The Irrationality of Expecting Businesses to Engage in Socially Responsible Behaviour

Trevor HunterKing’s University College

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What do Businesses do?

• They create, maximize and transfer wealth• They also:

– Create most of the world’s products, innovation, food, pharmaceuticals, etc. to allow people to live

– Provide most employment to allow people to live– Provide investment opportunity to spur innovation and

economic growth– Provide the bulk of governmental revenue to fund social

programs, educational institutions, to deal with societal problems

• They’re kind of importantTrevor Hunter

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Why do We Expect Businesses to Follow CSR

The answer:

We are irrational hypocrites!

Trevor Hunter

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Why do Businesses Act “Unethically”?

They have no choice! Businesses are in a no-win situation. We expect them to do the impossible:– Businesses are expected to hire a lot of people, at

home, pay everyone a living wage, provide a broad selection of the highest quality goods for the lowest price, produced sustainably, fairly, locally and organically while providing a quarterly return on investment in the double-digits and support social causes!

Irrational!

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Why do Businesses Act “Unethically”?

In the mean time we benefit from business’ activities and have the luxury of criticizing them because their operations (that we despise) allow us a lifestyle that is cushy enough to have no other cares than to worry about how bad businesses are.

Hypocrisy!

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Fundamental Question

• Should businesses act in a socially responsible manner? Depends on what you think CSR is

• Most people think of things like:– No sweat shops– CIBC Run for the Cure

• In reality it is much more sinister

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What is Corporate Social Responsibility?

• Definition depends upon the perspective the business takes as to WHY it might engage in CSR:– Legitimacy : Acting in the firm’s interest – most

common form– Managerial discretion: acting in the individual’s

interest – more common– Public responsibility: acting in society’s interest –

less common

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The Business Case for CSR

• Friedman Perspective:– Business should only be about profit maximization– When a business allocates resources to

endeavours other than profit maximization it is not fulfilling its fiduciary duty

– Allocating profits to CSR activities is like a tax on the owners of the firm - the shareholders – and firm’s do not have this right.

– If I want to give to charity I will do it with my money – the firm cannot use my money to do something it wants to do

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The Business Case for CSR

• Firms are more likely to sustain long-term success for the benefit of shareholders if they engage in socially responsible behaviour because they then become “legitimate” in the eyes of their stakeholders

• Legitimacy = Societal acceptance

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Strategic Uses of CSR

• Proactive – CSR to:–Attract customers – we’re just like you!–Reduce governmental/NGO/interest

group scrutiny – reduces indirect oversight costs –Limit or pre-empt bad press–Improve reputation, perceptions and

goodwill

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Strategic Uses of CSR

• The calculation:

–Action 1 will cost $1,000,000, help 10,000 people and 100,000 people will know about it

–Action 2 will cost $1,000,000, help 5,000 people and 150,000 people will know about it

–Choose Action 2 – make sure your name is more predominant than the cause

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Strategic Uses of CSR

• Proactive – CSR to:–Show your “soft” side–Get your name noticed–Divert attention–Attract “enlightened,” talented

employees and keep them happy. Happy staff increases productivity

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Strategic Uses of CSR

• Reactive – Being socially responsible in order to:– Correct past mistakes– Clean up image/reputation– Respond to boycotts– Meet legal requirements– Appease shareholders/employees/interest

groups/NGOs/governments/stakeholders/bloggers– Example: Performance-based CEO pay = higher

share price

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Problems with CSR

• CSR, as it is defined and utilized by business, is not “ethical”. It is used as a tool to fool us. Businesses are good at it and WE FALL FOR IT!

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Problems with CSR

• Perspective on what is “socially responsible” is dependent upon a given stakeholder’s morality or ethics which are often faith or religion based and not universal

• What if my beliefs are different than yours – Who is right and who is wrong and who is in the position to judge? A business? A manager?

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Problems with Ethics

• Ethics are culturally and socially based• Cultures and societies differ• Ethics differ between cultures and societies• Ethical differences further complicate

international business

How then, can a business act ethically?

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Ethics in Business

1. Define company rights that transcend borders and extend them to all stakeholders that are narrow but consistent with company strategy

2. Embrace moral absolutes which are independent of specific cultural norms, values and beliefs and are applied to everyone equally and therefore may be at times, higher than what are embraced in a given country

Ethics in Business

• The firm develops ethical standards that are “absolute” by evaluating all the perspectives of stakeholders around the world to find the “highest” standard.

• Members are then socialized to that standard (affects hiring and filtering mechanisms).

• Standards are communicated and incentives are created to support desired ethical behaviours.

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Ethics in Business

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EthicalStandard

Country 1 2 3

World Average

Firm global Standard:based on “highest”levels within thefirm’s locations

Ethical

Unethical

Unethical

Highest inFirm

Lowest in Firm

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Consumer/Investor Expectations and CSR

• Realities of Western consumer and investor expectations make operating in a truly ethical way very difficult, because ethics cost

• The only way to meet price and profit expectations is to move operations off-shore to a developing country and exploit lower factor costs – if a company doesn’t meet expectations someone else will

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Consumer/Investor Expectations and CSR

• Consumer and investor expectations create a one-way street that must end in exploitation– Keep in mind the consumers are you and the

investors are not just big institutions, they are you, your families and me too

• How can we vilify businesses for doing exactly what we tell them to do? Whose fault is it really?

• If we really want change we have to change our expectations – if there is a business case for ethics, businesses will follow it

Trevor Hunter