accounting, University of Canberra, Australia. He holds a PhD in Finance from the Australian National University. He has independently and collaboratively undertaken and successfully completed 16 externally (including CPA Australia and the World Bank Projects) and internally funded research projects and published in excess of 48 articles in the peer-reviewed quality international and national journals and conferences. He has supervised PhD students in the areas of corporate social responsibility. Most of his studies are based on applying sophisticated quantitative methodologies, including regression analysis to cross-sectional, time-series and pooled timeseries and cross-sectional (panel) data, vector auto-regression (VAR), unit root and co-integration analysis and structural equation modelling. ºDr. Andrea Pérez is a Lecturer in Marketing at the University of Cantabria (Spain). Her research interests include corporate social responsibility, business communications and consumer behaviour. She focuses her research on the banking and tourism industries. She has produced more than 70 scientific contributions. She has published papers in internationally renowned journals such as International Journal of Hospitality Management, Corporate Social Responsibility and Environmental Management, Psychology & Marketing, European Journal of Marketing, Journal of Business Ethics, Journal of Services Marketing and Service Business. She is the author of three books and three book chapters in CSR and marketing. She has also participated in numerous international conferences. Mr. Vinod Periasamy is a Manager at B. Brown, Malaysia. He completed his MBA at Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia. Mr. Peter Rampling is currently completing his PhD from the Southern Cross University, Australia in the area of corporate financial sustainability. Previously, Peter has worked in the Australian Private sector as an Accountant for 22 years before entering the University Sector for 15 years. He possesses a Bachelor of Financial Administration and Master of Economics from the University of New England, Australia.

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About Contributors  xv

Dr. Jocelyne Robert is a Professor at HEC-Management School of the University of Liege in Management, Organizations and People management. She holds a PhD in Social Science from the Universitélibre de Bruxelles and has an Executive Master in Marketing and Advertising from Solvay Brussels School of Economics and Management. Her domain of research is in Ethic, Leadership and International Staff Management and Professional. She is currently the Director of Management Department at the University of Liege, Belgium. Dr. Ignacio Rodríguez del Bosque is a Professor of Marketing at the University of Cantabria (Spain). His areas of research include business communication, relationship marketing and distribution channels. He has published his work in more than 40 international journals such as Journal of Retailing and Consumer Services, Tourism Management and Industrial Marketing Management. He has also participated in numerous international conferences in marketing such as EMAC, ICMC and Marketing Trends.

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The Structure of the Book The chapters of this book consist of research-based contributions of the authors and are distributed in four sections in terms of the major themes covered in the respective chapters.

Section 1: Introduction and Background This section has two chapters which set the stage for discussion of corporate social responsibility (CSR) and sustainability issues and inform readers of the progression of CSR and sustainability in terms of their growth and development in theoretical and practical terms. The chapters also provide an update of present state of CSR and sustainability. In particular, Chapter 1 digs deep into the various stages of development of CSR over the past and the relevant literature contributing to the shaping and nourishment of those distinctive phases leading to the modern era of CSR. Chapter 2 presents a vivid account of the current state of business practices at the present time that are shaped in response to the dynamic changes caused by environmental and social imperatives.

Section 2: Managing CSR and Sustainability The three chapters within this section explore the managerial aspects of CSR and sustainability in general and strategic perspectives in particular. Since CSR and sustainability issues are increasingly emerging as strategic issues, these chapters would particularly inform readers of the developments in the strategic and tactical arenas that are currently generating interests in the academic and business circles. Chapter 3 introduces the issues concerning strategic realm of sustainability and discusses how organisations might go about effectively addressing CSR/sustainability issues at a strategic level. Chapter 4 explores a novel way of looking at the relationship between business and society in which corporate success and social welfare are not considered necessarily as a zero-sum game. This chapter also presents frameworks such as social value co-creation and stakeholder prioritisation that firms can use to identify the positive and negative effects that these have on society and to determine which ones to address and also how to do so in an effective way. Chapter 5 presents the results of an empirical analysis in the Spanish banking industry demonstrating how CSR and stakeholder management can be instrumental in managing and overcoming the negative consequences of a crisis in an effective manner.

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xviii  The Structure of the Book

Section 3: CSR and Sustainability Implementation This section comprises three chapters and is devoted to exploration of some of the leading implementation issues that are currently considered critical in putting CSR and sustainability into action at the organisational and community levels. In specific terms, Chapter 6 addresses the concept of community engagement resulting in creation of value added for socially sensitive organisations. Chapter 7 highlights the major types of social responsibility and stakeholders that are considered critical by businesses. The chapter also identifies the means through which firms can achieve the sustainable development and social responsibility goals. Finally, Chapter 8 offers insights into the perception of CSR among small businesses and presents results of an empirical study in Malaysian setting to provide evidences of such perception followed by analysis and interpretation of the findings.

Section 4: Contemporary Issues and Practices in CSR and Sustainability The three chapters in this section focus on some of the contemporary issues and perspectives in CSR and sustainability that are considered central to the practices and performances of businesses and are driven by major stakeholder groups at the present time. In particular Chapter 9 offers results of an empirical study towards answering a contemporary question as to why accounting for citizenship leads to promote best socially responsible practices, while Chapter 10 identifies CSR-related practices of environmental management among contemporary Japanese firms since the historical Kyoto Protocol was put in place. Finally, Chapter 11 examines the emerging environmental and financial performance issues by empirically investigating the link between these burning issues in the energy sectors in Australia and New Zealand. Section 1: Introduction and Background -The CSR Journey (Ch. 1) -CSR and Businesses Today (Ch. 2)

Section 2: Managing CSR and Sustainability Section 3: CSR and Sustainability -Business Strategy and Implementation a Sustainable World -Community (Ch. 3) -Strategic and Proactive Engagement (Ch. 6) CSR (Ch. 4) -CSR and Stakeholder Management (Ch. 5)

Section 4: Contemporary Issues and Practices

-Organisation and Sustainable

-Accounting for Citizenship (Ch. 9)

Development (Ch. 7) -CSR for Small Firms (Ch. 8)

-Information Disclosure of Environmental Sustainability (Ch. 10) The Association Between Environmental Performance and Financial Performance (Ch. 11)

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CONTENTS Section 1 Introduction and Background . . . . . . . . . . . . . . . . . . 1

Chapter 1 The CSR Journey: Looking Through the Evolutionary Lens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Ali Quazi, Mehran Nejati, Azlan Amran Chapter 2 Corporate Social Responsibility and Businesses Today . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Azlan Amran, Mehran Nejati, Ali Quazi, Vinod Periasamy Section 2  Managing CSR and Sustainability

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Chapter 3 Business Strategy and a Sustainable World . . . . . . . . . . 41 Don Clifton Chapter 4 Strategic and Proactive Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Giacomo Boesso, Kamalesh Kumar, Giovanna Michelon Chapter 5 CSR and Stakeholder Management in the Banking Industry: Different Strategies and Consequences in a Crisis Context . . . . . . . . . . . . . . 81 Andrea Pérez, Ignacio Rodríguez del Bosque Section 3  CSR and Sustainability Implementation

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Chapter 6 Engaging Communities: Common Pitfalls, Uncommon Opportunities . . . . . . . . . . . . . . . . . . . . . . . 99 Robyn Eversole Chapter 7 Organisation and Sustainable Development: Towards a New Form of Social Responsibility?. . . . . . . 109 Jocelyne Robert, Adeline Goemans, Mehran Nejati Chapter 8 Embracing CSR for Small Firms: Insights from Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Mehran Nejati, Dessy Irawati, Azlan Amran

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xx Contents Section 4 Contemporary Issues and Practices In CSR and Sustainability

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Chapter 9 Accounting for Citizenship: Best Practices on Social Responsibility of Portuguese Foundations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Rute Abreu, Fátima David Chapter 10 Information Disclosure of Environmental Sustainability: Insights From Japanese Firms . . . . . . . . 165 Lopin Kuo, Bao-Guang Chang Chapter 11 The Association Between Environmental Performance and Financial Performance: A Study of the Electricity-Generating Companies in Australia and New Zealand . . . . . . . . . . 179 Monir Mir, Abu Mollik, Peter Rampling Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

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Preface Back in 2013 the members of the editorial team who share similar interests in corporate social responsibility (CSR) and sustainability field keenly felt the necessity of bringing out an edited book to address the need for such an academic source to scholars and practitioners interested in the field. ­Accordingly a plan was formulated and put into action immediately. Given the international nature of the topic, the team decided to make the book a true international publication. Invitations were then circulated internationally to potential contributors who are active in the field. This is how the enterprise started its journey. The response was enormous. We received a large number of manuscripts from around the world and after initial scrutiny 19 manuscripts were shortlisted for consideration for publication in the book. These manuscripts were then peer reviewed resulting in acceptance of 11 ­manuscripts. These manuscripts were edited by the editorial team and the authors were notified to check the originality, referencing styles and academic integrity of the respective manuscript. Upon receiving confirmation from the authors and subject to additional rounds of review and editing, the chapters were finalised to be included in the book. The accepted chapters were then placed in the four sections reflecting the leading contemporary themes of CSR and sustainability that are currently attracting a great deal of attention of academics, consultants and practitioners internationally. Thanks are also due to Professor Roger Layton and Associate Professor Wayne Binney for writing forewords, and to Professor Ishak Ismail and Associate Professor Faizah Darus for writing commentaries for this book. We would also like to extend their sincerest thanks to the contributors for supporting this enterprise. And also thank Pearson Malaysia for bringing the book to light within the scheduled time frame. Finally, the editors will consider this initiative a success if readers find this book to be useful. Mehran Nejati, PhD Universiti Sains Malaysia, Penang, Malaysia Ali Quazi, PhD University of Canberra, Australia Azlan Amran, PhD Universiti Sains Malaysia, Penang, Malaysia

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Section 1 Introduction and Background

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1

The CSR Journey Looking Through the Evolutionary Lens Ali Quazi, Mehran Nejati, Azlan Amran

Introduction Corporate social responsibility (CSR) has a longer history than what is generally believed. The concept of CSR which dates back centuries, is rooted deeply in the notion of ‘social contract’ which is ‘. . . a set of generally accepted relationships, obligations and duties between the major institutions and people’ (Steiner, 1972, p. 18). Social contract is considered as the ‘vehicle through which business behaviour is brought into conformity with society’s objectives’ (Wartick & Cochran, 1985, p. 759). Anshen (1970) noted that philosophers such as Thomas Hobbes (1651) and Jean Jacques Rousseau (1743) were among the early thinkers and contributors to the nourishment and growth of the concept of ‘social contract’. Buchholz (1986) presented an outline of old and new social contract as applied to business. The author argued that in addition to the old contract between business and society emphasising the delivery of goods and services, jobs and income, dividends and interests, business also has social obligations towards the emerging issues constituting a new social contract. The emerging issues in the new social contract deserve business attention and action which include the by-­products of business operations such as environmental degradation (e.g., pollution), unsafe products and working conditions, exposure to toxic chemicals and discrimination. Businesses are being urged to respond to these issues with a greater level of commitments and actions. Thus, it has been argued that social contract implies a ‘set of two-way understanding that characterises the relationship of business with society’ (Carroll, 1981, p. 9). As it is believed, modern CSR has been developed over the last several decades from a narrow, irrelevant, often relegated and self-contradictory ­issue to a complex, multifaceted and universally recognised notion influencing managerial decision-making (Lee, 2008; Cochran, 2007; McWilliams, Siegel, & Wright, 2006). However, it is not known exactly when modern CSR began its journey as pundits differ in their observations as to the origin and development of modern CSR. According to one view, Dodd (1932) is one of the early thinkers of CSR (Cochran, 2007). Dodd (1932, p. 1149) argued that large businesses are ‘permitted and encouraged by the law primarily because it is of service to the community rather than because it is a source of 3

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4  Chapter 1  The CSR Journey

profit to its owners’. Bowen (1953) is also believed to have coined the modern notion of CSR (Spencer & Butler, 1987; Lee, 1987; Wartick & Cochran, 1985; Davis, Frederick, & Bloomstorm, 1980; Sawyer, 1979). Bowen (1953, p. 6) argued in favour of CSR by highlighting that business has a responsibility 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’. There is another view by Bernard (1938), another pioneering author, arguing that businesses ought to be socially responsible. There is also a strong view that the Noble Laureate Milton Friedman laid the foundation of modern CSR by outlining the nature and scope of social responsibility of business in his momentous article titled, ‘Social responsibility of Business is to increase its profit’ published in the New York Times Magazine in 1970. This article triggered enormous controversies with regards to the definition and dimensions of CSR. Friedman took a conservative position by arguing that business is a single-dimensional entity devoted to only profit making within the legal framework. Friedman continued his line of argument in spite of bitter criticism of this thesis even after 19 years of publication of his controversial paper by affirming: ‘There is a very real social responsibility, and that is to make as much money as they (businesses) can subject to staying within the law and within the appropriate ethical standard . . . because that will best serve consumers’ (Friedman, 1989, p. 14)

Although a great deal of literature developed on CSR discourse in the post Friedman’s era, a literature search reveals that discussions on CSR issues were apparent in the contemporary literature even before 1970s, bulk of which were in line with Friedman’s thesis, ‘business of business is business’ (See DeGeorge, 1982; Dodd, 1932; Berle, 1954; Hass, 1960; Heyne, 1968). Support for Friedman’s orthodoxy proposition also continued in the 1970s (see Chamberlain, 1973) and beyond. In view of the above backdrop, this opening chapter aims to explore the journey that CSR has gone through at its different stages of growth with particular emphasis on the contributions made to the CSR journey by ­Friedman’s (1968, 1970) one-dimensional thesis of CSR, Carroll’s, (1979) three-dimensional perspective of CSR, Freeman’s (1984) stakeholder theory as extended constituents of CSR, Elkington’s (1998) triple bottom line perspective, and Quazi and O’Brien’s (2000) two-dimensional cross-cultural perspectives. Finally, we concentrate on the post-‘Friedmanist’ era (1970 onward) which is argued to have marked the beginning of the controversy in the modern journey of CSR in the 21st century. Some researchers have noted that the general interests in CSR have been actually developed since 1970s (Marinetto, 1999) which can be largely credited to the controversy that Friedman (1970) initiated. The CSR discourse thus continued to grow and

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Chapter 1  The CSR Journey  5

has perhaps matured today putting Friedman’s classical thesis in the centre of debate. A total of 8629 peer citations to date of his seminal article appearing in the New York Times Magazine in 1970 are perhaps reflective of the fact that Friedman’s proposition is still relevant to CSR. For example, in a recent article Karnani (2010, p. 1) echoed Friedman’s doctrine by noting that ‘companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to CSR will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholders’ interests’.

The One-Dimensional Orthodoxy Era During this era, the Friedman’s thesis of ‘business of business is business’ took its firm root in the literature. Friedman strongly argued that business is a single-dimensional entry and is committed to undertake only one responsibility to society which is to maximise profit within the framework of regulation. He and his supporters argued that if businesses are freely allowed to play its fundamental role based on the doctrine of ‘business of business is business’, society will be better off in terms of efficient and effective supply of goods and services and creation of jobs and generation of income. Friedman also argued that corporate managers are the agents of their principals and shareholders, and do not have the mandate to go beyond managing economic activities of firms aimed at ensuring maximum return to shareholders’ investment (Friedman, 1968; 1970). This classical view of CSR quickly became controversial because some authors supported and nurtured this thesis while others criticised and opposed its very assumptions. Some proponents of Friedman’s thesis even went further by labelling CSR as an unfair and counterproductive doctrine which can be dangerous for business to assume and practice. Emphasis has been on some specific functional areas of business that are considered integral and applied to the business system. Marketing is one of such functional areas that was drawn into the CSR debate. For example, Gaski (1985, p. 14) commented: “. . . the view that marketing has a greater social responsibility than just satisfying customers at a profit, is an erroneous and counterproductive idea. For marketers to serve the best interests of society is not only undemocratic but dangerous as well.

Samli (1992, p.  18) took a position on the other extreme of the CSR continuum by strongly supporting marketing’s involvement in social responsibility: “.  .  .  failure of marketing as a discipline and as a social process to take its social responsibility seriously can be detrimental not only to society at large, but also to marketing itself.”

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Researchers also supported the growth of societal marketing as an area integrating social issues into marketing theory and practice. As Abratt and Sacks (1988) argued: “The rationale for the development of the societal marketing concept is not only to safeguard marketing’s future freedom of action but to ensure the survival of business itself in an increasingly hostile social environment.”

In an attempt to balance both the classical and emerging responsibility of businesses, some authors proposed two-dimensional perspectives of business and marketing arguing that businesses are fundamentally socioeconomic institutions serving the interests of shareholders as well as that of society and as such there is no apparent conflict between the economic and social goals of corporations because businesses can make money and at the same time can also care for the community as well as for its other constituents (Quazi & O’Brien, 2000; Quazi, 1994). It was observed that as time progressed Friedman’s doctrine, ‘business of business is business’ witnessed increasing criticism and started to fade away following the emergence of arguments leading to multi-dimensional entities of business. The multi-dimensional line of arguments posited that corporations have multiple constituents to serve in order to survive in a changing social landscape. Several incidents of corporate scandals and improper behaviour had become the catalyst for this paradigm shift. Among the landmark incidents was Exxon Valdez oil spill in 1989 which had caused huge damage to the sea and the inhabitants at the Alaska (see: Peterson, 2001; Piatt, Lensink, Butler, Kendziorek, & Nysewande, 1990; Cohen, 1995). Union Carbide’s 1984 Bhopal chemical disaster in India claiming over 3,800 lives is another example of corporate misconduct resulting in public outrage around the world (See Turner & Pigeon, 1997; Vaughan, 1999). This public outrage resulted in community pressure on increasing scrutiny on corporations so that they behave in a socially responsible manner (see Quazi & Coghlan, 1999). Strong stakeholder advocacy that had been witnessed since then is perhaps the reflection of such state of affairs (Fassin, 2012; Amran & Keat Ooi, 2014). Research has identified that during 1950s and 1970s consumers emerged as one of the most influential forces in the market. Passage of President ­Kennedy’s Bills of Consumer Right by the US Congress in 1962 and the growing consumerist movement led my consumer activist and consumer associations at the global level resulted in increased consumer empowerment (Quazi, 2002; Fazal, 2012). Enactment of plethora of regulations protecting consumer rights internationally further contributing to mitigating power imbalance in the market in favour of consumers. Furthermore, publications such as Ralph Nader’s (1965) Unsafe at Any Speed highlighting auto safety issues, Rachel Carson’s (1962) Silent Spring identifying environmental degradation

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caused by corporate action, Vance Pacard’s (1957) The Hidden Persuader raising moral and ethical dimensions of advertising and promotion were also instrumental in making consumers aware of the business activities detrimental to consumers’ interests (Quazi, 2002; Cochran, 2007; Craig-Lees, 1991). Consequently, the empowered consumers appeared as emerging constituent putting pressures on businesses to behave with greater level of responsibility and commitment to consumer issues of concern. This development in the external environment of businesses signalled the possible extension of constituents of CSR beyond the classical constituent such as the stockholders as proposed by Friedman and his followers. Thus, Friedman’s classical CSR doctrine’s influence on managerial decision-making seems to be slowing down in the face of emergence of multi-dimensional entities of business organisations in a contemporary society.

The Multi-Dimensional Developmental Era This era is characterised by the emergence of the concept of multi-­ dimensional entities of businesses reaching beyond the conventional doctrine of single entity of businesses. Archie B. Carroll made fundamental contributions to advancement of the CSR journey by pushing the CSR paradigm from the narrowly defined perspective to a broader domain by introducing the concept of wider dimensions of CSR. He argued that CSR reaches far beyond the conventional economic doctrine and include wider perspectives such as ethical and discretionary obligations. He detailed the thesis in his remarkable article published in the Academy of Management Review in 1979 which was titled, A Three-Dimensional Conceptual Model of ­Corporate Social Performance. Carroll (1979) presented his CSR framework in a single element consisting of a three different aspects of corporate social performance. These are rooted in the philosophy of economic, social and philanthropic imperatives that businesses are under obligations to practice. Carroll (1979) presented a logical analysis of the three dimensions in terms of four active components. These are economic responsibility as the basic dimension on which businesses are founded, legal responsibility as a mandatory requirement which business cannot afford to ignore, ethical responsibility rooted in the moral principles reaching beyond mandatory compliance, and finally discretionary responsibilities stemmed from altruistic obligation of businesses to the community. He argued that these components of responsibilities are neither mutually exclusive nor cumulative nor additive, but an integral part of the unified whole where businesses have to perform around satisfying these set parameters simultaneously. His contribution can be considered seminal as his propositions deepened, broadened and nurtured our understanding of the pervasive appeal of CSR. Soon after publishing his article, CSR research took a new turn into the

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history and attracted a great deal of attention of CSR pundits, researchers and p ­ ractitioners at the global level. Professor Carroll then came up with further analysis and interpretation of this thesis individually and jointly with his colleagues which still continues. For example, in a subsequent paper Chrisman and Carroll (1984, p. 62) argued: ‘When a firm engages in social activities, it must do so in a way that it receives economic advantages. The net effect is that the firm simultaneously achieves social and economic objectives’.

In another milestone article, Carroll (1991) revisited his three-­ dimensional philosophies and emphasised more on the moral aspect of management and argued that ‘social responsibility can only become reality if more managers become moral instead of amoral or immoral’ (p. 39). He identified immoral managers as ‘those managers whose decisions, actions, and behaviours suggest an active opposition to what is deemed right or ethical’ and amoral managers as those ‘who simply believe that ethical considerations are for our private lives, not for business . . . business activity resides outside the sphere to which moral judgement apply’ (p. 45). Carroll continued his research to enrich his framework further and published numerous through provoking and seminal articles to highlight the various emerging facets of his thesis beyond the realm of the three-dimensional model. Today, he is considered as one of the leading thinkers of contemporary social responsibility and ethics in the world (see Carroll, 1991; Schwartz & Carroll, 2003; Carroll, 2000; Carroll, 2001, Carroll & Shabana, 2010). Parallel with Carroll’s contributions to the multi-dimensionality of CSR, Elkington (1998) came up with a framework which is popularly known as the Triple bottom line (TBL) perspective in which the author argued that a corporation has to address three bottom lines: economic, social and environmental imperatives to remain viable in the market and in the community. This progress is an outcome of the fast-accepted concept of sustainable development which was introduced in the Brudtland Report in 1987. Thus, the concept of sustainable development was the basis for TBL framework which posits that performance of a business is to be measured not only by its economic success but also by its contributions to the emerging social and environmental issues. The fundamental idea governing the concept of sustainable development has been in existence for centuries but was made official when the term was first used in the Brundtland report in 1987, where it was seen as ‘a development that meets the need of the present without compromising the ability of the future generations to meet own needs’ (p.16). The sustainable development requires the meeting of basic needs and legitimacy for the quality of life. Sustainable development involves two related issues: (a) those relating to environmental resources or natural capital (sometimes referred

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to eco-efficiency) issues; and (b) those relating to social (sometimes referred to as eco-justice) issues. Eco-efficiency is concerned with ecological sustainability, whereby the environment should be treated properly in the sense it should be sufficient to meet the demand for the current as well as future generation. Eco-justice on the other hand focuses on the outcome of human development that should be equally distributed not only between present generations (intra-­ generational equity) but also between future generations (inter-generational equity). The concept of sustainable development emphasises the continuing economic growth but not in the expense of environment and society (Nejati, Shahbudin, & Amran, 2010). Thus, TBL signalled a departure from the orthodoxy paradigm of profit maximisation to a more contemporary paradigm characterised by pragmatic realities in wider societal and environmental terms. Today, TBL is regarded as a useful tool to measure corporate performance in a comprehensive manner. Because of its practicality, TBL measures have gained acceptance not only in the academic world but also among the leading socially and environmentally sensitive multinationals such as Shell and BP (Vanclay, 2004) as well as 160 companies affiliated with the World Business Council for Sustainable Development that have already adopted TBL principles ­(Holliday, Schmidheiny, & Watts, 2002). In spite of its growing popularity, TBL model has been criticised for its limitations in isolating and quantitatively measuring social performance of an organisation (Vanclay, 2004). TBL has been criticised to ‘provide a smokescreen behind which firms can avoid effective social and environmental reporting and performance’ (­ Norman & ­MacDonald, 2004, p. 243).

The Expanded Stakeholder Era In 1984, Edward Freeman published his landmark book titled, Strategic ­Management-A stakeholders Approach which contributed to widening the view of the firm and its role in the society. Freeman (1984) took the CSR journey one step further by broadening the scope of responsibility of businesses by proposing that businesses are not just responsible to those who have stocks in the firms but also to those who have stakes in the businesses. In other words, corporations are responsible to those individuals and organisations that are affected by their operations and whose actions have impact on corporate operations (Donaldson & Preston, 1995; Freeman 1984). Popularly known as ‘Stakeholder theory’, this perspective emphasised the need for addressing a range of stakeholders’ internal and external interests to the firm including employees, business owners and managers, suppliers, creditors, consumers, the government, community groups, media, competitors and so on. F ­ reeman (1984) recognised the influence of constituents within

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and outside the organisation as strategic forces that shape business behaviour and affect organisational success. So, organisations have to take into consideration the roles of all stakeholders groups in successful management of firms. Because of its practicality and applied nature, stakeholders’ perspective attracted a great deal of attention of business people, academics, the policy makers and governments. Numerous academic researchers have examined the various facets of stakeholders on corporate operation and success. Eventually, stakeholder theory gained widespread recognition from businesses and different sections of society and quickly emerged as a widely applied framework in CSR and mainstream business research. Today, stakeholder’s perspective is considered as one of the most powerful theories used in research involving a wide range of disciplines and branch of knowledge having relevance to stakeholders. Later, pundits contributed to refinement of the theory by adding advanced thoughts and perspectives to it. For example, Donaldson and Preston (1995) enriched the stakeholder instrument by identifying three vital frills to be clearly distinguished and delineated for enhancing its effectiveness: descriptive (better management mechanism of stakeholders), normative (the oughts of managing stakeholders) and instrumental (value creation via stakeholders’ engagement). As far the normative perspective is concerned, Freeman (1984, p. 210) provided a clarification that ‘. . . it (stakeholder theory) is not normative in the sense that it prescribes particular positions of moral worth to the actions of managers’ (1984, p. 210). Overall, however, Freeman, Wicks & Parmer (2004) provided further explanation about the purpose of the stakeholder theory which partly supports the views of Donaldson and Preston (1995, p. 364): ‘Stakeholder theory begins with the assumption that values are necessarily and explicitly a part of doing business. It asks managers to articulate the shared sense of the value they create, and what brings its core stakeholders together. It also pushes managers to be clear about how they want to do business, specifically what kinds of relationships they want and need to create with their stakeholders to deliver on their purpose’ (p. 364)

Four years after the publication of his momentous book, Freeman joined his fellow researchers and provided further clarification of the applicability of stakeholder theory by affirming that the theory is not merely a means through which corporate goals can be achieved rather it is the end. A review research analysing 179 papers focusing on research concerning stakeholder theory over a period of two decades has revealed five themes: (a) stakeholder definition and salience, (b) stakeholder actions and responses, (c) firm actions and responses, (d) firm performance and (e) theory debates (Laplume, Sonpar, & Litz, 2008, p. 1152). Of the five themes emerged, 44 per cent of the papers reviewed were devoted to the theory debate suggesting that the theoretical underpinnings are in the centre of stakeholders’ discourse today. Literature indicates that Stakeholder theory has its admirers

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as well as critics. Interestingly, Freeman and his colleagues addressed many of the criticism against the stakeholder theory. For example, in response to Sundaram and Inkpen’s (2004) narrowly based proposition that the only proper goal of a modern corporation is to maximise shareholders’ value, Freeman, Wicks and Parmar (2004, p. 365) argued that ‘shareholders are stakeholders. Dividing the world into shareholders’ concerns and stakeholders’ concerns is roughly the logical equivalent of contrasting apples with fruit’. Thus, Freeman and his fellow researches integrated shareholders’ interests within the broad framework of stakeholders’ interests as stockholders are one of the very important constituents of stakeholder schema. Finally, Freeman and the proponents of his framework are continually ­advancing the underlying philosophical foundation, and practical implications of the stakeholder theory (Harrison & Freeman, 1999; Freeman & ­Phillips, 2002; Freeman et al., 2010; Freeman, Harrison & Wicks, 2007; ­Bradley et al., 2008) in the face of new perspectives are emerging in the field.

The Cross-Cultural Diversified Era The foregoing phases were generic in that the issues surrounding the growth and development of CSR mainly focused on the various facets of CSR mostly within national boundaries. The issue of researching CSR across borders was not much highlighted at the above phases. This state of affairs started to change since the beginning of 2000s when some authors took novel research initiatives by taking CSR beyond the national boundaries. Increasing trends in globalisation of businesses seemed to have provided impetus for such a move aimed at broadening our understanding of the complexities and dynamism of CSR issues in a cross-cultural or national setting. Quazi and O’Brien (2000) published a seminal paper titled, ‘An empirical test of a cross-national model of corporate social responsibility’ in the Journal of Business Ethics in its May issue. This publication seems to have made significant contribution towards advancement of CSR research across borders by providing an empirically validated framework. This framework might have sparked research interests in cross-cultural CSR and the journey for cross-cultural CSR quest thus started. Since then a plethora of research papers began to appear in the academic and professional outlets. Quazi and O’Brien’s (2000) research model was based on the extant literature and decades of personal observations and research experiences of the authors. The model was empirically tested using quantitative data gathered from senior managers operating in two very different markets located in Australia and Asia. The research model depicted two-dimensional perspectives of CSR: narrow to wider view on the horizontal axis and costs to benefit-driven views on the vertical axis. Four quadrants within these two dimensions: classical view, socio-economic view, modern view and philanthropic view emerged

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from the research. The model was drawn keeping in mind the continuum ranging from profit-driven single dimension of classical perspective to multidimensional emerging perspective of CSR as well as the continuum ranging from costs of CSR commitment to benefits derived from such costs. The research found CSR as a universal phenomenon and in particular the study found that the differing cultural and socio-economic settings in which managers operate have little or no impact on their CSR and ethical perception. Quazi (2003) undertook a follow-up study in Australian corporate sector and found the results to be consistent with those of the earlier one. Quazi and O’Brien’s framework and/or its underlying arguments have been cited widely in the extant literature concerning CSR research in an international context (see: Arthaud-Day, 2005) and particularly across Asia (see: Zu & Song, 2009; Lam, 2009), Australasia (see: Fatima & Zarkada-Fraser, 2004), Europe (see Singh, Sanchez, & Bosque, 2008; Quaak, Aalbers, & Goedee, 2007), North America (see: Spence, Jouhin, & Viviane, 2011), Africa (see: Amaeshi, Adi, Ogbechie, & Amao, 2006), and Middle East (see: Jamali & Sidani, 2008; Jamali, Sidani, & El-Asma, 2009). In support of adopting Quazi and O’Brien’s (2000) model as a research framework in their cross-national research, Jamali et al. (2009, p. 173) provided the following rationale: ‘This two-dimensional model was adopted because it integrates both classical and modern paradigms, allowing to consider in turn aspects of both in analysing managerial perspectives regarding CSR in Lebanon, Jordan and Syria.’

The expansion of CSR research across borders have contributed to deepening and diversifying our knowledge in interpreting the critical issues surrounding application of CSR principles in differing market and sociopolitical and economic settings. For example, while empirically uncovering the uniqueness of CSR in a Chinese cultural context, Wenzhong and LiJingyi (2013, p. 34) noted: ‘The core values of the Chinese Confucian culture such as “humanity, righteousness, harmony, courtesy, honesty and integrity” represent the soul of five-thousand-years Chinese traditional culture, which may represent the value of maintaining the balanced social benefits and harmonious development of the society from the prospective of a whole society, and which may also have some important uses for reference and implications for establishing the values of modern corporate social responsibility if it is effectively integrated into practices of modern business ethics in China.’

Researches are continuingly uncovering findings having crucial implications for formulation of strategies for businesses operating in the international arena, particularly in designing appropriate societal policies and strategies for their international markets. This trend is likely to advance further as firms are increasingly becoming involved in international

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operations where successful adaptation to societal norms is posing challenge.

The Diversified Modern Era The modernity in CSR is reflected in the ongoing journey reaching to a point where CSR is embracing every branch of business and beyond. F ­ urthermore, the focus of the modern era of CSR has shifted from general to specific issuebased areas. Since there are a number of frameworks available in the extant literature, business researchers and professionals are making a good use of them in further research as well as in practices. By now, CSR has embraced all functional areas of business such as Management, Marketing (see: ­Maignan & Ferell, 2004), Accounting (see: Hoi, Wu, & Zhang, 2013), Finance (see: Quazi & Richardson, 2012), Human resource (see: Gond, I­galens, Swaen, & Akremi, 2011), technology (see: Hasnaoui & Freeman, 2010) and so on. CSR also entered into other disciplines beyond business such as medicine (see: Nussbaum, 2009), public service (see: Ates & Buttgen, 2011), education (see: Stewart, 2013), engineering (see: ­Jammulamadaka  & Khonde, 2011), information systems (see: Keutel, Michalik, & Richter, 2014), defence (see: Byme, 2007) and so on. In the contemporary era, the concept of CSR in accounting is considered synonym to corporate social reporting which demands businesses to report beyond their traditional reporting of financial statement to include social and environmental performance. In line with this development, Gray (1996: p. ix) noted: ‘. . .  the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society at large. As such it involves extending the accountability of organization, beyond the traditional role of providing a financial account to the owners of capital, in particular, shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities than simply to make money for their shareholder.’

The underlying principle for CSR is transparency, where business is expected to report their economic, social and environmental impacts to stakeholders. In the area of Human Resources, the importance of internal stakeholder, that is, employees has been the main focus. Business is responsible to ensure the well-being of their employees because well-treatment of employees results in boosting loyalty of employees to their organisations and enhancing organisational productivity. This ever-expansive trend is likely to increase in future as more and more issues will arise in the interfaces of the above disciplines and CSR. Since CSR is a dynamic force within the broad umbrella of ethics, its appeal and

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relevance is likely to be more broad-based with the changing ethical climate at the national and international level. Applying Quazi and O’Brien’s (2000) two-dimensional framework to Lebanon, Jamali and Sidani (2008) found some managerial support for the modern dimension of CSR rooted in the wider perspectives of corporate philanthropy, environmentalism and social well-being. Finally, modern CSR is increasingly becoming a strategic tool for businesses (Jhunjhunwala, 2014) which can be used to reap the benefits of competitive advantage in the market (Kramer & Porter, 2007) by capitalising on the differentiated socially responsible image of firms (see: Asongu, 2007, Porter & Kramer, 2002, Lo & Sheu, 2007). Today, CSR is increasingly becoming an independent field of study warranting treatment of CSR as a functional area of its own for its further growth like other business functions. CSR is also being increasingly recognised at the academic level by including CSR in the educational courses and curricula at the tertiary level across the globe. Thus, integration of CSR in business curriculum would equip future business managers with the tools and techniques in the effective assessment of the impact of CSR on business operations and decision-making. Figure 1.1 shows the stages of the CSR journey and the leading scholars contributing to a particular stage of the journey.

Conclusion To sum up, the CSR journey that started centuries ago is still growing at an unprecedented pace with no sign of slowing down. A concept that was once considered irrelevant, value leaden, elusive and ambiguous has now emerged as an established branch of knowledge where there are now measurement scales, tools and frameworks for the assessment and evaluation of social performance along with economic performance of firms. Today, there are industry-specific focus of CSR and firm-specific code of conducts that are being monitored and implemented in business operations around the world. There are specific legislations, governmental bodies, non-­ government organisations at the local, regional, national and international levels that are playing pivotal roles in ensuring the social and sustainable development of businesses and the communities. This state of affairs indicates that CSR is gradually taking a formal shape in terms of institutionalisation of the concept across borders. A general consensus seems to be growing in the business and academic circle that CSR is a strategic issue which can be used to differentiate CSR oriented firms’ offerings from those of others who are not socially responsible (Blackburn, 2012; Calabrese, Costa, Menichini, Rosati, & Sanfelice, 2013). Therefore, it can be argued that CSR is quickly moving towards a strategic issue as CSR adds value to customers who care about the community and the environment and would like to pay premium

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The OneDimensional Orthodoxy Era

• Friedman (1968) • Friedman (1970)

• Carroll (1979) • Carroll (1984)

The MultiDimensional Developmental Era

The Expanded Stakeholder Era

The CrossCultural Diversified Era

The Diversified Modern Era

• Elkington (1998)

• Freeman (1984) • Freeman (1994) • Donaldson & Preston (1995)

• Quazi & O’Brien (2000) • Quazi (2002) • Jamali & Sidani (2008) • Jamali et al. (2009)

• Maignan & Ferell (2004) • Porter & Kramer (2006) • Hasnaoui & Freeman (2010) • Gond, Igalens, Swaen, & Akremi (2011) • Quazi & Richardson (2012) • Visser (2012) • Hoi, Wu, & Zhang (2013)

Figure 1.1  The CSR Journey at a Glance

price for the socially friendly products and services (Laroche, Bergeron, & Barbaro-Forleo, 2001; Ottman, 2000; Thomas, 1989; Ozanne & Vlosky, 1997). This creates opportunities for socially responsible businesses to position their products and services uniquely in the minds of customers to reap competitive advantages in the market (see: Porter & Kramer, 2002; Du,

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Bhattacharya, & Sen, 2010). Thus, by using CSR as a strategic tool, firms are not only gaining economic benefits but also attracting customers to invest in the socially responsible companies because socially responsible firms have more potential to sustain in the long run and gain economic prosperity and at the same time, care (Quazi & Shamsuddin, 2005). Finally, based on the current rate of growth, it can be predicted that the CSR life cycle will further progress, perhaps to a new phase which is, however, difficult to predict given the dynamic and diverse nature of the concept. However, some authors attempted to shed light on the futuristic trends of CSR. For example, Visser (2012, p. 1) has the following vision: ‘Looking to the future, what is needed—and what is just starting to emerge—is a new approach to CSR, which I call Systemic CSR, or CSR 2.0. This is a purpose-driven, principle-based approach, in which business seeks to identify and tackle the root causes of our present unsustainability and irresponsibility, typically through innovating business models, revolutionizing their processes, products and services and lobbying for progressive national and international policies.’

While we have to wait for a while to witness the future course of movement of CSR, Vissir’s (2012) proposition about lobbying for setting CSR standards internationally has already been started, providing some legitimacy to his predictions. Introduction and implementation of carbon taxing as a governmental policy in Australia is, perhaps an example of how the community is prepared to accept and support such a policy. Research shows that consumers are willing to switch over to buying products with proper carbon labelling (Vanclay et al., 2011). Although it is still a debatable issue at the national and international levels where researchers are taking polarised positions in terms of the impacts of climate change on the environment and the community, there seems to be a general consensus which is rapidly growing in society that such issues reserve immediate attention of all concerned parties (Jamelske, Barrett, & Boulter, 2013). Although these issues are concerned more with environmental sustainability rather than general CSR, further research would be needed to address the pros and cons of this vital area of emerging significance to society and corporations. The CSR journey presented above is a continuous process and as such the nature and the course of the journey in future will largely depend on how the social contract between business and society evolves and are shaped in the dynamic macro- and micro-environment surrounding corporations and the community. Finally, it is to be noted that the advancement of CSR as a notion cannot be strictly analysed in a sequential order in terms of the evolutionary trends delineated above as there are examples of cases where some firms are still operating within the one-dimensional classical doctrine of ‘business of business is business’. Interestingly, some scholars are supportive of that doctrine even in the modern age of CSR embracing

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the multi-dimensional path of profit maximisation and caring for society at the same time accepting that there is no apparent conflict between the two approaches. Opposition to this modern notion of CSR is reflected in the arguments by Karnani (2010) in a recent article published in the Wall Street Journal, ‘the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed’. Karnani (2010) went even further by noting that ‘the idea that companies have a duty to address social ills is not just flawed . . .  It also makes it more likely that we will ignore the real solutions to these problems’. Interestingly, as opposed to Karnani’s (2010) argument, Visser (2012, p.  20) considered CSR and corporate sustainability to be complementary to each other in the new CSR 2.0 model that he proposed. As Visser (2012, p. 20) noted: ‘A final point to make is that CSR 2.0—standing for corporate sustainability and responsibility—also proposes a new interpretation for these terms. Like two intertwined strands of DNA, sustainability and responsibility can be thought of as different, yet complementary elements of CSR. Hence, sustainability can be conceived as the destination—the challenges, vision, strategy and goals, that is, what we are aiming for—while responsibility is more about the journey—our solutions, responses, management and actions, that is, how we get there.

Therefore, reaching a conclusion on the sequential development of CSR seems not easy as there are contrasting views in the extant literature as to the distinctive evolutionary phases of CSR. However, it can be safely said that CSR as a notion is on the move and where it would end up within philosophical and practical terms is a subject of further research.

References Abratt, R. and Sacks, D., (1988), “The Marketing Challenge: Towards Being Profitable and Socially Responsible”, Journal of Business Ethics 7, 497–507. Amaeshi, K. M, Adi, B. C, Ogbechie, C., & Amao, O. (2006). Social responsibility in Nigeria. Journal of Corporate Citizenship, 24, 83–99. Amran, A., & Keat Ooi, S. (2014). Sustainability reporting: Meeting stakeholder demands. Strategic Direction, 30(7), 38–41. Arthaud-Day, M. L. (2005). Transnational corporate social responsibility: A ­tri-dimensional approach to international CSR research. Business Ethics Quarterly, 15(1), 1–22. Anshen, M. (1970 ),” Changing the Social Contract : A Role for Business,” Columbia Journal of World Business, Nov-Dec., 6–14. Asongu, J. J. (2007). Strategic CSR in practice. Lawrenceville, GA: Green View ­Publishing Company. Ates, Z., & Buttgen, M. (2011). Corporate social responsibility in the public service sector: Towards a sustainability balanced scorecard for local public enterprises. Journal for Public & Nonprofit Services, 34(3), 346–360.

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18  Chapter 1  The CSR Journey Barnard, C. I. (1938), Functions of the Executive, Cambridge, Massachusetts: Harvard University Press. Berle, A. (1954). The 20th century capitalist revolution. New York, NY: Harcourt Brace. Blackburn, W. R. (2012). The sustainability handbook: The complete management guide to achieving social, economic and environmental responsibility. New York, NY: Routledge. Bowen, H. R. (1953), Social Responsibility of Businessman, Harper & Row, New York, p.6. Bradley, R. A., Donaldson, T., Freeman, E. R., Jensen, M. C., Mitchell, R. K., & Wood, D. J. (2008). Dialogue: Towards superior stakeholder theory. Business Ethics Quarterly, 18(2), 153–190. Byme, E. (2007). Assessing arms makers’ corporate social responsibility. Journal of Business Ethics, 75(3), 201–217. Buchholz, R. A. (1986), Business Environment and Public Policy: Implications for Management and Strategy Formulation, Prentice Hall, Englewood Cliffs, N.J. Calabrese, A., Costa, R., Menichini, T., Rosati, F., & Sanfelice, G. (2013). Turning corporate social responsibility‐driven opportunities in competitive advantages: A two‐dimensional model. Knowledge and Process Management, 20(1), 50–58. Carson, R. (1962), Silent spring Houghton Miffin Company, Boston Carlson, L., and Kangun, N. (1988), “Demographic Discontinuity: Another Explanation for Consumerism?,” Journal of Consumer Affairs, 22, 55–73. Carroll , A.B. (1981), Business and Society, Boston: Little,Brown and Company. Carroll, A. B. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4(4), 496–503. Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34(4), 39–48. Carroll, A. B. (2000). Ethical challenges for business in the new millennium: ­Corporate social responsibility and models of management morality. Business Ethics Quarterly, 10(1), 33–42. Carroll, A. B. (2001). Models of management morality for the new millennium. Business Ethics Quarterly, 11(2), 365–371. Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibility: A review of concepts, research and practice. International Journal of Management Reviews, 12(1), 85–105. Chamberlain, N. W. (1973). The limits of corporate social responsibility. New York, NY: Basic Books Inc. Craig-Lees, M. (1991), An Examination of Consumer Activism: An Historical Analysis of the Consumer Movement in Australia, Unpublished Ph.D dissertation, School of Marketing, University of New South Wales, Australia. Chrisman, J. J., & Carroll, A. B. (1984). Corporate social responsibility—­Reconciling economic and social goals. Sloan Management Journal, Winter, 59–64. Cochran, P. L. (2007). The evolution of corporate social responsibility. Business Horizons, 50(6), 449–454. Cohen, M. J. (1995). Technological disasters and natural resource damage assessment: An evaluation of the Exxon Valdez oil spill. Land Economics, 71(1), 65–82. Davis, K., Frederick, W.C., Blomstrom, R.L., (1980), Business and Society - Concepts and Policy Issues, McGraw-Hill Book Company, U.S.A.

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De george, R.T. (1986), “Theological Ethics and Business Ethics,” Journal of Business Ethics, 5, 421–432. Dhara, R., & Dhara, R. (1995). Case study of international disaster. International Journal of Occupational and Environmental Health, 1(1), 58–69. Dodd, E. M., Jr. (1932). For whom are corporate managers trustees? Harvard Law Review, 45(7), 1145–1163. Donaldson, T., & Preston, L. (1995). The stakeholder theory of the modern ­corporation: Concepts, evidence, implications. Academy of Management Review, 20(1), 65–91. Du, S., Bhattacharya, C. B. & Sen, S. (2010). Maximizing business returns to corporate social responsibility (CSR): The role of CSR communication. International Journal of Management Reviews, 12(1), 8–19. Elkington, J. (1998). Cannibals with forks: The triple bottom line of 21st century business. The conscientious commerce series. Gabriola Island, BC: New Society. assin, Y. (2012). Stakeholder management, reciprocity and stakeholder responsibility. Journal of Business Ethics, 109(1), 83–96. Fatima, K., & Zarkada-Fraser, A. (2004). An empirical investigation of corporate citizenship in Australia and Turkey. British Journal of Management, 15(1), 57–72. Freeman, R. E. (1984). Strategic management-A stakeholders approach. Boston, MA: ­Pitman Publishing Inc. Freeman, R. E. (1999). Divergent stakeholder theory. Academy of Management Review, 24(2), 233–236. Freeman, R. E., & Phillips, R. A. (2002). Stakeholder theory: A Libertian defence. Business Ethics Quarterly, 12(3), 331–349. Freeman, R. E., Harrison, J. S., & Wicks, A. C. (2007). Managing for stakeholders: ­Survival, reputation, and success. New Haven, CT: Yale University Press. Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmer, B. L. & Colle, S. D. (2010). Stakeholder theory: The state of the art. Cambridge, England: Cambridge University Press. Freeman, R. E., Wicks, A. C., & Parmer, B. L. (2004). Stakeholder theory and “the corporate objective revisited”. Organization Science, 15(3), 364–369. Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. The New York Times Magazine, pp. 122–126. Friedman, M., (1968), “The Methodology of Positive Economics,” Reprinted in Readings in the Philosophy of the Social Science, MacMillan Publishing co., Inc., New York. Friedman, M. (1989). Capitalism and freedom. Chicago, IL: University of Chicago Press. Friedman, M. (An interview). (1989). Freedom and philanthropy. Business and Society Review, 71, Fall, 11–21. Gaski, J.F. (1985), “Dangerous Territory: The Societal Marketing Revisited,” Business Horizon, 28, 42–47. Gond, J. P., Igalens, J., Swaen, V., & Akremi, A. E. (2011). The human resources contribution to responsible leadership: An exploration of the CSR–HR interface. Journal of Business Ethics, 98(1), 115–132. Hass, P.F. (1979), “The Conflict Between Private and Social Responsibility,” Akron Business and Economic Review, 10(2), 33–36 Heyne, P.T. (1968), Private Keepers of the Public Interest,” New York, Mcgraw- Hills.

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20  Chapter 1  The CSR Journey Holliday, C. O., Schmidheiny, S., & Watts, P. (2002). Walking the talk: The business case for sustainable development. Sheffield, UK: Greenleaf Publishing Ltd. Harrison, J. A., & Freeman R. E. (1999). Stakeholders, social responsibility, and performance: Empirical evidence and theoretical perspectives. Academy of ­Management Journal, l42(5), 479–485. Hasnaoui, A., & Freeman, I. (2010). Diffusion and implementation of corporate social responsibility (CSR): The role of information and communication technologies (ICT). Revue Management & Avenir, 39(9), 386–406. Hoi, C. K., Wu, Q., & Zhang, H. (2013). Corporate social responsibility (CSR) associated with tax avoidance? Evidence from irresponsible CSR activities. Accounting Review, 88(6), 2025–2059. Jamali, D., & Sidani, Y. (2008). Classical vs. modern managerial CSR perspectives: Insights from Lebanese context and cross-cultural implications. Business and Society Review, 113(3), 329–346. Jamali, D., Sidani, Y., & El-Asma, K. (2009). A three country comparative analysis of managerial CSR perspectives: Insights from Lebanon, Syria and Jordan. Journal of Business Ethics, 85(2), 173–192. Jamelske, E., Barrett, J., & Boulter, J. (2013). Comparing climate change awareness, perceptions, and beliefs of college students in the United States and China. ­Journal of Environmental Studies and Sciences, 3(3), 269–278. Jammulamadaka, N., & Khonde, D. (2011). Embedding CSR at Burckhardt compression. Asian Case Research Journal, 15(2), 157–176. Jhunjhunwala, S. (2014). Intertwining CSR with strategy—the way ahead. Corporate Governance: The International Journal of Effective Board Performance, 14(2), 211–219. Karnani, A. (2010, August 23). The case against corporate social responsibility. Wall Street Journal, 1–5. Keutel, M., Michalik, B., & Richter, J. (2014). Towards mindful case study research in IS: A critical analysis of the past ten years. European Journal of Information Systems, 23(3), 256–272. Kramer, M. R., & Porter, M. E. (2007). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84, 78–92. Lam, M. L. L. (2009). Beyond credibility of doing business in china: strategies for improving corporate citizenship of foreign multinational enterprises in china. Journal of Business Ethics, 87(1), 137–146. Laplume, A. O., Sonpar, K., & Litz R. A. (2008). Stakeholder theory: Reviewing a theory that moves us. Journal of Management, 34(6), 1152–1189. Laroche, M., Bergeron, J., & Barbaro-Forleo, G. (2001). Targeting consumers who are willing to pay more for environmentally friendly products. Journal of Consumer Marketing, 18(6), 503–520. Lee, L.J. (1987), Social Responsibility and Economic Performance: An Empirical Examination of Corporate Profiles, Unpublished Ph.D thesis, United States International University, San Diego. Lee, M. D. P. (2008). A review of the theories of corporate social responsibility: Its evolutionary path and road ahead. International Journal of Management Reviews, 10(1), 53–73.

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Lo, S. F., & Sheu, H. J. (2007). Is corporate sustainability a value-increasing strategy for business? Corporate Governance: An International Review, 15(2), 345–358. Maignan, I., & Ferell, O. C. (2004). Corporate social responsibility and marketing: An integrative framework. Journal of the Academy of Marketing Science, 32(1), 3–19. Marinetto, M. (1999). The historical development of business philanthropy: Social responsibility in the new corporate economy. Business History, 41(4), 1–20. McWilliams, A., Siegel, D., & Wright, P. (2006). Corporate social responsibility: Strategic implications. Journal of Management Studies, 43(1), 1–18. Nader, R (1965), Unsafe at Any Speed: The Designed-In Dangers of the American Automobile, Grossman Publishers, USA. Nejati, M., Shahbudin, A. S. B. M., & Amran, A. B. (2010). Sustainable development: a competitive advantage or a threat?. Business Strategy Series, 11(2), 84–89. Norman, W., & MacDonald, C. (2004). Getting to the bottom of “triple bottom line”. Business Ethics Quarterly, 14(2), 243–262. Nussbaum, A. K. (2009). Ethical corporate social responsibility (CSR) and the pharmaceutical industry: A happy couple? Journal of Medical Marketing, 9(2), 67–76. Ottman, J. A. (2000). It’s not just the environment, stupid. Retrieved April 28, 2014, from http://www.greenmarketing.com/articles/IB_Sept00.html Ozanne, L. K., & Vlosky, R. P. (1997). Willingness to pay for environmentally certified wood products: A consumer perspective. Forest Products Journal, 47(6), 39–48. Packard, Vance (1957), The Hidden Persuaders, New York: David McKay. Peterson, C. H. (2001). The Exxon Valdez oil spill in Alaska: Acute, indirect and chronic effects on the ecosystem. Advances in Marine Biology, 39, 1–103. Piatt, J. F., Lensink, C. J., Butler, W., Kendziorek, M., & Nysewande, D. R. (1990). Immediate impact of the ‘Exxon Valdez’ oil spill on marine birds. AUK, 107(2), 387–397. Porter, M. E., & Kramer, M. R. (2002). The competitive advantage of corporate ­philanthropy. Harvard Business Review, 80(12), 56–68. Quaak, L., Aalbers, T., & Goedee, J. (2007). Transparency of corporate social ­responsibility in Dutch breweries. Journal of Business Ethics, 76(3), 293–308. Quazi, A. (1994). Social responsibility, consumerism and corporate behaviour. Unpublished PhD thesis, University of New South Wales, Australia. Quazi, A. (2002). Managerial views of consumerism: A two country comparison. European Journal of Marketing, 36(1–2), 36–50. Quazi, A. (2003). Identifying the determinants of corporate managers’ perceived social obligations. Management Decision, 41(9), 822–831. Quazi, A., & Coghlan, I. (1999, December). The relationship between corporate social commitment and corporate conduct: An empirical study of Australian managers. ANZMAC Conference Proceedings, University of New South Wales, Australia. Quazi, A., & O’Brien, D. (2000). An empirical test of a cross-national model of corporate social responsibility. Journal of Business Ethics, 25(1), 33–51. Quazi, A., & Shamsuddin, A. (2005, December). A conceptual exploration of antecedents and outcomes of socially responsible investment in equity markets. ­ANZMAC Conference Proceedings, University of Western Australia, Australia. Quazi, A., Richardson, A. (2012). Sources of variation in linking corporate social ­responsibility and financial performance. Social Responsibility Journal, 8(2), 242–256.

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22  Chapter 1  The CSR Journey Samli, A. C. (1992). Social responsibility in marketing: A proactive and profitable marketing management. New York, NY: Quorum Books. Sawyer, G. S. (1979), Business and Society: Managing Corporate Social Impact, Houghton Miffin Company, Boston, U.S.A. Schwartz, M. S., & Carroll, A. B. (2003). Corporate social responsibility: A threedomain approach. Business Ethics Quarterly, 13(4), 503–530. Singh, J., Sanchez, M. D. M. G. D. L. S., & Bosque, I. R. D. (2008). Understanding corporate social responsibility and product perceptions in consumer markets: A cross-cultural evaluation. Journal of Business Ethics, 80(3), 597–611. Spencer, B.A. and Butler, J.K.(1987),” Measuring the Relative Importance of Social Responsibility Components : A decision Model Approach,” Journal of Business Ethics, 6, 573–577. Spence, M., Jouhin, B. B. G., & Viviane, O. B. (2011). Sustainable entrepreneurship: Is entrepreneurial will enough? A North-South comparison. Journal of Business Ethics, 99(3), 335–367. Stewart, H. (2013). The complexity of teaching an emerging paradigm: Understanding the University Educator’s view of CSR. Journal of Business Ethics Education, 10(1), 103–124. Sundaram, A., & Inkpen, A. (2004). The corporate objective revisited. Organisational Science, 15(3), 350–363. Thomas, H. (1989, September). By appointment to the green consumer. Accountancy. Retrieved October 15, 2014, from http://www.consumersinternational. org/who-we-are/consumer-rights Turner, B. A., & Pigeon, P. N. F. (1997). Man-made disaster. Oxford, England: Butterworth-Heinemann. Vanclay, F. (2004). The triple bottom line and impact assessment: How do TBL, EIA, SIA, SEA and EMS relate to each other? Journal of Environmental Assessment Policy and Management, 6(3), 265–288. Vanclay, J. K., Shortiss, J., Aulsebrook, S., Gillespie, A. M., Howell, B. C., Johanni, R., . . . Yates, J. (2011). Customer response to carbon labelling of groceries. Journal of Consumer Policy, 34(1), 153–160. Vaughan, D. (1999). The dark side of organizations: Mistake, misconduct, and disaster. Annual Review of Sociology, 25, 271–305. Visser, W. (2012). Future trends in CSR—The next 10 years. SR International Inspiration Series, 11. Wartick, S.L. and Cochran, P.L., (1985), “ The Evolution of the Corporate Social Performance Model,” Academy of Management Review, 4 , 758–769. Wenzhong, Z., & Li Jingyi, J. X. (2013). Reflection into modern CSR from the perspective of Traditional Chinese Confucian Culture. International SAMANM Journal of Business and Social Sciences, 1(2), 34–43. Zu, L., & Song, L. (2009). Determinants of managerial values on corporate social responsibility: Evidence from China. Journal of Business Ethics, 88(1), 105–117.

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2

Corporate Social Responsibility and Businesses Today Azlan Amran, Mehran Nejati, Ali Quazi, Vinod Periasamy

INTRODUCTION This chapter will be observing the current state of business practices today in response to the dynamic changes caused by environmental and social factors. The evolution and historical context of Corporate Social Responsibility (CSR) will also be included in order to provide a clear understanding of how business performs its responsibility. The business impact towards the current condition is undeniable and strongly supported by scientific evidences. Scientists state, due to uncontrolled business practices, issue like climate change has caused danger to living being in the planet earth. The issue of climate change has huge implication to the environmental system that could lead to problems like hunger and other social problems. The concept of sustainable development was introduced to reflect the concern towards deteriorating condition of planet earth. The issue covered by the concept of sustainable development varies under three dimensions of economic, environment and social. This has become a big agenda that every entity or party, including company, has a role to play. The way we do things and live should be rethought and reconsidered in order to meet the objectives of the agenda of sustainable development. This has been clearly laid in the Agenda 21 which serves as a guideline for country, state, municipal, company and others to change their practices to reflect the objectives of sustainable development. Human activities due to increase in the number of population definitely has an adverse impact. Corporation has much greater responsibility as the impact caused by their operation if not controlled may cause serious damage. Awareness is an important factor in order to ensure responsible practices from corporations. Many still do not understand that responsibility of corporation go beyond profit maximization. In this chapter, the responsibility of business will be discussed which eventually followed by the concept of CSR. Clearly, there is a strong business case for company to look at CSR. There are various factors that may influence corporation in responding to CSR practices. Understanding of the concept is important for principle to

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be translated into practice. Stakeholders’ pressure is an important element to push corporation to look back into its business operation. Past incidence has proven that corporation caught in the improper business practices had to pay lots of money to recover and regain trust from its stakeholders. As such, strategic implementation of the CSR principles into business strategic and operation is really crucial in order to create competitive advantage.

THE IMPACT OF ECONOMIC SYSTEM: PREDOMINANCE OF NEOCLASSICAL ECONOMICS Neoclassical economic principles focus on efficient resource utilisation through market mechanisms, monetary measurement and profit maximization. Economic growth usually implies that there is an increase in the level of economic activity and this is normally measured in monetary terms ­(Hibbitt, 2001). In this school of thought, social responsibility of a business is to make profit by utilising the resources and energy effectively (Friedman, 1970). Friedman (1970) argued that if a business makes profit, then the profit produces dividend for shareholders, cash for capital expenditures, wage and employment for people and tax for public expenditures. Thus, the business enterprise provides benefits for everyone such as the purist’s interpretation of the free market. However, as pointed out by Lehman (1992, cited from Lodhia, 2002), market mechanism does not solve distributional and social conflicts because efficient market rarely exists. This is partly attributed to the inherent inequalities of economic and political freedom among individuals and other economic players. It is not individuals that exercise power but institutions. In short, there is power asymmetry between the economic players. As a result, only those who have power, wealth and access to financial information may benefit (Hibbitt, 2001). The current business mindset that places an altogether heavy emphasis on the bottom line inflicts scars on the environment and the society as a whole. The wealth gap between the rich and the poor is increasing all over the world. Destitute nations are left with unsustainable economic environments. The next section looks at the aspects of negative contribution by companies to society as a prelude to our discussion on the need for CSR.

BUSINESS, ENVIRONMENT AND SOCIETY Corporation responsibility is translated by the role that it has in shaping the world economy which is evident from the amount of wealth controlled by them worldwide. In the era of globalisation, their role is transcended across the places they operate. This may not be the case in most of the countries in this world. Nonetheless, the multinational corporation for example has footprint in places they operate because they do business and take profit

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from the locals. In some developing countries, their role is not only selling products and services but also serving as sources of economic activity for local people to get jobs. For some poor countries, economic growth very much relies on investment by multinational corporations. This interdependence between the nation and the multinational corporations indicates the strong role the corporation plays in these countries. Gray and Bebbington (2001) describe how big the role of corporation is in comparison to the country by indicating that the largest 500 companies control 42 per cent of the world’s wealth. Additionally, of the biggest 100 economies, half are now corporations and half are countries. Big power comes with a big responsibility. Today, corporation responsibilities are not just about making profit but also to take care of the social and environmental impacts caused by their enterprises within their respective territories. However, scepticisms exist as to whether the sustainability of the environment, for example, can be left to firms’ care without any kind of regulation (Gray, Owen, & Adams, 1996). In fact, these multinational companies are no longer controlled by states. Making them fully accountable for their impacts on the environment and society may be the only way to solve the problems caused by their businesses (Gray et al., 1996).

BUSINESS AND ENVIRONMENT Business operation works within the environmental system. The resources for the business products come from Mother Nature and most of the resources are finite. The by-product resulted through the business operation mostly contribute negatively to the environment. For example, heating and air conditioning systems emit greenhouse gas (GHG) from offices into the atmosphere and use up vast amount of electricity. In many instances, materials used for productions do not come from renewable resources. The waste generated throughout the production processes further dampens the state of environment. It is very important for corporations to realise that most of the business activities have impacts on the environment. The awareness of such implications has sparked public outcry about the needs for environmental responsibility. This demand is coupled with growing urges for corporation to be more open and transparent about their impact towards the environment. This can be traced due to the number of many environmental incidents caused by the corporations. The Love ­Canal toxic waste, Bhopal and Chernobyl nuclear incidents and Alaskan oil spill are the examples of causing massive anger from the stakeholders. The increasing pollution and decreasing resources are major concerns which businesses need to properly address in their business planning to avoid any associated business risk that may affect the long-term sustainability of the business.

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In 1992, Brazil captured the world’s attention when it hosted the historic United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro. Almost all world leaders attended this conference which assembled more than 100 heads and 178 government representatives. It is known as the Earth Summit and at this conference Agenda 21 was published. Agenda 21 is the principal global plan to confront and overcome the economic and ecological problems of the late 20th Century (California Global Corporate Accountability Project (hereafter CAP), 2002). It is meant to propose actions that should be taken into account by every individual, institution and state. Participants hoped to see improvements in strengthening environmental standards in the long-term period. Observation after eight years, however, has shown that little has been done in terms of environmental improvements. In fact, all indicators on environmental pollution have shown negative progress (Bebbington, 2001). And this is notwithstanding the fact that it is clearly stated in Agenda 21 that businesses must recognise environmental management as among the highest corporate priorities and as a key determinant for the success of sustainable development.

BUSINESS AND SOCIETY The environmental issues are not just the only concern since corporation deals directly with the society as such the relationship among all of them is important. The past issue which corporations ignored their role towards society has caused businesses to bear the consequences. The lesson learned through the classical case like Shell which faced aggressive attack from the NGO due to their improper treatment to the local people in Nigeria can be an important evidence for the corporation to consider the society interests in their business planning. The value of human rights is the fundamental ethical principle that provides power to citizens and communities to experience freedom and dignity in their lives. This includes civil and political rights, economic, social and cultural rights and the right to a clean environment. These are basic rights that companies should enforce in their operations either within or beyond their host country. Furthermore, the concept of ‘social contract’ is becoming a norm; companies need to broaden their scope of accountability to encompass this new idea. It would be great if companies be aware of their social responsibilities.

SUSTAINABLE DEVELOPMENT The concept of sustainable development was introduced as a reflection of the above concern. It was first introduced in Stockholm during the 1972 United Nation Conference on Human Environment. The agenda was further debated

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and studied and has gained international commitment. A group of experts headed by Madam Harlem Gro Brundtland were commissioned by United Nations to propose strategies for improving human well-being without threatening the environment. In 1987, the commission published its report which contained the definition of sustainable development as widely used today. The concept of Sustainable Development is a very important agenda for human survival. The agenda should also be incorporated into the business planning in order to reflect responsibility towards environment and the society. Sustainable development is a development that meets the needs of the present without compromising the ability of future generations. In the broadest view, sustainable development aims to promote mutual understanding among human beings and between humanity and nature. Eventually, sustainable development requires goals that should underlie national and international actions on development, which are inter-related to global issues such as poverty, inequality, hunger and environmental degradation (Brundtland et al., 1987). The concept of sustainable development was popularised by the World Commission on Environment and Development (WCED) in its report ‘Our Common Future’, which was published in 1987 and evolved further during World Commission in the Rio Conference in 1992. Sustainable development entails integrating the environmental, social and economic objectives. To slow the damage caused by human development, it is essential that each country takes actions to become more sustainable (Brundtland et al., 1987). For example, Asia Pacific region faces formidable environmental and ­socio-economy challenges in its effort to protect valuable natural resources. Resources are the backbones of every economy. In using resources and transforming them, capital stocks are built up and add wealth of present and future generations. However, land, energy, water and air quality are deteriorating while continued increases in consumptions and associated waste have contributed to the exponential growth in the region’s existing environmental problems (UNFCCC, 2007 cited from Veronica et al., 2010). Resources efficiency is an essential foundation of sustainability. Communities can significantly reduce environmental impacts and improve the economy by using energy, water and materials more efficiently, and by using better manufacturing techniques that cut pollution, waste and production costs because the correlation between economic activity, energy use, and human development is well-established (Kawai & Anbumozhi, 2009). Nowadays, more and more communities are realising the economic and environmental costs of sprawl and inefficient community infrastructure and design. New approaches like planning water, energy, transportation, buildings and community systems offer cost-effective and environmental sensitive ways. By using these sustainable approaches, business and society will preserve the environment for present and future generations.

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Some of the key driving forces of sustainability include urbanisation, limited resources, technology development, social awareness, health and safety imperatives, and new economics. These forces should be acknowledged for their impacts on and their potential opportunities for the community, industry and countries. If properly harnessed, these forces can play important roles in achieving the goals of sustainable development. Of all concerns being highlighted above, climate change is the most pressing issue by the human kind of this generation. Scientists have pointed that climate change can be the root of many other issues of sustainable development.

CLIMATE CHANGE AS A MAJOR CONCERN Climate change has the potential to undermine sustainable development and increase poverty. An effective way to address the impacts of climate change is by integrating adaptation measures into sustainable development strategies to reduce the pressure on natural resources, improve ­environmental risk management, and increase social well-being of the poor. ­Spending to adapt to climate change will undermine funding for sustainable development, and putting strong pressure on countries’ budget and development assistance. It is therefore vital that ways and means are found to enable developing countries to enhance their efforts to adapt in the ­context of sustainable development and sustainable development must incorporate adaptations plans. Sustainable development can successfully resolve many key issues faced in any countries today. Within the context of the good business from social, economic and environmental perspectives, sustainable development is especially effective across the countries since it offers practical solutions to common problems. Sustainable development can enhance a sense of place, reduce crime, mitigate natural hazard, conserve energy and resources, preserve culture and heritage, improve traffic circulation, and reduce waste. Perhaps more importantly, it can help relate and integrate many components of a country to achieve a synergistic as a whole.

THE SCIENTIFIC VIEW OF CLIMATE CHANGE Sun is the main source of energy in the universe. Earth absorbs radiation exerted from the sun and circulates the heat with the help of mediums such as atmosphere and ocean. Most of the heat is radiated back to the space via the equilibrium process where incoming solar radiation energy is balanced roughly by the outgoing terrestrial radiation (IPCC, 2001). This process helps to keep the earth warm. If any of these elements in the process of heat distribution are disturbed, the consequence will affect the climate behaviour. A change in the net radiative energy available at the atmosphere

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recognised as radiative forcing1. A positive radiating forcing will warm the environment whereas negative radiating forcing tends to cool the environment (Bernstein et al., 2007; IPCC, 2001). Radiating forcing is positively related to GHGs. Higher concentration of GHG in atmosphere will reduce the efficiency with which earth’s surface radiates to space. Thus, it enhances the greenhouse effect. The major GHGs are water vapour, carbon dioxide, ozone, methane and nitrous oxide (IPCC, 2001). The other element that helps to increase the negative radiating forcing is anthropogenic aerosols. These elements are microscopic airborne particles or droplets in the troposphere which are commonly found in fossil fuel and biomass burning which help to reflect solar radiation. Besides that, sulphate aerosols which are commonly obtained from the volcanic eruption activities, act as agents to cool the earth surface. These elements, namely anthropogenic aerosols and sulphate aerosols have much shorter lifetime than most of the GHGs (Bernstein et al., 2007; IPCC, 2001). Changes in temperature affect numerous aspects of our daily lives and economy. Temperature is one of most frequently used indicators of climate change. Direct measurement of surface temperature has been practiced since 19th century. Thousands of measurement instruments have been installed in land and ocean, which are used to record temperature updates globally. With the aid of these instruments, most of the variables in the equation of global warming are known. This helps to understand and identify the major contributors towards global warming. Global average temperature2 is one of the most-cited indicators of global climate change and temperature increase since 1861. The average global temperature had been risen by 0.74°C since 1906 until 2005 in comparison to 0.64°C during the period of 1906 until 2000 (Bernstein et al., 2007; IPCC, 2001; Preston, Suppiah, ­Macadam, & Bathols, 2006; UNFCCC, 2007 cited from Veronica et al., 2010). There was a drastic increase in average global temperature between years 2000 to 2005. The temperature increase has been spread over the globe but the impact is greater at northern latitude. Over the past 100 years, average arctic temperature was increased twice the global average temperature rate (UNFCCC, 2007 cited from Veronica et al., 2010). Another indicator for climate change is the global mean sea level. Global mean sea level had been rising at an average rate of approximately 1.8 mm per year from 1961 to 2003, which is significantly larger than the average rate over the last several thousand years. Since 1993, global sea level has risen at an accelerating rate of around 3.1 mm per year (Bernstein et al., 2007). From the observation of ocean temperature for couple of decades, In climate science, radiative forcing is loosely defined as the change in net irradiance at the atmospheric boundary between the troposphere and the stratosphere. 2 The average of near surface air temperature over land, and sea surface temperature. 1

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thermal expansion has been contributing consistently towards sea level changes. Deep ocean temperature changes slowly, therefore thermal expansion would continue for many centuries even if the atmospheric concentrations of GHGs are stabilised (IPCC, 2001). Besides that, sea level is affected by mass of seawater changes when ocean water exchanges with the water stored on land as ice sheet especially in Northern Hemisphere. Scientists believe that thermal expansion of the ocean has contributed around 57 per cent of the total sea level rise. Decrease in glaciers and an ice cap contribute 28 per cent of the sea level rise whereas the balance 15 per cent exerted from loss of polar ice sheets (Bernstein et al., 2007). Over the years before the Industrial Era, the atmospheric concentration of GHGs remained relatively constant. Since the industrialisation culture evolved in human life style, the concentrations of many GHGs have been increased directly and indirectly because of human activities. Human activities result in emission of four main greenhouse gases namely carbon dioxide, methane, nitrous oxide and halocarbons3. Atmospheric concentrations of GHGs increase when emissions are larger than removal processes. Seamless time and effort were spent in observing and interpreting the past variation and changes in the earth’s climate. These efforts have shown positive results towards identifying the variables influencing the climate system. Most influential driving forces on climate are the increase in the atmospheric concentration of GHGs, aerosols and the variation in solar activity (Bernstein et al., 2007; IPCC, 2001). The radiative forcing of the climate system is dominated by the GHGs. Its annual emission has grown between 1970 and 2004 by about 80 per cent, from 21 gigatonnes to 38 gigatonnes ­(Bernstein et al., 2007). One of the key elements in the GHGs is carbon dioxide (CO2). In the past 800 000 years, the CO2 concentration in the atmosphere is maintained in range between 170 ppm and 300 ppm (NESDIS, 2010). The concentration of CO2 in the atmosphere has been increased by roughly 35 per cent since the start of the industrial revolution (http://www. ncdc.noaa.gov/indicators). In late 1940s, a drastic increase in GHGs in the atmosphere has directly influenced the increase of global average temperature. There is a direct relationship between carbon dioxide concentration and global average temperature. In the middle of year 2010, CO2 concentration reached 380 ppm (Bernstein et al., 2007; NESDIS, 2010; Preston et al., 2006). Meanwhile, other contents of GHGs namely nitrous oxide (N2O) and methane (CH4) were increased by 17 per cent and 151 per cent respectively to their concentration prior to the industrial revolution (Preston et al., 2006). As the GHGs concentration increases, average global temperature increases proportionately.

3

A group of gases containing fluorine, chlorine or bromine.

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The amount of solar energy emitted is another factor that influences the global temperature. Total amount of solar energy from sun follows its natural 11-year cycle, which has been measured via satellites since 1978. Analysis on the solar life cycle shows no extraordinary behaviour. Thus, the net increase of solar energy throughout the observation period was zero (NESDIS, 2010). This indicates that it is extremely unlikely that solar influence has been a significant driver of global temperature change over several decades (http://www.ncdc.noaa.gov/indicators).

BUSINESS ROLE IN CLIMATE CHANGE Since 10, 000 years ago, agriculture business has undergone significant developments since the time of the earliest cultivation. In most of the Asian countries in 20th centuries, agriculture is one of the key contributors to their economy. In 2005, the agricultural output of China was the largest in the world, accounting for almost one-sixth of world’s share followed by the European Union (EU), India and the United States. In 2007, about onethird of the world’s workers were employed in agriculture (Llewellyn, 2007). However, the relative significance of farming has dropped steadily since the beginning of industrialisation. In the early 20th century, global warming or the climate change issues was not an agenda to be worried about, even though agricultural activities were one of the contributors towards global warming. However by contrast, both natural and man-made (anthropogenic) forcing apparently contributed more or less equally. Since mid-century, man’s activities seem to have been by far the major contributor (Sussman & Freed, 2008). Asia and the Pacific account for 37 per cent of the world’s total emissions from agricultural production, and the People’s Republic of China (PRC) alone accounts for more than 18 per cent of the total (ADB, 2009). Nowadays, any business activities need to be studied and analysed carefully in order to be environmental friendly businesses especially towards climate. Business community plays a major role in addressing the climate change. The business community has for some time been aware of the risks and opportunities associated with GHG mitigation in the context of current and future climate change policies. Many businesses have taken steps to reduce GHG emissions voluntarily. These efforts are more applicable and effective by redoubling efforts to improve energy efficiency, by focusing on specific areas such as transport, buildings and energy generators (Llewellyn, 2007). For instance, in 2007, Ford has announced plans to spend at least £1 billion developing a range of global environmental technologies for its Ford, Jaguar, Land Rover and Volvo brands. This is one of the largest commitments to the environment by a carmaker in the United Kingdom (Verwaayen, 2007). Ford introduced its sixth generation mainstream car at below 120 g/km CO2 with the name of

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Ford Fiesta ECOnetic in January 2008 with a sub 100 g/km Fiesta-size car following in early 2009. Thus, business committees should incorporate climate change policies into their corporate strategies. This attitude helps to tune direction of business communities to accommodate and abide climate issues when developing their business plans. Many communities are taking into account some of the impacts of climate change including potential countries’ regulations, shareholder perceptions and changes in consumer and supplier markets. Fewer businesses, however, are incorporating the risks and opportunities associated with the physical effects of climate change in their business planning. As trends in climate become clearer and the uncertainty surrounding future changes is reduced, more businesses will tend to consider to adapting to projected changes by taking actions now. This, in turn, involves reacting to and managing risks as well as taking advantage of opportunities. It is well-placed to make an early and decisive contribution to finding and implementing solutions to the challenge of climate change. One of the initial actions each business community ought to practice is to measure its carbon footprint and develop reporting systems to benchmark performance.

EARLY STAGE OF CSR CSR has become an important business jargon nowadays. It is a concept that is dynamic, fluid and broad in nature which makes it difficult to define. However, previous discussions have provided arguments about the need to have a concept that can educate businesses about the parameters and scope of their purpose of existence which is beyond mere making profit. The environmental and social issues particularly the issue of climate change are caused by the business activities and if it is not properly addressed, it may lead to self-destruction of human great civilisation. The understanding of the concept CSR to some businessmen is still limited to the narrow scope of how much business is giving back to the community – very much of philanthropic activities and ad hoc in nature. This is not aligned to the real concept of CSR that is promulgated by the scholars. The level of awareness and understanding about the concept determines the level of action and type of CSR activities being planned. CSR has many names, being proliferated due the broad nature of the concept. Terms like corporate responsibility, corporate citizenship, corporate volunteerism and corporate sustainability have been used to describe their social responsibility practices. There are also plenty of definitions of CSR proposed by various organisations. However, most of different terms and definitions proposed refer to the same meaning – the responsibility of the business. One of the earliest and famous definitions was proposed by Professor Carroll (1979). In 1979, Carroll proposed that CSR consists of the economic,

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legal, ethical, and discretionary expectations that society had of business organisations at a given point in time. Business institution is the basic economic unit in society. Thus, Carroll suggested that business has a responsibility that is economic in nature. Business has a responsibility to produce goods and services that society wants and to sell them with profit. So, the economic component of the business suggests that society expects business to produce goods and services and sell them with profit. Just as society expects business to make a profit, society expects business to obey the law. The law represents the basic rules of the game by which business is expected to function. Society expects business to fulfil its economic mission within the framework of legal requirements set forth by the society’s legal system. Hence, the second part of Carroll’s definition is the legal responsibility. Apart from obedience to the law, Carroll claimed that the ethical responsibility represents kinds of behaviours and ethical norms that society expects business to follow. These ethical responsibilities extended to actions, decisions and practices are beyond what is required by the law. Although they seem to be always expanding, they are expectations over and beyond legal requirements. Lastly, discretionary responsibilities represent voluntary roles and practices that business assumes for which society does not provide as a clear cut expectation as in the ethical responsibility. These are left for the managers and corporations to judge and decide, hence, they were referred to as discretionary. Regardless of their voluntary nature, the expectation that business performs are still held by the society. This expectation is driven by social norms. The specific activities are guided by businesses’ desire to engage in social roles not mandated, not required by law and not expected of businesses in an ethical sense. These activities are becoming increasingly strategic for businesses, for instance, making philanthropic contributions, conducting programs for drug abusers, training the unemployed or providing day care centres for working mothers. Later, Carroll called the fourth category as philanthropic, because they were mostly charitable and humanistic activities in which businesses engage to help society along with their business interests. Although Carroll’s CSR definition included an economic responsibility, many considered the economic component as what the business does for itself and the legal, ethical and discretionary (philanthropic) components as what business does for others. While this differentiation represents the more common view, Carroll argued that economic performance is something business does for society, even though society seldom looks at it that way.

CSR ADOPTS STRATEGIC FOCUS The development of CSR is just in the academia but consistent with the business practices in the real world. The awareness and perception from

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the stakeholders is also at the increasing trend. The recent survey based on the 2013 Cone Communications/Eco Global CSR Study (http://www. conecomm.com/global-csr-study), a follow up to the 2011 global survey of consumer attitudes, perception and behaviours around CSR, includes the opinions of more than 10,000 people living in 10 of the largest countries in the world by GDP. Consumers in the US, Canada, Brazil, the UK, Germany, France, Russia, China, India and Japan were surveyed. The findings indicate that business should change the way they do business. Majority of consumers believe that a business should align their business operations to address the environmental and social needs. They also believe that the business should involve in giving back to the society and also for the activities that help to preserve the environment. The recent development in terms of the growing awareness among the consumer should be able to send a strong message to the business to really think about the products and services. The recent evolution of CSR into strategic focus of business has been reflected well in the definition of CSR by ISO 26000, a guidance of Social Responsibility. The ISO 26000 aims to provide a clear guide for how organisation of any type, not just limited to business organisation to practice CSR. ISO 26000 defines CSR as ‘Willingness of the company to incorporate social and environmental considerations in the decision making and be accountable for the impact of its decision and activities on society and environment’. This implies both transparent and ethical behaviour that: ▪▪ contributes to sustainable development, ▪▪ takes into account stakeholders interest, ▪▪ is based on ethical behaviour, ▪▪ complies with applicable law, ▪▪ is consistent with international norms and ▪▪ can be integrated into the ongoing activities of an organisation.

The ISO 26000 really pointed to how CSR concept should be treated. It clearly describes the commitment that business should have, actions a company should take, and the clear scope of business responsibility. The key points in the definition are first about the ‘willingness to incorporate the social and environmental consideration in the business decision making’. By having such acts implemented in the business processes and activities will certainly help to avoid any negative impact of business operation towards the environment and society. For example, when a manager plans to set up new plant in certain areas, elements such as the impact to the environment and society should be analysed and appropriately paid attention and actions should be analysed and addressed in order to avoid any negative impacts produced due to the expansion plan of the business. The second salient point from the definition describes the accountability of the business towards the environment and society. This clause is

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consistent with the expectation of the stakeholder, and sinks harmoniously within the CSR scholars’ propositions. It is clear that the responsibility and accountability of the business is not only about financial impact but it also should include environmental and social impacts. The third salient point of the definition covers the scope which helps business practitioners visualise the parameters of their CSR practices. The sustainable development agenda has become the main focus for the business in the context of ISO 26000. This is reflected in the earlier discussions in this chapter. In fulfilling this characteristic, business should have a plan of how to minimise their contribution to the issue of climate change and this should be implemented and strategised accordingly. Business should also consider the expectation of the society, particularly in place where business operates. In this context, the business should understand CSR concept that is beyond law and ethics which also considers the norms and values of one particular society. Stakeholders hold the license for business to operate. Previous business cases proved that ignoring local society needs and expectations may expose business to the societal risks that may be detrimental for business growth. In addition, business should also behave ethically. Businesses’ behaviour should be based on the values of honesty, equity and integrity. These values are implying that business should concern for people, animals and the environment, and a commitment to address the impact of its activities and decisions on stakeholders’ interests. Business should also comply with the applicable law and behave in a consistent manner with the international norms. To ensure all the scopes are implemented accordingly, all the parameters mentioned above should be set clearly and integrated throughout the ongoing business operations and activities. This may involve serious reorganisation into business policy, planning, structure and strategy. It is obvious that CSR practices are not about giving back to community but it should be part of the business DNA in order to produce social and responsible businesses. The concept will help businesses to minimise their negative impacts on environment and society. And the concept should be applied to all types and sizes of businesses. Small businesses may seem to be unrelated and incapable of practising CSR as what many perceived but the real fact is the accumulated damage caused by the small businesses may be huge aggregately if it is ignored.

CONCLUSION This chapter was aimed to provide a clear understanding of why CSR is really an important business concept nowadays. The issues of sustainable development caused by the existing business philosophy and accompanied by the rapid industrialisation in many parts of the world provide strong justification

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of the need for business to change the way to do things. The power that businesses possess should be translated into greater responsibility. The social and environmental footprint of business is seriously needed to be addressed and avoided. Stakeholders’ expectation is changing towards business due to many serious business cases caused by the business operation. The stakeholders demand businesses to behave and be transparent in their practices. Failure to do so may cause business risk that may impede business growth. CSR is a concept that is still evolving academically and practically. The concept is now being accepted as one of the business mainstream strategy. The concept started as an academic concept and translated into business and joined important business strategies for all types and sizes of businesses. There are now various movements and initiatives being organised to help educate business to become part of the entity that live harmoniously to achieve the sustainability of humankind.

REFERENCES Asian Development Bank (ADB). (2009). Building climate resilience in the agriculture sector in Asia and the Pacific. Manila, Philippines: Asian Development Bank. Bebbington, J. (2001). Sustainable development: A review of the international development, business and accounting literature. Accounting Forum, 25(2), 128–157. Bernstein, L., Bosch, P., Canziani, O., Chen, Z., Christ, R., Davidson, O., . . . Yohe, G. (2007). Climate change 2007: Synthesis report. Geneva, Switzerland: Intergovernmental Panel on Climate Change (IPCC). Brundtland, G. H., Khalid, M., Agnelli, S., Al-Athel, S. A., Chidzero, B., Fadika, L. M., et al. (1987). Our common future. Oxford, England: Oxford University Press. California Global Corporate Accountability Project (CAP). (2002). Whose business? A handbook on corporate social responsibility for human rights and the environment. Retrieved 15 March, 2002, from http://www.eldis.org/go/home&id=11667&type= Document#.VGtJoGAcRjo Carroll, A. B. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4(4), 496–503. Cone Communication. (2013). 2013 Cone communications/Echo Global CSR Study. Available from http://www.conecomm.com/global-csr-study Friedman, M. (1970, 13 September). The social responsibility of business is to increase its profits. The New York Times Magazine, pp. 122–126. Gray, R. H., Owen, D. L, & Adams, C. A. (1996). Accounting and accountability: Changes and challenges in corporate social and environmental reporting. Hemel Hempstead, England: Prentice Hall. Gray, R. H., & Bebbington, J. (2001). Accounting for the environment. 2nd ed. London, England: Sage. Hibbitt, C. (2001, February 2002). Economic growth and sustainable development: Can we have our cake and eat it? Paper retrieved from www.gla.ac.uk/ departments/accounting/csear

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IPCC. (2001). Climate change 2001: The scientific basis. Contribution of Working Group I to the Third Assessment Report of the Intergovernmental Panel on ­Climate Change. Cambridge, UK: Cambridge University Press, 881. Kawai, M., & Anbumozhi, V. (2009). Towards a low carbon Asia: Challenges of economic development. Green Economics II at the Western Economic Association ­International, 8th Pacific Rim Conference, to be held in Kyoto, 24–27 March 2009. Llewellyn, J. (2007). The business of climate change challenges and opportunities. New York, NY: Lehman Brothers. Lodhia, S. K. (2002, July). Environmental accounting for the South Pacific: A possible mechanism for encouraging sustainable development corporations. Paper presented at the South Pacific Futures Symposium, Women’s college, University of Queensland, St Lacia Campus, Brisbane. NESDIS. (2010). Global climate change indicators. National Oceanic and Atmospheric Administration. National Climatic Data Center. Retrieved 20 October, 2010, from http://www.ncdc.noaa.gov/indicators/ Preston, B. L., Suppiah, R., Macadam, I., & Bathols, J. (2006). Climate change in the Asia / Pacific region. Clayton, Australia: CSIRO Marine and Atmospheric Research. Sussman, F. G., & Freed, J. R. (2008). Adapting to climate change: A business approach. Pew Center on Global Climate Change. ICF International Veronica, P., Lima, R., & Cristina, A.-G. (2010). Determinants of environmental accounting practices in local entities: Evidence from Portugal. Social Responsibility Journal, 6(3), 404–419. Verwaayen, B. (2007). Climate change: Everyone’s business. CBI Climate Change Task Force, 1, 1–56.

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Section 2 Managing CSR and Sustainability

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3

Business Strategy and a Sustainable World Don Clifton

Introduction ‘The first industrial revolution is flawed, it is not working, it is unsustainable, it is a mistake, and we must move on to another and better industrial revolution and get it right this time’

These are not the words of a social radical out to destroy capitalism, but those of (the late) Ray Anderson (Anderson, 2009), Chairman of Interface Inc, a global carpet manufacturer. Anderson went on to say: ‘Unless we can make carpets sustainably, then perhaps we don’t have a place in a sustainable world, but neither does anyone else making products unsustainably’

This chapter proceeds from a view of Corporate Social Responsibility (CSR) having evolved to the point where, along with similar concepts such as the Triple Bottom Line (‘people-planet-profits’) approach to business, it seeks to address the issues Anderson refers to: the sustainability of business activity and that of the economic system in which business operates. This view of CSR, as being consistent with the notion of ‘sustainability’ is ­captured by Frankental (2001) where he proposed that: ‘CSR is about a company’s long-term footprint on society. It is about the extent to which a company is prepared to examine and improve its impact on all those affected by its activities and to view its long-term reputation within the context of the social and ecological sustainability of its operations’ (p. 23)

In this chapter, we consider how organisations might go about addressing CSR or sustainability issues at a strategic level. In doing so, we will also use sustainability terminology in preference to CSR, as this better connects to other key concepts we will consider, such as a sustainable world and sustainable business. We begin by considering what it means for there to be a sustainable world and from there, what it means for a business to be sustainable. We then look at different ways in which businesses might demonstrate behaviours that are intended to reflect sustainable business practices, focusing on four main approaches: compliance, efficiency, proactivity and a sustainable business. 41

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A Sustainable World It is all well and good to talk of the need for humanity to live sustainably and for the business sector to play its part in achieving this, but what does it mean for there to be a sustainable world? What would such a world look like and what socio-economic system would support it? Answers to these questions are highly contested (Manderson, 2006; ­Osorio, Lobato, & Castillo, 2005). Ultimately however, a sustainable world is concerned with: ‘the flourishing of life on Earth over an indefinite time frame, incorporating human and ecological wellbeing, and with this wellbeing grounded in principles of intra- and inter-generational justice’ (Clifton & Amran, 2010 , p 123).

In the discussion that follows, we will refer to this as the well-being+justice principle of a sustainable world. Within this general framework, two main sustainable world approaches are evident within the sustainability literature, namely a reformist approach (or reformism) and a transformational approach. The reformist approach to a sustainable world proposes that the current dominant socio-economic system1 is fundamentally sound and more than capable of delivering its key goal of continued human development or, more commonly, sustainable development. For reformism, humanity’s challenge is to pursue human development through continued economic growth and technology advance, but in ways that address the ecological and social harms that are currently being experienced, that is, to make the current system more ‘green and socially just’. Other key features of this approach include: (a) ­continued economic growth as necessary to overcome problems of p ­ overty and to promote general human well-being; (b) continuation of the current globalisation and free-trade agenda to underpin these economic goals; (c) technological advance as necessary to improve resource use efficiency, maximise natural resource productivity to meet human demands, and to develop less polluting production and consumption processes; and (d) the incorporation of full externality pricing and ecosystem values into the market pricing system as a key mechanism for ensuring sustainable ­natural resource use (Clifton, 2010; Williams & Millington, 2004; Diesendorf, 1997). On the other hand, the transformational sustainable world approach sees the current dominant socio-economic system as a root cause of current unsustainable behaviours and, to progress a sustainable world, transformational change is needed. Key features of this approach include: (a) human The dominant socio-economic system is one of continuous economic growth encompassing free trade, globalisation, a key role for multinational corporations, a focus on technological advance, and human well-being progressed through increased personal income and consumption. In this sense, socio-economic system dominance can be seen in terms of the system that is currently dominant in the world by way of its economic and political power.

1

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well-being as best advanced through consumptive sufficiency and a focus on well-being through life experiences; (b) continued consumptive growth as unsustainable and a primary cause of both ecological problems and poverty; (c) poverty as best resolved through resource reallocation not more globallevel resource-throughput economic growth, with a key role for the rich, especially the wealthy industrialised nations, to cease the exploitation of resources from the politically and economically weak; and (d) constraints placed on the use of the Earth’s natural resources so that it remains within ecosystem limits (Clifton, 2010; Williams & Millington, 2004; Diesendorf, 1997). Reformism is the current dominant sustainable world approach and is consistent with the sustainable development agenda promoted by the business sector, the United Nations and its related bodies, and by most, if not all, governments (Clifton, 2010; Handmer & Dovers, 1996; Gould & Lewis, 2009). This does not mean that the transformational approach does not have a strong and well-established basis. To the contrary, various themes evident in the transformational approach are well established in a number of areas including ecological economics but more so the emerging field of green economics, environmental sociology, and eco-centric approaches to life on Earth. The important point for the purposes of this discussion is that although there are some common threads through these two main sustainable world approaches that can be applied in the business sector and sustainable business strategy, there are also substantial differences and it is important to think through exactly what we believe is a credible pathway forward for humanity to be living sustainably, and how this translates into business activity. We will look as some of these important issues as the c­ hapter progresses.

Sustainable Business What does it mean for a business to contribute to a sustainable world: for it to be a sustainable business? Both the reformist and transformational sustainable world approaches see the business sector as a (or the) major cause of ecological harms at local, regional and global scales and, as a consequence, this sector needs to play a key role in solving these problems (Bruno & Karliner, 2002; WCED, 1987). Much has been written about what the business sector, and individual firms within it, need to do to progress a sustainable world outcome, including reducing pollution, increasing efficiency of resource use, investing in new ‘cleaner’ technologies, redesigning and re-­engineering products and services to make them more environmentally friendly, engaging with various social actors to improve firm performance in meeting social expectations, transferring modern technologies to poorer nations, and so on (WCED, 1987; Hart, 2007; Esty & Winston, 2009; WBCSD, 2008; Hart & Milstein, 2003; McDonough & Braungart, 2002; UN, 2008).

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These specific actions are, however, all directed towards a higher level outcome, which Dunphy, Griffiths and Benn. (2003) describe as the sustaining corporation (or as we shall refer to it, as a sustainable business) where a business: ‘[provides] an excellent return to investors . . . [but where its] fundamental commitment is to facilitate the emergence of a society that supports the ecological viability of the planet and its species and contribute to just, equitable social practices and human fulfilment’(p. 16).

For Dunphy et al., a sustainable business is not only committed to making a positive contribution to human and ecological well-being in its own internal operations, but also actively advocates for change in the broader social context. The sustainable business is one that also seeks to: ‘exert influence on the key participants in the industry and in society in general to pursue human welfare, equitable and just social practices and the fulfilment of human potential of all . . . [It] tries to assist society to be ecologically sustainable and uses its entire range of products and services to this end, . . . [and] is prepared to use its influence to promote positive sustainability policies on the part of governments, the restructuring of markets and the development of community values to facilitate the emergence of a sustainable society’ (p. 26).

In these respects, a sustainable business is committed to progressing the well-being+justice sustainable world principle we spoke of earlier, and to do so within its internal operations and in the broader social context: it is to these ends that its various activities are directed. Whether the sustainable world approach that business should be advocating is one based on either the reformist or transformational approach is a separate question, but one that we cannot shy away from. The sustainable business terminology also highlights two main ways in which the terms sustainability and business are connected. The first is where the focus is on the business unit itself continuing as a going concern: what is sustained is the business. The second sees the focus of what is to be sustained in terms of the well-being+justice sustainable world principle, and the issue of interest is the role the business plays in contributing to the achievement of these goals. Some authors see these two concepts as necessarily linked in that unless a business is actively progressing to sustainable business status, it will itself cease to be viable. Others are somewhat sceptical of this linkage, pointing to various inconsistencies between corporate goals and sustainable world goals. Examples of these claimed inconsistencies include return on capital objectives which are often framed around net present value calculations over time frames that can be far removed from those appropriate to sustainable world considerations (Ehrlich, 1985), and the continued financial prosperity of some corporations even where the products and/or services they produce are fundamentally at odds with sustainable world objectives (Van De Ven & Jeurissen, 2005). This distinction between the two

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ways in which the sustainable business term is used is important to recognise. The confusion in use is often used deliberately in greenwash and policy debates. Some care is needed in identifying exactly what is meant when we hear or use sustainable business terminology; ask yourself ‘so what is it that is really being sustained here?’ A sustainable business is one that is seen to successfully combine corporate continuity and sustainable world objectives: it contributes positively to a sustainable world whilst sustaining itself in the process although. A key point to be made here, however, is this: outside of a collective self-extinction decision, humans have no option but to live sustainably and from an inter-generational justice perspective, each generation is morally bound to do so. Living sustainably must take priority and is the standard against which all human behaviour must be measured. Business strategies and behaviours must therefore be first and foremost consistent with sustainable world objectives. However, for this sustainable world comes first requirement to move from mere words into action, our socio-economic system must be restructured in such a way that it reliably removes from our society any business (or any organisation for that matter) that fails to meet the sustainable world well-being+justice criteria regardless of its financial performance. Currently, the socio-economic system only reliably removes businesses that consistently fail financially. A sustainable business is one that seeks to progress this type of socio-economic restructuring. Before moving on to the specific ways in which firms might pursue sustainable business strategies, we need to ask if it is possible for any business to be sustainable in its own right. This is part of a broader question of whether sustainability can only meaningfully be considered at a global level, or whether it does make sense to talk of a sustainable business, a sustainable industry, a sustainable nation, a sustainable community and so on. One way to think about this in the business sector is in relation to a set of ‘rules’ the ecological economist Herman Daly has presented as being necessary to adhere to if society is to live sustainably in ecological terms (for the sake of this exercise, we will not extend this discussion to the social justice dimensions of a sustainable world, although you may want also to think of how these Daly rules might have social justice implications). Daly (1999) focuses on the base of natural capital, that is, the capital base of natural resources humanity needs to ensure long-term well-being over an indefinite time frame, such as productive soils, fish stocks, forests, water, biodiversity, carbon cycles and so on. He then proposes that the following rules need to be adhered to: Output rule (a) Waste outputs must be kept within the natural absorptive capacities of the environment that is, non-depletion of waste-sink services of natural capital such that wastes do not accumulate in the environment.

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Input rules (b) Harvest rates of renewable natural resources should not exceed regeneration rates that is, non-depletion of the source services of natural capital. (c) For non-renewable natural resources, the rate of use must be paired to the rate of investment in renewable alternatives such that renewable alternatives are readily available once the non-renewable resource is depleted. The idea here is that if every generation adhered to these rules, then the generations that follow would have a natural resource base that remained intact and able to provide the needed resources for continued well-being. It can be equated to the idea of maintaining a level of capital in the bank and living only off the interest—the capital base is not depleted so, the interest can keep funding a lifestyle effectively forever. The question for our purposes is how any one business can meet the demands implied by these rules. Take the output rule for example: it might be possible for a business to reduce its output of pollutants to what might seem an incidental level and one that is a model for other businesses to follow. But, whether the wastes that are still discharged meet Daly’s output rule depends on what every other business is doing. It is this issue that brings some authors to conclude that the concept of sustainability can only make sense when looked at from a global perspective, as the positive actions by any one person, business, community or nation can easily be countered by others (Lamming, Faruk, Cousins, 1999; Alcott, 2008). Further, even apparently small ecological impacts of one firm can, when added to those of all other firms, add up to a collective major and unsustainable impact. This is particularly evident in the small business sector where any business may see its own ecological impacts as minor and not worthy of attention. However, when all small business impacts are added, the impact can be quite significant. Some authors have put forward the idea of a generalisation principle to help think about whether any one unit of analysis (a business, a household, a community, etc) can be seen as sustainable. The generalisation principle proposes that human behaviour at any sub-global societal level is inconsistent with a sustainable world if it is one that cannot be realistically attained by the rest of humankind (Daly, 1996; Naess, 1988; WCED, 1987). The reason this is important for the strategy issues we address in this chapter is that, without the broader global picture in mind, actions within any business to pursue a sustainable business agenda might do little more than give a feeling of achievement that, in the big scheme of things, fails to address the core issues society needs to confront. A simple example might help: much is made these days of the quest for more environmentally friendly motor vehicles (electric, hybrid, bio-fuel, and so on). Coupled with this attention to vehicle design is a marketing effort by auto firms to grow their businesses and to sell

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more cars globally. We need to ask if an auto firm trying to make its vehicles more environmentally friendly in design will address core sustainability issues if, at the same time, the quest is to increase total vehicle numbers in the global space (and all this entails: more roads, increased sprawl, fragmented natural habitat, and so on). Is ownership of a (claimed) ‘environmentally friendly’ car by say, 500 million people, generalisable to all potential car owners on Earth? If we answer ‘no’ to this question, then we have some serious questions to ask about the merits of a sustainable business strategy within an auto firm, and the industry as a collective, that fails to address this problem of the overall scale of vehicle use.

Strategy Strategy is concerned with how an organisation goes about conducting its operations and achieving its goals. Although there are many facets to how this simple view of strategy unfolds in the business domain, in this chapter we are concerned with what Mintzberg (2003) refers to as a pattern of ­behaviour—what actually occurs within a business regardless of what strategic plans might have been developed, or what management’s intentions were. The reason for this focus is simple: the Earth’s eco-systems don’t care about human constructs; they don’t care about our economic systems, our ideologies, our beliefs, our desires, our intentions. What matters is whether a sustainable world outcome is actually achieved. Our concern then is actual business behaviour, not plans or promises. To help us better consider different ways in which strategic patterns of behaviour manifest themselves within the sustainable business context, we will draw on the work of Baumgartner (2009) and Dunphy et al. (2003), and consider four general approaches: ▪▪ Compliance: This approach focuses on risk reduction from failing to meet minimum standards. Attention is given to sustainability issues that have the greatest litigation risk. Tighter regulations on environmental or social issue are mostly opposed, with any calls for action by business framed within a voluntary self-regulated approach. ▪▪ Efficiency: The efficiency approach displays an increased awareness of sustainability practices. The focus is on efficiency and the resulting costsaving benefits to business. ▪▪ Proactive: For the proactive approach, sustainability becomes part of core strategy. The focus is on gaining competitive advantage and long-term profitability from sustainability initiatives. ▪▪ Sustainable business: For this approach, sustainability values are fully internalised. The firm actively pursues ecological renewal, social equity, and human welfare at the firm, industry, social and political levels.

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Compliance Approach A compliance approach to sustainable business is fundamentally a risk-­ management strategy. The core objective is to minimise a firm’s potential liabilities from any action it might take that impact on the environment or on the well-being of its employees or members of the broader society who may be impacted on by the business. What types of risks are of importance here? We can think of risk in two main ways. First is the everyday use which has a somewhat imprecise meaning along the lines of ‘something might happen, mostly something bad, but it is an unknown possibility’. Then, there is the more technical use which is based on firmer statistical measurement of the probability that something might happen (say, the risk of respiratory diseases associated with smoking which can be quantified in statistical terms). In the context of a compliance approach to sustainability, both of these two views of risk are relevant, but the important question is risks to whom? Often, when looking at risk in a business setting, we think of risks to the business itself: things that may impact on the business which may cause it harm, mostly by way of reputation or financial loss, or both. In the sustainable business context, of at least equal and probably of greater importance are risks of harm to others—to human well-being and to ecological wellbeing. Sometimes these two harms (harms to the business and harms to other parties: human and non-human) are linked but they also may not be. One of the concerns about business activity that is seen as a major driver of unsustainable practices is the ability of a firm to externalise risks and harms and to limit its own exposure to the consequences of harms it might cause. When thinking of compliance, the first thing that comes to mind is compliance with the law, however, a broader view of compliance sees it in terms of not only laws but also in areas such as voluntary codes of conduct and social norms and expectations. We look at each of these three areas of ­compliance below. Regulation The focus of regulatory compliance is on obeying the law and limiting the risks of harmful consequences to a business that might come from breaching the law: fines, imprisonment, loss of operating licences, or even media exposure of regulatory breach together with the negative impacts this might have on a firm’s reputation. Although it is important for a firm to comply with regulations in order to progress its sustainable business agenda, regulatory compliance is quite limited in its effectiveness: it is necessary but not sufficient to become a sustainable business. One reason for this limited effectiveness in a compliance approach is usually coupled with a general orientation to resist stronger regulation and

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instead advocate voluntary action to address sustainability issues. It is, however, well-known that regulation is one of the most, if not the most, important drivers for businesses to change and adopt sustainability strategies: ‘As a bottom line, it is regulation itself . . . . or the threat of regulation that is the most powerful inducement to industry to negotiate credible environmental partnerships, either with the government of with environmental groups or with both. It is bargaining “in the shadow of the law” that has achieved the best results’ (Gunningham, 2002, p. 10).

An alternate view to this call for minimal regulation and voluntary action is proposed by Porter and van der Linde (1995) who, in a controversial article, call for stronger regulation to promote sustainability initiatives (in this case, focused on environmental issues) and to improve the competitiveness of firms, industries, and a nation’s business sector in general. Porter and van der Linde propose that a drive for less regulation and more voluntary action is misguided; instead, ‘properly crafted environmental regulation has a number of key benefits including the following: ▪▪ Providing signals to companies about likely resource inefficiencies (e.g., from waste generation) and potential technological improvements. ▪▪ Regulation focused on information gathering such as toxic substance inventories can raise corporate awareness and drive action to address identified problems. ▪▪ It reduces uncertainty that investments to address environmental issues will be valuable. ▪▪ It creates pressure that drives innovation and progress. ▪▪ It levels the playing field as firms transition to becoming sustainable businesses, by helping to ensure that one company cannot gain shortterm advantage by avoiding environmental investments. ▪▪ It can address the problem of firms not acting to attend to environmentally damaging activities where, at least in the short term, there is no financial incentive to change.

This view of Porter and van der Linde is consistent with how we described the core features of a sustainable business earlier in this chapter, where we referred to the role such a business plays in ‘promot[ing] positive sustainability policies on the part of governments’. Another problem with a focus on regulatory compliance (which is to a degree picked up by other compliance issues of voluntary codes and social expectations discussed below) is that regulations are generally reactive, that is, regulations are made based on problems that have occurred, not predictive of problems that may occur: ‘It is an unfortunate truth that a major incident is often the best stimulant for policy change, both in government and business. Too often policy is as good as the latest disaster was bad, (Winsemius & Guntram, 2002, p. 111).

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The final point we will cover here is that it is simply not possible to regulate everything. Ultimately, sustainability is a moral issue, one concerned with issues of justice within and across generations. Rushton (2002) makes this point: ‘I am very much of the view that ethics and values are at the foundation of sustainability. Successful global businesses will be those that integrate sustainable development, including social responsibility, into their business strategies. As the Brundtland Commission reported in 1987, “human survival and well-being could depend on the success in elevating sustainable development to a global ethic”’ (p. 3).

In this sense, compliance with the law can be seen as merely a starting point for progressing sustainability principles within a firm as opposed to being a comprehensive strategy in its own right. Voluntary Codes of Conduct Voluntary codes of conduct are mostly industry-based codes to which firms in an industry (or individual practitioners in some cases) agree to be bound. Often these codes require compulsory agreement to adhere to them in order to become a member of an industry association. The codes themselves are however, voluntary in the sense that they are established by the industry not by government regulation. Voluntary codes of conduct have the potential to be a forceful tool in progressing sustainability principles in the business sector, especially in the light of the discussion we have had so far on the limitations of regulation in achieving this end. Whether these codes can achieve this outcome is of course another question and critics argue that these codes can, instead of advancing sustainability outcomes, thwart them. There are a number of reasons for this view, some of the main ones being as follows (Barraclough & Morrow, 2008; King & Lenox, 2000; Landman, 2008): First, voluntary codes are often used as a mechanism for warding off more stringent government regulation. Industry in effect puts in place a voluntary code, designed by its own members suited to its own purposes, and uses this to demonstrate to government that regulation is not needed as the industry is addressing its own issues through its own internal processes. Further, having a voluntary code in place can give an industry group a seat at the negotiating table when regulations are being developed, providing the opportunity to dilute the impact of any regulations that might eventuate. Here is how one author describes this issue: ‘Cigarette companies were among the first to understand the value of voluntary behaviour codes in staving off more serious government regulation of their activities. This is as a result of the codes themselves acting as a block to government regulation, or the perceived credibility of industry bodies in having codes gives them a seat at legislative negotiations to help water down the strength of any regulations that might come into force’ (Landman, 2008).

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Next, voluntary codes can be used mostly as a means to improve the public image of an industry rather than to drive fundamental change to improve an industry’s social and ecological performance. Barraclough & Morrow (2008) make this point when commenting on the chemical industry’s ‘Responsible Care’ program, noting: ‘internal documents show[ed] the campaign was fundamentally designed to improve its [the chemical industry’s] poor public image (second only to that of the tobacco industry) in order “to complement its policy goals of countering stricter regulations”’ (p. 1786).

Third, is the question of who monitors the behaviour. The concern is that rather than the industry being proactive in enforcing its code, the monitoring of industry activity is left to the public. Before anything is done by way of code enforcement, a public complaint is needed. This can mean that unless someone outside the industry acts as a watchdog, then violations of codes can continue with no action being taken. This problem is of even greater concern when firms are operating in countries with little public capacity to conduct this type of monitoring. As Landman (2008) notes: ‘Few ordinary citizens, though, have the time or knowledge to monitor advertising and behaviour for compliance with corporate codes, especially in less developed countries such as Malawi, Mauritius and Nigeria, where BAT [British American Tobacco] violated its own codes’.

Fourth, is the question of who enforces the code and what penalties apply for breaches. Enforcement is mostly in the hands of the industry itself and critics claim that penalties are either not applied or, if they are, their impact on the violating firm is so minor as to be of little or no incentive to cease code breaches. The final point we will cover here (although there are other issues that can be discussed) is that, by having a code of conduct in place, firms within an industry can use the code as a justification for their behaviour, turning the code into a defence shield claiming that ‘our firm was acting in full accordance with the industry code of conduct’. The point is that as industry codes are developed by industry for industry, it is quite possible that they only cover the issues the industry wants to address, not necessarily the broader set of social and ecological issues that firms in the industry need to confront. The code can then become a justification for not acting in ways consistent with sustainable business objectives, rather than a force driving such actions. In summary, although voluntary codes of conduct have the potential to drive significant progress in how the business sector contributes positively to the achievement of a sustainable world, unless issues such as those highlighted above are addressed, they can act as a barrier to progress rather than as a facilitator. We noted earlier in this chapter that a sustainable business should act to progress broader sustainability outcomes: that is, to ‘exert

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influence on the key participants in the industry and in society in general to pursue human welfare, equitable and just social practices and the fulfilment of human potential of all’. Being an advocate for strong and purposeful industry codes is one way in which a firm can influence the industry in which it participates to address sustainability issues. Social Expectations The risks from social pressure come from the extent to which a firm’s public image—and from that, its reputation, product/service sales, and resulting financial performance—are impaired due to public reaction to behaviours of a firm that do not meet societal expectations. Exposure of a firm’s actions that may fail to meet public expectations can come from many sources: the general public, the press, activists groups, or even a competitor seeking to discredit a firm’s actions in order to gain market place advantage. Activism by non-government organisations (NGOs) is a particularly ­potent force on businesses to improve their performance in areas of ecological and human welfare. These NGOs range from well-established global groups such as Greenpeace, the World Wildlife Fund (WWF), and Amnesty International, to small groups that focus on issues specific to the local community. Activism does not need to actually be directed at a particular firm: just the threat of it is often enough to force firms to change. In addition, a firm may be targeted by activist groups for its association with another firm that is the primary target. For example, in 2007, Woolworths Australia was criticised for selling toilet paper which it claimed, without adequate grounding, was ‘environmentally, socially, and economically responsible’. A 2007 news article (Alberici, 2007), commented that: ‘[the] ABC Radio’s PM program has found at least two reports, plus an independent audit of the Indonesian company that supplies the pulp to Woolworths, that completely discredit that claim’. The pulp supplier in question, Asian Pulp & Paper (APP) is cited in the article as having a well documented track record of environmentally damaging practices (clearing of virgin rainforest) and human rights abuses’.

The key point to note here is that regardless of the legality or otherwise of APP’s actions in the countries in which it operates, pressure placed on Woolworths by various activists groups and news services resulted in a significant risk to Woolworths’ reputation and a need for it to take action to change its behaviour. Was Woolworths the primary target of the activists groups involved in the case? Possibly yes. However, APP has been a long standing target of NGOs such as Greenpeace and the WWF. In this sense, taking action against firms such as Woolworths which have a high sensitivity

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to adverse public sentiment is an effective way to drive change deeper into the supply chains in which these firms operate. The other example of social pressure issues we will address here has to do with practices that may be legal or even accepted as social norms in one country (say, a less-developed country) but fall far short of what we might expect in our own home country. This is an important topic and one that is becoming increasing relevant as firms deepen their supply chains across the globe, and outsource materials supply, manufacturing, and services to countries far removed from where final goods and services are consumed. Is it right, for example, for a firm to move its manufacturing processes offshore and, in doing so, exploit environmental laws that are less onerous and laws governing workers that allow the firm to treat workers by way of pay and employment conditions that would be totally unacceptable in the firm’s home country? There are many arguments surrounding these issues. The point for our current discussion, however, is that firms who engage in this type of value chain behaviour face the prospect of having their activities (including those of their value chain participants) publically exposed as violating social expectations, with possible negative consequences to the firm. Summary A compliance approach to sustainable business is important for any firm in order for it to progress its sustainable business agenda. This approach, however, requires no foundation of sustainability issues within the business at any strategy level: it can be implemented as merely a risk-control approach that may have little consequence to the bigger sustainability issues the firm, and society in general, needs to confront. Further, firms that stay focused only on the compliance approach expose themselves to the risk of missing out on important trends and opportunities that more comprehensive sustainable business strategies may offer. Efficiency Approach The basic idea behind the efficiency approach to sustainable business is that, by using resources more efficiently, and by reducing waste and pollutants, both the environment and the firm win: the environment benefits from less resource use and waste discharge, and the firm wins from a reduction in costs which flow through to improved financial performance. Discussions about the efficiency approach to sustainable business are mostly centred on ecological issues, and this will remain the focus of our discussion. Efficiency in this context covers two main issues. First is efficiency in the productivity of renewable natural resources: that is, we get more output from the resource base (like getting higher interest on money invested in a bank account). We will call this productivity efficiency (this is also referred to

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as optimisation efficiency or maximum sustainable yield in resource productivity). Note that we can also talk in terms of efficiency in the extraction of nonrenewable resources (such as oil, minerals, coal, etc.) but for the purposes of this discussion we will stay focused on renewable natural resources, as ultimately it is these resources that determine the sustainability or otherwise of life on Earth. The second form of efficiency has to do with efficiency in the production and consumption process: a reduction in resources used, and in waste and pollutants created, as products and services are made, delivered and consumed. We will call this production efficiency (this is also referred to as technical efficiency). Examples include using less energy per unit of production, reducing waste in the production process by using resource inputs more efficiently, reducing pollutant output, recycling, reducing packaging, and so on. So, despite the apparent benefits of the efficiency approach and the winwin claims it makes, will it help move society towards a sustainable world outcome? There are a number of reasons to suggest that, on its own, it will probably not do so. The first issue has to do with productivity efficiency. Applying new technologies to increase the productivity of the Earth’s natural resource base is an important part of the reformist agenda we spoke of earlier and includes things such as the use of modern industrialised agricultural practices, genetic engineering of plant and animal species, intensive livestock farming, and so on. Debates continue as to whether these technologies as they have developed to date genuinely have increased resource productivity in a way that can be sustained into the longer term. Some claim that this is clearly true while others are far from convinced and propose that this is only apparent if all negative externalities (use of fossil fuels, chemical and fertiliser pollution, long-term soil degradation, biodiversity loss, displacement of people from their lands, destruction of cultures, etc.) are excluded from the analysis (for an example of this alternate view, see Shiva (2005)). But beyond this debate is the important issue of ecosystem resilience. From a sustainability perspective, productivity efficiency must be linked to resilience. Resilience, in this context, is of two kinds: engineering resilience and ecological (or socio-ecological) resilience (Holling, 1996; Peterson, Allen, & Holling, 1998; Walker & Salt, 2006). Socio-ecological is the term we will use here for this second form of resilience. Engineering resilience has to do with the ability of a system to bounce back to its pre-disturbance state following some form of disturbance. For example, a personal illness and our ability to overcome it and get back to normal health. Socio-ecological resilience on the other hand has to do with the ability of a system to continue to function despite exposure to disturbance. An example might be the ability of our society to remain cohesive, caring and peaceful rather than fall into

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a state of anarchy and violence in the light of the emerging implications of global warming such as sea level rises, food shortages and competition for resources. It is the socio-ecological form of resilience that is of key importance for a sustainable world: it has to do with continuing to meet the well-being+justice sustainable world criteria regardless of what disturbance and change might occur to ecological and social systems over time. In this sense, the concepts of a sustainable world and socio-ecological resilience are inseparable (Holling, 1996; Walker & Salt, 2006). The key point is that in the sustainable world context, an approach that seeks to maximise natural resource productivity to underpin continued economic growth as a means of achieving human well-being (as is the agenda of the reformist sustainable world approach) undermines the resilience of the very system on which it depends. This occurs for many reasons including: (a) the removal of spare capacity as all natural resources are pulled into the field of production maximisation; (b) the imposition of change at a faster rate than ecosystem feedback mechanisms can provide information concerning the consequences of this change; and (c) in general, pushing eco-systems close to or beyond tipping points without society necessarily knowing this may be happening and with, more often than not, very undesirable consequences (Meadows, Randers, & Meadows, 2004; Walker & Salt, 2006). In short, from a socio-ecological resilience perspective, the quest for optimisation in the production of renewable natural resources is a disaster in the making. It becomes only a matter of time before ecological systems are pushed to a point where collapse is the probable outcome. The second issue we will cover here is the claimed win-win that can come from more efficient use of resource inputs in the production process—a production efficiency claim. If we assume a win for the firm, is there really a corresponding win for the environment and for a sustainable world? Efficiency gains have long been recognised as a key means by which firms improve productivity, reduce costs and increase wealth (Gould, Pellow, Schnaiberg, 2008). It has also been known for a long time that productionbased gains in resource efficiency lead to an increase in output and resulting consumption that can negate some or all of the resource use gains (rebound), or result in greater overall resource use (backfire) (Polimeni et al., 2009). Termed the Jevons paradox, the extent of rebound or backfire in respect of gains in resource use efficiency varies from case to case, however, it is a wellunderstood and recognised phenomenon (Polimeni et al., 2009). A quick thought experiment can help understand how this works. Assume for a moment that you run a large manufacturing business. You hire an efficiency expert who shows that you can reduce your resource use per unit of production by 15 per cent within 12 months resulting in a net improvement to your firm’s bottom line profit of $2m per year. You put the plan into action and the following year, the $2m shows on the bottom

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line results. So what happens to the $2m? Well, it could stay in the firm as retained profits and be applied to increased production and marketing efforts, possibly coupled with a cost reduction to consumers, with a result of higher overall sales. In this case, efficiency gains are spent through increased sales and consumption. You could instead distribute the $2m to shareholders as an increased dividend but what would they do with the extra money? Most likely, they would spend it on some form of consumption. Maybe you decide to apply the $2m to paying your employees more. What would they do with the money? Probably, spend it just as the shareholders might. The point is that somehow, at some point in the economic system, increased efficiency of resource use that also creates increased wealth—a feature of the win-win argument—ultimately finds its way into increased consumption that negates to varying degrees the resource use gains that at first seemed to have been created. These consumption increases may be: direct, where a firm increases sales based on the efficiency gains it has received: or indirect, as the increased wealth the efficiency gains delivered filters its way through the economy via increased dividends, through increased wages, or through increased tax revenues and resulting government expenditures. The other problem with the production efficiency approach to sustainable business that we will discuss here is that, initially, firms quite often find easy gains: ‘picking the low hanging fruit’, as it is often termed. After this, improvements in efficiency and achievement of a win-win become increasingly harder and the costs of efficiency improvements become increasingly higher per unit of progress. This poses some substantial challenges for industry in making needed improvements in resource use and waste reduction/ elimination, especially if coupled with a general opposition to regulation and reliance on voluntary initiatives as we discussed in the compliance section (above). Summary Baumgartner (2009) suggests that, in order for the efficiency approach to be effective, it needs to find a base in a firm’s values and be part of corporate philosophy. In this respect, a commitment to sustainability principles would be expected to be documented in key organisation statements, such as in a firm’s vision, mission and core values. The efficiency strategy is, however, fundamentally an internal process strategy: it is one where the firm focuses its sustainability efforts on innovative processes, technology, and monitoring and reporting systems to maximise efficiency gains with a resulting improvement in the firm’s bottom line (Baumgartner & Ebner, 2010). As such it is, on its own, an approach that does not address the broader set of issues that businesses need to confront in order for them to become sustainable businesses.

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Despite the criticisms that have been made in our discussion of the efficiency approach, using resources efficiently—especially in the production, distribution, and consumption process—is clearly important and something that all businesses need to actively pursue if we are to transition to a sustainable world. The problem is that unless this is coupled with a means to prevent efficiency gains being spent on more resource-consuming production and consumption, then we are deluding ourselves into thinking that progress is being made. Proactive Approach Dunphy et al. (2003) describe this approach as one where a firm sees sustainability not as a cost or impediment, or as something merely to be pursued by compliance or efficiency strategies, but rather as a source of strategic business opportunities and competitive advantage. It sees: ‘an organizational commitment to achieving competitive advantage through the strategic adoption and development of ecologically and socially supportive production processes, products and services and innovative human and knowledge resource management practices’ (p. 176).

Dunphy et al. describe how this approach to sustainable business requires organisations to shift their cultures, structures, reward systems and job responsibilities and build the internal capabilities to support this strategy. In addition, firms cannot forget that competitive advantage does not come from sustainability initiatives alone. Firms compete in many dimensions in the market place and attending to basic competitive strategic practices (such as logistics management, cost controls, marketing strategy, etc) is no less important under a proactive approach to sustainable business. As with the compliance and efficiency approaches we have discussed so far, the remainder of this section will look at some issues with the proactive approach to consider whether it is a credible sustainable business strategy in its own right. Green Consumerism One approach to the proactive approach is through green consumerism: the production of goods and services that are seen to have strong environmental (and/or social) credentials that appeal to specific markets. The argument is that action by a firm to produce goods and services in this manner can have positive environmental and social benefits, as well as giving the firm a strategic advantage in the market place by way of sales, reputation, community support and so on. These strong environmental and social credentials are mostly found though less-harmful behaviours in the production and consumption process

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and can cover a number of initiatives including less-harmful ways of extracting recourses (e.g., fishing practices that reduce by-catch and the killing of non-target species, or agriculture using less-harmful fertilisers and pesticides), less-polluting technologies, products manufactured for ease of recycling, consumer-level recycling systems and so on. All of these practices are important for business and society to pursue in order to reduce humanity’s impact on the Earth’s ecological systems. The business sector in particular has a key role to play as for the most, it is business that determines which resource extraction technologies are used, what the product design and manufacturing technologies are, what set of options the public has to select from in its consumption decisions, what information members of the public have in relation to the impacts of their consumptive choices, and whether consumptive waste can be recycled in a meaningful way (Bruno & Karliner, 2002; Gould et al., 2008). But, do we have a similar problem here as for the efficiency approach we discussed earlier? In some respects at least, the answer is ‘yes’. One reason is that the more we feel our activities are less harmful (less polluting, less resource intensive and so on), the more we may feel inclined to consume, or be convinced by marketing departments that we can consume and to believe we can do so sustainably. The marketing message is simple: you can save the world through your consumption choices, and can consume with a clear conscience (Beder, 2002; Bell, 2009). In the end, so the claim goes, everyone wins: business, the consumer and the environment. But this story is not difficult to see through. For one thing, green consumerism continues to push humanity down the resource consumption path which is currently running at unsustainable rates: consuming more is not going to solve this problem regardless of the ‘green’ nature of what is consumed (Beder, 2002). In addition, green consumerism simply continues the business-as-usual marketing strategies of need creation through the deliberate engineering of feelings of dissatisfaction and deprivation in people’s lives, offering the solution to this dissatisfaction through consuming a particular product (in this case, a ‘green’ product), and cycling the whole dissatisfaction-consume-dissatisfaction-consume routine indefinitely to drive continued consumptive demand and economic growth. This entire need-creating-and-consuming process is, however, ecologically damaging, undermines human well-being, and offers no durable well-being solution (Hamilton & Denniss, 2005; Raiklin & Uyar, 1996; Brown, 1995; Cato, 2009; Hamilton, 2004). Self-Interest versus Doing What Is Right The second point we will cover has to do with the core underpinnings to the proactive approach, based on a win-win outlook for business: good conduct

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in the sustainable business space is also good for business (this view also underpins the compliance and efficiency approaches discussed earlier). But is this approach sufficient? Hoffman (1991) discusses this issue of self-interest when looking at business ethics and environmental initiatives, and makes the point that at times we are called on, in order to act ethically and do what is right, to act in ways that may not be in our own self-interest or in the best financial interests of our business. Hoffman goes on to argue that to ground our decision-making in business to ‘doing what is right as this is also good for business’ is a shallow view as: ‘When the crunch comes, when ethics [and environmental initiatives] conflicts with the firm’s interests, any ethics program that has not already faced up to this possibility is doomed to fail because it will undercut the rationale of the program itself’ (p 176).

Hoffman goes on to argue that acting ethically and in ways consistent with responsible environmental care should be done because we are morally obligated to do so; it is not subject to a self-interest price test. The point to take from these approaches Hoffman raises is that the compliance, efficiency and proactive approaches to sustainable business all place progressing of the well-being+justice principles within the context of benefits to the firm. Self-interest remains the dominant driver for action. Earlier in this chapter, however, we made the observation that a sustainable world must come first and is the basis against which all of our activities need to be judged. In this respect, none of the three approaches to sustainable business we have discussed so far are sufficient to give humanity its best opportunity to progress to a sustainable world. This is where the idea of the sustainable business comes in to play. The Sustainable Business Dunphy et al. (2003) describe a sustainable business as an ideal, but one which few, if any, firms have achieved. There may be many businesses that aspire to this ideal, but achieving it is another matter and the change process that needs to occur both within any one firm, and within the broader social context, in which a firm operates, is substantial. The key points we have covered so far in this chapter, setting out what a sustainable business is (an organisation that is committed to progressing the well-being+justice sustainable world principles, doing so both within its internal operations and in the broader social context), captured in the sustaining corporation description Dunphy et al. (2003) offer, namely: For the social sustainability dimension: ‘The organization accepts responsibility for contributing to the process of renewing and upgrading human knowledge and skill formation in the community and society generally and is a strong promoter of equal opportunity, workplace diversity and

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60  Chapter 3  Business Strategy and a Sustainable World work—life balance as workplace principles. It adopts a strong and clearly defined corporate ethical position based on multiple stakeholder perspectives and seeks to exert influence on the key participants in the industry and in society in general to pursue human welfare, equitable and just social practices and the fulfilment of human potential of all. People are seen as valuable in their own right’ (p. 26).

And for the environmental dimension: ‘The organization becomes an active promoter of ecological sustainability values and seeks to influence key participants in the industry and society in general. Environmental best practice is espoused and enacted because it is the responsible thing to do. The organization tries to assist society to be ecologically sustainable and uses its entire range of products and services to this end. The organization is prepared to use its influence to promote positive sustainability policies on the part of governments, the restructuring of markets and the development of community values to facilitate the emergence of a sustainable society. Nature is valued for its own sake’ (p. 26).

Some of the key points to take from this description of a sustainable business are these. First is that sustainability principles must be embedded throughout all levels of strategy and must be an integral part of all strategy initiatives and activities. In short, for a sustainable business, sustainability is part of the organisation’s DNA. It is the norm, the way business is done, and there is no compromise. Second is that the problems we have identified as applying for each of the compliance, efficiency and proactive approaches are countered in the sustainable business approach. Notice, for example, that Dunphy et al. see people and nature as valued for their own sake, and actions to progress the well-being+justice principles are not dependent on there being a corporate self-interest benefit: if there is, then all well and good, but self-interest is not the overriding criteria for decision-making. The final question to consider from our discussions in this chapter is what sustainability approach should a firm be pursuing and promoting in its sustainable business quest: the reformist approach or the transformational? This is an important question and one that is beyond the scope of this chapter to explore. It is, however, a question we all need to ask ourselves and give some deep, insightful and reflective thought to. We can all talk of how important it is to live sustainably, and how critical it is for business to be part of this quest, but to pursue an approach to a sustainable world that merely gives the illusion of progress can easily become a barrier to needed change rather than a facilitator of change.

References Alberici, E. (2007). Woolworths busted over ‘environmental’ toilet paper. ABC online news. Available at http://www.abc.net.au/news/stories/2007/08/23/2013 650.htm

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Alcott, B. (2008). The sufficiency strategy: Would rich-world frugality lower environmental impact? Ecological Economics, 64(4), 770–786. Anderson, R. (2009). Ray Anderson on sustainability. Video available at http://www .bing.com/videos/search?q=video+ray+anderson+interface&view=detail&mid=9 2649030BA0B86D4617A92649030BA0B86D4617A&first=41#view=detail&mid=9 2649030BA0B86D4617A92649030BA0B86D4617A Barraclough, S., & Morrow, M. (2008). A grim contradiction: The practice and consequences of corporate social responsibility by British American Tobacco in ­Malaysia. Social Science & Medicine, 66, 1784–1796. Baumgartner, R. J. (2009). Organizational culture and leadership: Preconditions for the development of a sustainable corporation. Sustainable Development, 17, 102–113. Baumgartner, R. J., & Ebner, D. (2010). Corporate sustainability strategies: Sustainability profiles and maturity levels. Sustainable Development, 18, 76–89. Beder, S. (2002). Global spin: The corporate assault on environmentalism. Devon, UK: Green Books. Bell, M. M. (2009). An invitation to environmental sociology. Thousand Oaks, CA: Pine Forge Press. Brown, L. (1995). Ecopsychology and the environmental revolution. In T. Roszak, M. E. Gomes, & A. D. Kanner (Eds.), Ecopsychology: Restoring the earth, healing the mind (pp. xiiv–xvi). Berkley, CA: Sierra Club Books. Bruno, K., & Karliner, J. (2002). Earthsummit.biz: The corporate takeover of sustainable development. Oakland, CA: Food First Books. Cato, M. S. (2009). Green Economics. London, England: Earthscan. Clifton, D. (2010). Representing a sustainable world—A typology approach. Journal of Sustainable Development, 3(2), 40–57. Clifton, D., & Amran, A. (2010). The stakeholder approach: A sustainability perspective. Journal of Business Ethics, 98(1), 121–136. Daly, H. E. (1996). Beyond growth: The economics of sustainable development. Boston, MA: Beacon Press. Daly, H. E. (1999). Ecological economics and the ecology of economics. Cheltenham, UK: Edward Elgar. Diesendorf, M. (1997). Principles of ecological sustainability. In M. Diesendorf & C. Hamilton (Eds.), Human ecology, human economy (pp. 64–97). Sydney, Australia: Allen & Unwin. Dunphy, D., Griffiths, A., & Benn, S. (2003). Organizational change for corporate sustainability. London, England: Routledge. Ehrlich, P. R. (1985). Extinctions and ecosystem functions: Implications for humankind. In R. J. Hoage (Ed.), Animal extinctions: What everyone should know (pp. 59– 73). Washington, DC: Smithsonian Institute Press. Esty, D. C., & Winston, A. S. (2009). Green to gold. Hoboken, NJ: John Wiley & Sons Inc. Frankental, P. (2001). Corporate social responsibility—a PR invention? Corporate Communications: An International Journal, 6,(1), 18–23. Gould, K. A., & Lewis, T. L. (2009). The paradoxes of sustainable development. In K. A. Gould & T. L. Lewis (Eds.), Twenty lessons in environmental sociology (pp. 269– 289). New York, NY: Oxford University Press.

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62  Chapter 3  Business Strategy and a Sustainable World Gould, K. A, Pellow, D. N., & Schnaiberg, A. (2008). The treadmill of production. ­Boulder, CO: Paradigm Publishers. Gunningham, N. A. (2002). Green alliances: Conflict or cooperation in environmental policy. Working Paper Series. Canberra, Australia: Australian Centre for Environmental Law, Australian National University. Hamilton, C. (2004). Growth fetish. London, England: Pluto Press. Hamilton, C., & Denniss, R. (2005). Affluenza: When too much is never enough. Crows Nest, Australia: Allen & Unwin. Handmer, J. W., & Dovers, S. R. (1996). A typology of resilience: Rethinking institutions for sustainable development. Industrial and Environmental Crisis Quarterly, 9(4), 482–511. Hart, S., & Milstein, M. B. (2003). Creating sustainable value. Academy of Management Executive, 17(2), 56–69. Hart, S. L. (2007). Capitalism at the crossroads. New Jersey, NJ: Pearson Education. Hoffman, W. M. (1991). Business and environmental ethics. Business Ethics Quarterly, 1(2), 169–184. Holling, C. S. (1996). Engineering resilience versus ecological resilience. In P. C. Schulze (Ed.), Engineering within ecological constraints (pp. 31–44). ­Washington, DC: National Academy Press. King, A. A., & Lenox, M. J. (2000). Industry self-regulation without sanctions: The chemical industry’s responsible care program. Academy of Management Journal, 43(4), 698–716. Lamming, R, Faruk, A., & Cousins, P. (1999). Environmental soundness: A pragmatic alternative to expectations of sustainable development in business strategy. Business Strategy & the Environment, 8(3), 177–188. Landman, A. (2008). Corpwatch. Absolving your sins and CYA: Corporations embrace voluntary codes of conduct. Retrieved from http://www.corpwatch.org/ article.php?id=15165 Manderson, A. K. (2006). A systems based framework to examine the multi-­ contextual application of the sustainability concept. Environment, Development and Sustainability, 8, 85–97. McDonough, W., & Braungart, M. (2002). Cradle to cradle: Remaking the way we make things. New York, NY: North Point Press. Meadows, D. H., Randers, J., & Meadows, D. (2004). Limits to growth: The 30-year update. , White River Junction, VT: Chelsea Green Publishing Company. Mintzberg, H. (2003). Strategies. In H. Mintzberg, J. Lampel, J. B. Quinn, & S. ­Ghoshal. (Eds.), The strategy process (pp. 2–9). New Jersey, NJ: Prentice Hall. Naess, A. (1988). Sustainable development and the deep long-range ecology movement. Trumpeter, 5(4), 138–142. Osorio, L. A, Lobato, M. O., & Castillo, X. (2005). Debates on sustainable development: Towards a holistic view of reality. Environment, Development and Sustainability, 7, 501–518. Peterson, G, Allen, C. R., & Holling, C. S. (1998). Ecological resilience, biodiversity, and scale. Ecosystems, 1, 6–18. Polimeni, J. M, Mayumi, K., Giampietro M., & Alcott, B. (2009). The myth of resource efficiency. London, England: Earthscan.

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Porter, M. E., & van der Linde, C. (1995). Toward a new conception of the ­environment-competitiveness relationship. Journal of Economic Perspectives, 9(4), 97–118. Raiklin, E., & Uyar, B. (1996). On the relativity of the concepts of needs, wants, scarcity, and opportunity cost. International Journal of Social Economics, 23(7), 49–56. Rushton, K. (2002). Business ethics—A sustainable approach. Business Ethics: A ­European Review, 11(2), 137–139. Shiva, V. (2005). Earth democracy. Cambridge, MA: South End Press. United Nations (UN). (2008). Corporate citizenship in the world economy. New York, NY: United Nations Global Compact. Retrieved from http://www .unglobalcompact.org/docs/news_events/8.1/GC_brochure_FINAL.pdf Van De Ven, B., & Jeurissen, R. (2005). Competing responsibly. Business Ethics Quarterly, 15(2), 299–317. Walker, B., & Salt, D. (2006). Resilience thinking: Sustaining ecosystems and people in a changing world. Washington, DC: Island Press. World Business Council for Sustainable Development (WBCSD). (2008). The world business council for sustainable development—web site. Available at http://www.wbcsd .org/home.aspx World Commission on Environment and Development (WCED). (1987). Our common future: World commission on environment and development. Oxford, England: ­Oxford University Press. Williams, C. C., & Millington, A. C. (2004). The diverse and contested meanings of sustainable development. Geographical Journal, 170(2), 99–104. Winsemius, P., & Guntram, U. (2002). A thousand shades of green: Sustainable strategies for competitive advantage. London, England: Earthscan.

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4

Strategic and Proactive Corporate Social Responsibility Giacomo Boesso, Kamalesh Kumar, Giovanna Michelon

Introduction Companies are devoting increasing resources to support the demands of stakeholder groups (KPMG, 2013). However, despite the growth in corporate social responsibility (CSR) activities, evidence seems to suggest that companies undertake CSR mainly as a public relation tool, fed by media campaigns and reputation management. Not just the public, but also academics have major concerns about corporate social initiatives, in that existing CSR practices and processes ‘have little to do with extending accountability and amount to nothing more than exercise in stakeholder management and corporate spin’ (Cooper & Owen, 2007, p. 650). From the company’s perspective, there seems to be awareness that stakeholder perceptions are critical to corporate performance, and sometimes even to the company’s survival. At the same time, CSR initiatives are under scrutiny in terms of which benefits they bring to the business. It follows that accurate measurement of the benefits of CSR is important from both the corporate and the stakeholders’ perspectives. Such importance is reflected also in the recent growth of agencies that rank companies on their corporate social performance (CSP). The proliferation of ratings such as Kinder, Lydenberg, Domini Research and Analytics (KLD), Thomson Reuters Asset4, Sustanalytics and so on, potentially can make companies’ social initiatives more transparent as they analyse their plans and investments for enhancing CSP in depth. The existence of these CSR measures is relevant for the managers and the stakeholders of a company because they can improve corporate transparency and possibly stakeholders’ relationships. The social accounting literature, while critically evaluating the limitations and shortcomings of CSR reporting, stakeholder dialogue reporting, and sustainability reporting, has also suggested how these reports may contribute to heightened accountability and influence corporate social behaviour (e.g., Gray, 2002). In this chapter, we start addressing this debate by considering the nature and purpose of stakeholder management and CSR that dwells in the literature itself.

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CSR and Shared Value Creation Normative, Instrumental and Descriptive Approaches to Stakeholder Management Different theoretical thesis—moral obligation, sustainability, corporate reputation, and license to operate—provides various justifications for fostering CSR (Boesso, Kumar, & Michelon, 2013). The moral obligation school of thought argues that companies have a duty to ‘do the right things’ and to be ‘good citizens’ in modalities that incorporate ethical values and honour people, communities and the environment (Falck & Heblich, 2007). The sustainability authors stress corporate stewardship of the environment and the community—in other words, they recommend to managers to avoid socially and environmentally harmful actions (Clement, 2005). According to the reputation approach, managers are interested in pursuing CSR as a strategy to build positive feedbacks and improve their images (Peloza, 2006). The license-to-operate thesis portraits CSR as a tool to gain support and legitimacy from governments, communities and stakeholders on actions c­onnected with companies’ operations (Graves & Waddock, 1994). These four justifications for CSR relate to three more relevant domains of stakeholder theory: descriptive, normative and instrumental (Donaldson & Preston, 1995). The sustainability and license-to-operate approaches fit with the descriptive domain: companies’ interactions with stakeholders are supported by the legitimacy theory when companies describe in detail how they manage the interests of various stakeholders. The moral obligation justification emanate from the normative domain of CSR: it explains how stakeholders should be treated taking into consideration the appropriate moral or philosophical principles. The normative domain recalls the intrinsic value of stakeholders’ claims: each stakeholder desire should be scrutinised for its relevance and not because of one stakeholder ability to complement the goals of some other group, such as shareholders. Lastly, the reputation justification engages the instrumental domain: companies able to create synergies with the most relevant groups of stakeholders might benefit from an advantage over competitors that do not. In other words, the instrumental domain highlights a framework useful for examining the connections between stakeholder management and the achievement of performance goals. Further, theories connect the adoption of these approaches to stakeholder management to variations in companies’ performance. For the stakeholder-agency theorists, managers can be seen as agents of all ­ ­stakeholders, but stakeholders diverge in the relevance of their stakes in the firm and their power dealing with managers. Most often, the stakeholderagent relationships are not in equilibrium (Hill & Jones, 1992, p.  132). On the ­opposite, there are important conflicts in the stakeholder-agent interaction because of ‘some stakeholders’ ability to retard equilibrating

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adjustments that are unfavourable to them’ (Donaldson & Preston, 1995, p. 78). ­Accordingly, stakeholders are involved in relationships with managers to reach mutually important achievements in an efficient solution suggesting that companies prefer an instrumental approach to stakeholder management when corporate performance outcomes are designed to achieve short-term returns. Because of its pragmatism, the instrumental approach is often challenged from the ethical and normative perspectives, it can also provide a company advantages in surfing emerging trends in the market. Stakeholder management inspired by the instrumental approach to CSR could also increase competencies in the company by reinforcing its planning systems, supporting proactivity to change and helping in handling turbulence in the competitive environment. This approach will be appropriate only if the corporate aims mirror the preferences of at least one group of stakeholders as a consequence of its relevance in securing the company’s overall financial returns. On the opposite, managers implementing CSR in a more descriptive way are targeting the expectations of numerous stakeholders. They will very likely pursue social actions not necessarily connected with corporate financial performance goals. CSR initiatives related to the descriptive approach can be interpreted as ‘investments’ which generate corporate growth comparable to those made in R&D or employee training. Satisfying customers’ expectations, for example, can facilitate a stable and loyal client base and increase brand value. Similarly, a positive and constructive interaction with labour unions can foster the company’s ability to hire and remunerate talents, improve employees’ efforts and identification with the company, and, ultimately, increase the productivity and efficiency. Researchers also stress the evidence that targeted CSR initiatives can build a positive reputation with various stakeholders (Sen & Bhattacharya, 2004), which—in turn—can drive positive financial performance. Since a positive reputation is rare and difficult to imitate for competitors, the benefits are particularly enduring. Several managers also decide to engage—on a voluntary basis—in implementing tools such as CSR reports with the goal of assuring stakeholders that their claims are not only considered, but also addressed in a strategic way to lead to measurable outcomes. These voluntary disclosures sometimes are also externally certified and/or codified. Specialised institutions such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standard Board are growing in number and providing generally accepted guidelines. Companies implementing CSR under a descriptive approach are likely to undertake the Triple Bottom Lines framework (TBL), which details the economic, social and environmental concerns that managers should address. A recent KPMG survey (2013) highlights a strong increase in the number of Global Fortune 250 companies engaging in CSR reporting, stating

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that CSR reporting ‘appears to be standard business practice’ across the world (p. 10), and concludes that it is not a matter of deciding whether to report or not, but rather what and how to communicate to stakeholders. Following the descriptive approach, companies reinforce their core values and implement a sense of belonging for the stakeholders. CSR is a long-term plan (Falck & Heblich, 2007), embedded in the corporate mission or vision, centred on trust, which takes a long time to build (Choi & Wang, 2009). Because of such long-term direction, a descriptive approach to CSR is not appropriate when focused on short-term corporate performance (Boesso et al., 2013). Nevertheless, it might improve performance in the medium-term—especially when it is based on a clear and shared plan supported by specific investments. Managers often look for guidance from discussing and experimenting these various approaches to CSR and it is not rare to observe a heterogeneity of practices. Implementing the descriptive approach, managers share the ideal of ‘transparency’, and tend to provide basic and uniform information about the indicators that satisfy the TBL guidelines. Adopting the normative approach, good citizenship initiatives are the way to incorporate social values and respect communities and the natural environment, disregarding the impact on corporate performance. Finally, under the instrumental approach to CSR, managers are tempted to interact only with those stakeholders that more than others influence financial returns, thus enhancing relationships that help both corporations and stakeholders in sharing mutually relevant objectives in the most efficient way as possible. In spite of the rich literature on CSR published over the years, limited practical guidance is offered to managers when it comes time to identify, prioritise, and address a large range of social and environmental claims that deserve to be taken into consideration. As a result, corporate social initiatives often look like a ‘hodgepodge of uncoordinated CSR and philanthropic activities…that neither make any meaningful social impact nor strengthen the company’s performance’ (Porter & Kramer, 2006, p. 9). Strategic CSR: Social Value Co-creation According to the shared value framework (Porter & Kramer, 2011), CSR efforts are ‘so fragmented and so disconnected from business and strategy as to obscure many of the greatest opportunities for companies to benefit the society’ (p.  4). In addition to that, Werbel and Wortman (2000) describe how corporate investments in CSR domains are mainly exploited as a short-term ‘haphazard, reflexive response’ to avoid negative feedbacks. Opponents of CSR have long debated that CSR initiatives without any clear financial return are not sustainable for corporations’ shareholder. The difficulties in complementing CSR strategies with economic returns could help

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in understanding why several companies perceive CSR as a ‘non-productive cost’ (Murray & Montanari, 1986) or as a ‘tax or license for doing business’ (Porter & Kramer, 2011). The strong limits suffered by the standard CSR approached, coupled with the current economic crisis, urge for a betterfocused and sounder form of CSR able to contribute to corporate financial bottom line. The normative, descriptive and instrumental approaches to CSR postulate that managers should craft the social actions in a different way because various can be the performance goals that they want to achieve by implementing these CSR actions; however, these three perspectives are not necessarily mutually exclusive. Donaldson and Preston (1995) provided an extensive review of stakeholder management and CSR studies and they conclude, ‘the three approaches to stakeholder are nested within each other’ (p. 74). Specifically, the descriptive domain can be seen as an external shell when it extensively details all stakeholder relationships. It incorporates and is supported by the instrumental approach: when selected actions are implemented with the clear goal of obtaining short-term outcomes. The heart of the literature, however, is always normative. The accuracy of the CSR effort implies the truth of the core normative conception insofar as it postulates that managers and other corporate agents act as if all stakeholders’ claims have an intrinsic value not to be neglected. More recently, Porter and Kramer (2006, 2011) rationalised this integrated picture by formulating the concept of ‘Strategic CSR’. The strategic CSR framework is funded on the argument that good citizenship is an unavoidable genesis for any CSR initiative (in other words, the original moral justification). Companies cannot neglect the changing social concerns of stakeholders (license-to-operate view), and start experimenting measurable and verifiable social goals over time (sustainability and reputation arguments). Within this line of thought, the financial goals of corporations and the goals of CSR strategies should not be conflicting or distinct. Rather than focusing on the ‘tension between business and society’, companies need to fully understand the interconnections between them by including their CSR actions in their company-specific strategic agendas. By implementing CSR according to this strategic vein, managers ‘discover that CSR can be much more than a cost, a constraint, or a charitable deed—it can be a source of opportunity, innovation and competitive advantage’ (Porter & Kramer, 2006, p. 4). A strategic CSR plan focuses on issues that are highly related to the core business, and managers implement those CSR actions for which an interrelated social and business benefit is larger and more visible. The theoretical framework splits CSR issues that any company may face into three clusters: 1. Generic issues: not greatly impacted by the regular business operations or not directly influencing the long-term competitiveness (e.g., the

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environmental and economic conditions of third-world communities that companies may consider for future foreign investments). 2. Value chain issues: directly influenced by the business regular operations thus demanding a mitigating attitude to screen and monitor potential negative externalities (e.g., filters against air pollution) or representing an opportunity to benefit society while reinforcing corporate strategy (e.g., researching and testing new technologies that are both less pollutant and a better fit for the consumers’ needs). 3. Social dimensions of competitive context issues: greatly impacting on the drivers of corporate performance (e.g., investments in transportation and education as a way to contribute to the local business development and the local human capital from which the company will benefit when looking for new business partners or employees). When all of these three issues are handled into the main business model, a company is implementing a strategic approach to CSR. For example, authors quote the strategy that Whole Foods implemented in order to gain competitive advantage over its competitors as good case of generic issues included in the business model. As well as Toyota’s research on sustainable automobile emissions with the hybrid vehicle technology is a valuable example of adjusting product offerings and value chain design. And Microsoft’s projects in joint with community colleges to limit the shortage of information technology workers can be an effective example of investment in the social competitive context. Accordingly, Strategic CSR goes beyond good corporate citizenship, compromise actions, or multi-stakeholder accountability guidelines, as it helps in defining a new and defendable strategy in one of all of the three issue types. In doing so, managers are able to build a distinctive position from competitors for their companies by exploiting research and development initiatives able to mutually benefit society and the company’s own competitiveness. Such a strategic approach to CSR delivers a framework that managers can use to isolate the social issues in their business models that certainly benefit stakeholders while simultaneously strengthening the corporate competitive advantage. Porter and Kramer (2011) argue that it will ultimately generate a symbiotic interaction between a company and its stakeholders since the goodwill of the two sides becomes mutually reinforcing. Their standpoint is that managing the firm’s CSR initiatives better than and differently from how competitors manage them can contribute to competitive success in the same way that other aspects of strategy do (Porter & Kramer, 2006). Positive and negative externalities are crucial for a company’s survival. The decision to channel corporate resources according to stakeholder preferences may thus lead to a performance advantage for the company (Choi & Wang, 2009). By prioritising CSR actions to the most salient preferences

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of stakeholders, managers show that the company’s resources are deployed to help the creation of shared value for the stakeholders whose needs they are addressing and for the shareholders who are providing funding for the investments (Porter & Kramer, 2011). The selection of the most relevant groups is one of the more controversial and debated issues that managers implementing the strategic CSR approach face.

Managing Stakeholders and Value Creation Stakeholder Salience: Identifying Claims that Cannot Wait An important framework with which to deal with stakeholders concerns and expectations is developed by Mitchell, Agle, and Wood (1997). They identify three dimensions that describe normatively to which stakeholders the firm should pay attention: the power that the stakeholders have to affect the firms, the legitimacy of the relationship between the stakeholders and the firm, and the urgency of the stakeholders’ claims. Power describes which actor in a relationship moves another into doing something that the other would not have done otherwise. Legitimacy refers to perceptions of the claim’s desirability and appropriateness within the societal system of values. Urgency sets the degree to which the stakeholder’s claim calls for immediate attention. Along the intersection of these dimensions managers can identify the salience of each stakeholder group, defined as, ‘the degree to which managers give priority to competing stakeholder claims’ (Agle, Mitchel, & Sonnenfeld, 1999, p. 507). A stakeholder group with high level of salience—in other words, where the three dimensions of power, legitimacy and urgency are present ­simultaneously—is labelled a definite stakeholder, to whose claims managers have a clear and immediate mandate to give priority. For example, according to Bozzolan, Cho, and Michelon (2013) financial analysts fall into this group for large, listed companies. As information intermediaries, analysts are ‘surrogate investors’, as they ‘provide investors with information through their comments, recommendations, and interpretations of corporate plans and forecasts [that] tend to affect financial market valuations’ (Gabbioneta, Ravasi, & Mazzola., 2007, p. 102). The company’s reputation in the eyes of financial analysts influences the analysts’ willingness to provide or withhold support. The urgency of this relationship is documented in an example ­reported in Gray and Balmer (1998, p. 698): the impact of a firm’s reputation in the financial community is illustrated by the changing fortunes of United Airlines. The company, an airline company for most of its existence, diversified in the 1980s into hotels and the rent-a-car business, and renamed itself Allegis to reflect its new identity. Because financial analysts seriously

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questioned these new strategy and change of identity, the price of the company’s stock dropped well below what the individual parts of the company would have been worth separately. Mitchell et al. (1997) developed the distinction between latent and expectant stakeholder groups further, suggesting that latent stakeholders are those whose claims are characterised by only one of the three aforementioned dimensions. Since these stakeholders may pay no attention to the firm, managers may decide not to deal with their expectations or even to acknowledge their existence (low salience). Expectant stakeholders, on the other hand, are associated with moderate salience, in that they have two of the three dimensions of power, legitimacy and urgency. Dependent stakeholders are characterised by a lack of power but (relatively) urgent and legitimate claims. According to Mitchell et al. (1997), since power in this relationship is not reciprocal, its exercise is likely to be governed through the guidance of internal management values. When the firm’s power in the relationship with a stakeholder is comparatively less strong, but the stakeholder group has still a legitimate claim over the company, ‘established through the existence of an exchange relationship who supply the firm with critical resources (contributions) and in exchange each expects its interests to be satisfied (by inducement)’ (Hill & Jones, 1992, p. 133), we refer to this group as a dominant stakeholder, as it is both powerful and legitimate (Mitchell et al., 1997). The power of one stakeholder group compared to that of the firm might be linked to the institutional environment in which the firm operates. According to Boesso and Kumar (2009), for example, the societal norms and legislation in one country could take a greater protective and favourable view of promoting the interests of a labour group than they do in another, where these interests could be put in a more competitive context. The authors refer to the Italian versus U.S. contexts, where Italian managers might be more inclined to address the interests of the labour group than the consumer group, while the U.S. managers might be more inclined to address the interests of the customer group than the labour group. Finally, the combination of urgency and power and the lack of legitimacy make this stakeholder group dangerous stakeholders, as they can use coercive means to advance their claims. Mitchell et al. (1997) used as an example the General Motors’ employees in Lordstown, Ohio, in the 1970s, who welded pop cans to engine blocks to protest certain corporate policies. Mitchell et al. (1997) summarised the attributes of stakeholders’ salience in terms of latent and expectant. Stakeholder profile within the latent state of salience include definitive (having power, legitimacy and urgency), dormant (having power), discretionary (having legitimacy) and demanding (having urgency), while stakeholder profile within the expectant state of salience include dominant (having power and legitimacy), dangerous (having power

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and urgency) and dependents (having legitimacy and urgency). A last important element of stakeholder salience concerns the usual dynamism of the relationship between the firm and stakeholders. A first assessment of who and what really ‘counts’ at a particular time is important, but managers must be aware that the salience of stakeholder groups can vary over time and from issue to issue. The Focus on Themes: Corporate Weaknesses and Strengths Although the stakeholder salience framework is important, managers must manage a large number of stakeholder groups in terms of their salience, so a simpler and more direct approach is that used by notable rating agencies, such as KLD Social Ratings. Their assumption is that the differences in the firm’s commitment to various stakeholder groups are likely to manifest in the firm’s having strengths in certain CSR-related areas and weaknesses in others, as strengths and weaknesses in CSR-related areas depend on the firm’s strategic posture in various stakeholders’ domains. Weaknesses are typically found in a firm that adopts a reactive (deny responsibility and do less than required) or a defensive posture (admit responsibility but fight it and do the least that is required). Strengths are the outcome of an accommodation (accept responsibilities and do all that is required) or a proactive posture (anticipate responsibilities and do more than required). The expected impacts of these different strategic postures on corporate performance depend on whether the stakeholders’ domains refer to primary or secondary stakeholders (Clarkson, 1995; Michelon, Boesso, & Kumar, 2013). Relationships with primary (or definitive) stakeholders—those without whose co-operation and support the firm cannot survive—are considered investments comparable to those made in R&D or employee training because they support growth in the same way. According to the resource-based view, effective management of the relationships with primary stakeholders result in the development of an intangible, socially complex resource that can enhance a firm’s ability to outperform competitors in terms of value creation (Hillman & Keim, 2001). Strengths in primary stakeholders’ domains are related to corporate market value through improvement of the brand’s reputation and its enduring effect against competitors’ imitation. For example, the increasing willingness of customers to purchase products from companies that they deem to be socially responsible is particularly important given customers’ rising discretionary purchasing power. Social initiatives that target customers can also give a firm advantage in terms of its ability to identify trends and changes in the market, allowing the firm to act quickly to establish itself at the forefront of the change. Similarly, strength with respect to employee relations helps attract, retain and motivate talented employees who will work hard to

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enhance the firm’s effectiveness, and strong community performance might help the firm to secure favourable terms of doing business. In summary, strong social performance in the primary stakeholder domains is positively related to corporate performance because a positive relationship with a firm’s primary stakeholders helps it to develop valuable, rare, inimitable and non-substitutable resources that contribute to the firm’s competitive advantage (Choi & Wang, 2009; Hillman & Keim, 2001). Next, we discuss how a poor social performance in these stakeholders’ domains may affect corporate performance, in other words we explore whether a firm’s performance is adversely affected if the firm performs poorly or even fails to meet the expectations of one or more of the primary stakeholder groups and whether firms are rewarded for positive CSP in primary stakeholder domains but suffer no negative performance consequences for poor or negative CSP. Given that firms exchange resources with primary stakeholders, we argue that weaknesses in primary stakeholders’ domains put firms at a competitive disadvantage. Ignoring a primary stakeholder may result in cost savings but could also risk the company’s reputation in the long run. In addition, if any primary stakeholder group, such as customers or employees, becomes so dissatisfied as to withdraw from the firm’s system in whole or in part, the firm is likely to incur serious damage. Examples of these damages include consumer boycott campaigns or low employee commitment and high turnover, all of which adversely affect corporate performance. A firm that does little or nothing to build trust within the community or to create loyalty with customers or employees may also experience serious reputational issues. We next pose the question as to whether the positive relationship between strengths in primary stakeholders’ domains and corporate performance extends to the strengths in the domains related to secondary stakeholders. Secondary stakeholders are those groups who still influence or are influenced by the firm but are not engaged in a resource exchange with the firm. For example, issues related to the environment, diversity, human rights, and other societal expectations include aspects of stakeholder interactions for which the firm’s CSP is in response to normative expectations. While the interactions with primary stakeholders are characterised as ‘relational’ (Hillman & Keim, 2001) because they involve trust and co-operation developed over time, a firm’s interactions with secondary stakeholders are characterised as ‘transactional’ (Hillman & Keim, 2001), as they do not provide a sustained basis for value creation that improves competitive advantage. Nevertheless, the increasing capacity of non-governmental organisations (NGOs) and activist groups, together with growing awareness in local communities, can lead to pressure from secondary stakeholder groups that often forces firms to mobilise their resources to improve their CSP with these stakeholders. Although investing in relationships with secondary stakeholders may be

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desirable from a normative perspective, these groups do not play a direct role in the firm’s value-creation process, thus such investment may at times be simply the outcome of regulatory compliance. Even if there are indirect benefits from strengths in secondary stakeholders’ domains, such as the ability to attract and retain talent or to create positive impressions on the public at large, other firms can duplicate the performance advantages from many social initiatives related to the secondary stakeholder groups easily. In this sense, these initiatives cannot provide the basis for competitive advantage. The other side of the coin is that although firms are not dependent on secondary stakeholder groups for their survival, ignoring their interests can cause significant damage (Clarkson, 1995). Secondary stakeholders who are opposed to or unhappy with a firm’s policies or programs or who feel that a firm has not fulfilled its responsibilities towards them can mobilise public opinion, requiring companies to act in their interests. Given the increased pressures that firms face from secondary stakeholders (Clement, 2005), weaknesses in secondary stakeholder domains can affect corporate performance. Weaknesses (or the absence of strength) in the domains of environment, human rights, and/or diversity might be driven by resource constraints that force companies to prioritise other issues. Moreover, since weaknesses are not simply the converse of strengths but are qualitatively distinct types of social initiatives, they may have marked but not necessarily inverse associations with corporate performance. Table 4.1 provides some examples of strengths and weaknesses in relationship with primary and secondary stakeholders. The Need to Be Selective: Stakeholder Prioritisation Following the 2007 financial crisis and subsequent changes in the economic climate, CSR initiatives are under much closer scrutiny in terms of the business benefits received from supporting the demands of non-shareholding stakeholder groups. In other words, the basic question for executives is whether firms can ‘do well by doing good’ and, if so, how. Even if several academic authors argue for CSR as ‘an efficient management strategy’ (Baron, 2003) and an ‘investment in a company’s future’ (Falck & Heblich, 2007), we prefer to hypothesise that managers can implement alternative perspectives to this end that can be equally attractive. First, very often companies have limited resources to invest in CSR actions; thus, the board of directors is called to identify which stakeholders to address, in what order, and to what extent. Then the firm must link its CSR initiatives to the preferences of the chosen stakeholders. The academic literature refers a firm’s sound relationships with its stakeholders as valuable, rare, inimitable and non-substitutable. Accordingly, the decision on how to couple corporate resources and actions with stakeholder claims and

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76  Chapter 4  Strategic and Proactive Corporate Social Responsibility Table 4.1  Ratings Criteria (Examples)

Primary Stakeholder Issues Employees’ ratings criteria assess a company’s record in managing its employees. Issues of concern include labour-management relations, employee safety and workers’ rights.

Weakness

Strength

Poor union relationships

Strong union relationships

Safety controversies

Profit sharing

Workforce reductions

Involvement

Pension and benefits concerns

Strong retirement benefits

Customers’ ratings criteria measure the quality and safety record of a company’s products, its marketing practices and its involvement in anti-competitive controversies.

Weakness

Strength

Product safety controversies

Quality

Marketing and contracting controversies

R&D innovation

Anti-trust controversies

Benefits to economically disadvantaged

Community ratings criteria measure how well a company manages its impact on the communities where it operates, including treatment of local populations and its commitment to charitable giving.

Weakness

Strength

Investment controversies

Generous giving

Negative economic impact

Innovative giving Support for housing and/or education

Governance ratings criteria address a company’s investor relations and management practices, including company sustainability reporting and board accountability.

Weakness

Strength

High compensation

Limited compensation

Tax disputes

Ownership strength

Ownership concern

Political accountability

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Secondary Stakeholder Issues Environment ratings criteria cover a company’s management of its environmental challenges, including its efforts to reduce or offset the impact of its products and operations.

Weakness

Strength

Hazardous waste

Beneficial products and services

Regulatory problems

Pollution prevention

Ozone-depleting chemicals

Recycling

Substantial emissions

Alternative fuels

Diversity ratings criteria assess a company’s record in managing anti-discrimination policies and practices.

Weakness

Strength

Controversies

Family benefits

Non-representation

Women and minority contracting Employment of the disabled

Human rights ratings criteria evaluate a company’s record in handling human rights issues.

Weakness

Strength

Negative record in Africa

Positive record in Africa

Human rights controversies

Positive relationships with indigenous peoples

Social disputes

Exceptional human rights initiatives

Source: Authors’ elaboration on KLD information

preferences might be taken without compromising on the competitive advantage (Alniacik, Alniacik, & Genc, 2011). Just as initiatives in employee training or R&D are considered investments in future growth, CSR initiatives that are prioritised based on strategic concerns should be considered the same kind of investments. Prioritisation can also help a company to identify changes and trends taking place in the market, allowing the company to establish itself at the forefront of the change (Falck & Heblich, 2007). Finally, prioritisation may help the company to build competencies proactively because it will improve organisational preparedness for change (Welford, Chan, & Man, 2007).

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When adopting any CSR approach, companies might target the greatest outcome when they connect the firms’ CSR actions to prioritised stakeholder preferences and organise their resources and investments according to a strategic agenda that is related to the most relevant claims (Peloza, 2006). Stakeholder dialogue is an important element of prioritisation because it gauges the stakeholders’ perspectives and ambitions. Analysing what emerges from such dialogues, companies prioritise which demands to address first and construct the CSR initiatives in a strategic way; this implies that they can come up with propositions based on capabilities that create value for different stakeholders. In addition, companies can create valuable relationships with those stakeholders that more than others contribute to corporate success and help reducing non-productive investments. Summarising, this literature suggests that a positive return from CSR initiatives does not diverge from success in any other strategy. There is a need to decide which social issues to focus on (Porter & Kramer, 2006, p. 91), to identify which problems the company can respond and from which it can obtain a competitive benefit (Porter & Kramer, 2006, p. 92). It is a selective process. Managers are called to address only a selected sample of social issues, preferred to others because they clearly represent opportunities to make a real difference to society and that can contribute to competitive advantage for the corporation. The prioritisation exercise allows envisioning an affirmative corporate social agenda that does not just incorporate some or the most loudly community expectations but look at opportunities to deliver simultaneously social and economic benefits (Porter & Kramer, 2006, p. 85).

Conclusion The integration of business principles and social needs requires more than ethical intentions or enlightened governance. Only a few companies have started to identify and prioritise social issues by looking at the operating salience of social issues and/or their importance to the company’s competitive advantage. A meaningful integration of business and society requires that most companies modify their approaches to both CSR and philanthropy. CSR managers must move from a descriptive and defensive attitude to an integrated, affirmative agenda. The dominant CSR focus on measuring stakeholder satisfaction does not facilitate this managerial shift, so CSR managers should attend to the social impact of their CSR investments. The shift to an affirmative social agenda involves a new job definition for the CSR manager because she must overcome several long-standing tendencies, including the tendency to respond defensively to the discussion of any social issue, just as too many NGOs tend to oppose any relationship between social value and corporate profit.

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Strategic attitude always requires making choices to increase value creation, whether financial, social, or both, and successful CSR is no different. Strategic and prioritised CSR requires choosing which social issues to address first in a mutable competitive context. Companies are exposed to dozens of social issues every day, and effective CSR managers are those who can screen the few issues that represent opportunities to improve society and deliver or reinforce a competitive advantage at the same time. CSR managers who can make the right decisions can deliver integrated and proactive social initiatives that fit with their organisations’ core strategies. Such an affirmative agenda is likely to increase the strategic practice of CSR in such a way that both the organisation and its primary stakeholders see significant benefits.

References Agle, B. R., Mitchel, R. K., & Sonnenfeld, J. A. (1999). What matters to CEO? An investigation of stakeholder attributes and salience, corporate performance, and CEO values. Academy of Management Journal, 42(5), 507–525. Alniacik, U., Alniacik, E., & Genc, N. (2011). How corporate social responsibility information influences stakeholders’ intentions. Corporate Social Responsibility and Environmental Management, 18(4), 234–245. Baron, D. (2003). Business and its environment. Upper Saddle River, NJ: Prentice Hall. Boesso, G., & Kumar, K. (2009). Stakeholder prioritization and reporting: Evidence from Italy and the US. Accounting Forum, 33(2), 162–175. Boesso, G., Kumar, K., & Michelon, G. (2013). Descriptive, instrumental and strategic approaches to corporate social responsibility: Do they drive the financial performance of companies differently? Accounting, Auditing and Accountability Journal, 26(3), 399–422. Bozzolan, S., Cho, C., & Michelon, G. (2013). Impression management and organizational audiences: The FIAT group case. Journal of Business Ethics. Online first. doi: 10.1007/s10551-013-1991-9 Choi, J., & Wang H. (2009). Stakeholder relations and the persistence of corporate financial performance. Strategic Management Journal, 30(8), 895–907. Clarkson, M. B. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 20(1), 92–117. Clement, R. W. (2005). The lessons from stakeholder theory for U.S. business leaders. Business Horizons. 48(3), 255–264. Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidences and implications. Academy of Management Review, 20(1), 65–91. Falck, O., & Heblich, S. (2007). Corporate social responsibility: Doing well by doing good. Business Horizons, 50(3), 247–254. Gabbioneta, C., Ravasi, D., & Mazzola, P. (2007). Exploring the drivers of corporate reputation: A study of Italian security analysts. Corporate Reputation Review, 10(2), 99–123.

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80  Chapter 4  Strategic and Proactive Corporate Social Responsibility Graves, S. B., & Waddock, S. A. (1994). Institutional owners and corporate social performance. Academy of Management Journal, 37(4), 1034–1046. Gray, E. R., & Balmer, J. M. T. (1998). Managing corporate image and corporate reputation. Long Range Planning, 31(5), 695–702. Gray, R. (2002). The social accounting project and Accounting Organizations and Society: Privileging engagement, imaginings, new accountings and pragmatism over critique? Accounting Organizations and Society, 27(7), 687–708. Hill, C. W. L., & Jones, T. M. (1992). Stakeholder-agency theory. Journal of Management Studies, 29(2), 131–154. Hillman, A. J., & Keim, G. D. (2001). Stakeholder value, stakeholder management, and social issues: What’s the bottom line? Strategic Management Journal, 22(2), 125–139. KPMG. (2013). The KPMG survey of corporate responsibility reporting 2013. Retrieved from http://www.kpmg.com/global/en/issuesandinsights/articlespublications/ corporate-responsibility/pages/corporate-responsibility-reporting-survey-2013 .aspx Michelon, G., Boesso, G., & Kumar, K. (2013). Examining the link between strategic corporate social responsibility and company performance: An analysis of the best corporate citizens. Corporate Social Responsibility and Environmental Management, 20(2), 81–94. Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853–886. Murray K., & Montanari, J. (1986). Strategic management of the socially responsible firm: Integrating management and marketing theory. Academy of Management Review, 11(4), 815–827. Peloza, J. (2006). Using corporate social responsibility as insurance for financial performance. California Management Review, 48(2), 52–72. Porter, M. E., & Kramer, M. R. (2006, January). Creating shared value. Harvard Business Review, 78–92. Porter, M. E., & Kramer, M. R. (2011, December). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 62–77. Sen, S., & Bhattacharya, C. B. (2004). Doing better at doing good: When, why and how consumers respond to corporate social initiatives. California Management ­Review, 47, 9–24. Welford, R., Chan, C., & Man, M. (2007). Priorities for corporate social responsibility: A survey of business and their stakeholder. Corporate Social Responsibility and Environmental Management, 15(1), 52–62. Werbel, J. D., & Wortman, M. S. (2000). Strategic philanthropy: Responding to negative portrayals of corporate social responsibility. Corporate Reputation Review, 3(2), 124–137.

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5

CSR and Stakeholder Management in the Banking Industry Different Strategies and Consequences  in a Crisis Context Andrea Pérez, Ignacio Rodríguez del Bosque

INTRODUCTION The World Business Council for Sustainable Development (WBCSD) defines Corporate Social Responsibility (CSR) as “the commitment of business to contribute to sustainable economic development, working with employees, their families and the local communities” (WBCSD, 2001). Hence the fundamental ideal of CSR is that business corporations have an obligation to work towards meeting the needs of a wide array of stakeholders (Jamali & Mirshak, 2007). This fact justifies the close connection that scholars have traditionally attributed to CSR and stakeholder management and it also justifies our interest in specifically studying stakeholder management to better understand CSR in businesses. CSR is now well settled in business practices. It first came through a troubled era, the 1960s, when CSR had to fight profit maximisation defenders (Friedman, 1970) by demonstrating its long-term advantages. However, nowadays it is a trendy strategy considered to help businesses in building outstanding corporate images and reputations. It is also believed to be very helpful during financial crises, since it enables businesses to recover customers’ trust and minimise the negative consequences of an economic recession (Selvi, Wagner, & Türel, 2010). In this regard, many researchers have demonstrated that a close connection exists between CSR practices and corporate performance (Waddock & Graves, 1997; Orlitzky, Schmidt, & Rynes, 2003; Schnietz & Epstein, 2005; Torres et al., 2012). Schnietz and Epstein (2005) consider that the value of CSR during a crisis resides in its ability to insulate the corporation from negative financial performance. Our purpose in this chapter is to empirically analyse the relationship between the stakeholder management strategies of banking institutions and the consequences of the current international crisis in this industry. Our interest lies on the Spanish banking industry because evidence exists that the consequences of the crisis have been significantly different for organisations over time. Actually, two kinds of organisations exist in Spain which are facing different realities in the marketplace: banks and building societies. While banks are quickly recovering from the economic downturn, building societies have gone through a profound restructuring process since 81

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2010 and many of them are facing solvency problems which have taken the ­government to ask its European partners (the Euro group) for a bailout. According to the reasoning provided by authors such as Orlitzky et al. (2003) and Schnietz and Epstein (2005), we might think that these divergences in the results of corporations derive from significant differences in the amount of money invested in CSR initiatives by banks and building societies. However, the reality is that both kinds of organisations are allocating similar portions of their expense budgets to CSR. Where we can actually find some noticeable differences is in the kind of stakeholder management strategies that have traditionally characterised banks and building societies. For example, banks have traditionally paid greater attention to stockholders and they especially orient their corporate personality towards the efficiency in their core business activities and a strong customer orientation (Pérez & Rodríguez del Bosque, 2012). On the contrary, savings banks are characterised by their social dividend and they are more oriented towards local communities (Gardener et al., 1997). Nevertheless, in the last decades we have also assisted to the increase of competition in the banking industry and some authors have identified a shift in the role of CSR in building societies (Pérez & Rodríguez del Bosque, 2012). Because of deregulation in the banking industry, building societies have expanded geographically and many of their processes tend to equate with those of banks. If this is so, then do differences still exist in stakeholder management strategies of banks and building societies? And, if divergences persist, can we establish any sort of correlation between stakeholder management and the consequences of the economic crisis for banking i­nstitutions in Spain? Our purpose in this chapter is to provide readers with empirical evidence of this connection between stakeholder management and the latest economic downturn. Although scholars have long related CSR and stakeholder management to financial performance and corporate success both theoretically and empirically, in this chapter we try to provide additional evidence by exploring the relationship in a crisis context. In this regard, the connection between stakeholder management and corporate performance stays unexplored in the context of economic crises and this fact accounts for the originality of our research. As we will see along this chapter, we also propose several managerial implications to guide firm owners to enhance their understanding about CSR and stakeholder management. Our findings demonstrate that a strategic approach to CSR, derived from a special significance given to customers and employees in stakeholder management, leads to effective CSR policies which contribute to corporate stability. On the contrary, orienting CSR strategies to the satisfaction of secondary stakeholders, such as local communities or the environment, might be negatively related to corporate performance,

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as it is represented by the solvency and cash-flow problems which have seriously modified the structure of building societies in Spain.

AN OVERVIEW OF THE SPANISH BANKING INDUSTRY Banking institutions have experienced a significant transformation over time (Poolthong & Mandhachitara, 2009). Globalisation, deregulation, deintermediation, financial innovation and the appearance of new technologies that modify traditional distribution channels have caused the growing homogenisation of institutions (Flavián, Guinalíu, & Torres, 2005). Homogenisation increases competition and narrows the possibility for competitive advantages for any company in the sector. The international business climate during the last decade, characterised by frequent financial scandals and questionable accounting and management practices, only compounds the identity crisis of banking institutions (KPMG, 2008). All in all, the consequence of all these problems is the beginning of the global economic crisis in 2007 which led to the loss of society’s confidence in banking institutions and increased the social conscience of stakeholders who now demand better tools for evaluating business practices (KPMG, 2008). These facts have motivated banking institutions to take a greater interest in managing their image and retaining customers, leading the retail banking sector to be one of the most active in the adoption of relational marketing strategies. These kinds of strategies are optimal to achieve differentiation, because they highlight corporate characteristics that are different from those traditionally linked to products and services. CSR investments are perfect examples of how banking institutions are trying to differentiate themselves to stand out from competitors and recover customer trust. For example, many banking institutions have adopted CSR principles internationally (McDonald & Rundle-Thiele, 2008). Furthermore, the Green Paper on Corporate Governance in the Financial Sector, promoted by the CGSH Alert European Commission, states that banking institutions have traditionally been the most linked to the United Nations Global Compact, representing 9.48 per cent of a total of 3,700 subscribing businesses in 2008. Banking institutions also represent more than 11 per cent of the businesses of FTSE4Good and nearly 22 per cent of the businesses of the Dow Jones Sustainability Index (CECA, 2008). In Spain, the retail banking sector has also developed multiple CSR initiatives and some of its banking institutions are among the largest organisations investing in CSR worldwide. For example, La Caixa, Caja Madrid and the Santander Foundation are on the list of the 20 organisations most highly committed to CSR in Europe. Altogether, in 2008 they invested over 871 million euros in CSR. Additionally, around 84 per cent of banking institutions in Spain publish CSR reports annually (KPMG, 2008).

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Nevertheless, still the effects of the latest crisis have been tough for banking institutions in Spain, even though differences are observed between banks and building societies. For example, Spanish banks have suffered from the economic downturn, as any other company in the world, but their financial position is still strong enough to cope with the situation. No news has revealed any cash-flow or solvency problem. Banks such as the Santander Group, for example, are even acquiring other international corporations. British Abbey Bank is one of the latest examples. This fact can be taken as a signal of the financial strength of Spanish banks with an international scope. Building societies represent the opposite situation. In this case, recent solvency problems of building societies have dramatically changed the competitive scenario of the banking industry in Spain (Carbó, 2010). In 2010, a new law was promoted to restructure building societies by allowing massive merges which could help these companies rationalising their financial accounts. Most of building societies had recently entered the Real Estate industry, exponentially rising their selling of mortgages. However, with the beginning of the crisis and the increase in the level of unemployment in the country (almost 21 per cent by 2008) people stopped being able to pay their mortgages. Thus, building societies had to face an enormous amount of unpaid services which just derived in a huge stock of bricks in their accounts. Solvency was by then a significant issue for these companies which started to collapse and encouraged legislators to push the new law. By this point, a natural question comes to mind: is CSR helpful at all in the face of an economic crisis? If companies are massively investing in CSR and some of them still encounter difficulties to cope with the downturn, is there a direct link between CSR strategies and corporate performance? We will try to answer these questions in the following sections of the chapter.

CSR, STAKEHOLDER MANAGEMENT AND CORPORATE PERFORMANCE There is a growing body of credible evidence that corporate investments in CSR performance provide tangible financial benefits both across industries and study contexts (Waddock & Graves, 1997; Orlitzky et al., 2003; Schnietz & Epstein, 2005; Torres et al., 2012). Furthermore, Miles, Munilla, and Darroch (2006) consider that explicitly including conversations with diverse stakeholders in the CSR strategy-making process does, through the mechanism of strategic conversations, maximise stakeholder engagement and organisational sustainability (Miles et al., 2006). Orlitzky et al. (2003) theorise on two potential ways in which stakeholder management may affect corporate performance, especially financial performance. First, the authors point to a positive link between CSR and corporate performance because CSR investments improve capabilities and competencies within the

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company. Second, CSR contributes to the improvement of corporate reputation among stakeholders. Regarding the first way of improving corporate performance, the resource-based view of the corporation argues that CSR requires and improves managerial competencies such as scanning skills, processes and information systems, which increase corporate performance when facing external changes, turbulences and economic or reputational crisis. Thus, CSR can decrease firm-specific risk and volatility. Orlitzky and Benjamin (2001) also find that higher levels of corporate social performance are significantly correlated with lower levels of risk, particularly market measures of risk (Orlitzky & Benjamin, 2001). In a subsequent paper, Orlitzky et al. (2003), based on instrumental stakeholder theory, argue that the implicit and explicit negotiation and contracting processes entailed by reciprocal, bilateral stakeholder-management relationships serve as monitoring and enforcement mechanisms that prevent managers from diverting attention from broad organisational financial goals at the same time that it increases the efficiency of the adaptation of the company to external demands. Furthermore, companies with difficult-to-imitate resources and several capabilities in successfully addressing the demands of stakeholders are likely to suffer lesser economic losses. In this regard, companies succeeding in stakeholder management are less likely to suffer social boycotts than companies which are not known for their socially responsible practices. Also, Cornell and Shapiro (1987), based on transaction cost reasoning, justify that those companies that focus not only on explicit contractual claims (claims of owners and investors), but also on implicit claims of other stakeholders (e.g., customers, employees, society) will receive higher market valuations than firms which ignore their claims (Cornell & Shapiro, 1987). Thus, companies devoting resources to CSR tend to have better reputations. Scholars have also demonstrated that a good CSR reputation might help companies during crises. In a crisis, the benefit of a reputation comes not from increases in financial performance, but rather from insulation from negative financial performance. Schnietz and Epstein (2005) refer to crises such as the Tylenol tampering in the 1980s suffered by Johnson and Johnson. During this crisis, the company encountered lesser economic losses than firms without good reputations. Fombrun (2001) claims that reputation has a considerable hidden value because it acts as insurance and a reservoir of goodwill towards the company. Nevertheless, as Schnietz and Epstein (2005) explain, there is still a dearth of empirical support for the claim that CSR yields tangible corporate benefits during a crisis. Thus, the new evidence that we aim to provide in this chapter will positively contribute to literature and will provide interesting ideas for managers dealing with CSR in organisations.

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In our research, we consider that differences in stakeholder management strategies might account for some of the consequences of the current economic crisis for banks and building societies in Spain (Figure 5.1). Previous researchers have already confirmed this idea. Wood and Jones (1995) argue that differential effects of CSR initiatives on performance may occur because the expectations and evaluations of CSR may differ from one stakeholder to another. For example, Orlitzky et al. (2003) report that philanthropic donations aimed at community are more strongly related to corporate performance than any other CSR initiative. Along this line, Torres et al. (2012) theoretically propose that CSR practices geared towards community undoubtedly satisfy corporate credibility as these initiatives clearly go beyond the direct interest of the company. Nevertheless, in their empirical analysis the authors observe that CSR towards community and customers does not have a significantly larger effect on a company’s brand equity than other CSR efforts. It is the combination of both CSR policies that has a larger impact on brand equity than CSR towards other stakeholders. In the introduction of the chapter, we have already presented some differences that have traditionally existed in stakeholder management of Spanish banks and building societies. However, we have also talked about how building societies have expanded geographically and how they have modified some of their policies in order to reduce competitive advantages of larger national and international banks. Thus, our research is necessary to identify which current differences, if any, are regarding CSR and stakeholder management. Based on these results, we can determine to what extent the differences help us understand the current competitive scenario of Spanish banking institutions better. Based on these ideas, we propose two research questions, which we will try to answer by means of an empirical analysis of banking institutions in the Spanish context: RQ1: Do differences in stakeholder management exist between banks and building societies in Spain? RQ2: Do diverse stakeholder management strategies affect corporate performance of Spanish banks and building societies during the crisis differently?

Differences exist in STAKEHOLDER MANAGEMENT in banks and building societies

Can we establish a correlation?

Differences have been identified in THE CONSEQUENCES OF THE LATEST ECONOMIC CRISIS for banks and building societies

Figure 5.1  Conceptual Model

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METHODOLOGY To try to answer these research questions, we carried out a descriptive and exploratory study at the end of 2010. We implemented a content analysis of public information concerning Spanish banks and building societies. We also interviewed CSR managers in several banking institutions to get firsthand information about CSR and stakeholder management which was not available through other sources. We concentrated our analysis on Spain because some of the banking institutions in this country are world leaders and their study could help other international businesses to implement successful corporate strategies while anticipating negative consequences of wrong stakeholder management strategies. The institutions were selected to represent the broadest spectrum of cases possible regarding the size of the institutions, their geographic locations, legal structures and management models. In total, six banking institutions were studied: Santander (bank), BBVA (bank), La Caixa (building society), Caja Madrid (building society), Caja Navarra (building society) and Caja Cantabria (building society). The interest in studying these organisations was justified by the fact that they gathered a declared assets (loans) volume of € 2,139,165 million (on December 31, 2009), which represented 62.75 per cent of the total assets in the Spanish banking industry by that time. Thus, the six institutions did highly represent the Spanish market, at least according to the total assets of the market which is one of the traditional measures statistically used to rank companies in Spain. For further information, a technical summary of each of the institutions in the sample is included in Table 5.1. Table 5.1  Profile of Banking Institutions in the Study (December 31, 2009)

Institution

Employees

BBVA

106,976

Net Assets Benefit (million €) (million €) 535,065

4,595

Tier 1 (%)

Core Capital (%)

9.4

8.0

Santander

33,658

217,951.50

2,673.18

10.1

8.6

La Caixa

25,288

252,759.47

973.14

9.9

8.6

Caja Madrid

15,279

191,904.48

726.18

9.0

6.9

Caja Navarra

1,925

19,384.46

121.55

9.89

9.03

14,000

10,342.62

45.38

8.63

6.25

Caja Cantabria Source: Corporate websites

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STAKEHOLDER MANAGEMENT IN SPANISH BANKS Spanish banks have clearly started to focus more on building strong global brands than on building multiple (strong) local brands. A strong CSR record is then expected from these global brands. However, scholars consider that quite frequently global brands do not have strong CSR records, and they are accused of predatory behaviour. Nevertheless, the results we are going to present in this and the following sections will demonstrate that, predatory or not, stakeholder management in banks is directly linked to their stability in the marketplace and it is an interesting source of benchmarking for other companies who need to survive crises. Thus, we will see that the answer to both our research questions is affirmative: still differences exist in the way banks and building societies manage stakeholder claims and these differences account for some of the consequences of the latest crisis. First, references to stakeholder management in banks and building societies are identified when institutions define their understanding of CSR. Roughly speaking, banking institutions understand that CSR is a broad concept that makes organisations ‘take all possible impacts of their activities into account’ (CSR manager of Santander). Nevertheless, application of stakeholder management principles is more easily identifiable in CSR definitions promoted by banks. More precisely, stakeholder approach appears to be the first basic tenet of CSR programs for these institutions since they refer to the contribution to the economic development of society, the advancement of employees’, their families’ and society’s quality of life (Santander) or the generation of value for direct stakeholders—shareholders, customers, employees and suppliers (BBVA). Furthermore, when defining corporate values, CSR managers of banks point to ‘Innovation’ and ‘Focus on Customers’ as the most notable values of their identity. Thus, satisfying customer claims seems to be a primary goal for this kind of institutions: ‘The identity and positioning of the corporate brand are defined by the combination of three basic axes: corporate principles, priority of innovation and the idea of people working for people’ (CSR manager of BBVA) ‘We present ourselves as an innovative institution (. . .) now; an important topic in our image is the focus on the customer’ (CSR manager of Santander)

We can also analyse stakeholder management by studying corporate behaviour. In this regard, banks usually concentrate their resources on some specific stakeholders (mostly customers and employees) which are the centre of their CSR policies. This is the case of the Santander Group, specialised in the support to education. BBVA also focuses its CSR strategy on both financial inclusion and financial education in diverse social layers. These strategies align with the core business of national banks, as they are mostly

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targeting key primary stakeholders with a direct impact on corporate performance. Through financial inclusion banks encourage the rapprochement of potential customers to financial markets, products and services. Through educational programs banks try to boost the training of those individuals who could become employees of their organisations in the near future (e.g., university students). If we take into consideration the consequences of the economic crisis for Spanish banks we can perceive some sort of positive correlation between stakeholder management and the stability and even international growth of these institutions. Ideas by researchers such as Wood and Jones (1995) and Torres et al. (2012) ratify our conclusion. For example, Wood and Jones (1995) suggest the existence of a positive relationship between CSR initiatives to market-oriented stakeholders (e.g., customers) and market measures. Applying this reasoning to our study, one could argue that CSR initiatives relevant to customers should have a stronger effect than other CSR initiatives on corporate performance, which is partially based on customer metrics. Torres et al. (2012) provide an additional explanation for why prioritising customer and employee claims might be more beneficial for companies than prioritising other stakeholder needs. These authors base on visibility reasoning: ‘CSR initiatives may differ in their visibility. While initiatives to customers may be rather visible in the marketplace, initiatives to internal stakeholders (e.g., employees) and external stakeholders higher up the supply chain (e.g., suppliers, investors) will be less visible in the market. Moreover, such differentials in visibility are amplified in global brands, given that they are closely monitored by the mass media’.

STAKEHOLDER MANAGEMENT IN SPANISH BUILDING SOCIETIES Building societies have been traditionally linked to CSR, channelled through their foundations and voluntary financing of social projects. This fact has much to do with the legal status of this type of institutions. Building societies were created as foundations and non-profit organisations with a strong social and charitable character. Thus, CSR has become a differential trait of building societies which has always been integrated in their corporate mission. Furthermore, the profit maximisation of these institutions is not devoted to shareholders or investors since the governance structure of building societies is only formed by customers, local governments and other local organisations which are considered as stakeholders (Ley de Órganos Rectores de Cajas de Ahorro, LORCA). According to this fact, the board of directors is responsible for the affairs of the society while they have a fiduciary duty to

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balance the interests of different types of corporate stakeholders. In being so, a significant percentage of the net profit of building societies is oriented to financing social projects which improve the welfare of local communities. Nevertheless, building societies do not refer to stakeholders as often as banks and, when done, references are general and vague. There are just two building societies, Caja Madrid and Caja Navarra, mentioning stakeholders in their CSR definitions, who are referred to without a detailed identification of relevant target groups. For example, Caja Madrid refers to the necessary consideration of the impact of corporate activities in all its stakeholders while Caja Navarra refers to the fulfilment of governmental concerns of the stakeholders. Building societies choose other CSR approaches to conceptualise CSR. For example, some institutions apply Carroll’s (1979) social responsibility categorisation when they define CSR as corporate actions that go beyond legal requirements. In this sense, Carroll considers that an exhaustive definition of a company’s social responsibility should include corporate economic, legal, ethical and philanthropic obligations that go beyond that prescribed by law or union contract. This perspective is adopted by some of the biggest national building societies such as La Caixa. However, the most common perspective adopted by these banking institutions is that proposed by sustainable development theory (van Marrewijk, 2003). In this case, CSR is found in the triple-bottom line of the organisation and it covers the full range of business concerns related to the environmental, economic and social dimensions of companies. References to this perspective are found in the CSR definition given by La Caixa (social and environmental concerns, sustainable growth), Caja Cantabria (sustainability, social cohesion and environmental protection) and Caja Navarra (social, environmental and economic concerns). When defining corporate values, CSR managers of building societies especially point to their ‘Link to the Community’ (Caja Cantabria): ‘Social commitment is one of the values of the corporation, evident not just in our Social Projects but in the combination of all the actions of the business’ (CSR manager of Caja Cantabria)

Regarding corporate behaviour, building societies choose a ‘light shower’ (CSR manager of Caja Cantabria) strategy. This metaphor refers to the purpose of building societies to impartially balance all stakeholder claims to get sustainable development and harmonious growth rates. Nevertheless, it is also necessary to highlight that most building societies in Spain have recently undertaken merger processes which are taking them to reduce their CSR investments. On the contrary, now these institutions have to derive higher profit amounts to reserves in order to meet the solvency rates demanded by national regulators. Currently, CSR investment seems to have gone back to

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levels of 2006 seeding doubts on the future of CSR in this banking subsector (La Voz de Galicia, 2011). Analysing stakeholder management differences between banks and building societies from a ‘shared value’ perspective (Porter & Kramer, 2011), it is possible to glimpse a more strategic approach to stakeholder management on the part of national banks than building societies. In this regard, banks especially focus on the advancement of customers (market orientation through innovation in banking services and products), a primary stakeholder with direct influence on corporate performance. According to Porter and Kramer (2011), this is the first stakeholder to be satisfied since it directly broadens the commercial opportunities of businesses. On the other hand, building societies concentrate on the society (through social commitment represented in social projects), a broader concept that includes diverse groups (environment, ONGs, social agents) generally not representative of primary stakeholders. The secondary targets to which building societies are orienting their CSR policies do not have a direct impact on the value chain of a banking institution. Thus, the principles of the shared value concept are not being implemented in building societies and it is possible to conclude that stakeholder management is less strategically oriented in this banking subsector.

CONCLUSION The empirical study presented in this chapter leads to sound conclusions. First, not only the principles of stakeholder theory are applied to the design and implementation of CSR strategies, but also significant differences exist between banks and building societies when it comes to managing their relationships with stakeholders. Results point to international banks’ strategy as more advantageous for the purpose of corporate performance. First, stakeholder management principles are more accepted and clearly implemented in banks than building societies. Second, when planning their interaction with stakeholders, this kind of institutions aligns their CSR objectives with operational goals. In doing so, banks identify two especially relevant stakeholders, customers and employees, which they centre their CSR policies around. Thus, the identification and management of stakeholders align with the most restrictive perspectives on stakeholder theory, which reduce the number of relevant targets to those groups most directly linked to the organisation, primary stakeholders (Clarkson, 1995). In this regard, customers and employees are those groups with the greatest ability to influence corporate success in the long-term. First, customers can broaden commercial opportunities for companies (e.g., microfinance) and second, employees are the face and voice of the company when managing relationships in the value chain of distribution

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channels, which finally also get to customers. Accordingly, CSR principles are integrated in corporate strategy and they are managed to contribute to corporate financial goals. Why do we assume this approach is more effective than broader stakeholder management strategies? We just need to have a look at the current situation of banking institutions in the middle of the world financial crisis. Spanish banks have not excessively diverted their attention to non-financial issues such as massive investment in CSR initiatives oriented to secondary stakeholders (e.g., the environment or local communities). CSR investment goes hand in hand with core goals such as profit maximisation. We might consider microfinance as a clear example. At the same time banks are, first, promoting their ethical standards by contributing to the economic welfare of the basis of the social pyramid and, second, they are expanding both geographically and by attending new targets. No news has revealed any cashflow or solvency problem. As we already discussed here, banks are even acquiring other international corporations (e.g., Santander Group). This fact can be taken as a signal of the financial strength of Spanish banks with an international scope. Building societies represent the opposite situation. They have suffered many solvency problems, some companies have even collapsed and a new governmental law has been promoted to restructure building societies by allowing massive merges which could help these companies rationalising their financial accounts. We firmly believe these problems are directly related to the management of stakeholders by building societies. These institutions talk about stakeholders as a general concept and references to sustainability, social needs or sustainable growth of the community are common in their parlance. Thus, building societies align with broad definitions of stakeholder management when they focus their CSR on advancing the society welfare and fulfilling secondary stakeholders’ needs, including a long range of target groups such as the environment, local communities, governmental institutions or academic organisations, among others. When this is the situation, CSR might be considered a cost which detracts from investing monetary resources on initiatives with a more direct impact on the annual accounts of banking institutions. We can easily understand that, by applying this vague CSR approach, building societies are diversifying their activities, not focusing on primary stakeholders but contributing money to all of them to the same extent. When this principle takes over a company, it might result in less corporate expertise in managing some business areas and more naïve decisions in this regard. This has been the case with real estate departments in Spanish building societies. Inexperience has taken these institutions to overinvest in this area which has critically triggered the financial crisis in the country. At this point, the government needs

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to take control over the situation of building societies, rescuing c­ ompanies— the case of Caja Castilla-La Mancha has been the most significant one in Spain—and creating specific laws to regulate the industry. Significant managerial implications can be derived from these results. In this sense, as researchers we consider that the stakeholder management implemented by banks could result in better corporate results in the longterm. More specifically, banks are focusing on two primary stakeholders with an especial relevance to the success of business activities. Furthermore, these kinds of strategies are well integrated into corporate philosophy and identity so this would facilitate the design of coherent and credible CSR activities which, when focusing on the advancement of customers and employees, have been demonstrated to get better results. In this sense, previous studies have already demonstrated that customers do highly appreciate CSR policies focusing on themselves rather than those policies implemented by companies commonly investing in society or any other ­secondary stakeholder. Also in this regard, there are several theories in literature, such as the congruence or the attribution theory that, when applied to CSR, recommend companies to design and implement CSR strategies coherent with their business activity. The goal would be not to raise suspicion among stakeholders. If so, then a banking institution should concentrate on generating economic value for stakeholders. And this objective would be more easily achieved by dedicating resources to primary stakeholders closely involved in business activities rather than donating money to society. Then, even though CSR policies of most building societies are perfectly aligned with their corporate desired identities, it might be that this orientation is not the most advisable one in the long run since other management styles has demonstrated to be more effective. This idea is supported by the trend followed by building societies in the Spanish market now. These institutions, confronted with the necessity of being more competitive, solvent and being able to survive in the marketplace are entering a process of merges and acquisitions which is resulting in solid bigger financial groups with better access to financing and a management style more similar to national banks.

REFERENCES Carbó, S. (2010). Present and future of the model of savings banks in Spain. CIRIEC—España, Revista de Economía Pública, Social y Cooperativa, 68, 167–182. Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), 497–505. CECA. (2008). Green Paper on corporate social responsibility in the financial sector. Retrieved 30 September, 2014, from http://www.ceca.es Clarkson, M. B. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 20(1), 92–117.

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94  Chapter 5  CSR and Stakeholder Management in the Banking Industry Cornell, B., & Shapiro, A. (1987). Corporate stakeholders and corporate finance. Financial Management, 16, 5–14. Flavián, C., Guinalíu, M., & Torres, E. (2005). The influence of corporate image on consumer trust: A comparative analysis in traditional versus internet banking. Internet Research, 15(4), 447–470. Fombrun, C. (2001). Corporate reputations as economic assets. In M. Hitt, M. R. Freeman, & J. Harrison (Eds.), Handbook of strategic management. Oxford, England: Blackwell. Friedman, M. (1970, 13 September). Social responsibility of business is to increase its profit. The New York Times Magazine, pp. 122–126. Gardener, E. P. M., Molyneux, P., Williams, J., & Carbo, S. (1997). European savings banks: Facing up to the new environment. International Journal of Bank Marketing, 15(7), 243–245. Jamali, D., & Mirshak, R. (2007). Corporate social responsibility (CSR): Theory and practice in a developing country context. Journal of Business Ethics, 72(3), 243–262. KPMG. (2008). KPMG international survey of corporate responsibility reporting 2008. Retrieved 30 September, 2014, from http://www.kpmg.com La Voz de Galicia. (2011, 27 December). Investment in social projects from the savings banks back to levels of five years ago. http://www.lavozdegalicia.es. Retrieved from http://www.lavozdegalicia.es/dinero/2011/12/28/0003_201112G 28P34994.htm?utm_source=buscavoz&utm_medium=buscavoz McDonald, L. M., & Rundle-Thiele, S. (2008). Corporate social responsibility and bank customer satisfaction. International Journal of Bank Marketing, 26(3), 170–182. Miles, M. P., Munilla, L. S., & Darroch, J. (2006). The role of strategic conversations with stakeholders in the formation of corporate social responsibility strategy. Journal of Business Ethics, 69(2), 195–205. Orlitzky, M., & Benjamin, J. (2001). Corporate social performance and firm risk: A meta-analytic review. Business and Society, 40(4), 369–396. Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24, 403–441. Pérez, A., & Rodríguez del Bosque, I. (2012). The role of CSR in the corporate identity of banking service providers. Journal of Business Ethics, 108(2), 145–166. Poolthong, Y., & Mandhachitara, R. (2009). Customer expectations of CSR, perceived service quality and brand effect in Thai retail banking. International Journal of Bank Marketing, 27(6), 408–427. Porter, M. E., & Kramer, M. R. (2011, January). The big idea: Creating shared value. How to reinvent capitalism—and unleash a wave of innovation and growth. Harvard Business Review. Schnietz, K. E., & Epstein, M. J. (2005). Exploring the financial value of a reputation for corporate social responsibility during a crisis. Corporate Reputation Review, 7(4), 327–345. Selvi, Y., Wagner, E., & Türel, A. (2010). Corporate social responsibility in the time of financial crisis: Evidence from Turkey. Annales Universitatis Apulensis Series Oeconomica, 12(1), 281–290.

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Torres, A., Bijmolt, T. H. A., Tribó, J. A., & Verhoef, P. (2012). Generating global brand equity through corporate social responsibility to key stakeholders. International Journal of Research in Marketing, 29(1), 13–24. van Marrewijk, M. (2003). Concepts and definitions of CSR and corporate sustainability: Between agency and communion. Journal of Business Ethics, 44(2–3), 95–105. Waddock, S. A., & Graves, S. B. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18, 303–319. World Business Council for Sustainable Development (WBCSD). (2001). The business case for sustainable development: Making a difference towards the Johannesburg Summit 2002 and beyond. Retrieved 30 September, 2014 from http://www.wbcsd.org. Wood, D. J., & Jones, R. E. (1995). Stakeholder mismatching: A theoretical problem in empirical research on corporate social performance. International Journal of Organizational Analysis, 3(3), 229–267.

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Section 3 CSR and Sustainability Implementation

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6

Engaging Communities Common Pitfalls, Uncommon Opportunities Robyn Eversole

Introduction Corporate Social Responsibility (CSR) activities often require organisations to work beyond their own boundaries and those of their supply chains to engage with other kinds of social actors. This chapter discusses this process of engaging external ‘stakeholders’ or ‘communities’ and how to do it effectively. It presents a simple framework for analysing the nature of relationships between a corporate organisation and external communities, and it describes four common pitfalls in community-engagement efforts and their consequences. Finally, this chapter provides guidance as to how to capture the value that can be added to organisations through effective community engagement. The process of engagement with external stakeholders and communities is increasingly of interest to a broad range of organisations internationally. Across many different fields, it has been argued that effectively engaging with external communities can generate real benefits for organisations: from private corporations to government bodies and not-for-profits. Private companies can identify new product or market opportunities and build their reputational capital in the communities where they work. Government and non-governmental organisations can avoid inefficiencies in service delivery, grow their reputation and legitimacy, and identify local resources to support their missions. Regardless of the type of organisation, engaging with external communities has the potential to reveal untapped resources and stimulate innovative practice. In the 21st century, it would be difficult to find an organisation of any size or influence that does not, at least in principle, recognise the value of building relationships with external stakeholders and communities. Nevertheless, the language of community engagement is imprecise, and the art of engagement is still poorly understood. This chapter explores why communities may be difficult to engage, and why corporate organisations may repeatedly fail to reap real benefits from engagement efforts. It then suggests some guidelines for achieving effective community engagement, and what effective e­ ngagement might look like. 99

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The chapter begins by defining ‘community engagement’ as the intentional creation of relationships between a corporate organisation and other, external organisations and communities: relationships which may be developed for a range of instrumental and normative ends, with a range of characteristics. Drawing upon analyses of community-engagement efforts by government and non-governmental organisations (NGOs), the chapter argues that engagement relationships can be analysed with reference to the motivation and influence of each party in the relationship, and the institutional turf upon which the relationship occurs. These characteristics are central to whether or not external stakeholders are effectively engaged and whether or not the relationship creates a value-add for the organisations concerned.

Engagement as a Relationship Community engagement can be defined as the intentional creation of relationships beyond the boundaries of one’s own organisation, with other organisations and communities of various kinds (such as communities of place or communities of interest). These relationships may include, but should extend well beyond, an organisation’s employees, clients, suppliers and operational partners. Community engagement is externally focused; at the same time, it is more specific than the ‘public face’ of an organisation: the organisation’s image as managed through media, advertising and communications. Engagement implies a relationship: the flow of communication is not just one-way. Community engagement is the process of building relationships. Community engagement is also sometimes referred to as stakeholder engagement. Stakeholders can be defined broadly as individuals, communities or organisations that have some stake in the activities of the organisation. Stakeholders include an organisation’s employees, suppliers, customers, and partners of various kinds, but stakeholders also include local residents, potential employees, potential suppliers, and anyone else who is actually or potentially affected by the activities of an organisation. Community engagement can be understood as a process of building intentional relationships with external communities of stakeholders and potential stakeholders, including those who do not yet have a clearly defined stake in the organisation or its activities. For instance, a company may provide training to unemployed people who may not initially see themselves as stakeholders; as the result of this community-engagement activity, however, they may come to see themselves as having a relationship with the company and may eventually even become employees. There are numerous reasons an organisation would seek to build a relationship with external communities. First, there are instrumental motivators, based on a recognition that external communities can help the organisation to do its core business better. For instance, where there is a shortage of

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labour, investing in community-based training programs can fill a practical need for workers. There are various documented examples of how different kinds of organisations have intentionally sought to engage with others to fill an instrumental need. Government organisations in different parts of the world are engaging actively with local community organisations and NGOs to provide devolved, locally responsive service delivery (see e.g., Baulderstone, 2008; Shergold, 2008; Watkins et al., 2012). Public sector and private sector organisations increasingly engage and formally partner with each other and with community sector organisations to deliver outcomes that no one individual organisation would be able to deliver on its own (see e.g., Lowndes & Skelcher, 1998; Geddes 2005). These kinds of engagement relationships have strong instrumental drivers. There are, however, other reasons why an organisation would seek to engage with external communities, beyond assistance with delivering its core business. Normative motivators are also important: the recognition that creating relationships with external stakeholders is understood to be a good thing to do. Being seen to engage outside of one’s own organisation can grow the reputation of the organisation as collaborative and community-minded. Government organisations that engage with communities can enhance their legitimacy as democratic and participatory; private companies can use their visible engagement with local communities to support their social license to operate in a particular locality. Normative engagement acknowledges that there are social norms that look favourably on relationship-building, particularly when it is seen to create benefits for less-advantaged groups. Yet, even normative engagement indirectly has an instrumental value: as it grows an organisation’s reputation, this reputational capital can in turn create a range of other benefits. While there are generally strong motivators for organisations to seek to engage with external communities, there are also obstacles to engagement. The first common obstacle is that the organisation does not see any value in engaging with particular stakeholder groups or communities. Engagement may be viewed as a necessary evil, for instance where local communities are resisting the organisation’s presence. Or it may be viewed as a luxury, a source of distraction from core business, which the organisation cannot afford. In each case, the potential value to be gained from engagement is overlooked. A second obstacle to engagement is a lack of interest from external communities that an organisation wishes to engage. They may have no interest in building a relationship with the organisation in question, or may be wary of doing so because they do not trust the organisation or its motives. A final obstacle to engagement is cultural differences between organisations and communities that impede communication and relationship-building. Thus, even when there is interest in building a relationship, the different parties may find it impossible to do so.

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Analysing these common obstacles in the context of the participatory processes through which governments and NGOs have sought to engage communities in various contexts, it becomes apparent that successful community engagement depends upon the motivation of the organisations and communities involved—whether or not they see any value to be gained from the relationship—as well as their respective power, legitimacy, and trust for each other (Eversole, 2003). Unpacking these relationships further, different organisations and communities also have cultural differences that can be understood in terms of differences in what they know (knowledge differences) and differences in how they work (institutional differences) (Eversole, 2012). This chapter applies these insights more broadly to organisations of various kinds that are seeking to engage with communities, in order to provide a framework for analysing community engagement. Community engagement is ultimately a relationship among different social actors. This relationship can be described in terms of the motivation of each party, the relative influence of each party (how much power do they have, how much legitimacy do they have, and do others trust them) and the cultural turf on which the engagement occurs: that is, whose knowledge and whose institutions dominate in the relationship. A given engagement relationship between an organisation and an external organisation or community may be described in terms of these three continuums as pictured in Figure 6.1: the motivation continuum, the influence continuum, and the institutional turf continuum. Each describes the extent to which the relationship is balanced, or whether to the contrary it is weighted towards the interests of one party over another. The top line in Figure 6.1, the motivation continuum, describes the response to the question: To what extent is each party motivated to participate in the relationship? Does this relationship respond to their core business or core concern? Do they believe the relationship will create benefits for them? If the engagement effort responds to the core business of the organisation doing the engaging, but not to the concerns of the community being engaged, it will sit to the left of the continuum, as in the example below. This is the case for instance, when an organisation has a pre-existing project or initiative and wants others to help them to deliver it. On the other hand, if the engagement relationship responds to the concerns of the external community, but not to that of the organisation doing the engaging, it will sit to the right of the continuum. If, however, the engagement relationship responds to the core business or concerns of both parties, for instance a mutually beneficial project or initiative, it will sit in the middle of the continuum. The second line in Figure 6.1, the influence continuum, describes the response to the question: Who has influence in this relationship? Which party is more powerful, which party is perceived as most legitimate and trustworthy, and who is able to influence the outcomes? The most powerful

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party often has considerable influence; if an organisation is powerful and controls access to resources other social actors may be afraid not to engage with it, and they may be unwilling or unable to challenge its agendas. Legitimacy and trust are, however, another form of influence, based on an organisation’s reputation with other organisations and communities and its perceived role: respected and trusted organisations are often highly influential. These different forms of influence are represented on the second continuum. In many cases, the organisation seeking to engage communities is often the more influential party: a government organisation, a wealthy company, or an NGO with a track record of important community-benefit activity. In the example below, however, the external community has on balance greater influence: perhaps because they are well respected by others, control access to important resources, or both. The bottom line in Figure 6.1, the institutional turf continuum, describes the response to the question, upon whose turf does the engagement occur? In whose language is it conducted? In whose physical space? Do the structures and conventions of one organisation or community dominate? All of these questions can be summed up as an assessment of the ‘institutional turf’ on which the relationship is established. Writing on government attempts to engage communities in the United Kingdom, researchers have highlighted the predominance of ‘invited spaces’ (Cornwall, 2008). Invited spaces are the institutional terrain of governments: their board rooms, consultative fora, their bureaucratic language and structures that are very different from the ‘spaces that people create for themselves’ (Cornwall, 2008, p. 275). Engagement may occur on the turf of the organisation doing the engaging or on the external community’s turf: in their local offices, community gatherings, public spaces, or via ‘kitchen table’ conversations. Together, attention to the continuums of motivation, influence and institutional turf in any given community-engagement relationship can tell us a great deal about how likely the relationship is to create benefits for an organisation and for its community stakeholders. Assessments that fall heavily to the left of the motivation continuum will tend to receive limited buy-in from external stakeholders, even if they feel they must nominally be seen to engage with an influential organisation. Assessments that fall heavily to the right will tend to receive little priority from the organisation doing the engaging, even if they feel they must nominally be seen to engage with a more influential community. Ideally, engagement relationships will sit somewhere towards the middle of the continuum: a relationship with some form of shared agenda. At the same time, engagement activities can be heavily influenced by one party or the other; when influence sits heavily to the left, external communities will struggle to have a say in the outcome, leading to merely ‘nominal’ participation or non-participation (see e.g., White, 1996; Arnstein, 1969). Ideally all parties should share influence, even if this

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Our Organisation Motivation

Influence Institutional Turf

Shared Motivation

External Organisation or Community

Shared Influence

Shared Turf

Figure 6.1  Framework for Analysing Community Engagement

requires an intentional act of power-sharing or trust-building. Finally, attention to the institutional turf upon which an engagement relationship occurs highlights the extent to which each party is likely to be comfortable or uncomfortable with the ‘terms of engagement’ (Eversole, 2011, p. 67).

Common Pitfalls in Community Engagement The framework presented in Figure 6.1 can be used to describe and analyse four common pitfalls in community engagement that have been identified in the literature on community participation and through practice. These pitfalls can be described as blind engagement, straw man engagement, active manipulation and framed engagement. Each is defined and discussed below. ­Table 6.1 describes these in terms of the extent to which motivation, influence and institutional turf are relatively equal, or whether they are unequally weighted to one side of the framework. In blind engagement, a corporate organisation seeks to create a relationship with an external community, with little understanding of who or what that external community is. ‘Community’ becomes simply a generic term for ‘others’ who are unknown. Blind engagement is thus ‘engagement’ with no possibility of a relationship. When formal institutions attempt to engage ‘communities’, they often start from a few dangerous assumptions, assuming that communities are homogenous, easily defined and easy to identify on the landscape. They may conflate ‘community’ with a large or ill-defined geographical place (the Australian community, the rural community) or a category of interest to them (the consumer community, the poor). Such communities are often a product of other people’s categories rather than a recognisable, engageable group. The lack of precision in the use of the term ‘community’ has often been noted in the literature of community development and public policy (see e.g., Bryson & Mowbray, 1981). In blind engagement, not only are motivation, influence and institutional turf all on the side of the

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Table 6.1  Four Pitfalls of Community Engagement

Motivation

Influence

Institutional Turf

Blind Engagement

Unequal

Unequal

Unequal

Straw Man Engagement

Unequal

Unequal

Unequal

Active Manipulation

Unequal

Unequal

May be equal

Framed Engagement

Equal

May be equal

Unequal

‘engaging’ organisation, but other organisations or communities are not even being engaged. In straw man engagement, by contrast, organisations seek to engage a particular, defined organisation or community. They do so, however, on the assumption that this organisation or community necessarily has the same interests and agendas as the organisation that is seeking to engage them. The external community or organisation is treated as a metaphorical ‘straw man’: constructed in the image of the engaging organisation. ‘Straw man engagement’ is thus a relationship built on a mistaken understanding of the other, and an inability to recognise that other communities and organisations have their own interests and agendas. This kind of engagement has been common over the years in international development work, when development organisations have sought the ‘participation’ of local communities in externally run development initiatives (see e.g., Cooke & Kothari, 2001). In straw man engagement, local communities are expected to be motivated to take up external agendas, most commonly on external institutional turf. They typically have little influence to make their own perspectives and agendas known. This can result in a kind of ‘nominal’ participation (White, 1996) in which stakeholders appear to be engaged, but there is little communication or joint action. This kind of engagement is also sometimes referred to as window-dressing: it has the appearance of a relationship, but no substance. A third common pitfall in community engagement is active manipulation. Here, the engagement relationship is simply a vehicle that one party uses to attempt to manipulate the other party: to pressure them to do or think in the way that they want. In active manipulation, an organisation’s motivation in engaging the other is to change them: if the other organisation or community does not want to be changed, then they will have little motivation to engage—­unless they are forced to do so. Research on government—community engagement in the US has identified ‘manipulation’ as a type of non-participatory engagement sometimes seen in the relationship between governments and l­ocal communities; in contrast to more participatory relationships that encourage delegated authority and citizen control (Arnstein, 1969). While it is most

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common for a more-powerful organisation to attempt to manipulate a lesspowerful community, manipulation can underpin any kind of engagement relationship: for instance, influential community stakeholders may engage with an external organisation solely for the purpose of extracting resources from it. In manipulation, both motivation and influence are strongly on the side of the manipulating organisation, but others’ institutional turf may be leveraged to make the relationship appear more participatory than it is. The fourth pitfall is framed engagement. In this case, the engagement relationship has the potential to benefit all parties concerned, yet it is constrained because the relationship is confined to the institutional terrain of the most powerful organisation. Engagement processes between formal organisations and less-formal communities, for instance, tend to be framed by the professional ways of working of the former (see e.g., Craig & Porter, 1997). This may mean that communities are unable to engage even if they want to: the language, location or format are in some way inaccessible to them: for instance, scheduling meetings in locations inaccessible via public transport, or at a time that parents are otherwise occupied collecting children from school. It has often been observed in community work that in meetings, some people tend to dominate and others remain quiet. Even when there is shared motivation to engage, and even where there is a willingness to share influence, framing engagement on unfamiliar or uncomfortable institutional turf can cause people to remain silent, or to fail to engage from the start.

Effective Community Engagement: From Relationships to Innovation Effective community engagement, by contrast, is not framed or manipulative. Nor does it set communities up as straw men, or attempt to engage with them blindly, without an understanding of who or what the community is. Effective engagement requires that the organisation doing the engaging, and the communities or organisations to be engaged, are clearly defined; that they have a motivation to work together; that they share influence over the outcomes; and that the engagement process is accessible and in accordance with the ways-of-doing-things of each group. Motivation is important, because it implies that the various parties are willing to invest time and energy in building a relationship. Influence is important; each party needs to have influence in the relationship so that one party does not dominate the other and turn the relationship into mere manipulation or window-­dressing. And institutional turf is important: whether this is the physical meeting place and time, the language or degree of formality in the proceedings, or the assumed values and protocols that underpin the process, these need to be comfortable and accessible to all parties. If these three dimensions of community engagement are taken into account, then the groundwork is laid for strong relationships.

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Strong relationships are not only important in their own right—for the instrumental or normative benefits they may generate for the organisations concerned—but they are also important in terms of their potential to generate innovation. Innovation defined by Schumpeter (1934) is a new or significant improvement in a product, process, market, supply chain or governance. Contemporary research on innovation processes, in the context of regional innovation systems, teaches us that relationships underpin innovation. Research into why some regions are successful (and others less so) has highlighted that relationships among firms and organisations are a key determinant of the ability to generate innovative solutions (see e.g., Cooke & Morgan, 1998). As organisations engage with other communities and organisations beyond their borders—including with different kinds of sectors and interest groups—new kinds of knowledge flows are generated; knowledge ‘spills over’ from one organisation to another and from one sector to another (see e.g., Audretsch & Aldridge, 2009; Asheim, Boschma, & Cooke, 2011). This process has the potential to spark new ideas and new solutions: both within and across organisations. It is therefore possible to consider the value of effective community engagement not just in terms of the opportunity to develop relationships with others—relationships that have value in their own right—but also in terms of the opportunity for these relationships to stimulate innovation. Effective community engagement creates cross-organisational and cross-sectoral networks. These networks can form the basis for strategic knowledge-sharing and ultimately new kinds of organisational and collaborative arrangements. Nevertheless, these kinds of benefits will not emerge from engagement relationships in which one party dominates the other. If those being ‘engaged’ by a corporate organisation have no motivation to build a relationship, and no ability to influence or even be heard by others, then no relationship exists. Networks cannot be built, knowledge cannot be shared, and ideas cannot be sparked. More powerful organisations can easily dominate an engagement relationship, even when they do not intend to do so. Over the years, the ­community-engagement efforts of governments and NGOs have often sought to attract the participation of communities: but in the end many have only succeeded in imposing their own motivations, influence and institutional ways of working. These experiences have meant numerous missed opportunities to engage communities, build relationships across organisations and sectors and stimulate innovation. These experiences can be learned from, so that they are not repeated. Blind engagement, straw man engagement, active manipulation and framed engagement are all ways that the engagement efforts of corporate organisations can fail. On the other hand, with shared motivation to work together, shared influence over outcomes, and shared institutional processes, there is enormous opportunity to create and capture value from these kinds of relationships.

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References Arnstein, S. (1969). A ladder of citizen participation. Journal of the American Institute of Planners, 35(4), 216–224. Asheim, B. T., Boschma, R., & Cooke, P. (2011). Constructing regional advantage: Platform policies based on related variety and differentiated knowledge bases. Regional Studies, 45(7), 893–904. Audretsch, D. B., & Aldridge, T. T. (2009). Knowledge spillovers, entrepreneurship and regional development. In R. Capello, & P. Nijkamp (Eds.), Handbook of regional growth and development theories. Cheltenham, England: Edward Elgar. Bryson, L., & Mowbray, M. (1981). Community: The spray-on solution. Australian Journal of Social Issues, 16(4), 255–267. Baulderstone, J. (2008). Changing relationships between the public sector and community service organisations: Insights from the South Australian case. Public Policy, 3(1), 1–16. Cooke, B., & Kothari, U. (2001). Participation: The new tyranny? London, England: Zed Books. Cooke, P., & Morgan, K. (1998). The associational economy: Firms, regions and innovation. Oxford, England: Oxford University Press. Cornwall, A. (2008). Unpacking ‘Participation’: models, meanings and practices. Community Development Journal, 43(3), 269–283. Craig, D., & Porter, D. (1997). Framing participation: Development projects, professionals, and organisations. Development in Practice, 7(3), 229–236. Geddes, M. (2005). Making public private partnerships work: Building relationships and understanding cultures. Hampshire, England: Gower Publishing, Ltd. Eversole, R. (2003). Managing the pitfalls of participatory development: Some insight from Australia. World Development, 31(5), 781–795. Eversole, R. (2011). Community agency and community engagement: Re-theorising participation in governance. Journal of Public Policy, 31(1), 51–71. Eversole, R. (2012). Remaking participation: Challenges for community development practice. Community Development Journal, 47(1), 29–41. Lowndes, V., & Skelcher, C. (1998). The dynamics of multi-organizational partnerships: An analysis of changing modes of governance. Public Administration, 76(2), 313–333. Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest and the business cycle. Cambridge, MA: Harvard University Press. Shergold, P. (2008). Collaboration for the public good? The State and the Third sector. CSI Lecture Series [Online]. Retrieved from http://www.ipaa.org.au/ documents/2012/05/2008-spann-oration.pdf/?4a054b [Accessed 29 November 2014]. Watkins, S. C., Swidler, A., & Hannan, T. (2012). Outsourcing social transformation: Development NGOs as organizations. Annual Review of Sociology, 38, 285–315. White, S. (1996). Depoliticising development: The uses and abuses of participation. Development in Practice, 6(1), 6–15.

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7

Organisation and Sustainable Development Towards a New Form of Social Responsibility? Jocelyne Robert, Adeline Goemans, Mehran Nejati

Introduction As major actors in the society, companies sometimes present a double-face. They appear sometimes as the prior agents of the ecological crisis, while at other times they are the initiators of actions for sustainable development. Being important economic agents, organisations cannot deny their impact on the environment, through their daily activities. In addition, the news often points out these organisations as responsible for multiple environmental disasters such as oil spills and deforestation. One example is the explosion of a pesticide factory in Bhopal in 1984 or even the oil spill caused by the sinking of the Erika . Erika is an oil Tanker under Maltese Pavillon chartered by Total to bring fuel to Italy alongside the coast of France. It sank in December 1999 causing severe pollution. Furthermore, some organisations have been trying to highlight policies of sustainable development and social responsibility to change the negative image imputed to them. Aware of their environmental impact and of the importance of turning to sustainable development, companies demonstrate some consideration of the stakeholders and address the social responsibility accordingly. Beyond a legal requirement, companies are orienting to a management that reflects the adverse social, environmental and economic effects of their businesses. The interest in ecology is not always the result of a genuine desire to protect the environment; it can also result from economic or legal constraints or even from a desire expressed by the stakeholders. Regardless of the key drive for such initiatives of being pressure for compliance or seeking an opportunity, organisations seem to show a greater interest in environmental practices. Intermixing sustainable development and social responsibility, the analysed firms in our approach argue to act in accordance with the social, the environmental and the economic. Leaders put this interest in a socially responsible approach. But how is this approach being developed and implemented? In this chapter, we try to identify through the discourse of the organisation, especially that of the human resource managers, the type of social responsibility implemented and the means used to develop socially responsible activities. We will then ask about the involvement of stakeholders. 109

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Does social responsibility, including an interest in ecology, bring a new way of taking into account stakeholders? Does social responsibility respond to the desire or demand management stakeholders? Which group of stakeholders is preferred? Does the discourse of human resources demonstrate a new management and staff involvement through the actions of social responsibility? Does this new management team lead, in turn, to a new definition of social responsibility? At first, we will define the concepts of social responsibility and of sustainable development, and then we will set the theoretical framework that will enable us to classify firms according to the different types of social responsibility. We will conclude by highlighting the role of human resources in consideration of the stakeholders. We will then consider the assumption of the emergence of a new form of social responsibility: a more citizen-minded one.

Definitions and Approaches Definition of Social Responsibility and Sustainable Development On the one hand, we will retain the definition of social responsibility favouring the stakeholders approach (Freeman, 1984, p. 46), and the theory of sustainable development involving people, environment and benefit on the other hand. The stakeholders’ notion comes from Freeman. The latter defines stakeholders as ‘any group or individual who can affect or is affected by the achievement of the organization’s objectives’ (Freeman, 1984, p. 46). For example, shareholders as well as employees or even customers belong to the stakeholders. We will retain as a definition of sustainable development a model of development characterised by taking into account the impact on the future actions of the company combining the following three areas: people, profit and the environment. There is as well the idea of respect of democracy and respect for the rules of good governance (Brégeon, 2004, p. 78). Several approaches to social responsibility exist, some focusing on the responsibility, other on performance or on ethical development. They enable a joint reading of the notion of social responsibility. Several Approaches of Corporate Social Responsibility (a) Archie Carroll: The economic, legal and philanthropic responsibilities The first type enables to highlight the goals pursued by the company in its implementation of the Corporate Social Responsibility (CSR) programs. Carroll (1991; Carroll & Shabana, 2010) identified four kinds of responsibilities and this categorisation is represented using a pyramid. These responsibilities, however, are mixed: one responsible action may result from two different types of responsibilities (Carroll & Schwartz, 2003). On the one hand, the economic and legal responsibilities are

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required and the company must comply. On the other hand, ethical and philanthropic responsibilities are expected or desired by the stakeholders as well as society in general. The company can submit their requirements and focus on the first two categories. ▪▪ The economic responsibility matches with the production of goods and services desired by society (Carroll & Shabana, 2010, p. 90). ▪▪ The legal responsibility refers to obligations imposed by the law of the place where the business is located. Organisations act with consideration for the precautionary principles by predicting potential lawsuits and avoiding them. ▪▪ The ethical responsibility refers to the values, standards and requirements as stakeholders judge right (Carroll & Shabana, 2010, p. 95). The company is well in line with what society expects. ▪▪ If the company acts as a good corporate citizen and promotes the well-being of men, it applies its philanthropic responsibility.

(b) Castello and Lozano: The forms of the corporate legitimacy

Castello and Lozano (2011) reiterate the distinction made by Suchman (1995) to identify three types of legitimacy of the company’s actions through its communication on its social responsibility. They illustrate the manner in which managers will define the role of their organisation in society to gain its acceptance. The organisational activities are therefore described as desirable, proper and as based on values. ▪▪ The ‘pragmatic legitimacy’ is based on the best interests of the company and on the views of the stakeholders. ▪▪ The ‘cognitive legitimacy’ is based on shared values in the company and the commitment to a policy of social responsibility. ▪▪ The ‘moral legitimacy’ is constituted by the judgment of the company and its activities.

We will highlight the importance, in the collected speeches, of the ‘pragmatic legitimacy’ (importance of the interests of the company and of the stakeholders) and the ‘cognitive’ one (respect advanced by the company values) compared to the ‘moral legitimacy’.

(c) Garriga and Melé: Four theories of the social responsibility

Garriga and Melé (2004) suggest a classification of approaches relative to the CSR implementation into four groups: ▪▪ The ‘instrumental theories’ that are part of a wealth production logic; the company being its main mean. ▪▪ ‘Political theories’ that analyse the company in terms of power. The company has then the responsibility to use that power for the good of the community.

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▪▪ The ‘integrative theories’ argue that the business must incorporate the demands of society in its policy to achieve greater efficiency. The decision-making is made in accordance to the stakeholders, in a wide sense. ▪▪ Finally, the ‘ethical theories’ involve a business–society relationship embedded by the ethical values. Thus, companies have an ethical obligation to act in a socially responsible manner.

We will try to show, through the official websites of companies and discourses of human resource managers, which theories are mostly highlighted. We will see that the form of responsibility changes with the situation and the context in which the organisations are.

(d) Széll: Top-down or bottom-up

Social responsibility in organisations can operate in two different ways (Széll, 2006, p. 38): ▪▪ In a ‘top-down’ logic. ▪▪ In a ‘bottom-up’ logic.

In the first logic, social responsibility results from a desire of the management in collaboration with the government. While in the second sense, these are groups (e.g., unions) who collaborate with non-governmental organisations to implement the social responsibility within the company. In the specific case of environmental responsibility, we see a double movement. Social responsibility meets as well both political and economic requirements than a social pressure. One example is the principle of ‘polluter pays’ adopted by the Organisation for Economic Co-operation and Development (OECD) in 1972 (Igalens & Joras, 2002, p.  66). Companies must therefore worry about the environmental effects of their activities. In addition, management may consider diminishing the consumption of the company with the objective of reducing costs. Moreover, it is noteworthy that the concerns are also covered by a request from stakeholders: employees through representative bodies and consultation, the consumers, but also civil society constituted by association of ­environmental protection (Persais, 1998) are pushing for a more naturefriendly business.

The Organisational Discourse The Methodology We analyse qualitative data. We have retained the status of six companies that we call A, B, C, D, E and F. The first two belong to the chemical sector; C belongs to the service sector (consultancy); D to the energy and the last two to the metal sector. More specifically, those are subsidiaries of multinationals

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in Belgium facing problems of pollution and/or adopting measures to protect the environment. For each of the companies, we first gathered official information mentioned mainly on the websites of the company. In the second step, we conducted one to two interviews lasting 45 minutes on average with each of the human resource managers of these companies except for one of them. We have focused on semi-structured interviews: the position taken in these i­nterviews is to let the interviewee speak freely but to direct him or her in the topics of interest (Quivy & Van Campenhoudt, 2006, p.15). We first asked about the function of the interviewee. Then, we guided the interview to the following topics: the social responsibility and sustainable development, and finally, we questioned the inclusion of ‘stakeholders’. The sub-themes were used to boost the respondents to obtain information on the type of activities and communication organised around the above themes. Thematic analysis allowed us to compare the different companies from the theories presented above. For the companies A, E and F, we used their websites and interviews with human resource managers as sources of information. Regarding companies B and C, we gathered information from the websites of companies and official documents as well as through the human resource managers’ interviews. To analyse the firm D’s situation, we used the website of the company, a conference on the ‘social responsibility in times of crisis’ given by the organisation as well as official documents. The websites indicate the availability of topics related to social responsibility and sustainable development. Visibility, time of onset (first sub-tab page) and content analysis helped to define the communication the company wants to make about its responsible actions and the importance it attaches to these actions. The analysis of this information enables us to answer the question of what kind of social responsibility is implemented and which means are used. We then present the identification and the place of the stakeholders. This analysis will enable us to locate the position of human resources in the development of social responsibility and the existence of a new form of social responsibility. Data Analysis We started from the Internet sites, human resource manager speeches and highlights for each company, the types of responsibility, the types of legitimacy and the theories of social responsibility that are favoured by each company. The table below summarises the status of each company. A first reading of Table 7.1 leads us to hypothesise the existence of several business groups. The first group (Group 1) consists of companies in the chemical sector and energy (A, B, D). A second group (Group 2) consists of companies in the metal sector (E, F). Company C, the service sector (consultancy) differs from the first two groups.

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F

Metal

Energy

D

E

Service

Chemistry

Sector

C

B

A

Companies

Table 7.1  Summary of Findings

Cognitive Moral

Ethical Philanthropic Economic Ethical Ethical Legal Ethical Legal

Ethical Philanthropic Economic Ethical Economic Ethical Economic Ethical Pragmatic

Cognitive Pragmatic

Cognitive

Cognitive Pragmatic

Economic Ethical

Economic Ethical

Cognitive

Site

Ethical Economic

Discourse

Cognitive

Integrative

Integrative

Politic

Cognitive Pragmatic Cognitive

Politic

Integrative

Integrative

Politic

Politic

Integrative

Ethic Integrative

Integrative

Integrative

Discourse

CSR Theory Site

Cognitive Pragmatic

Pragmatic Cognitive

Pragmatic Cognitive

Discourse

Form of Legitimacy

Ethical Economic

Site

Type of Responsibility

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(a) Responsibility types

All companies relate mainly, on their website, their responsibility as being ‘ethical’ (importance of stakeholders and values) and ‘economic’ (importance of interests), while in the speeches of human resource managers the ‘ethical’ type dominates, sometimes with the ‘economic’ or ‘legal’ (law enforcement) approach. The websites of each company has a part dedicated to social responsibility, to ‘visions’, to the ‘issues’ (A), to sustainable development (B), to the ‘corporate governance’ and ‘citizenship’ (C), to the ‘responsible growth’ (D), to ‘corporate responsibility’(E) or to ‘values’ (F). We note, in the discourse of human resource managers, that the ‘economic’ approach is particularly present in companies A and B (Group 1). The following quotes attest this. ‘The company . . . uses alternative raw materials in a logic of economic development and ecological sustainability.’ (B)

The best goal is the creation of economic values, profits, placing ethical issues in the background. This confirms the idea that the social responsibility induced that ‘each company must contribute to the common good while pursuing their own purposes’ (Gendron, Lapointe, & Turcotte, 2004, p. 79). Company A first pursues an economic objective to reduce costs but also to obtain a building permit. It then fills considerations: ‘The energetic audit was fundamental because it was fact-based. This helped justify the measures that have been taken, even though it was not at the ecological level, but at least in economic terms.’ For the company B, it is essential that its activities have an economic purpose; however, this does not prevent it in any way to affix a more ethical aim, in particular environmentally. Company C has the particularity of focusing on philanthropy and does not advance the economic criterion. The human resource manager told us about activities focusing on the promotion of human welfare. The human resource manager of the company reminded throughout the interview that the legal obligations and compliance with the legislation were passed before any consideration of sustainable development. Company D knows the importance of her role, has a network of ­expert and present an political approach. The legal aspect overtops in the companies E and F (Group 2) where union presence is particularly important and where the risks of restructuring are constant. (b) The legitimacy We observe that companies report on their responsible actions primarily through a ‘cognitive legitimacy’ (matching the social responsibility to the values of the company) and a ‘pragmatic legitimacy’ (importance of

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the interests of the business and stakeholders) that reflects both on the sites and in the speeches of each company. The web pages of the company C, dedicated to corporate citizenship, to the corporate governance, to diversity, to civic engagement, demonstrate the importance of values within this organisation. The human resource manager says ‘Sustainability is an evaluation when recruiting base’. Thus, the legitimacy of its actions is justified by the adequacy of the values that the company promotes. Indeed, not long ago, the company A has been moved into a fully furnished building to reduce the environmental impact of their activities. This move is essentially an action based on the values of the company and meets its commitment to reduce its energy consumption and its impact on the environment. We have seen that businesses justify, in their websites, that their actions usually match their values, while the human resource managers’ speeches add a willingness to consider the interests of the company and the opinion of the stakeholders. ‘The main concern is the customer’ (C). ‘The initiative (eco-label) came from a request of a colleague .  .  . This local initiative has involved staff, management committee, staff representatives, public authorities. This initiative concerns customers, suppliers’ (A).

The company integrates this consideration of stakeholders more in a discussion on the consistency of its actions to the values it preaches: ‘There was a demand for consistency precisely against the principles of Total’ (A).

(c) The responsibility theories

Responsibility theories mentioned by companies are either ‘political’ theory or ‘integrative’ or both. The ‘political’ theory focuses on corporate power and the responsibility that they follow and the ‘integrative’ theory emphasises more on the role of ‘stakeholders’. The site of the company A presents in the form of videos, consultation with stakeholders and it shows by various articles, the importance attributed by the company to control its environmental impact. The speech of the head of human resources of the organisation insists on the interest for stakeholders and present the rule of social responsibility in the human resource politics ‘It is for us a way to motivate staff to consider his needs’ (A). The human resource manager of the company D indicates that the social responsibility was intended to ‘develop action in the field by promoting the initiative’ (D). The human resource manager of the company E believes the company has ‘a duty to all the people who work there’ (E). Company C is characterised by an ethical theory, which is based on an ethical and

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philanthropic conception of responsible actions of the company that wants to act for the well-being of humans. This organisation involves its employees in humanitarian missions such as the organisation of training nurses in Africa and this in an ethical, civic vision, without economic advantage. Comparison of Sites versus Speech Companies include, for the most part, on their website, economic and ethical issues, and also the discourse of human resource managers seems to focus on ethical matters. However, those of the metal sector also mention the economic and legal aspects. Similar to the websites, speeches by human resource managers also highlight the ‘cognitive’ aspects (adequacy of social responsibility to the values of the company). The human resource managers of companies A, B (chemical industry) and C (energy) insist on a theory of ‘integrative’ type (considering the stakeholders). The human resource managers of companies in the metal sector combine the ‘integrative’ perspective with the ‘political’ perspective (the responsibility involved the power of the company). We can combine the companies into three groups: the first is composed of companies A, B (chemical industry) and D (industry), the second of the company C (Service-consultancy) and the third of companies E and F (metal sector). We can therefore say that organisation A, B and D are the first group seeking to involve staffs in their actions (‘integrative’ perspective), these being a catalyst for staff involvement. The human resource manager of the company D mentions a desire to ‘develop an awareness of managerial and collective at all levels of the group’, there are some more use of social responsibility as ‘common anchor’ and as a means of ‘increasing the sense of belonging’. Company C is also characterised by the involvement of employees. We remind that the match to the values of the company is a hiring criterion. ‘They generate initiative taking but does not negatively evaluate staff’. (C). Company C therefore encourages employees to adopt behaviours or even to develop projects in line with its values. The discourse of human resource managers of organisations E and F take into account the highly competitive industry involving restructuring and possible job losses they belong to. They are aware of their responsibility in this regard. In addition, a strong union presence imposes a climate of dialogue and negotiation. ‘All of CSR policies are negotiated and discussed with stakeholders before the implementation’ (E). In this process of dialogue, the position of the human resource managers is substantial. ‘First, the HR has a role as a communicator. He must translate and transmit information to the entire “public”. Then, he acts as a trigger for action’. (F).

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Taking into Account the Stakeholders We noticed differences in the consideration of the stakeholders: each company defines stakeholders and their role in social responsibility. We have identified major differences between companies A, B, C and D that involve staffs in the actions of social responsibility and companies E and F that fit more in a dictate position, although they negotiate these actions with the social partners (trade unions, prevention and protection at work committee). We have chosen to present two cases to illustrate these differences. We will explain in detail the situation in companies A and E, the latter with two different ways to involve stakeholders. And we will highlight the differences in the identification of stakeholders and the place assigned to them in the implementation of actions on the social responsibility.

(a) Company A: eco-labelling

The human resource manager of the company A names as individuals or groups that influence or are influenced by the results of the company: ‘The staff, public authorities, neighbours, people who are part of where it is located, as well as shareholders . . . corporate bodies, there are also customers and suppliers’ (A). The manager notes, however, that shareholders are major players, but said they also advocate for the most in favour of a socially responsible company. This confirms the idea that precedence will be given to ‘the interests of shareholders before those of society as a whole’ (Gendron, Lapointe, & Turcotte, 2004, p. 79). Let us explain how an action associated with a process of social responsibility happened in this business to understand the involvement of its players. It was an eco-labelling action. This action came from a request by a staff member and was co-ordinated by the human resource manager. Although he has neither the manpower nor the need to develop the project budget, he built a strategy and invited students to help. The human resource manager adds that ‘we must consult the social organizations because no change is possible without them’ (A). To justify this eco-labelling to management, the human resource manager based his arguments on factual and economic data (cost reduction). This ecolabelling also reflects a desire of shareholders, in favour of social responsibility accompanied by the creation of profits. It echoes a request for environmental protection from clients and a staff request for consistency between the subsidiaries. This eco-labelling responds moreover to a legal requirement to obtain an environmental permit. Besides this eco-labelling, the firm is trying to induce behaviour to reduce energy consumption and costs as well as supplies. ‘It was also phased out the majority of individual printers. We replaced the colour printers by larger printers’ (A). Project organisers also encourage employees to use public transportation by participating significantly to

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transport costs but also by interviewing employees about their travelling habits and invite them to consider the change. Beyond these projects arising from a legal, economic and social logic, environmental, the company is part of an ethical approach: it sponsors various activities (football clubs) and provides budgets for employees who wish to make social projects. ‘When the project is evaluated with the corporate bodies, we will give points. Based on points awarded, we will allocate the budget (from 500 to 2500 Euros)’ (A). The company is also present as a mentor to other organisations, smaller, by offering offices to those that cannot afford paying their first rent.

(b) Company E: negotiation

The human resource manager of the company E justifies the choice of actions in terms of social responsibility: ‘the company has a duty to all the people who work there’ (E). In his speech, he distinguishes the staffs, the social agencies and the subcontractors as stakeholders. ‘Compared to external stakeholders, . . . internal requirements apply to all subcontractors’. (E) The company focuses on their social responsibility on the legal obligations and those related to ISO (14001) standard, as well as sustainable human development: ‘There are all training policies aimed at social development agents. In addition to legal obligations, it is the development of skills through internal and external training designed to improve the employability of workers’. (E). Company E therefore includes its training policy in a responsible and sustainable development target. The companies E and F are facing restructuring, so it is not insignificant that they act favourably on the employability of staffs. The interest for ‘safety’ and ‘health’ aspects is also explained by the particular context of metal-working that pushes companies to prevent incidents. These issues are moreover a legal requirement (Law of 4 August 1996 on the well-being of workers (Belgium)1) to ensure a healthy environment for workers. The human resource manager said, however, these issues receive interest beyond the norm. The firm also develops policies of social responsibility that are ‘negotiated and discussed with internal stakeholders before being implemented. Social dialogue is very important’.(E). The human resource manager is responsible for discussing the policies of social responsibility with the corporate bodies. It has an ‘active role! . . . in relations and social dialogue’. He must ‘boost approaches, encourage dialogue and make it positive and constructive . . . To that we have to add the training component.’ The human resource manager also has an information role (E).

1

Moniteur Belge, date of printing: 18 September 1996

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Showing less interest in environmental issues, the speech of the human resource manager of the organisation E differs from that of the human resource manager of the Company A by the way of taking into account the stakeholders and the role the human resource manager in the process social responsibility. Companies A, B, C and D include and integrate stakeholders in the formulation of policies of social responsibility but they mostly seek the staffs’ implication in the development of specific projects. In fact, these companies encourage their employees to participate in the social responsibility and promote their involvement. Those firms (A, B, C and D) also show a more blatant interest in social, ethical and environmental matters than the companies E and F. The human resource managers have an incentive role of catalyst of social responsibility. They bring ‘social responsible’ projects and sustainable development projects, organise and defend them to the management so that they can be realised. The organisations E and F are characterised by a social responsibility led primarily by legal obligations and that focuses its actions towards the social. Stakeholders are not invited to propose projects, even less to build the policy of social responsibility with the management. However, it is not clear whether the interest in developing the skills of workers stems from a request of the staff or from a management initiative. Note further that the projects of social responsibility are not imposed on workers without being previously discussed and modulated with the corporate bodies. The human resource manager in these companies are there as mediators for projects of social responsibility and as organisers of training policies.

The Role of the Human Resource Managers in the CSR Development Within the Subsidiaries It is interesting to synthesise from our interviews the decision process implemented, the role of the human resource manager and the management tools used in the implementation of the ‘socially responsible’ activities (see Table 7.2). We noticed in the table below that the role of human resource manager varies depending on the company, we indicated the firm in which the human resource manager plays this role. Our research enabled to highlight the existence of two types of human resource managers: one (A, B, C, D) oriented to coordination and communication around activities, the respect for values, support for initiatives and defining activities models. The other type (E, F) is rather oriented to transparent communication about the corporate values (security and local development) and interest for employment. In both cases, the human resource manager is an intermediary that links top management and staffs. The human resource manager allows the inclusion of stakeholders and dissemination of initiatives.

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Table 7.2  Summary of Interview Findings

HR Manager Role

Management Tools

The group fixes from the business strategy the outline to follow and defines corporate values (energy saving, quality of jobs, the principle of sustainability). Subsidiaries apply the principles defined at the group level.

Participate in seminars (all).

Project management

Uphold the values (all). Remind the requirements: results, customer satisfaction (C). Ensure the organisation and participation in trainings on company values (C). Encourage initiatives (A, D). Motivate (all). Involve (A, B, D). Promote and support staff’s social projects (A, B, C, D). Research subsidy for the implementation of projects (A). Collect data (all).

Education Communication plan (intranet, meetings, folders). Company charters Staff evaluation.

Communicate in a transparent way (B, E, F). Communicate with the other departments (A, D). Communicate with stakeholders (all). Identify the privileged stakeholders and ensure consideration of their wishes (all).

BOTTOM-UP

The subsidiary managers decide to pass the information and spread achievements to other departments, other subsidiaries and headquarters.

INTERMEDIATE

Subsidiaries adapt the implementation of the group’s principles to the local situation and promote staff initiatives. Initiatives can be formally (meeting competition) or informally (the staff make suggestions to managers) induced.

TOP-DOWN

Decision Process

Negotiate with the management (A, B, D). Negotiate changes with the stakeholders, more specifically the union representatives (E, F). Link between management and staff (all).

The Measures of Social Responsibility to the Human Resources Department Our analysis enables us to distinguish the discourse of human resource managers in the sector of chemistry and energy on the one hand and on the other hand the metal sector. The first emphasised the importance of taking into account the stakeholders and the employee involvement in the project definition. Their approach is both top-down and bottom-up. The main areas of their policy are defined by the headquarters of the firm; each division has to implement the

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policy through concrete actions, giving the freedom to the staffs to define projects of social responsibility and sustainable development they want to favour. The discourse of human resource managers of companies in metal industry highlight the importance of the social impacts of policies pursued by the company. We can therefore hypothesise that the social responsibility and the actions of sustainable development are part of a new human resources policy seeking to mobilise staffs in a process that also wants to be a bottom-up approach. However, the advantages to companies facing economic difficulties associate social responsibility and sustainable development in compliance with legal measures, transparency and honesty of information. They are also trying to limit the negative impacts of their activities. The analysed companies communicate on their activities related with social responsibility and with sustainable development both through their websites and their speeches to the staffs. Studies have shown the importance of this communication: external communication related to the social responsibility, strengthens organisational identification (Smidts, Pruyn, & van Riel, 2001) and intentions to invest in the company (Sen, 2006). Our study shows, for its part, the human resource managers’ concern to communicate with stakeholders about the internal ‘socially responsible’ activities applied to sustainable development. Some human resource managers also use those activities to mobilise their employees. Using the social responsibility as a factor in mobilising staffs, the company is developing a new tool for human resources management. The human resource managers provide support to ‘social responsible’ initiatives of staffs and contribute to projects involving various departments (Gond et al., 2011). Our study has also shown the need to take account of the reality of different companies and of sectorial specificities. Some companies are moving to a more ethical responsibility, philanthropic, moral or political management, while others prefer an approach anchored in economic benefit, legal, pragmatic and integrative, and this, according to the different sectors. Our study proves the importance of taking into account the realities of the sectors concerned, therefore, to have a contingency approach. The various situations indeed contribute to explain the differences between the discourses of human resources in different contexts.

Conclusion Despite biases explored above, our research shows the involvement that human resource managers may have in supporting the activities of social responsibility and sustainable development. Indeed, we have seen that the human resource managers can collect various departments around a common project. Social responsibility and its activities may also pursue the goal

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of mobilising staffs and therefore represent a key challenge for human resource managers. Beyond the importance of the company to consider the potential role of the human resource managers in the social responsibility, it is essential to adapt it to the contextual realities that businesses face. According to this study, there seems to be a relative coherence between official discourses found in the websites and discourses of human resource managers. Each company integrates its sustainable development activities in a process of social responsibility. This approach of social responsibility is at the service of human resources development. The remarks from the human resource managers showed the differences between the sector of activity of the selected companies and the focus on the specifics of their sectors. The companies in Group 1 (chemistry and energy) highlighted the importance of economic interests, whereas the metal sector companies mentioned the importance of considering the legal aspects. Company C specialised in services (consultancy) would in turn highlight the importance of values and philanthropy. This company is also characterised by a strong culture and by the staff engagement around the values it defends. Does the fact that some companies give their employees the freedom and the power to get involved in social and environmental actions and the fact that they are attentive to the impact of their policies on the staffs, demonstrate the emergence of a more citizen-minded management model for being responsible towards environment? It would be a model that would encourage the employees to think and act as a responsible actor in environmental as well as in economic and social matters. This new form of management would in turn, be likely to alter the social responsibility giving it a place and a role in human resource policies. As argued by Ditlev-Simonsen and Gottschalk (2011), there are six categories in CSR growth. Their model comprises three core stages, namely the First movers, the Doers and the Changers, and three by-products, which are a lag behind each of the core stages, namely the Followers, the Reporters and the Responders. It appears that the investigated companies in this study did not start off as the first movers and were drawn to CSR reporting as an effort to ride the wave and avoid falling behind from other companies. Thus, one of the core challenges faced by companies is to pioneer sustainable development to ensure sustainable growth of the business while building a better life for the stakeholders. Before concluding, it seems essential to shed light on the limits of our research. We can first interrogate ourselves about the completeness of results obtained by the analysis of only six firms, due to lack of time and resources. The results would be of greater interest if the sample was expanded. Moreover, we have focused on subsidiaries of multinationals; it would be possible to compare the results with those obtained from the analysis of smaller companies. In addition, we have adopted the definition of social responsibility

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that focuses on the stakeholders approach (Freeman, 1984, p. 46). However, we have not been able to approach the various components of these stakeholders. In future studies, researches can extend to an empirical approach involving these stakeholders whose testimony is absent from this study.

References Brégeon, J. (2004). Développement durable versus responsabilité. In J. Igalens (Ed.), Tous responsables (p. 75–92). Paris, France: Editions d’Organisation. Carroll, A. B. (1991, July–August). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 39–48. Carroll, A. B., & Schwartz, M. S. (2003). Corporate social responsibility: A three domain approach. Business Ethics Quartely, 13(4), 503–530. Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibility: A review of concepts, research and practice. International Journal of Management Reviews, 12(1), 85–105. Castello, I., & Lozano, J. M. (2011). Searching for new forms of legitimacy through corporate responsibility rhetoric. Journal of Business Ethics, 100(1), 11–29. Ditlev-Simonsen, C. D., & Gottschalk, P. (2011). Stages of growth model for corporate social responsibility. International Journal of Corporate Governance, 2(3), 268–287. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitan Publishing. Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53(1–2), 51–71. Gendron, C. Lapointe, A., & Turcotte, M-F. (2004). Social Responsibility and the ­Regulation of the Global Firm. Industrial Relations, , 59(1), 73–100. Gond, J-P., Igalens, J., Swaen, V., & El Akremi, A. (2011). The human resources contribution to responsible leadership: An exploration of the CSR-HR interface. Journal of Business Ethics, 98(1), 115–132. Igalens, J., & Joras, M. (2002). La responsabilité sociale de l’entreprise. Paris, France: Editions d’Organisation. Persais, E. (1998, October). The Firm and the Ecological Pressures, Annales des mines, - Responsabilité et environnement, 13–23. Quivy, R., & Van Campenhoudt, L. (2006) ). Manuel de recherche en Sciences sociales. Paris, France: Dunod. Sen, S. (2006). The role of corporate social responsibility in strengthening multiple stakeholder relationships: A field experiment. Journal of the Academy of Marketing Sciences, 34(2), 158–166. Smidts, A., Pruyn, H., & van Riel, C. R. M. (2001). The impact of employee communication and perceived external prestige on organizational identification. Academy of Management Journal, 49 (5), 1051–1062. Suchman, M. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610. Széll, G. (Ed.). (2006). Corporate social responsibility in the EU and Japan. Frankfurt, Germany: Peter Lang.

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8

Embracing CSR for Small Firms Insights from Malaysia Mehran Nejati, Dessy Irawati, Azlan Amran

INTRODUCTION Recent corporate social responsibilities (CSR) literature has been very much focused on multinational corporations (MNCs) (Ireland, Hoskisson, & Hitt, 2010; Lu & Castka, 2009). As a result, CSR has become firmly rooted as an agenda in the global business operation of MNCs, particularly highlighting the importance of ethical behaviour of their subsidiaries in their international operations. An increasing number of MNCs have therefore focused on producing guidelines for ethical conduct in the formulation and implementation of their social responsibility strategies. Nevertheless, CSR is also now playing a significant part in small- and ­medium-sized enterprises (SMEs), as it is of increasing relevance and concern to SMEs that are suppliers to MNCs and perform as a significant economic player in developing countries (Lu & Castka, 2009; Luken & Stares, 2005). While corporate size has been shown to be positively related to social activities (Roberts, 1992; Siwar & Harizan, 2008), recognition of the growing significance of SMEs (Fuller, 2003; UNIDO, 2002) has resulted in an emphasis on their social and environmental impact. SMEs individually have, by definition, very limited operations compared to large companies, and therefore would not have the potential to impact society and environment to the same degree as large businesses. That is why many small business owners believe that they have slight impact on the environment (Lee, 2000; Rowe & Hollingsworth, 1996). Nonetheless, it is argued that due to their great number, SMEs total impact is high and they account for two-third of all carbon dioxide emissions and 70 per cent of all pollution (Parker, Redmond, & Simpson, 2009). For the discussion framework of this chapter, we focus on Malaysian SMEs. Malaysian SMEs have established a successful track record by building productive capacities, nurturing entrepreneurship and innovation, and being the backbone for national productivity income. Furthermore, Malaysian SMEs play a critical role in the country’s economic development and contribute to regional income generation, savings, training, stimulation of competition, aiding large firms and introduction of innovation (Hashim, 1999). They form almost 99 per cent of total business establishments in M ­ alaysia, and are responsible for 31 per cent of the nation’s Gross Domestic Product 125

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(GDP), 56 per cent of the total employment, and 19 per cent of exports (SME Corp., 2010). In view of that, recent CSR development in Malaysia is notable. Even though the initiatives mostly address big companies, the impact on SMEs is also significant. In developing countries like Malaysia, SMEs are vendors to the big companies. Last year, Bursa Malaysia launched a Corporate Sustainability guide for the listed companies. An active awareness campaign surrounding the launch of ISO 26000 (Social Responsibility) was also conducted by the Malaysian Standard Users. Nevertheless, some scholars (Ahmad & R ­ ahim, 2003; Ramasamy & Ting, 2004; Rashid & Ibrahim, 2002) say Malaysia is in infancy level in its experience of CSR, with such development the current status of social responsibility practices for Malaysian SMEs is not clear. Given those facts, the integration of SMEs in CSR studies is an essential agenda for further strategic development of CSR in Malaysia. This is particularly an emerging topic for developing countries like Malaysia, where CSR continues to be perceived as a Western-centric ethical agenda (Perry & Towers, 2009; Van der Heijden, Driessen, & Cramer, 2010). As with attempts to manage ethical conduct, Malaysian SMEs usually make some efforts to actively address social responsibility. This generally starts from their basic approach to social responsibility. It then extends to how they manage issues of compliance, the informal dimensions of social responsibility, and how they implement and evaluate their efforts regarding social responsibility. In an attempt to highlight the importance of CSR in Malaysian SMEs, this study aims to find out how the CSR is perceived by the SMEs. It is important to comprehend how CSR is embedded in Malaysian SMEs as it is relatively a new concept for them. Some of Malaysian SMEs have been involved in CSR; however, they are not necessarily perceived them as a CSR concept, rather than a religious deed in dealing with the business. This chapter starts with conceptual theoretical literature in CSR and its perception amongst SMEs, along with the challenges and opportunities faced by SMEs regarding the CSR agenda in developing countries, specifically ­Malaysia. This is followed by a section on methods and details of how the empirical data was sourced from SMEs in Malaysia, followed by discussion and analysis on variables. The final section summarises the key arguments of this chapter and presents a conclusion regarding the importance of understanding local context when it comes to the perception of CSR by Malaysian SMEs.

THEORETICAL FRAMEWORK CSR for Malaysian SMEs: A Transitional and a Developing Path CSR is really a broad concept that discusses the responsibilities of business. Carroll (1979) conceptualised CSR as comprising four different types of

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responsibilities, namely: economic, legal, ethical and discretionary. Additionally, CSR is about the right attitudes and accepted perceptions. Therefore, SMEs believe that formalisation with reports may help to improve transparency and accountability, but reports alone are not enough, unless there is a proper implementation of suitable policies (Jamali, Zanhour, & Keshishian, 2009). In view of that, CSR in SMEs perception is very much influenced by ethical belief. SMEs in developing country like Malaysia believe that ethical behaviour arises from a belief (as well as religious deed) in whether a decision and action is right or wrong. Nevertheless, what constitutes ethical behaviour varies from one SME to another. But while ethical behaviour may be in the eye of the beholder, it usually refers to behaviour that conforms to generally accepted social norms. A society generally adopts formal laws that reflect the prevailing ethical standards (the social norms) of its members. Additionally, cultural differences can create ethical complications, if acceptable behaviour in one culture is viewed as immoral in another (Griffin & Pustay, 2010). SMEs in Malaysia are continually attempting to find a suitable and proper balance between the roles and behaviours expected by their home government and those expected by all of the stakeholders (Nejati & Amran, 2012). This is a complex case from Malaysian perceptive as SMEs play very different roles in shaping the economy of a nation. At the same time as ethics reside in individuals, many SMEs attempt to manage the ethical behaviour of their organisations, including managers and employees. That is, they want to clearly establish the fact that they expect their managers and other employees to engage in ethical behaviours. SMEs in Malaysia, therefore, need to fashion an approach to social responsibility the same way that they develop any other business strategy in their enterprise. This is a long-term challenge for any SMEs in Malaysia as CSR requires careful planning, decision-making, consideration, and evaluation through both formal and informal dimensions. SMEs in Malaysia do not generally implement their CSR through legal compliance, ethical compliance and philanthropic giving. However, in addition to these formal dimensions for managing CSR, there are also informal ones namely leadership, organisational culture, and how the organisation responds to disclosure by an employee of illegal or unethical conduct on the part of others within the organisation (i.e., whistleblowing). As it is believed that the fundamental nature of CSR lies in the implementation of responsible business practices at all levels of the corporation; it lies in the corporate culture, not in formalisation (Fassin, 2008; Ireland et al., 2010). Despite the fact that SMEs in Malaysia can often learn from bigger companies, the management of large companies, rather than imposing their

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views, could also learn from the real social responsibility assumed by many small business leaders. Through entrepreneurship, creating jobs, wealth and welfare in their region, Malaysian SMEs largely contribute their share of social responsibility. Moreover, responsible SMEs do not necessarily need ISO CSR standards. They perform in a social and responsible way because that is the good way to do business. Many SMEs in Malaysia view doing the job properly simply as good business ethics. In view of that, it is essential for Malaysian SMEs to clearly define their policies towards CSR to set obligations of an organisation to protect and enhance the society in which it functions. SMEs may gear their CSR towards their stakeholders, the natural environment and general social welfare. Some SMEs acknowledge their responsibilities to meet each of their CSR requirements, while others emphasise only one or two areas of social responsibility. And perhaps, a few acknowledge no social responsibility at all. CSR for Malaysian SMEs The general perception among SMEs in developing countries seems to be that CSR represents a new burden and a threat (Perry & Towers, 2009). Many SMEs fear that they may not be able to congregate the social and environmental requirements of buyers and supply chains without losing their competitive edge in national and international markets. At the same time, they are aware that if they do not meet these requirements, they may not then be in a position to access new foreign markets or large international buyers who require SMEs to meet their own codes of corporate ethics (Ciliberti, Pontrandolfo, & Scozzi, 2008; Fassin, 2008; Luken & Stares, 2005). Yet, many SMEs are also driven to integrate CSR because of the personal beliefs and values of the founders, who are often also the owner/manager, and employees. The main attention given to managing CSR, particularly in developing countries like Malaysia, takes into account three main actors: the government, which passes and enforces law; the market, which utilises inputs and allocates outputs to members of the society through processes of competition and pricing mechanisms; and civil society which manifests the cultural values of the citizens of the country (Lu & Castka, 2009; Van der Heijden et al., 2010). The interplay among these three actors establishes public policy and the norms of social interactions as well as accepted business behaviour. Not surprisingly, there have been many attempts to mandate and regulate ethical and socially responsible behaviour by business for SMEs and (mainly) MNCs in numerous laws and international agreements to promote socially responsible international business practices. However, at this stage, this chapter highlights the perception of CSR from SMEs only as the main focus to be discussed.

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Regarding the Malaysian context, there are a number of previous studies on the social responsibility of Malaysian SMEs. Siwar and Harizan (2008) investigated the issue of CSR practices among business organisations in Malaysia by examining a total of 36 enterprises, 28 of which were SMEs. Their findings showed that SMEs were lagging behind other groups of investigated enterprises (MNCs, government-Linked Corporations and local Malaysian Corporations) in the overall CSR commitment, workplace policy and environmental policy. Another significant study is the one conducted by Lu and Castka (2009) who investigated the status of CSR and different CSR practices in Malaysia, as well as future diffusion of CSR in Malaysia, through interviewing 13 experts who were highly regarded as leaders in CSR in Malaysia. Based on their findings, the most common forms of CSR involvement in Malaysia appeared to be grants, donations, sponsorships and support for educational activities. Nejati and Amran (2009) conducted an exploratory study on Malaysian SMEs that looked at motivations for practicing CSR, with an effort to view the issue from the SMEs’ own perspective. They found that most of the interviewed firms were not receiving any benefits for practicing CSR activities but were still practicing it because of their own beliefs and values, with some of them mentioning the effect of religion on their CSR tendency. In addition, a recent study by Nejati and Amran (2012) on Malaysian SME owner/ manager attitudes towards CSR showed that majority of Malaysian SME owners have a philanthropic view towards CSR followed by modern view. In view of that, although the Malaysian SMEs have been studied in empirical evidence, however further and in-depth empirical studies are still limited, and it becomes apparent that stakeholder (i.e., business partnership with MNCs throughout the supply chain) pressure is still the most frequent encouragement for many SMEs to improve their social initiatives. A Future Agenda: Difficulties and Challenges for Implementing CSR in Malaysian SMEs In the contemporary dynamic business context, Malaysian SMEs face several features which seem to have an influence on their corporate strategies. Size, commitment to the local community, brand recognition, innovation, and environmental and ethical concerns are crucial. Within this context, the concentration on CSR and the contribution to sustainable development is now an established and provoking fact for Malaysian SMEs in order to sustain their businesses. Another key challenge for Malaysian SMEs in implementing CSR are lack of time and resources, a low margin for error, informal status, ad-hoc management styles, family ownership and competition with other SMEs. Beyond MNCs, who with conspicuous efforts pioneered this field, Malaysian SMEs are still in transition to manage social and environmental issues

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within the scope of their strategic and competitive activities. Additionally, Malaysian SMEs are having difficulties to set up mutual help relationships, in order to aid stability and survival in increasingly competitive market arenas. Additionally, some of their difficulties are establishing formal and informal engagement, networking within and across sectors, volunteerism and giving to charity provide an extremely fruitful opportunity to invest in social capital, and cultivating close relationships within the social as well as with the business environment. In terms of practice, SME engagement in CSR is not an easy task but involves a number of strategic challenges (Griffin & Pustay, 2010; Perry & Towers, 2009). For instance, SME participation in global supply clearly poses a dilemma, as MNCs are seen to regulate the behaviour of the SMEs beyond any legal regulation and often against the interests of the SMEs. On the other hand, SMEs operate in, for example, developing countries like Malaysia with a lack of innovative experience—and tough market conditions—and a new focus has emerged around how business opportunities sometimes develop for SMEs in the wake of CSR demands. These SMEs (as well as their internal and external stakeholders) institute CSR approaches because it makes business sense to do so, not because they have been forced to do so by MNCs. Given those facts, the integration of Malaysian SMEs in CSR studies is important for further strategic development of CSR. This is particularly an emerging topic for developing countries where CSR continues to be perceived as a Western-centric ethical agenda (Perry & Towers, 2009; Van der Heijden et al., 2010). As with attempts to manage ethical conduct, SMEs usually make some efforts to actively address social responsibility. This generally starts from their basic approach to social responsibility. It then extends to how they manage issues of compliance, the informal dimensions of social responsibility, and how they implement and evaluate their efforts regarding social responsibility. With the intention of contributing to this growing debate and to balance the interest traditionally accorded to SMEs in CSR discussion, this study proposes to focus on the way SMEs perceive CSR. In line with the discussions mentioned above, this study seeks to answer the following research questions: RQ1: What is the perceived level of commitment and practice to social and environmental responsibility by Malaysian SMEs? RQ2: What are the key motivations for involvement in social responsibility from the perspective of Malaysian SME owners/managers? RQ3: What are the key barriers for involvement in social responsibility from the perspective of Malaysian SME owners/managers? RQ4: To which stakeholder do Malaysian SMEs communicate about their social and environmental practices (if any)?

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Driving Forces

Adopting CSR Practices for SMEs

Restraining Forces

Figure 8.1  Theoretical Framework

RQ5: How can Malaysian SMEs be best encouraged to be socially and environmentally responsible? To better understand the process of adopting CSR practices by Malaysian SMEs, the following theoretical framework has been developed (­ Figure 8.1). It is based on force-field analysis and aims to explain how decisions for adopting responsible practices by SMEs is fostered, through analysing the forces for and against adopting CSR practices.

METHODS Data Collection It is important to note that this study does not aim to test any hypothesis. The main objective is to answer some research questions which aim to explore ­Malaysian SMEs in relation to their CSR practices. This study applies quantitative data to answer the research questions. The population of this study involved Malaysian SME owners/managers operating in Northern states of the country. The required quantitative data for this research was collected through convenient sampling. Due to the difficulty of engaging SMEs in research and common low-response rates in small business research (­ Macpherson & W ­ ilson, 2003), data was collected by inviting SMEs to a seminar held in association with Small and Medium Industries Development Corporation (SME Corp.) in Universiti Sains Malaysia (USM), one of the research intensive universities in Malaysia. Since the topic of seminar was on CSR, this might limit the study. The invitation to attend the seminar was sent to a list of SMEs operating in Northern states of Malaysia. The list was provided by SME ­Corporation. The SME Corp. is the caretaker of Malaysian SMEs and often provides ­programmes and seminars for Malaysian SMEs to educate them about the importance and principles of CSR and raise awareness among them. Participants included owners and/or managers of small businesses from the Northern states of Malaysia. At the end of the event, a questionnaire was administered to the participants and they were assured of its being treated anonymously. While the sample of this research was limited to SMEs operating in Northern states of Malaysia, variation of the collected samples across different sectors facilitates generalisability of the findings.

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A total of 100 questionnaires deemed usable were collected for this study. The majority of participating SMEs were involved in business and professional services or manufacturing and construction which formed 45 per cent of the total participants. Table 8.1 summarises the demographic profile of participating SMEs. In terms of business dealings, 33 per cent of investigated SMEs had dealings with government-linked companies, while 28 per cent had dealings with government. About 26 per cent had dealings with MNCs, but only 8 per cent of them had dealings with foreign companies. Instrument Variables investigated in this research include perceived importance and involvement in the social and environmental responsibility of the business, motivations for involvement in social responsibility, barriers of involvement in social responsibility and social responsibility communication targets. In order to measure perceived importance and involvement of social and environmental responsibility, respondents were asked to self-assess their social and environmental responsibility. To measure the perceived importance and involvement in CSR practices, a list of 21 common practices were provided in the survey and respondents were requested to select whether they find the practice to be important or not, and if their firm practiced the mentioned activity. As for social responsibility motivations and barriers, a list of common motivations and barriers of CSR involvement were extracted from literature and applied in this study. Respondents were supposed to select the motivations for social responsibility which applied in their case and choose the common barriers they faced in practicing social responsibility. Similarly, respondents were required to select their preferred target group for sharing their social and environmental practices (if any), from a list of stakeholders. Finally, to answer the last research question on ways of encouraging Malaysian SMEs to engage in social environmental responsibility, respondents were required to select their agreement to three options in answer to the question ‘How do you think SMEs can best be encouraged to be socially and environmentally responsible?’, using a five-point Likert-type scale ranging from strongly disagree to strongly agree.

FINDINGS Perceived Importance and Involvement of Social and Environmental Responsibility of the Business Findings of this study revealed that (Table 8.2) item 8 (taking responsibility for the health and well-being of staff) and item 10 (ensuring a mutually

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Table 8.1  Demographic Profile of Investigated Firms in Quantitative Stage

Demographics

Percentage (%)

Business Category Other

32

Business and Professional

27

Manufacturing and Construction

18

Retail

9

Media and Communication

3

Health and Medicine

3

Technology

3

Legal and Financial

2

Tourism and Culture

1

Not Stated

2

Legal Status of the Business Sole Proprietorship

49

Private Limited Enterprise

24

Partnership

25

Other

1

Not Stated

1

Annual Turnover 0–RM250,000

76

RM250,001–RM500,000

9

RM500,000–RM1 Million

6

RM1 Million–RM5 Million

6

More than RM5 Million

1

Not Stated

2

Position of Respondent in the Firm

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Sole or Joint Owner/Founder

35

Director

49

Other

15

Not Stated

1

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134  Chapter 8  Embracing CSR for Small Firms Table 8.2  Importance and Involvement Level of Responsible Behaviours by Small Businesses

Responsible Behaviours

Importance

Involvement

1) Reducing environmental impact and pollution prevention

84%

24%

2) Waste reduction and recycling

74%

21%

3) Energy conservation

81%

31%

4) Taking into consideration the environmental impact when developing new products

78%

25%

5) Encouraging skill development among staff

84%

27%

6) Ensuring adequate steps are taken against all forms of discrimination, both in the workplace and at the time of recruitment

83%

27%

7) Encouraging a healthy work/life balance among staff

85%

23%

8) Taking responsibility for the health and wellbeing of staff

86%

24%

9) Ensuring honesty and quality in all contract dealings and advertising

83%

26%

10) Ensuring a mutually beneficial relationship with society

86%

29%

11) Supplying clear and accurate information and labelling about products and services, including after-sales obligations

80%

26%

12) Being active in the local community

78%

26%

13) Working with charities or the voluntary sector

67%

22%

14) Working together with other companies or other organisations to address issues raised by responsible entrepreneurship

68%

27%

15) Working with local schools, colleges or universities

63%

21%

16) Investing in deprived or run-down areas

53%

19%

17) Offering training opportunities to people from the local community (e.g., apprenticeships)

72%

15%

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Responsible Behaviours

Importance

Involvement

18) Engaging with traditionally excluded groups (e.g., the long-term unemployed or homeless)

65%

15%

19) Ensuring that priority is given to local products

77%

22%

20) Ensuring that products sourced from overseas are produced in an ethical manner

65%

19%

21) Reflecting the ethnic make-up of the community in which you operate

70%

23%

beneficial relationship with society and your business) were the most important aspects of responsible behaviour from the perspective of SME owners/ managers, with 86 per cent of respondents deeming these to be important. This was followed by item 7 (encouraging a healthy work/life balance among staff) with 85 per cent, and item 1 (reducing environmental impact and pollution prevention) and item 5 (encouraging skill development among staff), both with 84 per cent of perceived importance by the respondents. The least important aspects of responsible behaviour from the perspective of SME owners/managers were item 16 (investing in deprived or run-down areas) and item 15 (working with local schools, colleges or universities), with 53 per cent and 63 per cent respectively. One reason why investing in deprived areas is perceived to have a low importance by respondents can be attributed to the general belief among small businesses that they are too small to have a significant impact on society, especially compared to large businesses, and their impact on society and environment is negligible and can be ignored (Lee, 2000). Furthermore, due to the nature of small businesses which concentrate on their daily activities and lack sufficient time and resources for other activities, there is also a lower priority to get engaged and collaborate with academic institutions. In terms of responsible behaviour practices by small businesses, the majority of Malaysian SMEs practice item 3 (energy conservation) with 31 per cent of firms involved in such activity, followed by item 10 (ensuring a mutually beneficial relationship with society) with 29 per cent, item 5 (encouraging skill development among staff), item 6 (ensuring adequate steps are taken against all forms of discrimination, both in the workplace and at the time of recruitment) and item 14 (working together with other companies or other organisations to address issues raised by responsible entrepreneurship) with 27 per cent each. The least practiced behaviours are those of offering training opportunities to people from the local community (item 17) and engaging with traditionally excluded groups (item 18) both showing 15 per cent.

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136  Chapter 8  Embracing CSR for Small Firms

21 20

1 100%

2 3

80%

19

4

60% 40%

18

5

20% 17

6

0%

Importance Involvement

7

16

15

8

14

9 10

13 12

11

Figure 8.2  Gap Analysis for Responsible Practices of Malaysian Small Businesses

In order to investigate the differences between importance and involvement of responsible behaviours from the perspective of Malaysian SMEs, a radar graph has been drawn. As shown in Figure 8.2, there is a major gap between importance and involvement in all areas of responsible behaviours. The largest gap exists for items 7, 8 and 1. Table 8.3 summarises findings pertaining to the gap scores across various dimensions of responsible behaviours investigated in this study. It was found that the biggest gap between the importance and involvement of responsible behaviours from the perspective of Malaysian SME owners/managers belonged to the employees’ dimension, which had the highest perceived importance among other dimensions as well. This gap score was followed by the environment and customers’ dimensions. The smallest gap pertained to the philanthropic dimension, which has the least perceived importance from the perspective of SMEs owners/managers. The findings of this section indicate that some Malaysian SMEs are practicing some level of social responsibility in dimensions which they perceive to be the most important ones; however, there is a negative gap between perceived importance and involvement level, indicating that the majority

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Table 8.3  Gap Scores for Dimensions of Responsible Behaviours

Dimensions of Responsible Behaviours

Items

Importance

Involvement

Gap

5, 6, 7, 8

85%

25%

−59%

1, 2, 4

79%

23%

−55%

Customers

11

80%

26%

−54%

Energy

3

81%

31%

−50%

Fair Operation and Trade with Society

9, 10, 20

78%

25%

−53%

Local Community

12, 14, 15, 16, 17, 18, 19, 21

68%

21%

−47%

13

67%

22%

−45%

Employees Environment

Philanthropic

of SMEs whose owners believe these dimensions to be important are not yet practicing them. These results call for further studies to examine the underlying reasons behind them. The findings of this study revealed that Malaysian SME o ­ wners/ managers consider the employees’ dimension to be the most i­mportant aspect of CSR, followed by energy, customers and environment. The least important CSR dimension from the perspective of Malaysian SMEs was the philanthropic dimension, with only 67 per cent of SME owners/managers believing it to be important. Respondents were asked to what extent they consider their firm to be socially responsible. Interestingly, one out of four SMEs claimed to have very little responsibility towards society and environment, which calls for some follow-up investigations on the underlying reasons behind this. Thus, the next two sections will examine the motivations and barriers for practicing social responsibility from the eyes of small businesses. Motivations for Involvement in Social Responsibility The findings of this study revealed that Malaysian SMEs consider developing a good business image to be the most important motivation for involvement in social responsibility, followed by giving back to the community and employee satisfaction. Table 8.4 summarises the findings of this section. While the Malaysian government has taken the initiative to promote social responsibility practices among firms by providing tax incentives,

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138  Chapter 8  Embracing CSR for Small Firms Table 8.4  Motivations for Involvement in Social Responsibility

Motivations

Percentage (%)

Developing a good business image

92

Giving back to the community

86

Employee satisfaction

81

Good business practices

79

Financial reasons/success

76

Commitment to reducing the company’s impact on the environment

75

Ethics/Integrity

72

A better future for the community/children/everyone

70

Tax incentives

50

the findings of this study show that it is the least important motivation in the eyes of Malaysian SMEs. This could be because the tax incentives have not been well publicised among SMEs, as results of our survey revealed that only 33 per cent of the participating SMEs were even aware of the tax incentives for social and environmental practices provided by the government. Barriers to Involvement in Social Responsibility The majority of Malaysian SMEs find the costs involved are the most significant barrier to practicing CSR, followed by lack of time, bureaucracy and resource constraints (see Table 8.5). These findings are consistent with previous studies of CSR in the SME context, where costs (Biondi, Frey, & Iraldo, 2000; Gerrans & Hutchinson, 2000; Hillary, 2000; Hitchens et al., 2005), lack of time, bureaucracy and resource constraints (BITC, 2002; Sweeney, 2007) were found to be the main impediments to CSR involvement by small businesses. Social Responsibility Communication In terms of communicating their socially and environmentally responsible practices, the majority of Malaysian SMEs consider government to be their major communication target, followed by trade press, customers and employees. The least communicated stakeholders include local/ regional press and external shareholders with less than 12 per cent of SMEs communicating their social and environmental practices to them. Table 8.6 summarises the findings of this section on the various stakeholders Malaysian SMEs target for communicating their social and ­environmental practices.

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Table 8.5  Barriers to Involvement in Social Responsibility

Barriers

Percentage (%)

Cost/impact on profits

63

Lack of time

59

Bureaucracy

53

Resource constraints

52

Lack of awareness about social responsibility

38

Lack of motivation by the rest of management

36

Lack of interest from staff

29

Not knowing enough about how to get involved in social responsibility

29

Not knowing where to go for information about social responsibility

29

Not being able to see the payback

23

Not knowing enough about social responsibility

22

Table 8.6  Social Responsibility Communication Targets

Communication Targets

Percentage (%)

Government (local or central)

56

Trade press

48

Customers

46

Employees

34

Suppliers

32

Local community

21

External shareholders

11

Local or regional press

7

Encouragement for Practicing Social and Environmental Responsibility The findings of this section (Table 8.7) showed that from the perspective of small businesses, social and environmental practices should be based on voluntary efforts from SMEs (with a mean score of 3.99 out of 5) rather

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140  Chapter 8  Embracing CSR for Small Firms Table 8.7  Means of Encouraging SMEs to Practice Social and Environmental Responsibility

Approach

Mean

Standard Deviation

By voluntary efforts from SMEs

3.99

1.06

By regulation/law

3.64

1.18

By pressure from large purchasers

3.59

1.06

than pressure from large purchasers (mean score of 3.59) or regulation/law (mean score of 3.64).

DISCUSSION CSR is a significant emerging trend in current SME business and strategy. Ethics, environment and sustainability are the main focal issues among SMEs who are trading for sustainable business. From the perspective of Malaysia as a developing country, SMEs have taken this agenda seriously, regardless of a relative lack of depth and breadth in dealing with CSR issues. Even though the percentage is considerably small, there is nevertheless evidence to indicate that CSR is being practiced to some extent by the SMEs. On average, the majority of the responsible behaviours listed in the questionnaire of this study scored high, which implies that the majority of Malaysia SMEs are at least aware of the importance of those issues. Nevertheless, that perception is not currently translated into practice or involvement: this study shows that involvement is relatively low, with only 15 per cent to 31 per cent of SMEs putting certain aspects of CSR into practice. This creates a huge gap between what is perceived as important and what is being practiced. The greatest gap was found in the area related to employees, followed by those related to the environment and to the customer. This could be attributed to the high level of awareness about the importance of these areas among SME owners/ managers. While the high level of awareness of these areas is a positive sign, more efforts need to be made in order to convert perception into practice. It is known that SMEs in Malaysia are normally vendors to big companies, such as MNCs and other government-linked companies, where cost factors are the main element that keeps them relevant and competitive in securing tenders and contracts. This is clearly supported by the responses received from the SMEs themselves about the gap. Such a gap is contributed to by the barriers which are obviously related to the cost, followed by lack of time, bureaucracy, resource constraints and other factors. This is consistent with Jarvis’ (2004) findings. Being small in terms of the numbers of employees running the business also imposes limitations on SMEs to practice what they perceive to be important.

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They have to maintain low-operating costs, which leaves them with less room for improvement or enhancement of employee benefits. They have to focus more on production efficiency which most of the time leads to less focus on the skill development of the staff, work–life balance and other elements of good human resource practice that are normally found in big firms. To compound the problem, most of the SMEs are owned and run by one individual, where decisions are centralised in the hands of a single owner who has many other matters to think about. This can explain why matters not directly essential to production tend to be ignored. These barriers are clearly due to the resource constraints that SMEs have in comparison to big business organisations. Interestingly, for implementing CSR, Malaysian SMEs are most encouraged by voluntary efforts rather than regulation from government or pressure from supply-chain large purchasers. Additionally, in the context of Malaysia, where shared norms, religion, ethics and culture are highly respected, the SMEs believe that CSR is an important agenda for them as it will be a significant organisational image for the sustainability of their business in the society. This illustrates the importance of local context for SMEs. The findings show that the main motivation for practicing CSR by SMEs is to develop their good image, followed by giving to the community and employee satisfaction. This is consistent with what is expected by big companies when they ‘invest’ in CSR. Figure 8.3 shows the summary of the findings using the force-field analysis. This study found developing a good business image, giving back to the community, employee satisfaction and good business

Driving Forces

Adopting CSR Practices for SMEs

- Developing a good business image - Giving back to the community - Employee satisfaction - Good business practices - Financial reasons/success - Commitment to reducing the company’s impact on the environment

Restraining Forces

- Cost/impact on profits - Lack of time - Bureaucracy - Resource constraints

Figure 8.3  Force-Field Analysis of the Findings

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142  Chapter 8  Embracing CSR for Small Firms

practices as the major driving forces for adopting CSR practices by Malaysian SMEs. Meanwhile, CSR costs, lack of time, bureaucracy and resource constraints were among the principal obstacles for CSR practices. The overall balance of these two forces will determine the decision to practice social responsibility by the SMEs. Nevertheless, the most practiced responsible behaviour does not really reflect these stated motivations. Energy savings scored high, placing this as the most common CSR practice. Energy saving has the least gap between importance and involvement, which provides strong support for the argument that SMEs are mainly interested in lowering costs, as this is the main element which will help them to survive in the robust business world and to become the preferred vendors. As government is the most powerful stakeholder in Malaysia (Amran & Devi, 2008), it is well understood why the SMEs are targeting government as the main stakeholder for them to communicate their social responsibility practices, followed by media and customers. This provides an indication that government should take further action in helping SMEs to implement CSR without any worries of increment in cost.

CONCLUSION SMEs in Malaysia still perceive CSR as a cost burden (Nejati & Amran, 2009). One of the key actions that could help SMEs to practice CSR is through CSR education. There is much evidence indicating the benefits of CSR, even if those benefits may not be realised in the short term. Like other investments, initial capital needs to be invested for changes. In order to encourage SMEs to change towards adopting more social responsibility practices, a number of change levers might be utilised. Through providing empirical evidence on the improved image, financial success and increased satisfaction level of employees for responsible firms, along with outlining the positive role of CSR in reducing firm’s environmental impacts, SMEs can be encouraged to adopt CSR practices. This results in reinforcing the driving forces against the restraining forces in adopting CSR by SMEs. This study expanded the understanding about the current status of social responsibility perception and practices by Malaysian SMEs. This can assist policy makers and authorities dealing with SMEs to customise their strategies for encouraging responsible practices by small businesses. Government is the best stakeholder in Malaysia to help push this agenda forward. SMEs still regard government as the most powerful stakeholder among all the others. Relevant agencies like SME corporations and Companies Commission of Malaysia (CCM) should take more action in ensuring the improvement of social responsibility practices among SMEs. It seems that tax incentives do not work, perhaps because SMEs do not know how to utilise them. Though there are some initiatives being organised by CCM, a mere

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half-day presentation may not be able to convince them. A useful guide with convincing cases about the success stories for practicing CSR could be one of the alternatives. The overall scenario above shows that CSR has a bright future among SMEs. The pressure could also be seen soon as all the listed companies in Malaysia are now seriously looking into CSR practices. The emergence of sustainable supply-chain practices being practiced by MNCs in Malaysia will also have a great impact on SMEs. Sooner or later the consumer will also put pressure on SMEs and when that time comes it may be too late for them to adapt. This study is not without limitations. The main limitation of this study is related to the method applied. Since subjects of the study are mostly small businesses operating in Northern states of Malaysia, the findings of this study may not be representative of the whole country. Future studies may apply a mixed method to explore major underlying reasons for the current social behaviour of small businesses, particularly to study the involvement of the three actors namely: government, market and civil society where the CSR concept is intertwined within them respectively. Additionally, this study is confined by the sampling technique applied. Although it is quite challenging to obtain responses from SMEs, future studies may strive to apply random sampling to provide more generalisable findings.

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Ramasamy, B., & Ting, H. W. (2004). A comparative analysis of corporate social responsibility awareness: Malaysian and Singaporean firms. The Journal of Corporate Citizenship. 13, 109–123. Rashid, M. Z. A., & Ibrahim, S. (2002). Executive and management attitudes towards corporate social responsibility in Malaysia. Corporate Governance, 2(4), 10–16. doi: 10.1108/14720700210447641 Roberts, R. W. (1992). Determinants of corporate social responsibility disclosure: An application of stakeholder theory. Accounting Organizations and Society, 17(6), 595–612. Rowe, J., & Hollingsworth, D. (1996). Improving the environmental performance of small- and medium-sized enterprises: A study in Avon. Eco-Management and Auditing, 3(2), 97–107. Siwar, C., & Harizan, S. H. Md. (2008). A study on corporate social responsibility practices amongst business organisations in Malaysia. Proceedings of Annual American Business Research Conference, Vol. 16417, Dubai, UAE. SME Corp. (2010). SME Annual Report 2009/10. Retrieved from http://www.smecorp .gov.my/vn2/node/70 Sweeney, L. (2007). Corporate social responsibility in Ireland: Barriers and opportunities experienced by SMEs when undertaking CSR. Corporate Governance, 7(4), 516–523. doi: 10.1108/14720700710820597 United Nations Industrial Development Organization (UNIDO). (2002). Corporate social responsibility: Implications for small and medium enterprises in developing countries. Vienna International Centre, United Nations Industrial Development Organization, p.13. Van der Heijden, A. J. W., Driessen, P. P. J., & Cramer, J. M. (2010). Making sense of corporate social responsibility: Exploring organizational processes and strategies. Journal of Cleaner Production, 18(18), 1787–1796.

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SECTION 4 CONTEMPORARY ISSUES AND PRACTICES IN CSR AND SUSTAINABILITY

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9

Accounting for Citizenship Best Practices on Social Responsibility of Portuguese Foundations Rute Abreu, Fátima David

INTRODUCTION The private sector of business due to the main objective, that is maximise the profit, generates benefits enough to promote social responsibility (SR) practices that allow the social sector to develop their activity. In this relation, it appears that the public sector government has different perspectives (Salamon, 1987). One, as regulator entity (TC, 1999), obliges the private sector of business to disclose all the accounting information and then justifies the financial support of the social sector. Another, as supervisor entity, appears as a result of the financial and economic crisis, because it decreases the level of profits of the private sector of business and the social sector needs the financial support of the government to survive. Also, the disclosure of accounting information is relevant as a communicative system by which public sector details the SR practices, because it reports them in the public sphere and then corporate annual reports may not be as a full representation or communication system (Kuasirikun & Sherer, 2004). In this context, the accounting for citizenship is focused on the citizens’ well-being and the foundations’ best practices, in particular, or other civil society organisations, in general, through engage of SR activities. The successful awareness of policies and strategies centred on citizens will be dependent on the context of the SR activities (Peloza & Falkenberg, 2009) that increasingly pressure the foundation strategic decisions to invest in sustainable practices (Aguilera et al., 2006) and in terms of the trade-off between using income to build-up cash reserves and serving more clients (Handy & Webb, 2003). Obviously, the increase of laws, norms and regulations empowering the protection on the well-being of the citizen (Helliwell & Putnam, 2004) as consequence of evolving hybrid role of accounting that it is associated with the SR disclosure made on the annual report of foundations. Moreover, governmental regulation could possible play a role in the manner in which the board governs the foundation (Stone, 1975). The research question is: why accounting for citizenship lead to promote best practices on social responsibility by Foundations? And the answer to the question is complex, due to the fact that the recent financial crisis has severe implications in several practices such as culture, arts, human services, education 149

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and health care as well as the result of the reduction of Budget State and private sector business. The authors also observe that the society to classify a best practice on SR goes far beyond the ‘philanthropy’ of the past as Vasilescu et al. (2010) propose. Nonetheless, to ensure success in today’s highly competitive environment, foundations need to meet the expectations of citizens and compete for reputational status (Maden et al., 2012). There is, however, some overlap about the quality of best practices that needs specific criteria to ensure this classification. In this context, the authors agree with Krek et al. (2012), each practice needs to accomplish several criteria, but without the need to accomplish all: ▪▪ Clear definition of objectives, activities and budget to be carried out by participants, stakeholders and groups of citizens; ▪▪ Consistency between planned implemented objectives, activities and budget; ▪▪ Active and direct participation of citizens as a democratic decisionmaking processes and shared responsibility; ▪▪ Full collaboration between different foundations, institutions, associations and organisations; ▪▪ Ability to make use of or include new technologies and new media to give more visibility to the best practice promoted by foundations; ▪▪ Level of interest on the influence of the outcome and their impact as a result of the assessment process; ▪▪ Exploitation of the disclosure information on outcomes and assessments at local, regional, national and international levels; ▪▪ Promotion of values of democracy, human rights, social cohesion and tolerance.

Once these criteria are achieved by different objectives, activities and budget promoted by foundations, then findings aid citizens to effectively maximise their welfare (Joppke, 2007) and exploit opportunities arising from raise of cultural, educational, economic, social, artistic, scientific and philanthropic nature (Eikenberry, 2006). Foundations are linked to strongly combat, at the present moment, major inequalities that exist to the access to social services. This chapter presents a unique data set of Portuguese Foundations. However, due to limited regulatory guidance, the social contract of each foundation is relevant to prove the best practices with an assessment process subdivided by relevance, effectiveness and sustainability (SEAP, 2012). Indeed, some of this evidence has been very difficult to obtain because of the complexity and the broad conception of the mission, vision and values of each foundation. Furthermore, the results have implications for SR that will help Portuguese Foundations to better manage themselves and then promote best practices in coherence with the society.

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Each emerging practices on SR developed by foundations is plausibly a result of a call for voluntary disclosure. Formerly, as Roberts and Scapens (1985, p. 450) argue ‘the real power of accounting perhaps lies in the way in which, as a structure of meaning, it comes to define what shall and shall not count as significant’. It is obvious that this research demonstrates that monitoring the disclosure of best practices is an essential task to create value to the foundation. Thus, it adds value for the citizen well-being. Also, it achieves better information tools that reduce the asymmetric information and it lets that each citizen understand the accountability process. This evidence does not establish causality and much more research is needed to be done, because multiple issues will update certain recommendations of SR. The findings are consistent that it is urgent that foundations, in general, and the citizen, in particular, must promote the SR practices taking this reality into account in the planning, analysis, management and assessment through the accounting for citizenship, reducing ambiguities on the future of foundations and suggest an appropriate behaviour to ensure their sustainability. However, to the best of the understanding of authors, the role of the best practices on SR has not previously been emphasised on the accounting for citizenship.

FROM ACCOUNTING FOR CITIZENSHIP TO SR Starting on the accounting for citizenship then SR strategy involves the adoption of policies focused on meeting the expectations of all parties, as well as, creating new competitive factors and the renewal of the social model itself. This strategy focuses on planned exercises and systematic actions, and implementation of channel relationship between the foundations and its environment. In the case of the foundation, it is substantially created by the will of a donor or other reasons more than business strategy. The ­authors agree with the proposals of Bueno (2003) that should be applied to contribute to social development, respect for human beings, whatever their views and beliefs, the development of cultural diversity and the protection of freedom of thought and expression; provide ideal working conditions for their employees, specifically, fair remuneration, professional motivation, personal development, and encouraging dialogue and participation in ­decision-making; take the transparency and ethics as key attributes in business; preserve the environment by focusing on resource management and supply of non-aggressive nature; practice excellence in products and ­services, taking into consideration interests and expectations of consumers; implement projects aimed at sustainable development of communities where they operate. In other words, foundations require that public policy should be shaped in a­ ccordance with wishes of citizens (Mouck, 1994) and if this is achieved, then this is an important result.

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It does not seem necessary, but the definition of foundation will encourage new ideas and studies about the social sector. At the present, the authors find on the literature that a foundation could be defined ‘has a capital which is permanently devoted a specific legal purpose – a charitable purpose in particular’ (BDS, 2011). Therefore, any suggestion may require that a foundation, at least, to show some large definition. Alternatively, it may accomplish goals not directly attainable through legislation and as Stone (1975), also, defends ‘yet, for foundations to play a significant role they must be prepared to respond to changing times and needs’. Then, foundations are better positioned to gain levels of awareness among citizens. Foundations, in particular, and non-profit sectors have a long history in the Portuguese society and the literature identifies four major impulses: ‘first, the country’s Roman Catholic heritage; second, its long tradition of mutuality and self-help; third, its equally long history of authoritarian political control; and fourth, its recent democratic transition, which has led to a growing reliance of state agencies on private non-profit groups’ (DGEAC, 2010, p. 1). This evolution shows that Portuguese Foundations co-exist with diverse cultural, social, religious diversity with commitment of donors, private sector of business and citizens (EC, 2005; EC, 2006). While much research and studies has been done on the social sector, it is inevitable to understand the existence of the Economic and Social Council as an advisory and consultation institution in Portugal, in the field of economic and social policies. This entity issued an opinion in 2003 on the initiative of responsibility in companies, proposes to: ‘build a database and a system for processing and dissemination of information with regard to good practice’ (CES, 2003, p. 26). Despite the apparent advantages of this database, since then, it has been the object of more criticism, instead of support and disclosure of the best practice itself. All this evolution shows a pluralistic society with a diversity of public sector entities with a common objective that promotes the best practices on SR. For example, the National Quality Institute published the Portuguese Quality Standard 4469-1 (IPQ, 2008), which entered into force in 2008. This standard meets the needs of organisations in the definition of a management system for SR. This system specifies the ‘requirements of a management system for social responsibility, which allows an organization to develop and implement a policy, objectives and actions consistent, taking into account legal requirements and other regulations which the organization subscribes. Applies to aspects of social responsibility that the organization identifies as those that can control and those who can influence’ (IPQ, 2008, p. 11). Indeed, Foundations (and no other type of organisation) perfectly answer to the changing needs of the society, in general, and citizens, in particular. As a result, this standard of SR also contributes to the National Strategy for Sustainable Development that congregates the needs of the present without compromising the ability of future

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generations to meet their own needs (IPQ, 2008). Foundations have a legal framework to endorse, and then with a relative freedom they could change old problems to new solutions and the capability to be more flexible and independent. The Law nº 1/2012, of January 3 (AR, 2012a), approved the need of the census of all foundations based on Portugal. At the same time, it prohibits any transfers to foundations that do not acceded to this census. The same behaviour is applied to incomplete or wrong information which prevents the respective evaluation. Following the census and the change on the legal framework, for example, Fundação Oriente (FO, 2013) was created on 1988 and it is a non-profitmaking private law organisation with established legal status. In addition, this foundation has been recognised as being of public utility in two different countries and moments of time. In Portugal, it was created by the declaration of the Prime Minister published, on 6 March 1989, on the Official Journal of the Government. Similarly, on 1 February 2013, on the Official Journal of the Government, there was a new declaration due to the change of legal framework. Also, in Macau, it was published on the Official Government Journal the Decree-Law nº 16/89/M, on March 8th. After that, the National Assembly published the Law nº 24/2012, of July 9 (AR, 2012b), that approved the framework of Foundations (or in Portuguese Lei-Quadro das Fundações) and established the new norms and rules. Due to this new legal framework, Portaria nº 75/2013 (PCMMF, 2013) approved the internal regulation of Foundations, because it introduced changes on the proposal of the Council Regulation on the Statute for European Foundation. In this new tendency of globalisation appears the European Foundation Centre as an international association of foundations. This entity published, in 2007, the Principles of Good Practice that has been used as general recommendation to reinforce good practice, openness and transparency among Foundations. The development of SR strategy is a central key of accounting for citizenship in terms of the seven principles and the main areas of focus are compliance, governance, informed policies, operations and support programmes, stewardship, management and finance, disclosure and communication, monitoring and evaluation and co-operation (EFC, 2007). Then, the content of each principle present several strategic alternatives that the foundation may response to the stakeholders concern. So, this assortment is expressed in multicultural and sectorial differences and the discussion of the accounting for citizenship goes far than SR.

FROM SR TO BEST PRACTICES Till now, the theoretical part has presented a synopsis of legal issues related with foundations and different research streams that investigated the role of

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the citizen’s perception of well-being. The empirical part is centred on the annual reports of Portuguese foundations (Yin, 2008) through its content analysis (Krippendorff, 2004) and the assessment made by the Portuguese government (SEAP, 2012) as an important impulse to explore dimensions of SR (Carroll, 1979). So, the authors start to examine the complexities involved in the accounting for citizenship. It cannot simply be done as an abstraction. Its influence needs to be empirically proved to implement best practices on SR and then offer citizens the right ‘to respond to public needs or its ability to provide real alternative to public sector’ (Stone, 1975). The methodology to assessment of management (TC, 2009) was used in this research to improve the value of the foundation through a system that needs an up-and-down analysis and at that point reduce the level of potential constraints, detect faults, increase the level of benefits and compare their operational, investment and finance strategies. It allows to understand and to ensure three criteria for decisions: economy, efficiency and effectiveness. The processes of changes that Foundations are facing lead to the need to do it in a sustainable way. In this sense, Foundations are susceptible to present a probability of bias, but more important is develop best practices to answer to the needs of citizens. Although, forgetting their real purpose, socially responsible practices are, often, applied on strict compliance with the law, regulations and norms, even if SR strategies are arguably recognised as crucial to promote economic success, social and life quality, and environmental sustainability. Indeed, the challenges on SR in which the citizen, foundations, firms, entities and policy makers are immerged need sophisticated and comprehensive strategies and truly best practices to promote the welfare of the society. In this approach, Kok et al. (2001, p.  287) defined corporate social responsibility (CSR) as the obligation of the organisation to use its resources in ways to benefit society, through committed participation as a member of society, taking into account the society at large, and improving welfare of society at large independently of direct gains of the company.

FROM BEST PRACTICES TO PORTUGUESE FOUNDATIONS The research question is specifically focused on the mainstreaming of accounting for citizenship that answers the best practices on SR. In this sense: ‘Why accounting for citizenship lead to promote best practices on social responsibility by foundations?’ The authors start to analyse several documents and statistics about foundations. The formal work led by the Directorate General for Internal Market and Services of the European Union was begun in 2010 with the ‘Impact Assessment (IA) of Foundations’ (EC, 2012). All the tables quoted below are intended to provide a global perspective rather than a complete picture of the foundation sector in Portugal. This is due to the difficulty to collect data and especially to the prominent number of foundations that

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present different levels of activities at national, regional and local level. For example, Fundação EDP (FEDP, 2013) is related with energy and Fundação PT (FPT, 2013) is related with communication and technology. Table 9.1 presents the distribution by legal framework of foundations. The results show that Social Solidarity Private Institutions (SSPI) represent 43 per cent of the total and other foundations represent 57 per cent of the total. In relation with legal framework, foundations based on private law are 70 per cent of the total, public foundations based on private law are 25 per cent of the total and public and private foundations are 5 per cent of the total. Table 9.2 shows the distribution of the capital fund between the starting year till 2010 and the sample presents disparities. This analysis highlights the importance of foundations promoting active citizenship. The capital fund increases due to greater demands and successful implementation of full range of SR activities that encourage the interaction between citizens Table 9.1  Distribution by Legal Framework of the Foundations

Legal Framework

SSPI

Other

Total

Public under Public Law

0

0

0

Public under Private Law

26

73

99

8

12

20

Private

140

142

282

Total

174

227

401

Public and Private

Source: SEAP (2012)

Table 9.2  Distribution of the Capital Fund (Starting and 2010 Year)

SSPI Capital Fund (€)

Starting Year

OTHER 2010

Starting Year

2010

Public under Public Law

0

0

0

Public under Private Law

34,209,019

36,311,303

911,257,762

3,806,060,389

7,488,713

8,635,674

16,107,393

99,354,698

203,173,774

744,541,758

833,058,261

1,232,143,776

Public and Private Private

0

Source: SEAP (2012)

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and foundations through co-operation between them. Table 9.2 shows some of the changes that occur. By one side, on other foundations with private and public legal framework with an increase of 517 per cent and a change from M€16 to M€99 and, by other side, on SSPI with public under private law increase only 6 per cent and a change from M€34 to M€36. For example, Fundação Paula Rego has free entrance to all citizens that aims to observe or study the art collection that consists of an extraordinary group of paintings, drawings and etchings produced by the artist on a variety of media and using a wide range of techniques. This is possible because of Paula Rego: thanks ‘to the generous donation made by Paula Rego of all of her etchings, amounting to 257 in total, along with a set of 273 drawings, most of which have never been seen before. Paula Rego has also loaned 22 of her paintings to the Casa das Histórias, most of which are works from the 1980s and by 15 oil paintings from the late 1950s of her late husband Victor Willing’ (FPR, 2013). There has been criticism, then the Decree-Law nº 51/2013 (PCM, 2013) determines the dissolution of this foundation because the government assessment has been drastic. Due to the fact that it has been created in 2009, the new proposal of Cascais Municipal Council is still maintaining open Casa das Histórias (FPR, 2013). This change has not been accepted by citizens that need to increase the knowledge of this important Portuguese Artist and, as a consensus, it will be open to provide best practices of SR at a cultural level. More than this foundation example, the Organization for Economic Co-operation and Development (OECD) report (2009, p. 8) details that best practices related with tax exemptions on foundations, such as: ‘in terms of corporate tax and VAT, according to the objectives pursued as long as certain legal conditions are met. Concerning the donors, every donation granted to administrative public utility legal persons or public utility entities pursuing charity purposes, providing assistance, beneficence and social solidarity as well as to social solidarity cooperative societies, may be considered as cost or net loss, and may be calculated at 120%, 130% and 140% of the total amount of the donation, according to the entity benefiting from the donation to the maximum threshold of 8/1000 of the entity‘s turnover or of the services provided in accordance with the legislation’. Foundations, on the behalf of administrative principles of equality, fairness and impartiality, could get several tax exemptions that may complement other benefits on a voluntary basis derive from a behavioural model of the social sector. Table 9.3 presents the distribution of the tax exemptions between 2008 and 2010. Table 9.3 reports several tax savings as result of investments on non-current assets (buildings, administrative equipment and transport equipment, between others), operational policy (current expenses) and finance strategy (benefits of donors or consigned rent tax by several citizens). In this line of financial support, the OECD report (2009, p.  11) detail that foundations could use ‘may, on occasion, be used for assets acquisition or for exempted commercial operations and contravene the underlying conditions, for example, the obligation

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Table 9.3  Distribution of the Tax Exemptions (2008–2010)

Taxes

2008

2009

2010

Total

1,526,851

2,030,170

2,890,462

6,447,483

Imposto sobre Rendimento Pessoas Colectivas

477,841

795,359

858,065

2,131,265

Imposto sobre Rendimento Pessoas Singulares

539,278

437,968

592,767

1,570,012

650

470,592

280,078

751,320

92,898

46,454

73,528

212,879

0

56,877

38,164

95,041

20,906

24,887

30,275

76,069

2,658,424

3,862,306

4,763,338

11,284,068

Imposto sobre Valor Acrescentado

Imposto Municipal sobre Transmissão Onerosa de Imóveis Imposto sobre Veículos Imposto de Selo Imposto único de Circulação Total Source: SEAP (2012)

to allocate part of the company’s revenue to social aims’. This effect does not provide an abuse because, in reality, the national taxation authority uses several data matching from donors and foundations as detection strategies. Table 9.4 presents the distribution of financial support ranges for foundations during 2010. The results show that SSPI represents 21 per cent of the total and other foundations represent 79 per cent of the total. In average of the financial support that each foundation obtain has been SSPI with €1,245,220 and other foundations with €3,599,716. It is important to notice that the biggest financial supports are on foundations without main objective of social solidarity. This leads to other government funding in order to provide other social services. The Portuguese government reveals important reduction of financial support and it reveals more efforts to the awareness of the importance of implementing a whole-foundation approach for supporting citizenship. Table 9.5 shows the distribution of the number of employees by types of labour relations on Foundations. The results show that SSPI represents 28 per cent of the total and other foundations represent 72 per cent of the total. The results show that in SSPI exists 56 per cent of their total with employees with labour contract without finish deadline, 16 per cent of their total with employees with contract with finish deadline and 10 per cent of their total are free-lancer. In the other foundations, volunteers represent 33 per cent of their total, employees with labour contract in public activities

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158  Chapter 9  Accounting for Citizenship Table 9.4  Distribution of Financial Support Ranges

Financial Support Ranges

SSPI Value (€)

Without answer

Other Nº

Value (€)

Total Nº

Value (€)



0

60

0

109

0

169

142,884

7

274,088

19

416,972

26

1,104,614

7

3,909,623

30

5,014,237

37

250,000– 1,000,000

20,291,277

34

13,886,840

24

34,178,117

58

1,000,000– 10,000,000

143,318,999

62

103,176,407

34

246,495,406

96

>10,000,000

51,810,485

4

695,888,558

11

747,699,043

15

216,668,259

174

817,135,516

227

1,033,803,775

401

0–50,000 50,000– 250,000

Total Source: SEAP (2012)

Table 9.5  Distribution of the Employees by Labour Relation

Type of Labour Relation

SSPI

Other

Total

679

936

1,615

Labour contract without finish deadline

5,444

4,310

9,754

Labour contract with finish deadline

1,537

1,929

3,466

3

5,308

5,311

15

134

149

1,002

1,751

2,753

17

1,386

1,403

550

8,119

8,669

58

42

100

331

816

1,147

9,636

24,731

34,367

Board

Labour contract in public activities Labour contract of exchange workers Free-lancer Fellow Volunteer Partial work Other situation Total Source: SEAP (2012)

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Table 9.6  Distribution of the Site Availability

SSPI Site Availability

Other

Total

Yes

No

Yes

No

Yes

No

Public under Public Law

0

0

0

0

0

0

Public under Private Law

6

20

55

18

61

38

Public and Private

1

7

8

4

9

11

Private

55

79

67

81

122

160

Total

62

106

130

103

192

209

Source: SEAP (2012)

goes to 21 per cent of their total and only 17 per cent of their total are employees having labour contract without finish deadline. Table 9.6 shows the availability of sites of Foundations. According to the results, each foundation should make available a site with information to ensure the promotion of activities. The results show that SSPI represents 15 per cent of the total and other foundations represent 32 per cent of the total. There is a long way to transform this public available information and disclosure of the strategy of the foundation as response to the needs of information of the citizen, institutions, firms and governments. The image and visibility of foundations (EC, 2006), it seems not concern the Board, neither the promotion of activities to increase the number of citizens involved on their missions. So, one of the criteria to classify best practices is the exploitation of the disclosure information on outcomes and assessments at local, regional, national and international levels. Then, it is not possible to benefit the citizen knowledge. Also, it seems a long way to promote the disclosure of information on the social sector. This may suggest that the government funding should be dependent of their disclosure and promotion on time of different activities with its budget. Table 9.7 shows the distribution of the information type and its number for the entire sample of foundations. According to the results, each site of the foundation makes available a different type of information to ensure proper accounting and to endorse rules of the Portuguese State. This table allows concluding three different perspectives. The first result, related with entire sample, demonstrates that the board identification (26.5 per cent of the total), statutory regimen (21.6 per cent of the total) and activity report (10.4 per cent of the total) are the most relevant. They may recognise various responsibilities to enforce legal accountability and it promotes a sense of mutual responsibility throughout society. The second result, related with SSPI, reveals that the board identification (7.3 per cent of the total), statutory regimen (5.3 per cent of the total) and

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160  Chapter 9  Accounting for Citizenship Table 9.7  Distribution of the Information Type

Information Type

SSIP

Others

Total

Board Identification

40

106

146

Statutory Regimen

29

90

119

Activity Report

15

42

57

Internal Regulation

19

35

54

Legal Documents

11

39

50

Activity Plan

16

34

50

Annual Report and Accounts

13

33

46

7

21

28

Employees (number) Source: SEAP (2012)

internal regulation (3.5 per cent of the total) are the most pertinent. This availability is responsible to justify the official duties and obligations made by law and, at the same time, intended to codify societal consensus. The third, related with other foundations, show board identification (19.0 per cent of the total), statutory regimen (16.0 per cent of the total) and activity report (8.0 per cent of the total) are the most relevant due to the limits of SR on the coherence of the society. The authors agree with Caldwell (1994) who argues responsibility is nonetheless a human value and expectation indispensable to mutual trust, to the integrity of society and hence to legitimate foundations, despite the proposal of the Portuguese government to propose the closing or the continuing of several foundations. The assessment of foundations may be complex and it must include contradictory considerations, but the collective process of change should be based on four principles of CSR (sustainability, transparency, accountability and social contract) proposed by Crowther and Rayman-Bacchus (2004), because they are: ‘concerned with the effect which action taken in the present has upon the options available in the future. If resources are utilised in the present then they are no longer available for use in the future, and this is of particular concern if the resources are finite in quantity’. So, the model used by the Portuguese government could be more focused on citizenship, such as the proposal of Mirvis and Googins (2006) that outline the elementary, engaged, innovative, integrated and transforming stages and based on experiences of best practices on SR promoted by foundations.

CONCLUSION In Portugal, the economic, financial and social uncertainties rise which increase the importance of Foundations that emerge to mitigate these

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disparities. So the convergence of best practices on SR promoted by foundations is possibly due to the increasing attention on the citizens. Clearly, new laws, regulations and policies are aimed to promote a wide range of publicly funded schemes adopted in order to stimulate and support the expansion of social services and, at the same time, enlarge obligations with the accountability of the foundation. These changes are, especially in the European Union context, generally positive in their effects, as they have benefited economic, social, cultural, educational, health and political development in Portugal. More specifically, the foundation is the basis of the accounting for citizenship as a driving force for development and self-reinforce mechanism of value creation. This tendency puts the identity and strategy of the citizen as fundamental to the development process based on learning process with more realism. At the same time, that remain controversial, the determinant charitable status. Yet, there has been developed a general perception that several projects and initiatives promote accounting for citizenship and encourage citizens to change behaviour. In doing so, the government grants may crowd-in or leverage private donation (Knight, 2002). In this way, best practices on SR, predominantly, enable foundations to guide to undergoing change and transformation of the concept of well-being and the status must be entirely and wholly charitable.

ACKNOWLEDGEMENTS The authors wish to thank José Ángel Pérez López of Universidad de Sevilla (Spain) and the current version has benefited from comments of two anonymous referees. The authors thank UDI-IPG and Fundação para a Ciência e Tecnologia (PEst-OE/EGE/UI4056/2011) for the financial support. The authors belong to the Centro de Investigação de Contabilidade e Fiscalidade.

REFERENCES Aguilera, R., Williams, C., Conley, J., & Rupp, D. (2006). Corporate governance and social responsibility: A comparative analysis of the UK and US. Corporate Governance, 14(3), 147–158. Assembleia da República (AR). (2012a). Lei nº 1/2012. Diário da República, 1ª série, 2, 3 de janeiro, 21–23. Assembleia da República (AR). (2012b). Lei nº 24/2012. Diário da República, 1ª série, 131, 9 de julho, 3550–3564. Bueno, W. C. (2003). Comunicação empresarial: Teoria e prática. Barueri, Brazil: Manole. Bundesverband Deutscher Stiftungen (BDS). (2011). The Association of German Foundations. Berlin, Germany: BDS. Caldwell, L. K. (1994). Conditions for social responsibility. American Behavioral Scientist, 38(1), 172–192. Carroll, A. B. (1979). A three-dimensional conceptual model of orporate performance. The Academy of Management Review, 4(4), 497–505.

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162  Chapter 9  Accounting for Citizenship Conselho Económico e Social (CES). (2003). Parecer de iniciativa sobre a Responsabilidade Social das Empresas. Lisboa, Portugal: CES. Crowther, D., & Rayman-Bacchus, L. (2004). The future of corporate social responsibility. In D. Crowther, & L. Rayman-Bacchus, (Eds.), Perspectives on corporate social responsibility (pp. 229–249). Aldershot, England: Ashgate. Directorate General Education and Culture (DGEAC) (2010). Study on volunteering in the European Union. Country Report Portugal. Brussels, Belgium: DGEAC/GHK. Eikenberry, E. M. (2006). Philanthropy and governance. Administrative Theory & Praxis, 28(4), 586–592. European Commission (EC). (2005). Giving more for research in Europe: The role of foundations and the non-profit sector in boosting R&D investment. Brussels, Belgium: EC. European Commission (EC). (2006). Giving more for research in Europe: Strengthening the role of philanthropy in the financing of research. Brussels, Belgium: EC. European Commission (EC). (2012). Impact assessment. Proposal for a council regulation on the statute for a European foundation. COM(2012) 35 final. Brussels, Belgium: EC. European Foundation Centre (EFC) (2007). Principles of good practice Brussels, Belgium: EFC. Fundação Eletricidade de Portugal (FEDP). (2013). Site da Fundação EDP. Retrieved from http://www.fundacaoedp.pt/ Fundação Oriente (FO). (2013). Site da Fundação Oriente. Retrieved from http:// www.foriente.pt Fundação Paula Rego (FPR). (2013). Site da Fundação Paula Rego. Retrieved from http://www.casadashistoriaspaularego.com/en/ Fundação Portugal Telecom (FPT)., (2013). Site da Fundação Portugal Telecom. Retrieved from http://fundacao.telecom.pt/ Handy, F., & Webb, N. (2003). A theoretical model of the effects of public funding on saving decisions by charitable non-profit service providers. Annals of Public and Cooperative Economics, 74(2), 261–283. Helliwell, J., & Putnam, R. (2004). The social context of well-being. Philosophical Transactions of the Royal Society of London, Serie B, 359, 1435–1446. Instituto Português da Qualidade (IPQ). (2008). Sistema de gestão da responsabilidade social. Parte 1: Requisitos e linhas de orientação para a sua utilização. Lisboa, Portugal: IPQ. Joppke, C. (2007). Transformation of citizenship: Status, rights and identity. Citizenship Studies, 11(1), 37–48. Knight, B. (2002). Endogenous federal grants and crowd-out of state government spending: Theory and evidence from the Federal Highway Aid Program. American Economic Review, 91(1), 71–92. Kok, P., Wiele, T., McKenna, R., & Brown, A. (2001). A corporate social responsibility audit within a quality management framework. Journal of Business Ethics, 31(4), 285–297. Krek, J., Losito, B., Ridley, R., & Hoskins, B. (2012). Good practices report: Participatory citizenship in the European Union. Brussels, Belgium: Institute of Education. Krippendorff, K. (2004), Content analysis: An introduction to its methodology. Thousand Oaks, CA: Sage.

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Kuasirikun, N., & Sherer, M. (2004). Corporate social accounting disclosure in Thailand. Accounting, Auditing & Accountability Journal, 17(4), 629–660. Maden, C., Arikan, E., Telci, E., & Kantur, B. (2012). Linking corporate social responsibility to corporate reputation: A study on understanding behavioral consequences. Procedia Social and Behavioral Sciences, 58, 655–664. Mirvis, P., & Googins, P. (2006). Stages of corporate citizenship. California Management Review, 48(2), 104–123. Mouck, T. (1994). Corporate accountability and Rorty’s Utopian Liberalism Accounting, Auditing & Accountability Journal, 7(1), 6–30. Organization for Economic Co-operation and Development (OECD). (2009), Report on abuse of charities for money-laundering and tax evasion. New York, NY: Centre for Tax Policy and Administration. Peloza, J., & Falkenberg, L. (2009). The role of collaboration in achieving corporate social responsibility objectives. California Management Review, 51(3), 95–113. Presidência do Conselho de Ministros (PCM). (2013). Decreto-Lei nº 51/2013. Diário da República, 1ª série, nº 75, 17 de abril, 2211. Presidência do Conselho de Ministros e Ministério das Finanças (PCMMF). (2013). Portaria nº 75/2013. Diário da República, 1ª série, 34, 18 de fevereiro, 988. Roberts, J., & Scapens, R. (1985). Accounting systems and systems of accountability understanding accounting practices in their organizational contexts. Accounting, Organizations and Society, 10(4), 443–456. Salamon, L. M. (1987). Partners in public service: Toward a theory of governmentnonprofit relations. In W. Powell (Ed.), The nonprofit sector: A research handbook. New Haven, CT: Yale University Press. Secretaria de Estado da Administração Pública (SEAP). (2012). Relatório de Avaliação das Fundações, Lisboa, Portugal: SEAP. Stone, L. (1975). The charitable foundation: Its governance. Law and Contemporary Problems, 39(4), 57–74. Tribunal de Contas (TC). (1999). Manual de Auditoria e de Procedimentos, Vol I, ­Lisboa, Portugal: TC. Vasilescu, R., Barna, C., Epure, M., & Baicu, C. (2010). Developing university social responsibility: A model for the challenges of the new civil society. Procedia Social and Behavioral Sciences, 2, 4177–4182. Yin, R. (2008). Case study research: Design and methods. Thousand Oaks, CA: Sage Publications.

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10

Information Disclosure of Environmental Sustainability Insights From Japanese Firms Lopin Kuo, Bao-Guang Chang

PERCEPTIONS OF ENVIRONMENTAL MANAGEMENT AMONG MANAGERS OF JAPANESE FIRMS The rapid economic growth in Japan has generated serious public nuisances, which have in turn increased people’s attention to environmental issues. Firms involved in generation of the nuisances are demanded to be responsible for restoring the destructed environment. Traditionally, corporate environmental management is focused only on processing of terminal pollution generated during the production process. With the exacerbation of global climatic conditions, corporate environmental management has undergone drastic changes in both the content and methods. However, the major challenge in implementing of environmental management still lies in managers’ thoughts. It is noteworthy that managers in Japan have been proactive in introducing environmental management concepts as guidelines for managing operating activities. Annually, a Japan government report (Ministry of the Environment [ME], 2008), conducted a ‘detail survey on the actions of eco-friendly businesses’ and published the results on its website. According to the full version of this survey results released in ­December 2009, 81.6 per cent of the firms perceived solution of environmental problems as ‘one of corporate social responsibilities (CSR)’ during 2005 to 2008 fiscal years. The ratios of firms regarding it as mandated by law, a business opportunity, a strategy that influences sales performance or irrelevant to them were all below 10 per cent (see Table 10.1). The survey results revealed that environmental management has become a core issue in management of operating activities for most Japanese managers. The Japanese government encourages firms to reveal their environmental conservation information to the public. Firms are also required to calculate carbon footprint from raw materials extraction, manufacturing, to final disposal stage in order to avoid the transfer of pollution sources. In addition, firms also disclose the actual recovery of environmental expenses and the amount of money saved. In terms of disclosure of environmental information, Japanese firms have been one of the most transparent in the region. Kuo, Huang and Wu (2010) found a positive correlation with statistical significance in 165

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166  Chapter 10  Information Disclosure of Environmental Sustainability Table 10.1  Perceptions of Environmental Management Among Japanese Firms

Fiscal Year

One of CSR (%)

Mandated By Laws (%)

2005

80

3

2006

81.9

2007

One of Strategies Affecting Sales Performance (%)

A Business Opportunity (%)

Irrelevant (%)

11.1

4

0.2

2.6

9

5

0.4

82.6

2.3

8.3

4.6

0.5

2008

81.9

2.7

7.8

5.5

0.5

Average

81.6

2.65

9.05

4.78

0.4

Source: Ministry of the Environment. (2008). Detail survey on the actions of eco-friendly businesses in Japan (full version). Available from http://www.env.go.jp/policy/j-hiroba/kigyo/h20/full.pdf

terms of firm’s environmental conservation cost, net income and economic benefit of environmental conservation for the three Japanese industries during 2001 to 2006 fiscal years. In addition, the relationship between firm’s environmental conservation cost and carbon dioxide emission reduction are positively correlated but without significance. This finding indicates that investment in environmental activities increases long-term profitability and mitigates global warming among Japanese firms. Table 10.1 shows that managers perceive the importance of environmental management for Japanese firms from 2005 to 2008 fiscal year.

LITERATURE REVIEW ON ENVIRONMENTAL MANAGEMENT AND ENVIRONMENTAL PERFORMANCE Introduced in 1996, the ISO 14001 standard has slowly established itself as the reference model in environmental management. It offers firms a series of directives on environmental protection and pollution prevention, helping them to reach a balance between retention of existing profits and reduction of environmental impact. The literature of environmental management has examined whether ISO 14001 certification can really lead to better environmental performance or not. After comparing facilities that have ISO-certified Environmental Management Systems (EMS) with facilities that have uncertified EMS or no EMS at all, Potoski and Prakash (2005) showed that the adoption of an ISO 14001 certified EMS-improved facilities’ environmental performance. However, Dahlstrom et al. (2003) and Matthews (2001) found the opposite conclusion. Russo (2002) and Melnyk,

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Sroufe and Calantone (2003) discovered that firms that have gone by EMS certification experience a greater positive impact on environmental performance than firms that have not certified their EMS. However, King, Lenox and Terlaak (2005), and Jiang and Bansal (2003) found that ISO certification adds little value beyond establishing an EMS. The results from these studies have presented a different conclusion for the relationship between ISO-certified EMS with environmental performance. ISO 14001 represents both an internal management tool and a way of publicising an organisation’s legitimacy among various stakeholders. For internal management, the ISO 14001 standard responds to the need to promote a preventive approach and integrate environmental concerns in daily activities (Boiral, 2007). This integration and prevention rationale, which is at the heart of environmental management systems (Kitazawa & Sarkis, 2000; Russo & Fouts, 1997), requires that a management system be implemented and many more people take responsibility for this system. From the standpoint of external recognition, green certification helps to improve the image of an organisation and to demonstrate environmental commitment to clients, public authorities, citizens and ecological groups (Zutshi & Sohal, 2004; Bellesi, Lehrer, & Tal, 2005; Jiang & Bansal, 2003). In fact, some researchers have argued that varied implementation more likely occurs when the search for external legitimacy rather than internal efficiency drives adoption (Meyer & Rowan, 1977; Boiral, 2003, 2007). Follett (1995) argued that if a standard is induced externally, independent thinking and customisation play an important role in actual implementation. On the one hand, if they only have interest in external legitimacy that largely hinges on adoption rather than implementation, organisations may decide to adopt standards but fail to make real operational changes. On the other hand, if they pay attention to external legitimacy as well as internal efficiency, organisations may try hard to integrate the standards into their daily operations and even go beyond minimum standards. However, it has been argued that the effects of ISO 14001 on environmental performance may vary across organisations (Barla, 2007). Sarkis and Dijkshoorn (2007) empirically showed that firms which have adopted environmentally supportive practices perform better on environmental performance than those which have not. Thus, environmental performance depends on firms’ activity in adoption of environmentally supportive practices. Claver, Lopez and Molina (2007) pointed out that preventive environmental management can lead to better environmental performance. Barla (2007) identified five steps to increase environmental performance through ISO 14001. First, the organisation should have an EMS set up, and its senior management must adopt an environmental policy statement containing an explicit commitment. Second, at a planning stage, the organisation identifies all legal, conceptual and voluntary environmental obligations. Third,

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employees should be trained to properly document EMS activities. Fourth, procedures must be designed for controlling and monitoring and correcting non-conformity. Fifth, senior management periodically re-evaluates the EMS operations to ensure continuous improvement of their effectiveness. Some empirical studies have revealed that pollution prevention strategies can help organisations create unique advantages (Christmann, 2000; ­Klassen & Whybark, 1999; Russo & Fouts, 1997) and even improve production performance. According to Klassen and Whybark (1999), unlike endof-pipe controls, pollution prevention strategies have positive effects on production performance. Pollution prevention strategies reduce production costs by controlling use of un-eco-friendly raw materials, decreasing waste disposal costs and eliminating unnecessary procedures in the production process. As a result, they can help firms reduce costs required to conform to environmental standards and legal requirements. According to ISO, a total of 128,211 applicants passed ISO 14001 certification in 2006 fiscal year, and 22,593 of them were Japanese (17.6 percent); the total increased to 154,572 in 2007 fiscal year, and 27,955 of them were Japanese (18.1 per cent). Japan tops all nations in terms of the ratio of firms passing ISO 14001 certification. The 2008 statistics released by Ministry of the Environment, Government of Japan, showed that 74.6 per cent of listed firms have passed ISO 14001 certification, and the ratio among non-listed firms has also reached 56.1 per cent. Protection of the global environment is one of the major tasks of the century. All types of organisations have the responsibility to offer environmentally friendly products and services to the society. Therefore, many organisations view environmental protection as a goal in their management and acquisition of ISO certification simply as a foundation for environmental management. The high ratios of Japanese firms with ISO 14001 certification manifest their intention to declare that they have adopted specific guidance on environmental protection.

PREVIOUS LITERATURE ON ECO-EFFICIENCY AND ECONOMIC PERFORMANCE Evaluation of the relationship between implementation eco-friendly activities and economic performance has always been one of the dominant topics among environmental management studies. This relationship can be explained from two perspectives. One is the win-win hypothesis, which proposes that firms can acquire more competitive advantages and enjoy a boost of profitability by increasing their investment on environmental technologies (Porter & van der Linde, 1995; Hart, 1997). The other is the win-lose hypothesis, which proposes that environmental investment creates more corporate costs (including opportunity costs) and will ultimately result in a drop of profitability (Walley & Whitehead, 1994).

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In recent years, some scholars attempted to examine environmental performance and economic performance from a perspective of the socio-­ economic theory, eco-efficiency (Birkin & Woodward, 1997a, 1997b; Burnett & Hansen, 2008). Eco-efficiency is also one of the main goals of corporate ­environmental management. It was first introduced by Schaltegger and Sturm (1990) and has been applied in various areas. Eco-efficiency is a process that seeks to minimise a product’s environmental impact (including consumption of resources and emission of pollution) while maximising its economic value. It is believed to be able to help firms increase productivity, decrease costs (Huppes & Ishikawa, 2005) and also improve environmental performance (Bebbington, 2001; Lehman, 2002; Stone, 1995; Burnett & Hansen, 2008). In the research of eco-efficiency, many scholars have provided evidence to support eco-efficiency (e.g., Myer, 1992; Mohr, 2002; ­Dowell, Hart, & Yeung, 2000; Peck & Sinding, 2003). For instance, Feldman, Soyka and Ameer (1997) argued that a firm can deliver an effective message to shareholders that it has abilities to create values and reduce risks for them by introducing eco-efficiency into process management and control. However, previous studies have mixed and inconsistent conclusions as to the effects of compliance with environmental protection requirements on corporate performance (Hassel, Nilsson, & Nyquist, 2005; Cormier, Magnan, & Morard, 1993; Belkaoui, 1976; Jaggi & Freedman, 1982, 1992; Klassen & Mclaughlin, 1996; Berthelot, Cormier, & Magnan, 2003). Sinkin, Wright and Burnett (2008) mentioned that past studies on the relationship between compliance with environmental requirements and firm value have not taken into account the effects of eco-efficiency, arguing that perhaps eco-efficiency can be used to explain inconsistency of their conclusions. Their findings suggested that firms which have introduced ecoefficiency into process management and control have significantly higher values than those which have not. Introduction of EMS has become one of the indicators of better management quality (Cormier & Magnan, 1997; Russo & Fouts, 1997; Konar & Cohen, 2001; Blank & Daniel, 2002). Adams (1999), Delmas (2000) and Chapple et al. (2001) found that ISO 14001 was adopted as a tool of gaining competitive advantage such as increasing international trade opportunities and forging a greater market share. ISO certifications are widely recognised standards. Sinkin, Wright and Burnett (2008) used ISO 14001 certification as an external recognition indicator of compliance with eco-efficiency to investigate the relationship between eco-efficiency and firm value. Their empirical findings confirmed that the relationship is positive. In addition to ISO certifications, corporate environmental reporting and disclosure offers substantive evidences of efforts on eco-efficiency, which can facilitate public supervision. Some scholars have integrated environmental-friendly investment and recycling into business performance evaluation and used a sample of Japanese firms to

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validate the model. They found that the model could differentiate firms with higher eco-efficiency (Kuo et al., 2010).

JAPANESE SURVEY ON THE ACTIONS OF ECO-FRIENDLY BUSINESS: RESULTS AND ANALYSIS Effects of EMS Certification Ministry of the Environment, Government of Japan, conducts ‘Survey on the Actions of Eco-Friendly Businesses’ annually. According to the results for fiscal year 2008, among the 1,923 firms with ISO 14001 certification, a high proportion of them agreed that ISO 14001 certification could contribute to ‘reduction of environmental loads’ (83.1 per cent), ‘improvement of ­employees’ environmental awareness’ (82.9 per cent) and ‘reduction of costs through saving of resources and energy’ (70.5 per cent). The proportion of firms viewing the certification as ‘not beneficial at all’ was only 5.5 per cent (see Table 10.2). These figures show a belief among most Japanese firms that ISO 14001 certification is helpful. By building and implementing an EMS, they could raise economic efficiency and lower environmental impacts, making contribution to mitigation of global warming. Table 10.2 shows that ­perceived effects of ISO 14001 certification for managers in Japan. Establishment of EMS Among Japanese Firms As shown in Table 10.3, Japanese firms tend to rely on international certification standards in environmental management. In fiscal year 2008, 63.8  per  cent of Japanese firms have acquired ISO 14001 certification. In addition, 6.6 per cent of Japanese firms have set up a self-developed EMS, but 17.7 per cent of them have not.

Table 10.2  Perceived Effects of ISO 14001 Certification

Fiscal Year

Improvement of Employees’ Environmental Awareness (%)

Reduction of Environmental Impacts (%)

2005

83.3

82

68.6

4.9

1,804

2006

83.7

82.1

67.8

2.8

1,880

2007

85.5

84.5

68.5

4.5

1,837

2008

82.9

83.1

70.5

5.5

1,923

Costs Not Reduction Beneficial (%) (%)

Sample Size

Source: Ministry of the Environment. (2008). Detail survey on the actions of eco-friendly businesses in Japan (full version). Available from http://www.env.go.jp/policy/j-hiroba/kigyo/h20/full.pdf

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Table 10.3  Establishment of EMS among Japanese Firms

Fiscal Year

Have Already Acquired ISO 14001 Certification (%)

Planning to Acquire ISO 14001 Certification (%)

Have Set Up an EMS By SelfDeveloped (%)

No EMS (%)

Sample Size

2005

67

7.7

5.3

12.8

2,691

2006

67.7

6.1

5.2

14.4

2,774

2007

65.1

5.6

6.7

16.1

2,819

2008

63.8

5.0

6.6

17.7

3,028

Source: Ministry of the Environment. (2008). Detail survey on the actions of eco-friendly businesses in Japan (full version). Available from http://www.env.go.jp/policy/j-hiroba/kigyo/h20/full.pdf

Table 10.4  Development and Documentation of EMS among Japanese Firms

Fiscal Year

Yes (%)

Planning (%)

No (%)

Sample Size

2005

75.4

9.0

14.9

2,691

2006

76.9

8.3

13.8

2,774

2007

76.2

9.9

13.4

2,819

2008

76.1

8.3

15.1

3,028

Source: Ministry of the Environment. (2008). Survey on the actions of eco-friendly businesses in Japan (full version). Available from http://www.env.go.jp/policy/j-hiroba/kigyo/h20/full.pdf

Development and Documentation of EMS As shown in Table 10.4, the majority of Japanese firms would document their EMS. In fiscal year 2008, 76.1 per cent of them documented EMS ­strategies and only 15.1 per cent did not. Documenting development of ­environmental management could facilitate subsequent tracking and auditing of ­management performance. Introduction of Environmental Accounting Environmental accounting is ‘to quantitatively collect and measure investment on environmental protection as well as the economic and environmental effects obtained from the investment’. For corporate managers, environmental accounting can clarify the environmental expenditure invested and the benefits it can bring. For external stakeholders, it can substantively present an organisation’s fulfilment of CSR. According to the

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172  Chapter 10  Information Disclosure of Environmental Sustainability Table 10.5  Establishment of Environmental Accounting System among Japanese Firms Fiscal Year

2001

2002

2003

2004

2005

2006

2007

2008

Number of Firms

491

573

661

712

790

819

761

805

Ratio (%)

16.9

19.3

23.6

28.2

29.4

29.5

27.0

26.6

Source: Ministry of the Environment. (2008). Detail survey on the actions of eco-friendly businesses in Japan (abstract version). Available from http://www.env.go.jp/policy/j-hiroba/kigyo/h20/gaiyo.pdf

Table 10.6  Statistics of Publication of Environmental Reports among Japanese Firms Fiscal Year

2001

2002

2003

2004

2005

2006

2007

2008

Number of Firms

579

650

743

801

933

1,049

1,011

1,160

Ratio (%)

20.0

21.9

26.6

31.7

34.7

37.8

35.9

38.3

Source: Ministry of the Environment. (2008). Detail survey on the actions of eco-friendly businesses in Japan (abstract version). Available from http://www.env.go.jp/policy/j-hiroba/kigyo/h20/gaiyo.pdf 

abstract version of Japan CSR survey results released from ME in December 2009, Table 10.5 shows the statistics of introduction of environmental accounting among both listed and non-listed firms in Japan during fiscal years 2001 to 2008. As shown in this table, the ratio of firms that had introduced environment accounting was on the increase from fiscal years 2001 to 2006 and gradually declined after fiscal year 2006, and about 70 per cent of the firms had not introduced environmental accounting in fiscal year 2008. Publication of Environmental Reports Environmental reports refer to document on which firms present the directives, goals, plans, measures and performance regarding environmental management. They provide evidences of commitment to fulfilment of CSR. According to the abstract version of Japan CSR survey results released from ME in December 2009, Table 10.6 shows the number and ratio of firms which released environmental reports during fiscal years 2001 to 2008. Except in fiscal year 2007, a gradual growth of the ratio can be found in all other years. Implementation of Environmental Auditing and Adoption of Guidelines for Monitoring Environmental Expenditure and Effects In Japan, the Toyo Keizai CSR Survey has been implemented every year since 2005. With a continuous history of 117 years, Toyo Keizai Inc. is a leader in business publishing and a trusted commentator on Japanese politics and economics, always from a liberal perspective. Toyo Keizai sent questionnaires to some listed

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Table 10.7  Implementation of Environmental Auditing

Fiscal Year

Regularly (%)

Irregularly (%)

Never (%)

Sample Size

2005a

67.8

2.9

27.1

724

2006b

70.6

1.9

25.4

853

2007c

67.5

1.7

28.8

1012

Source: a Toyo Keizai CSR Databank Series. (2006). Detail CSR actions of Japanese firms. Tokyo, Japan. b Toyo Keizai CSR Databank Series. (2007). Detail CSR actions of Japanese firms. Tokyo, Japan. c Toyo Keizai CSR Databank Series. (2008). Detail CSR actions of Japanese firms. Tokyo, Japan.

Table 10.8  Adoption of Guidelines for Monitoring Environmental Expenditure and Effects

Fiscal Year

Data Collected According to Guidelines Set Up By Ministry of the Environment (%)

Data Collected According to Self-Developed Guidelines (%)

Sample Size

2005a

56.4

11.0

408

2006b

62.9

10.0

450

2007c

63.4

10.5

476

Source: a Toyo Keizai CSR Databank Series. (2006). Detail CSR actions of Japanese firms. Tokyo, Japan. b Toyo Keizai CSR Databank Series. (2007). Detail CSR actions of Japanese firms. Tokyo, Japan. c Toyo Keizai CSR Databank Series. (2008). Detail CSR actions of Japanese firms. Tokyo, Japan.

Japanese companies and unlisted major companies. The authors will use the CSR database compiled by Japan Toyo Keizai for below analysis. According to Toyo Keizai CSR databank (2006, 2007, 2008), they provided detailed CSR actions of Japanese firms from 2005 to 2007 fiscal years. The results shown in ­Table 10.7 suggest that 67.5 per cent of Japanese firms performed e­ nvironmental auditing on a regular basis in fiscal year 2007. As shown in ­Table 10.8, 63.4 per cent of the firms followed guidelines set up by Ministry of the Environment to collect data about environmental expenditure and effects. In other words, more than half of the firms collected and disclosed environmental information based on the guidelines set up by the government authority. Establishment of an Exclusive Department and a Team of Employees to Be Responsible for Environmental Issues CSR has become a trend among Japanese firms. Many Japanese firms have set up an exclusive department or a team of specialists to deal with environmental affairs. The CSR data bank of Toyo Keizai was employed for

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174  Chapter 10  Information Disclosure of Environmental Sustainability Table 10.9  Ratio of Firms with an Exclusive Department Dealing with Environmental Issues

Fiscal Year

Environmental Environmental Issues Are Issues Are Dealt Dealt with by with By Other an Exclusive Departments Department (%) (%)

No Department Is Responsible for Environmental Issues (%)

Sample Size

2005a

75.5

22.7

1.8

730

2006b

50.9

29.2

18.7

859

2007c

45.7

30.7

21.9

1017

Source: a Toyo Keizai CSR Databank Series. (2006). Detail CSR actions of Japanese firms. Tokyo, Japan. b Toyo Keizai CSR Databank Series. (2007). Detail CSR actions of Japanese firms. Tokyo, Japan. c Toyo Keizai CSR Databank Series. (2008). Detail CSR actions of Japanese firms. Tokyo, Japan.

Table 10.10  Ratio of Firms with Exclusive Employees Dealing with Environmental Issues

Fiscal Year

Environmental Issues Are Dealt with By Exclusive Employees (%)

Environmental Issues Are dealt with By Employees from Other Departments (%)

No Employee Is Responsible for Environmental Issues (%)

Sample Size

2005a

67.8

30.1

2.1

727

2006

13.2

59.4

26.3

855

2007c

9.5

58.7

30.7

1,014

b

Source: a Toyo Keizai CSR Databank Series. (2006). Detail CSR actions of Japanese firms. Tokyo, Japan. b Toyo Keizai CSR Databank Series. (2007). Detail CSR actions of Japanese firms. Tokyo, Japan. c Toyo Keizai CSR Databank Series. (2008). Detail CSR actions of Japanese firms. Tokyo, Japan.

this analysis. Table 10.9 shows the ratio of firms with an exclusive department dealing with environmental issues. The ratio reached the highest in fiscal year 2005 (75.5 per cent) and began to decline in the following years. Table 10 shows the ratio of firms with exclusive employees dealing with environmental issues. The ratio also reached the highest in fiscal year 2005 (67.8 per cent) and began to decline afterwards. The variations of the two ratios offer support for a common belief among Japanese firms that setting up an environmental department is just a transition towards development of CSR.

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CONCLUSION A high proportion (81.6 per cent) of Japanese firms considered solution of environmental problems as ‘one of CSR’ during fiscal years 2005 to 2008. The ratios of firms viewing it as mandated by law, a business opportunity, a strategy that influences sales performance or irrelevant to them were all below 10 per cent. For Japanese firms, the three major benefits of ISO 14001 certification were reduction of environmental loads, improvement of employees’ environmental awareness and costs reduction. Only a small proportion of firms viewed the certification as unhelpful. Among all the nations, Japan had the highest ratio of firms with ISO 14001 certification, suggesting that Japanese firms tended to adopt international standards in environmental management and viewed the certification as an external recognition indicator of their compliance with eco-efficiency. In fiscal year 2008, 26.6 per cent of Japanese firms had built up environmental accounting and 38.3 per cent of them published environmental reports. In general, Japanese firms viewed setting up an exclusive environmental department as a transition towards development of CSR. Most Japanese firms document environmental management strategies and acquired ISO-certified EMS. Moreover, they follow official guidelines to collect data about environment expenditure and effects and perform environmental auditing on a regular basis. The survey results indicate that most managers of Japanese firms perceived to get benefits from environmental management models of this type.

REFERENCES Adams, R. (1999). ISO 14001: A key ingredient of competitive edge. Environmental Law Management, 11(3), 103–104. Barla, P. (2007). ISO 14001 certification and environmental performance in ­Quebec’s pulp and paper industry. Journal of Environmental Economics and Management, 53(3), 291–306. Bebbington, J. (2001). Sustainable development: A review of the international development, business and accounting literature. Accounting Forum, 25(2), 128–157. Belkaoui, A. (1976). The impact of the disclosure of the environmental effects of organization behavior on the market. Financial Management, 5(4), 26–31. Bellesi, F., Lehrer, D., & Tal, A. (2005). Comparative advantage: The impact of ISO 14001 environmental certification on exports. Environmental Science & Technology, 39(7), 1943–1953. Berthelot, S., Cormier, D., & Magnan, M. (2003). Environmental disclosure research: Review and synthesis. Journal of Accounting Literature, 22, 1–44. Birkin, F., & Woodward, D. (1997a). Management accounting for sustainable development—Part 2: From economic to ecological efficiency. Management ­ ­Accounting, 75(7), 42–45. Birkin, F., & Woodward, D. (1997b). Management accounting for sustainable development—Part 5: Accounting for sustainable development. Management ­ ­Accounting, 75(10), 52–54.

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176  Chapter 10  Information Disclosure of Environmental Sustainability Blank, H., & Daniel, W. (2002). The eco-efficiency anomaly. New York, NY: QED International. Boiral, O. (2003). ISO 9000: Outside the iron cage. Organization Science, 14(6), 720–737. Boiral, O. (2007). Corporate greening through ISO 14001: A rational myth? Organization Science, 18(1), 127–146. Burnett, R. D., & Hansen, D. R. (2008). Ecoefficiency: Defining a role for environmental cost management. Accounting, Organizations and Society, 33(6), 551–581. Chapple, W., Cooke, A., Galt, V., & Paton, D. (2001). The characteristics and attributes of UK firms obtaining accreditation to ISO 14001. Business Strategy and the Environment, 10(4), 238–244. Christmann, P. (2000). Effects of best practices of environmental management on cost advantage: The role of complementary assets. Academy of Management Journal, 43(4), 663–680. Claver, E., Lopez, M. D., & Molina, J. F. (2007). Environmental management and firm performance: A case study. Journal of Environmental Management, 84(4), 606–619. Cormier, D., & Magnan, M. (1997). Investors’ assessment of implicit environmental liabilities: An empirical investigation. Journal of Accounting and Public Policy, 16(2), 215–241. Cormier, D., Magnan, M., & Morard, B. (1993). The impact of corporate pollution on market valuation: Some empirical evidence. Ecological Economics, 8(2), 135–155. Dahlstrom, K., Howes, C., Leinster, O., & Skea, J. (2003). Environmental management systems and company performance. European Environment, 13(4), 187–203. Delmas, M. (2000). Barriers and incentives to the adoption of ISO 14001 in the United States. Duke Environmental Law and Policy Forum, 11, Fall, 1–38. Dowell, G., Hart, S., & Yeung, B. (2000). Do corporate global environmental standards create or destroy market value? Management Science, 46(8), 1059–1074. Feldman, S., Soyka, P., & Ameer, P. (1997). Does improving a firm’s environmental management system and environmental performance result in a higher stock price? The Journal of Investing, 6(4), 87–97. Follett, M. P. (1995). Prophet of management: A celebration of writings from the 1920’s, Boston, MA: Harvard Business School Press. Hart, S. (1997). Beyond greening: Strategies for a sustainable world. Harvard Business Review, 75(1), 66. Hassel, L., Nilsson, H., & Nyquist, S. (2005). The value relevance of environmental performance. European Accounting Review, 14(1), 41–61. Huppes, G., & Ishikawa, M. (2005). A framework for quantified ecoefficiency analysis. Journal of Industrial Ecology, 9(4), 25–41. Jaggi, B., & Freedman, M. (1982). An analysis of the informational content of pollution disclosures. Financial Review, 17(3), 142–152. Jaggi, B., & Freedman, M. (1992). An examination of the impact of pollution performance on economic and market performance: Pulp and paper firms. Journal of Business Finance and Accounting, 19(5), 697–713. Jiang, R. J., & Bansal, P. (2003). Seeing the need for ISO 14001. Journal of Management Studies, 40(4), 1047–1067.

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King, A. A., Lenox, M. J., & Terlaak, A. (2005). The strategic use of decentralized institutions: Exploring certification with the ISO 14001 management standard. Academy of Management Journal, 48(6), 1091–1106. Kitazawa, S., & Sarkis, J. (2000). The relationship between ISO 14001 and continuous source reduction programs. International Journal of Operations & Production Management, 20(2), 225–248. Klassen, R. D., & Mclaughlin, C. (1996). The impact of environmental management on firm performance. Management Science, 42(8), 1199–1214. Klassen, R. D., & Whybark, D. C. (1999). The impact of environmental technologies on manufacturing performance. Academy of Management Journal, 42(6), 599–615. Konar, S., & Cohen, M. (2001). Does the market value environmental performance? The Review of Economics and Statistics, 83(2), 281–289. Kuo, L., Huang, S. K., & Wu, Y. C. (2010). Operational efficiency integrating the evaluation of environmental investment: The case of Japan. Management Decision, 48(10), 1596–1616. Lehman, G. (2002). Global accountability and sustainability: Research prospects. Accounting Forum, 26(3), 219–232. Matthews, D. H. (2001). Assessment and design of industrial environmental management systems. Ph.D. Dissertation, Pittsburgh, PA: Carnegie-Mellon University. Melnyk, S. A., Sroufe, R. P., & Calantone, R. (2003). Assessing the impact of environmental management systems on corporate and environmental performance. Journal of Operations Management, 21(3), 329–351. Meyer, J., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. The American Journal of Sociology, 83(2), 340–363. Ministry of the Environment (ME). (2008). Detail survey on the actions of ecofriendly businesses in Japan (full version). Retrieved from http://www.env.go.jp/ policy/j-hiroba/kigyo/h20/full.pdf Mohr, R. (2002). Technical change, external economies, and the porter hypothesis. Journal of Environmental Economics and Management, 43(1), 158–168. Myer, S. (1992). Environmentalism and economic prosperity: Testing the environmental impact hypothesis. Project on Environmental Politics and Policy. Cambridge, MA: Massachusetts Institute of Technology. Peck, P., & Sinding, K. (2003). Environmental and social disclosure and data richness in the mining industry. Business Strategy and the Environment, 12(3), 131–146. Porter, M., & van der Linde, C. (1995). Toward a new conception of the ­environment-competitiveness relationship. Journal of Economic Perspectives, 9(4), 97–118. Potoski, M., & Prakash, A. (2005). Covenants with weak swords: ISO 14001 and facilities’ environmental performance. Journal of Policy Analysis and Management, 24(4), 745–769. Russo, M. V., & Fouts, P. A. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3), 534–559. Russo, M. V. (2002). Institutional change and organizational strategy: ISO 14001 and emissions in the electronics industry. Academy of Management Best Papers Proceedings, 2012(1), A1–A6.

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178  Chapter 10  Information Disclosure of Environmental Sustainability Sarkis, J., & Dijkshoorn, J. (2007). Relationships between solid waste management performance and environmental practice adoption in Welsh small and mediumsized enterprises (SMEs). International Journal of Production Research, 45(21), 4989–5015. Schaltegger, S., & Sturm, A. (1990). Ecological Rationality. Die Unternehmung, 4(90), 273–290. Sinkin, C., Wright, C. J., & Burnett, R. D. (2008). Eco-efficiency and firm value. Journal of Accounting and Public Policy, 27(2), 167–176. Stone, D. (1995). No longer at the end of the pipe, but still a long way from sustainability: A look at management accounting for the environment and sustainable development in the United States. Accounting Forum, 19(2–3), 95–110. Toyo Keizai CSR Databank Series. (2006). Detail CSR actions of Japanese firms. Tokyo, Japan: Toyo Keizai CSR Databank. Toyo Keizai CSR Databank Series. (2007). Detail CSR actions of Japanese firms. Tokyo, Japan: Toyo Keizai CSR Databank. Toyo Keizai CSR Databank Series. (2008). Detail CSR actions of Japanese firms. Tokyo, Japan: Toyo Keizai CSR Databank. Walley, N., & Whitehead, B. (1994). It’s not easy being green. Harvard Business Review, 72(3), 46–52. Zutshi, A., & Sohal, A. S. (2004). Environmental management system adoption by Australasian organizations: Part 1: Reasons, benefits and impediments. Technovation, 24(2), 335–357.

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11

The Association Between Environmental Performance and Financial Performance A Study of the Electricity-Generating Companies in Australia and New Zealand Monir Mir, Abu Mollik, Peter Rampling

Summary This chapter provides empirical evidence on the associations between environmental and financial performance of the electricity generation companies in Australia and New Zealand. The evidences provided in the chapter indicate that the financial performance of Australian and New Zealand electricity-power-generating firms have contributed positively towards their enhanced environmental performance. This finding signifies that rich companies can afford to spend more money for their environmental performance. On the other hand, it indicates that the environmental performance of these companies did not have any positive effects on their financial performance. This finding suggests that firms may face increased marginal costs of their e­ nvironmental-performance-related activities compared to the marginal benefits of these activities and that it is the quality of environmental activities which does matter instead of the quantity of the activities. The evidence provided in this chapter will be valuable source to researchers, practitioners and regulators globally, who are seeking insight and verification that there is a direct benefit to those electricity-power-generating companies that are socially responsible and are committed to environment improvements and change.

Introduction There is consensus among political leaders around the globe about the need for environmental responsiveness as well as the need to regulate emission levels of corporate entities. However, the extent of regulation required to achieve global environmental targets is currently being debated in most countries around the world. In the majority of countries, key sectors such as mining and energy are considered the main environmental pollutants that are candidates for stringent regulation (Mia, Mir, & Hyndman-Rizk, 2014). It is the potential economic impact on these sectors that has the debates dragging on in many of the countries around the globe—both the developed and developing. These countries believe that the costs of inaction or inadequate or delayed action on climate change are going to be many times higher than the costs of starting to mitigate it effectively now. They cannot 179

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even bring themselves to acknowledge what study after study has revealed, that is, the costs of an effective level of emissions reductions will not, in fact, be ruinous for their economies. Clearly, at the centre of this debate is the potential effects that enhanced environmental performance would have on corporate financial performance. Not surprisingly, this debate has cascaded to the level of academics and corporate managers. In most Australian and New Zealand boardrooms a common question that is very often raised is, whether and the extent to which corporate financial performance would be affected if they pursued better environmental performance (Mir & R ­ ahaman, 2011). Earlier, in a 1995 study, Porter and van der Linde (1995, p.120) summarised the various positions as follows: ‘The need for regulation to protect the environment gets widespread but grudging acceptance: widespread because everyone wants a liveable planet, grudging because of the lingering belief that environmental regulations erode competiveness. The prevailing view is that there is an inherent and fixed trade-off: ecology versus the economy. On one side of the trade-off are the social benefits that arise from strict environmental standards. On the other are industry’s private costs for prevention and clean up—costs that lead to higher prices and reduced competitiveness. With argument framed this way, progress on environmental quality has become a kind of arm-wrestling match. One side pushes for tougher standards; the other tries to roll them back. The balance of power shifts one way or the other depending on the prevailing practical winds.’

Against this backdrop, this chapter examines the association between environmental and financial performance of selected Australian and New Zealand electricity-power-generating companies. By examining the above-mentioned issue, this chapter extends the literature about the association between corporate environmental performance and corporate financial performance.

Theoretical Foundation To pursue the objective of empirically examining the association between environmental and financial performance of selected Australian and New Zealand electricity-power-generating companies, this chapter draws on the environmental performance and financial performance linkage theoretical framework espoused by Schaltegger and Synnestvedt (2002). Schaltegger and Synnestvedt (hereafter, S & S) argue that two schools of thought exist regarding the effect of corporate environmental protection on economic success. On the one hand, there are those who opine that the current level of corporate environmental protection often conflicts with the economic success of a company. On the other hand, some contend that not only is current level of corporate environmental protection economically sustainable, but also that the environmental protection practised by a company has beneficial effects on its economic success. S & S argue that beginning at a certain level of economic success (e.g., a certain shareholder value) every environmental protection activity will

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reduce the economic success. S & S further argue that the negative marginal impact on the economic success can be expected to increase leading to a company becoming unprofitable. They also argue that environmental protection practised by a company has a beneficial effect on its economic success. However, they point out that an indefinite number of pollution prevention activities will not increase the financial performance indefinitely. That is, under this point of view, the financial performance first will increase to an optimum point and then will decrease continuously beyond this point. The net marginal benefits from environmental protection will be decreasing and sooner or later the increased environmental effort will represent net costs. S & S further argue that the optimum level of environmental performance would be the one, which maximises economic performance. It is a fact that environmental issues have now become economic realities for many corporations. As discussed previously, S & S hypothesise that environmental issues influence both costs and income of a company and therefore have a more or less direct influence on the economic success of a company. However, S & S also provided an opposing hypothesis where they say that enhanced financial performance also drives environmental performance.

Literature Review and Hypotheses Development One of the widely cited studies on the relationship between a firm’s environmental performance and financial performance was conducted by Jaggi and Freedman (1992) who investigated 13 US firms in the pulp-and-paper- producing sector. They observed a negative association between pollution and financial performance. They found that in the short run a firm’s profitability will be negatively affected by pollution abatement activities involving heavy expenditures. They further argued that as markets reward short-run profit maximisation policies, management is encouraged to focus on operational income generating policies, in most cases, with limited appreciation of less visible social and environmental impacts of corporate operations. Rennings, Schröder and Ziegler (2003) reached similar conclusions when they argued that better environmental or social performances are often achieved at the expense of a firm’s financial performance. Wagner, Schaltegger and Wehrmeyer (2001) and Wagner (2005, 2006) found mixed results from two of their studies and concluded that depending on the specific conditions, it is possible to find a predominantly neutral or predominantly negative relationship between environmental and financial performance. While Jaggi and Freedman’s (1992) findings may describe corporate attitudes in the early 90s, emphasis on global warming over the last decade have seen environmentally sensitive industries come under extensive scrutiny by different stakeholders and the management has no choice but to pay attention to the effect of its operation on the environment.

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Other studies have produced completely different findings. For example, Al-Tuwaijri, Christensen and Hughes (2004) studied interrelations among environmental disclosure, environmental performance and financial performance using a cross-sectional sample of 198 US ‘Standard & Poor’s 500’ firms and concluded that enhanced environmental performance is significantly associated with enhanced financial performance. One important aspect of their study is the contention that financial performance and environmental performance are both related to quality of management. The conclusions of Al-Tuwaijri et al (2004) support an earlier study by Hart and Ahuja (1996) which used the same data source (Standard and Poor’s 500 list of corporations) and found that efforts by companies to prevent pollution and reduce emissions negatively impacted the ‘bottom line’ within one to two years after initiation and thereafter operating performance (return on sales, return on asset) is significantly benefited in subsequent years. Similarly, Carmona-Moreno, Céspedes-Lorente and Burgos-Jiménez (2004) studied the association between environmental performance and financial performance of Spanish hotels and concluded that firms with more developed environmental strategies are associated with higher level of environmental performance, but rejected the idea that environmental performance are positively associated with financial performance. Wagner and Schaltegger (2004) also argue that the existence of a value-oriented corporate environmental strategy would most likely produce a positive relationship between environmental and financial performance. In a 2006 study of the relationship between environmental and financial performance and the influence of different positions on corporate environmental strategies of a set of British and German manufacturing firms across different sectors, Wagner (2006) found that not all industries showed a positive relationship between environmental performance and financial performance, especially, in an environmentally intensive industry such as paper manufacturing. However, Wagner found that corporate environmental strategies and resulting environmental management activities emerged as major factors in moderating the relationship between environmental and financial performance (i.e., he found that a company’s environmental management activities have a positive effect on the drivers of shareholder value). Similar findings were also reported by Salama (2005) and Russo and Fouts (1997) who contended that going green does not necessarily negatively affect the long-run bottom line but on the contrary, depending upon the particular strategies that a company pursues, it very often pays to be green. Seeking to provide additional support for Salama (2005), Clemens (2006) investigated the relationships among green performance, financial performance and green economic incentives for small firms and found a positive relationship between these variables. The study also found that the positive relationship between green and financial performance is greater

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when green economic incentives exist for small firms. Earlier, Hitchens et al. (2003) investigated the association between environmental performance and financial performance of small and medium-sized (SME) European manufacturing firms. Although, unlike Clemens (2006) they did not find a positive association between green performance and financial performance of SMEs, they nonetheless found that in the majority of cases, improved environmental performance is not associated with worsening financial performance. They also concluded that positive economic benefit arising from any particular environmental performance initiative rose as the firm moved up the environmental performance ladder. A careful perusal of the subject reveals studies that support, and indeed an equally large number of studies that refute, the thesis that higher environmental performance negatively impacts on corporate financial performance (see for example the meta-analyses by Margolis & Walsh, 2001; Margolis & Walsh, 2003; Margolis, Elfenbein, & Walsh, 2009). Margolis and Walsh in their 2003 study have provided the following findings when corporate social performance is regarded as the independent variable and corporate financial performance as the dependent variable: ▪▪ Between 1972 and 2002, 127 published studies empirically examined the relationship between companies’ socially responsible conduct and their financial performance. ▪▪ Corporate social performance has been treated as an independent variable, predicting financial performance, in 109 of the 127 studies. ▪▪ Out of these 109 studies, 54 pointed to a positive relationship between corporate social performance and financial performance. Only seven studies found negative relationship; ▪▪ About 28 studies reported non-significant relationships, while 20 reported a mixed set of findings.

A common theme across the studies reviewed above is the focus on whether environmental performance improves financial performance or not. In an interesting and radical departure from the literature, Earnhart and Lizal (2006) reversed the research question to determine whether a firm’s financial performance improves its environmental performance. They used data from the transitional Czech economy from 1993 to 1998 and found that a firm’s successful financial performance improves its future environmental performance. They also observed that state ownership actually improves environmental performance relative to all other ownership types. This observation is consistent with earlier studies conducted by McGuire, Sundgren and Schneeweis (1988) and Stanwick and Stanwick (1998), which concluded that improved corporate social responsibility performance, might primarily be artefacts of pervious high financial performance. ­Margolis and Walsh (2003) provided the following findings when corporate

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social performance is regarded as the dependent variable and corporate financial performance as the independent variable: ▪▪ Corporate social performance has been treated as a dependent variable, predicted by financial performance, in 22 of the 127 studies. ▪▪ In these studies, 16 studies pointed to a positive relationship between corporate financial performance and social performance. ▪▪ In 4 of the 127 studies investigated the relationship in both directions.

In their recent and comprehensive meta-analysis, Margolis et al. (2009) examined 251 different studies published over a 35-year period and found that the overall relationship between corporate environmental and economic performance is positive. As discussed above, existing literatures have investigated extensively the association between corporate environmental performance and corporate financial performance. While majority of the studies have refuted the thesis that higher environmental performance negatively impacts on corporate financial performance, there still exist a large body of literature that supported the thesis. As a result, many unanswered questions relating to the association between corporate social and economic performance still exist. Hence, there is a call for further research to explore the associations between companies’ environmental and financial performance. Moreover, these studies are based on samples drawn from a broad range of industries but surprisingly neglected the energy where emissions and effluents are especially salient. Evidence provided in this chapter fills this void by focusing on providing empirical evidence on the relationship between environmental performance and financial performance of major Australian and New Zealand electricity-powergenerating companies considering the fact that energy-generation sources of these two countries differ significantly. The energy sector industries in both of these countries are most environmentally sensitive as far as the global warming and climate change is concerned. For example, low-cost coal-fired power stations currently produce about 80 per cent of electricity in Australia. Gas is not extensively used in Australia to generate electricity and it is a fact that gas has about half the greenhouse emissions of coal. Therefore, Australian power-generating industry is under increased scrutiny from all levels of stakeholders concerning their environmental performance. On the other hand, New Zealand’s energy industry traditionally sourced power generation from renewable sources such as hydro-powered electricity generation. Given the results of prior research, the following hypotheses are suggested: H1: The financial performance of electric-power-generation companies does not have any effect on environmental performance. H2: The enhanced environmental performance does not drive financial performance of power-generation companies.

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Research Method and Data Collection The research method employed is an empirical quantitative analysis technique by means of extracting data from electricity-power-generating companies from Australia and New Zealand where available between financial years 1997 to 2006. The reason for selecting this data collection period is that the Kyoto protocol to the United Nations Framework Convention on Climate Change came into force from 2005. Therefore, the environmental performance objectives of New Zealand and Australian electricity-power-­ generating companies were not affected by the compliance requirements of Kyoto protocol prior to 2006. On the other hand, the environmental performance objectives of the New Zealand and Australian electricitypower-­generating companies were affected by Kyoto protocol requirements differently after 2006 as Australia and New Zealand companies faced differential levels of Kyoto compliance requirements that came into force after 2005. Data collated is both financial and environmental data, which form both dependent and independent variables that will be tested to ascertain whether, stated hypotheses could either be accepted or rejected.

Research Design and Analyses The sample comprises four New Zealand and four Australian electricitypower-generating companies. Data to calculate the environmental and financial variables were manually collected from the annual reports of the sampled companies over the 10-year period from 1997 to 2006. The analysis was performed based on an unbalanced data set due to non-availability of environmental data on all the variables for all companies for each of the 10 years. Given this limitation of the data set, we applied pooled bivariate and multivariate OLS regression analyses in EViews 7 to test the hypotheses. Observations on the environmental performance for the New Zealand companies were very limited to conduct a separate analysis. Therefore, the analyses were done based on the pooled data of the two countries together. Estimation of coefficients and the t-statistic were based on White’s ­heteroskedasticity-consistent standard errors and co-variance which is available in EViews 7. A wide range of financial performance (FP) measures have been used in earlier studies. Most studies examining the relationship between corporate social responsibility (CSR) and firms financial performance (FP) use either accounting rates of return or market-based measure of financial performance (Margolis et al., 2009). Many studies use return on asset (ROA), return on sales (ROS) or return on equity (ROE) as measures of FP (Simpson & Kohers, 2002; Tsoutsoura, 2004; Rutledge et al., 2014). In this study, we use five measures of FP including ROE and ROS. Other measures are asset turnover ratio (Asset Turnover), net profit before tax (NPBT) and net profit after tax (NPAT). We use three measures of environmental performance such as

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disclosure about CSR, disclosure about carbon dioxide (CARBON) emission and the amount of carbon emission (COD). As CSR and CARBON increases the environmental performance is assumed to increase, while the environmental performance is expected to decrease with the increase in COD. To test the hypothesis H1, the effect of financial performance (FP) on environmental performance (EP), the following multivariate models were specified. CARBONit = α + βFPjit + εit CSRit = α + βFPjit + εit CODit = α + βFPjit + εit

(1) (2) (3)

Where, CSRit= represents the corporate social responsibility of company i at year t; FPjit= represents the financial performance variable j of company i at year t; CARBONit= is the frequency of discloser in the annual report on carbon dioxide emission of company i at year t; CODit= is the amount of carbon dioxide emission of company i at year t; εit = is the error term; and j = 1, . . .  5, is the index of five proxy variables representing the financial performance of a company. The empirical models were selected using step-wise method of model selection including the significant independent variables (i.e., variables with significant t-statistic) of financial performance that best describe the relationship between the dependent and independent variables, that is, with the highest Adjusted R2 (Adj-R2) and F-statistic. To test the hypothesis H2, the effect of firms’ environmental performance on the financial performance, the following bivariate model were specified for each pair of FP and EP variables. FPit = α + βEPit + εit

(4)

The descriptions of the variables are the same as in models (1) to (3) above.

Regression Results and Discussion Hypothesis H1: Hypothesis H1 states that ‘The financial performance of electric-power-generation companies does not have any effect on environmental performance’. To test the hypothesis, we estimate models (1) through model (3). The results are presented in ­Tables 11.1 and 11.2. The F-statistic values of models (1) and (2) indicate that the models are significant at the 1 per cent level, which suggest that the specified

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Table 11.1  Dependent Variable: Environmental Factor CARBON

Independent Variables

Multivariate Regression CARBONit = α + βFPjit + εit (1) Specification Specification Specification Specification Specification 1 2 3 4 5

Intercept

33.681** (5.585)

7.300*** (1.689)

ROS

−2.409* (−3.493)

−0.739* (−2.525)

Asset Turnover

3.146 (0.906)

0.067** (2.499)

NPAT

0.050* (4.000)

−2.941* (−4.381)

−2.010* (−3.526)

0.054* (4.498) 0.023*** (2.187) −0.452 (−.1.625)

ROE

F-statistic

42.252* (4.898)

0.081** (2.355)

NPBT

Adj-R2

28.430* (3.906)

0.027*** (1.943) −0.828 (−1.352)

0.447

0.383

0.224

0.624

0.401

5.041**

7.435*

4.751**

6.545*

3.236***

a t-statistics appear under each coefficient. *Significant at the 1 per cent level; **Significant at the 5 per cent level; *** Significant at the 10 per cent level.

models are strong to explain the variation in the particular dependent/ endogenous variables, that is, CARBON and CSR in this case.1 To remove any heteroskedasticity effect, the models have been estimated with White ­adjusted standard errors and t-statistics. The F-statistic of model (3) is not statistically significant, suggesting that specified model is unable to explain the variation in the amount of carbon dioxide emission (COD). Overall, it can be claimed that the models establish a significant linear relationship between the proxy independent variables representing the firms’ financial performance and the dependent variables represent the firms’ environmental performance. Therefore, we reject hypothesis H1 and conclude that firms’ financial performance has significant effect on their environmental performance. F-statistic values are significant at the 1 per cent level for all the five different specifications (or combinations) of financial performance variables of model (1). The data limitation of small number of observations have forced us to specify the models in two/three variables combination without including control variables which have been used in earlier studies.

1

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188  Chapter 11  The Association Between Environmental and Financial Performance Table 11.2  Dependent Variables: Environmental Factors CSR and COD

Independent Variables Constant

CSRit = α + βFPit + εit (2)

CODit = α + βFPit + εit (3)

11.172** (2.077)

30.146 (1.231)

Asset Turnover NPAT

0.444*** (1.957) 0.053* (4.066)

NPBT

0.099** (2.417)

ROE

−0.414 (1.351)

ROS

−0.529** (−2.086)

−12.001*** (−2.127)

0.259

0.150

3.450**

1.590

Adj-R2 F-statistic

a t-statistics appear under each coefficient. *Significant at the 1 per cent level; **Significant at the 5 per cent level; *** Significant at the 10 per cent level.

The coefficients of four (ROS, NPBT, NPAT and Asset Turnover) out of five financial performance variables, except ROE, are significant (significant t-statistic) in all the models in Tables 11.1 and 11.2, indicating that these are appropriate proxies for a firm’s financial performance. Asset Turnover, NPBT, NPAT are new variables we explored in this study and found to have significant positive effects on the firms’ environmental performance, including CSR. The standard accounting measures of financial performance used in the earlier studies such as ROE and ROS are found to have negative effects on the firms’ environmental performance although the effect of ROE is not statistically significant. The finding is consistent with the majority of the findings of the previous studies that have examined the effect of firms’ financial performance on their environmental performance (Margolis & Walsh, 2003). Hypothesis H2: Hypothesis H2 states that ‘The enhanced environmental performance does not drive financial performance of power-generation companies’. To test the hypothesis, we estimate model (4) in bivariate form with the proxy variables of firms’ financial performance. The results presented in Table 11.3 depicts

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Chapter 11  The Association Between Environmental and Financial Performance  189

Table 11.3  Dependent Variables: Financial Performance Factors

Bivariate Regression Model specified as: FPit = α + βEPit + εit (4) Independent Variables

Asset Turnover

NPAT

NPBT

ROS

ROE

Panel A: CSR Constant

240.635* (6.156)

143.944* (4.526)

208.365* (4.796)

12.975* (5.862)

13.237* (7.415)

CSR

−2.712 (−1.280)

5.757* (2.559)

7.272** (2.398)

−0.115 (−1.123)

−0.001 (−0.011)

Adj−R2

0.026

0.233

0.209

−0.002

−0.050

F−statistic

1.579

6.064**

5.283**

0.947

0.000

Panel B: CARBON Constant

173.936* (5.712)

223.558** (2.206)

320.815** (2.269)

15.307* (11.598)

14.691* (6.544)

CARBON

0.212 (0.110)

2.193 (0.494)

2.413 (0.393)

−0.226* (−3.376)

−0.075 (−0.695)

Adj-R2

−0.200

−0.085

−0.094

0.345

−0.061

0.009

0.215

0.141

6.275**

0.425

F-statistic

Panel C: COD Constant

259.041* (7.313)

199.614* (4.598)

285.467* (4.900)

13.427* (10.344)

9.747* (7.223)

COD

−0.447 (−0.688)

0.664 (0.670)

0.661 (0.545)

−0.044 (−1.613)

0.019 (0.640)

−0.081

−0.079

−0.093

0.172

−0.083

0.249

0.269

0.151

1.867

0.235

Adj−R2 F−statistic

a t-statistics appear under each coefficient. *Significant at the 1 per cent level; **Significant at the 5 per cent level; *** Significant at the 10 per cent level.

that the coefficients of the variable CSR has significant positive effect on firms’ f­inancial performance measure of net profit after tax (NPAT) and net profit before tax (NPBT) as the coefficients are significant and F ­ -statistics of the regressions are also significant. The environmental variable CARBON is found to have significant negative effect only on firms’ return on sales (ROS). Except these three cases, out of 15 regressions estimated, neither

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190  Chapter 11  The Association Between Environmental and Financial Performance

the coefficients of independent environmental variables nor the F ­ -statistics of the remaining 12 regressions are statistically significant, suggesting that the firms’ environmental variables such as CSR, CARBON and COD do not have any significant effect on the firms’ financial variables. If we exclude the CSR’s effect on two new proxy variables, it reduces the significant e­ ffect of only CARBON on ROS, further weakening the claim of significant effect. Thus, in overall consideration, we accept the hypothesis H2 and conclude that the enhanced environmental performance of electric-power-­generation companies of Australia and New Zealand does not drive their financial performance.

Discussion of the Results In this chapter, we examined the relationship between the environmental performance and financial performance of electricity-power-generating companies in Australia and New Zealand. Overall, the findings suggest that the firms’ financial performance has significant effect on their environmental performance. However, the firms’ environmental performance does not have any such significant effect on their financial performance. These findings corroborate findings of previous studies on the issue, especially in regard to the findings on the effect of financial performance on CSR. A closer examination of the results reveal that CSR disclosure is associated with a negative impact on the firms’ accounting-based financial performance measures, that is, ROS and ROE. This is consistent with findings of Rutledge et al. (2014) and Zhu and Yao (2010) who documented a negative association between the variables. However, our study shows that this relationship between firms’ CSR and their financial performance is dependent on the choice of the proxy variable for the firms’ financial performance as we find that CSR has significant negative effects on firms’ NPAT and NPBT (Table 11.3). These results suggest that firms’ after tax and before tax profits tend to increase with increased CSR activities of firms. Nonetheless, based on our overall results, we reject hypothesis H1 that ‘The financial performance of electricity power generation companies does not have any effect on environmental performance’ and accept hypothesis H2 that ‘The enhanced environmental performance does not drive financial performance of electricity power generation companies’.

Conclusion The debate about the perceived association between environmental performance and financial performance still remains inconclusive. The meta-­ analyses of Margolis and Walsh (2003) pointed out that most studies, using CSR as independent variable predicted by financial performance, have found positive relationship between firms’ economic performance and firms’ ­environmental performance implying that financially sound firms can

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afford to spend more monies for their environmental performance. The empirical evidences emerging from the research reported in this chapter support this view. On the other hand, while the above meta-analyses pointed out that the majority of the firms’ environmental performance have contributed towards their enhanced financial performance, the evidences provided in this chapter contradict and find that the enhanced environmental performance of Australian and New Zealand’s electricity-power-generating companies did not contribute to enhancing their financial performance. Electricity-power-generating companies in these two countries are under social and political pressures to perform better environmentally and perhaps the marginal costs of their environmental-performance-related activities outweigh their marginal benefits. Wagner and Schaltegger (2004) and ­Wagner (2006) argued that firms that actively pursue a value-oriented corporate environmental strategy seem to be most likely to achieve a positive relationship between environmental and financial performance.

Further Studies and Limitations The evidence provided in this chapter may further be expanded through incorporating and analysing data from 2007 to present examining the effect of the ratification of Kyoto protocol by these countries. Stated limitation includes, although the study was for the period 1997 to 2006 which is ample for a longitudinal study, that the sample size used was quite small. Hence, the findings should be interpreted cautiously in terms of generalisation.

References Al-Tuwaijri, S., Christensen, T., & Hughes, K., II. (2004). The relations among environmental disclosure, environmental performance, and economic performance: A simultaneous equations approach. Accounting, Organizations and Society, 29, 447–471. Carmona-Moreno, E., Céspedes-Lorente, J., & Burgos-Jiménez, J. (2004). Environmental strategies in Spanish hotels: Contextual factors and performance. The Service Industries Journal, 24(3), 101–130. Clemens, B. (2006). Economic incentives and small firms: Does it pay to be green? Journal of Business Research, 59, 492–500. Earnhart, D., & Lizal, L. (2006). Effects of ownership and financial performance on corporate environmental performance. Journal of Comparative Economics, 34, 111–129. Hart, S., & Ahuja, G. (1996). Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business Strategy and the Environment, 5, 30–37. Hitchens, D., Clausen, J., Trainor, M., Keil, M., & Thankappan, S. (2003). Competitiveness, environmental performance and management of SMEs. Greener Management International, 44, Winter, 45–57.

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192  Chapter 11  The Association Between Environmental and Financial Performance Jaggi, B., & Freedman, M. (1992). An examination of the impact of pollution performance on economic and market performance: Pulp and paper firms. Journal of Business Finance and Accounting, 19(5), 697–713. McGuire, J., Sundgren, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(4), 854–872. Margolis, J., & Walsh, J. (2001). People and profits? The search for a link between a company’s social and financial performance. New Jersey, NJ: Lawrence Erlbaum. Margolis, J., & Walsh, J. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48, 268–305. Margolis, J., Elfenbein, H., & Walsh, J. (2009). Does it pay to be good. . . and does it matter? A meta-analysis of the relationship between corporate social and f­ inancial performance. SSRN Working Paper. Retrieved from http://ssrn.com/abstract= 1866371 Mia, P., Mir, M., & Hyndman-Rizk, N. (2014). Impacts of legislative events on corporate greenhouse gas disclosure. Paper presented at Accounting for Sustainability Conference 2014, RMIT, Melbourne, Australia. Mir, M., & Rahaman, A. (2011). In pursuit of environmental excellence: A stakeholder analysis of the environmental management strategies and performance of an Australian energy company. Accounting, Auditing & Accountability Journal, 24(7), 848–878. Porter, M., & van der Linde, C. (1995). Green and competitive—ending the stalemate. Harvard Business Review, 73(5), 120–134. Rennings, K., Schröder, M., & Ziegler, A. (2003). The economic performance of European stock corporations—does sustainability matter? Greener Management International, 44, Winter, 33–43. Russo, M., & Fouts, P. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3), 534–559. Rutledge, R., Karim, K., Aleksanyan, M., & Wu, C. (2014). An examination of the relationship between corporate social responsibility and financial performance: The case of the Chinese state-owned enterprises. Advance in Environmental Accounting & Management, 5, 1–22. Salama, A. (2005). A note on the impact of environmental performance on financial performance. Structural Change and Economic Dynamics, 16, 413–421. Schaltegger, S., & Synnestvedt, T. (2002). The link between ‘green’ and economic success: Environmental management as the crucial trigger between environmental and economic performance. Journal of Environment Management, 65, 339–346. Simpson, W., & Kohers, T. (2002). The link between corporate social and financial performance: Evidence from the banking industry. Journal of Business Ethics, 35, 97–109. Stanwick, P., & Stanwick, S. (1998). The relationship between corporate social performance and organisational size, financial performance, and environmental performance: An empirical examination. Journal of Business Ethics, 17, 195–204. Tsoutsoura, M. (2004). Corporate social responsibility and financial performance. Working Paper Series. Centre for Responsible Business, University of California, Berkeley, CA.

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Wagner, M. (2005). How to reconcile environmental and economic performance to improve corporate sustainability: Corporate environmental strategies in the European paper industry. Journal of Environmental Management, 76, 105–118. Wagner, M. (2006). Achieving environmental-economic sustainability through corporate environmental strategies—empirical evidence on environmental shareholder value. In S. Schaltegger, M. Bennett, & R. Burritt, (Eds.), Sustainability accounting and reporting (pp. 183–206). The Netherlands: Springer. Wagner, M., & Schaltegger, S. (2004). The effect of corporate environmental strategy choice and environmental performance on competitiveness and economic performance: An empirical study of EU manufacturing. European Management Journal, 22(5), 557–572. Wagner, M., Schaltegger, S., & Wehrmeyer, W. (2001). The relationship between the environmental and economic performance of firms. Greener Management International, 34, Summer, 95–108. Zhu, Y., & Yao, H. (2010). The empirical research about the relationship between CSR and financial performance. Research on Financial and Economic Issues, 2, 102–106.

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index A

B

Employees, 13; 48; 56; 67; 70; 72–74; 81–82; 85; 88–89; 91; 100; 110; 112; 117–120; 122–123; 127–128; 136–140; 142; 151; 157–160; 168; 170; 173–175 Environment, 8–9; 24–27; 43; 45; 47–49; ­52–53; 57–60; 66–68; 82; 90–92; 109–110; 112–113; 116; 118–120; 123; 125; 128–132; 134–142; 151; 165–175; 179–191

Biodiversity, 45; 54 Board of directors, 75–76; 89; 149

G

C

Global warming, 29; 31; 55; 166; 170; 181; 184

Accountability, 13; 26; 34–35; 65; 70; 76; 127; 151; 159–161 Agency, 66 Assessment, 14; 73; 103; 150–151; 154; 156; 159–160

Capitalism, 41 Carbon labelling, 16 Carbon taxing, 16 Citizenship, 32; 68–70; 115–116; 149; 151; 153–155; 157; 160–161 Climate change, 28; 179; 184–185 Communication, 100–101; 111; 113; ­120–122; 149; 153; 155 Community, 16; 31–32; 44–46; 57; 59–60; 66; 74; 76; 78; 100–107; 111; 132–133; 138–139 Corporate governance, 76; 78; 89; 107; 110; 115–116; 153 Customers, 5; 14–16; 67; 73–74; 76; 82–83; 85–86; 88–89; 91–93; 100; 110; 116; 118; 136–139; 142

D Dialogue, 65; 78; 117; 119; 151 Disclosure, 67; 127; 149–153; 159; 169; 182; 186; 190 Diversified era, 11; 15 Diversity, 59; 74–75; 77; 116; 151–152

E Eco-labelling, 118 Education, 70; 76; 88; 121; 129; 149 Emission, 30–31; 70; 77; 125; 166; 169; ­179–180; 182; 184; 186–187

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H Health, 28; 54; 119; 132–134; 161 Human resource, 13; 109–110; 113; 116; 141

I Infrastructure, 27 Integrity, 12; 35; 138; 160 Investment, 5; 25; 46; 49; 70; 71; 73; 75–78; 83–84; 90; 92; 142; 154; 156; 166; 168–169; 171

M Market, 6; 14–15; 24; 42; 44; 52; 57; 60; 67; 71; 73; 77; 87–89; 91; 93; 99; 107; 128; 130; 143; 169; 181; 185 Media, 9; 65; 89; 100; 133; 142; 150; 156 Multidimensional era, 6; 7; 8; 15; 17

N Natural resources, 43; 45–46; 53–55 NGOs, 52; 74; 78; 100–104; 107

O One-dimensional era, 5; 15; 16 Orthodoxy era, 5; 15

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196 Index

P

T

Philanthropy, 14; 78; 115; 123; 150 Poverty, 27–28; 42–43 Profitability, 47; 166; 168; 181

Transparency, 13; 65; 68; 122; 127; 151; 153; 160 Trust, 24; 68; 74; 81; 83; 102–104

R

U

Recycling, 54; 58; 77; 134 Relationships, 3; 10; 65–69; 73–78; 85; 91; 99–103; 105–107; 130; 182–183

Union, 67; 90; 112; 115; 117; 118; 121

S

Value, 10–12; 14; 44; 47; 50; 56; 60; 66–75; 78–79; 85; 88; 93; 99; 100–102; ­111–112; 115–117; 120–121; 123; 151; 154; 158; 161; 167; 169; 180; 182; 191 Vision, 16; 17; 56; 68; 115; 117; 150

Safety, 6; 28; 76; 119 Shareholders, 5–6; 11; 24; 56; 66; 71; 88–89; 110; 118; 138–139; 169 SME; 125–132; 135–143; 183 Social contract, 3, 16; 26; 150; 160 Stakeholders, 9–11; 24–25; 34–36; 66–75; 78–79; 81–86; 91–93; 99–101; 103; 105–106; 109–113; 115–124; 127–128; 138; 150; 153; 167; 171; 181; 184 Strategy, 17; 35; 36; 43; 46–48; 50; 53; 56; 57; 60; 66; 68; 70; 72; 75; 78; 81; 84; 88; 90–92; 118; 121; 127; 140; 151–153; 156; 159; 161; 165; 175; 182; 191 Suppliers, 9; 88–89; 100; 118; 125; 139

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V

W Waste, 25; 27–28; 45–46; 49; 53–54; 77; 134; 168 Water, 27; 29–30; 45

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