Corporate social responsibility

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Corporate social responsibility (CSR), also known as corporate responsibility, corporate
citizenship, responsible business, sustainable responsible business (SRB), or corporate
social performance,[1] is a form of corporate self-regulation integrated into a business model.
Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business
would monitor and ensure its support to law, ethical standards, and international norms.
Consequently, business would embrace responsibility for the impact of its activities on the
environment, consumers, employees, communities, stakeholders and all other members of the
public sphere. Furthermore, CSR-focused businesses would proactively promote the public
interest by encouraging community growth and development, and voluntarily eliminating
practices that harm the public sphere, regardless of legality. Essentially, CSR is the deliberate
inclusion of public interest into corporate decision-making, and the honoring of a triple bottom
line: People, Planet, Profit.
The practice of CSR is subject to much debate and criticism. Proponents argue that there is a
strong business case for CSR, in that corporations benefit in multiple ways by operating with a
perspective broader and longer than their own immediate, short-term profits. Critics argue that
CSR distracts from the fundamental economic role of businesses; others argue that it is nothing
more than superficial window-dressing; others yet argue that it is an attempt to pre-empt the role
of governments as a watchdog over powerful multinational corporations. Corporate Social
Responsibility has been redefined throughout the years. However, it essentially is titled to aid to
an organization's mission as well as a guide to what the company stands for and will uphold to its
consumers.
Development Business ethics is one of the forms of applied ethics that examines ethical
principles and moral or ethical problems that can arise in a business environment.
In the increasingly conscience-focused marketplaces of the 21st century, the demand for more
ethical business processes and actions (known as ethicism) is increasing. Simultaneously,
pressure is applied on industry to improve business ethics through new public initiatives and
laws (e.g. higher UK road tax for higher-emission vehicles).
Business ethics can be both a normative and a descriptive discipline. As a corporate practice and
a career specialization, the field is primarily normative. In academia, descriptive approaches are
also taken. The range and quantity of business ethical issues reflects the degree to which business
is perceived to be at odds with non-economic social values. Historically, interest in business
ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and
within academia. For example, today most major corporate websites lay emphasis on
commitment to promoting non-economic social values under a variety of headings (e.g. ethics
codes, social responsibility charters). In some cases, corporations have re-branded their core
values in the light of business ethical considerations (e.g. BP's "beyond petroleum"
environmental tilt).
The term CSR came in to common use in the early 1970s, after many multinational corporations
formed, although it was seldom abbreviated. The term stakeholder, meaning those on whom an
organization's activities have an impact, was used to describe corporate owners beyond
shareholders as a result of an influential book by R Freeman in 1984.[2]
ISO 26000 is the recognized international standard for CSR (currently a Draft International
Standard). Public sector organizations (the United Nations for example) adhere to the Triple
Bottom Line (TBL). It is widely accepted that CSR adheres to similar principles but with no
formal act of legislation. The UN has developed the Principles for Responsible Investment as
guidelines for investing entities.

Contents
[hide]
• 1 Approaches
• 2 Social accounting, auditing, and reporting
• 3 Potential business benefits
○ 3.1 Human resources
○ 3.2 Risk management
○ 3.3 Brand differentiation
○ 3.4 License to operate
• 4 Criticisms and concerns
○ 4.1 CSR and the nature of business
○ 4.2 CSR and questionable motives
○ 4.3 Ethical consumerism
○ 4.4 Globalization and market forces
○ 4.5 Social awareness and education
○ 4.6 Ethics training
○ 4.7 Laws and regulation
○ 4.8 Crises and their consequences
○ 4.9 Stakeholder priorities
• 5 See also
• 6 Footnotes
• 7 References
• 8 Further reading

[edit] Approaches
Some commentators have identified a difference between the Continental European and the
Anglo-Saxon approaches to CSR.[3] And even within Europe the discussion about CSR is very
heterogeneous.[4]
An approach for CSR that is becoming more widely accepted is community-based development
approach. In this approach, corporations work with local communities to better themselves. For
example, the Shell Foundation's involvement in the Flower Valley, South Africa. In Flower
Valley they set up an Early Learning Centre to help educate the community's children as well as
develop new skills for the adults. Marks and Spencer is also active in this community through the
building of a trade network with the community - guaranteeing regular fair trade purchases.
Often activities companies participate in are establishing education facilities for adults and
HIV/AIDS education programmes. The majority of these CSR projects are established in Africa.
JIDF For You, is an attempt to promote these activities in India.
A more common approach of CSR is philanthropy. This includes monetary donations and aid
given to local organizations and impoverished communities in developing countries. Some
organizations[who?] do not like this approach as it does not help build on the skills of the local
people, whereas community-based development generally leads to more sustainable
development.[clarification needed Difference between local org& community-dev? Cite]
Another approach to CSR is to incorporate the CSR strategy directly into the business strategy of
an organization. For instance, procurement of Fair Trade tea and coffee has been adopted by
various businesses including KPMG. Its CSR manager commented, "Fairtrade fits very strongly
into our commitment to our communities."[5]
Another approach is garnering increasing corporate responsibility interest. This is called Creating
Shared Value, or CSV. The shared value model is based on the idea that corporate success and
social welfare are interdependent. A business needs a healthy, educated workforce, sustainable
resources and adept government to compete effectively. For society to thrive, profitable and
competitive businesses must be developed and supported to create income, wealth, tax revenues,
and opportunities for philanthropy. CSV received global attention in the Harvard Business
Review article Strategy & Society: The Link between Competitive Advantage and Corporate
Social Responsibility [1] by Michael E. Porter, a leading authority on competitive strategy and
head of the Institute for Strategy and Competitiveness at Harvard Business School; and Mark R.
Kramer, Senior Fellow at the Kennedy School at Harvard University and co-founder of FSG
Social Impact Advisors. The article provides insights and relevant examples of companies that
have developed deep linkages between their business strategies and corporate social
responsibility. Many approaches to CSR pit businesses against society, emphasizing the costs
and limitations of compliance with externally imposed social and environmental standards. CSV
acknowledges trade-offs between short-term profitability and social or environmental goals, but
focuses more on the opportunities for competitive advantage from building a social value
proposition into corporate strategy.
[edit] Social accounting, auditing, and reporting
Main article: Social accounting
Taking responsibility for its impact on society means first and foremost that a company must
account for its actions. Social accounting, a concept describing the communication of social and
environmental effects of a company's economic actions to particular interest groups within
society and to society at large, is thus an important element of CSR.[6]
Social accounting emphasizes the notion of corporate accountability. D. Crowther defines social
accounting in this sense as "an approach to reporting a firm’s activities which stresses the need
for the identification of socially relevant behavior, the determination of those to whom the
company is accountable for its social performance and the development of appropriate measures
and reporting techniques." [7]
A number of reporting guidelines or standards have been developed to serve as frameworks for
social accounting, auditing and reporting including:
 • AccountAbility's AA1000 standard, based on John Elkington's triple bottom line (3BL)
reporting
• Accounting for Sustainability's Connected Reporting Framework
• The Fair Labor Association conducts audits based on its Workplace Code of Conduct and
posts audit results on the FLA website.
• The Fair Wear Foundation takes a unique approach to verifying labour conditions in
companies' supply chains, using interdisciplinary auditing teams.
• Global Reporting Initiative's Sustainability Reporting Guidelines
• GoodCorporation's Standard developed in association with the Institute of Business
Ethics
• Earthcheck Certification / Standard
• Social Accountability International's SA8000 standard
• The ISO 14000 environmental management standard
• The United Nations Global Compact promotes companies reporting in the format of a
Communication on Progress (COP). A COP report describes the company's
implementation of the Compact's ten universal principles.
• The United Nations Intergovernmental Working Group of Experts on International
Standards of Accounting and Reporting (ISAR) provides voluntary technical guidance on
eco-efficiency indicators, corporate responsibility reporting, and corporate governance
disclosure.
• Verite's Monitoring Guidelines
The FTSE Group publishes the FTSE4Good Index, an evaluation of CSR performance of
companies.
In some nations legal requirements for social accounting, auditing and reporting exist (e.g. in the
French bilan social), though international or national agreement on meaningful measurements of
social and environmental performance is difficult. Many companies now produce externally
audited annual reports that cover Sustainable Development and CSR issues ("Triple Bottom Line
Reports"), but the reports vary widely in format, style, and evaluation methodology (even within
the same industry). Critics dismiss these reports as lip service, citing examples such as Enron's
yearly "Corporate Responsibility Annual Report" and tobacco corporations' social reports.
In South Africa, as of June 2010, all companies listed on the Johannesburg Stock Exchange
(JSE) were required to produce an integrated report in place of an annual financial report and
sustainability report[8]. An integrated report includes environmental, social and economic
performance alongside financial performance information and is expected to provide users with a
more holistic overview of a company. However, this requirement was implemented in the
absence of any formal or legal standards for an integrated report. An Integrated Reporting
Committee (IRC) was established to issue guidelines for good practice in this field.
[edit] Potential business benefits
The scale and nature of the benefits of CSR for an organization can vary depending on the nature
of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting
business to adopt measures beyond financial ones (e.g., Deming's Fourteen Points, balanced
scorecards). Orlitzky, Schmidt, and Rynes[9] found a correlation between social/environmental
performance and financial performance. However, businesses may not be looking at short-run
financial returns when developing their CSR strategy.
The definition of CSR used within an organization can vary from the strict "stakeholder impacts"
definition used by many CSR advocates and will often include charitable efforts and
volunteering. CSR may be based within the human resources, business development or public
relations departments of an organisation,[10] or may be given a separate unit reporting to the CEO
or in some cases directly to the board. Some companies may implement CSR-type values
without a clearly defined team or programme.
The business case for CSR within a company will likely rest on one or more of these arguments:
[edit] Human resources
A CSR programme can be an aid to recruitment and retention,[11] particularly within the
competitive graduate student market. Potential recruits often ask about a firm's CSR policy
during an interview, and having a comprehensive policy can give an advantage. CSR can also
help improve the perception of a company among its staff, particularly when staff can become
involved through payroll giving, fundraising activities or community volunteering. See also
Corporate Social Entrepreneurship, whereby CSR can also be driven by employees' personal
values, in addition to the more obvious economic and governmental drivers.
[edit] Risk management
Managing risk is a central part of many corporate strategies. Reputations that take decades to
build up can be ruined in hours through incidents such as corruption scandals or environmental
accidents. These can also draw unwanted attention from regulators, courts, governments and
media. Building a genuine culture of 'doing the right thing' within a corporation can offset these
risks.[12]
[edit] Brand differentiation
In crowded marketplaces, companies strive for a unique selling proposition that can separate
them from the competition in the minds of consumers. CSR can play a role in building customer
loyalty based on distinctive ethical values.[13] Several major brands, such as The Co-operative
Group, The Body Shop and American Apparel[14] are built on ethical values. Business service
organizations can benefit too from building a reputation for integrity and best practice.
[edit] License to operate
Corporations are keen to avoid interference in their business through taxation or regulations. By
taking substantive voluntary steps, they can persuade governments and the wider public that they
are taking issues such as health and safety, diversity, or the environment seriously as good
corporate citizens with respect to labour standards and impacts on the environment.
[edit] Criticisms and concerns
Critics of CSR as well as proponents debate a number of concerns related to it. These include
CSR's relationship to the fundamental purpose and nature of business and questionable motives
for engaging in CSR, including concerns about insincerity and hypocrisy.
[edit] CSR and the nature of business
Milton Friedman and others have argued that a corporation's purpose is to maximize returns to its
shareholders, and that since (in their view), only people can have social responsibilities,
corporations are only responsible to their shareholders and not to society as a whole. Although
they accept that corporations should obey the laws of the countries within which they work, they
assert that corporations have no other obligation to society. Some people perceive CSR as
incongruent with the very nature and purpose of business, and indeed a hindrance to free trade.
Those who assert that CSR is contrasting with capitalism and are in favor of neoliberalism argue
that improvements in health, longevity and/or infant mortality have been created by economic
growth attributed to free enterprise.[15]
Critics of this argument perceive neoliberalism as opposed to the well-being of society and a
hindrance to human freedom. They claim that the type of capitalism practiced in many
developing countries is a form of economic and cultural imperialism, noting that these countries
usually have fewer labor protections, and thus their citizens are at a higher risk of exploitation by
multinational corporations.[16]
A wide variety of individuals and organizations operate in between these poles. For example, the
REALeadership Alliance asserts that the business of leadership (be it corporate or otherwise) is
to change the world for the better.[17] Many religious and cultural traditions hold that the
economy exists to serve human beings, so all economic entities have an obligation to society
(e.g., cf. Economic Justice for All). Moreover, as discussed above, many CSR proponents point
out that CSR can significantly improve long-term corporate profitability because it reduces risks
and inefficiencies while offering a host of potential benefits such as enhanced brand reputation
and employee engagement.
[edit] CSR and questionable motives
Some critics believe that CSR programs are undertaken by companies such as British American
Tobacco (BAT),[18] the petroleum giant BP (well-known for its high-profile advertising
campaigns on environmental aspects of its operations), and McDonald's (see below) to distract
the public from ethical questions posed by their core operations. They argue that some
corporations start CSR programs for the commercial benefit they enjoy through raising their
reputation with the public or with government. They suggest that corporations which exist solely
to maximize profits are unable to advance the interests of society as a whole.[19]
Another concern is when companies claim to promote CSR and be committed to Sustainable
Development whilst simultaneously engaging in harmful business practices. For example, since
the 1970s, the McDonald's Corporation's association with Ronald McDonald House has been
viewed as CSR and relationship marketing. More recently, as CSR has become mainstream, the
company has beefed up its CSR programs related to its labor, environmental and other
practices[20] All the same, in McDonald's Restaurants v Morris & Steel, Lord Justices Pill, May
and Keane ruled that it was fair comment to say that McDonald's employees worldwide 'do badly
in terms of pay and conditions'[21] and true that 'if one eats enough McDonald's food, one's diet
may well become high in fat etc., with the very real risk of heart disease.'[22]
Shell has a much-publicized CSR policy and was a pioneer in triple bottom line reporting, but
this did not prevent the 2004 scandal concerning its misreporting of oil reserves, which seriously
damaged its reputation and led to charges of hypocrisy. Since then, the Shell Foundation has
become involved in many projects across the world, including a partnership with Marks and
Spencer (UK) in three flower and fruit growing communities across Africa.
Critics concerned with corporate hypocrisy and insincerity generally suggest that better
governmental and international regulation and enforcement, rather than voluntary measures, are
necessary to ensure that companies behave in a socially responsible manner. Others, such as
Patricia Werhane argue that CSR should be looked more upon as a Corporate Moral
Responsibility, and limit the reach of CSR by focusing more on direct impacts of the
organization as viewed through a systems perspective to identify stakeholders.
[edit] Ethical consumerism
The rise in popularity of ethical consumerism over the last two decades can be linked to the rise
of CSR. As global population increases, so does the pressure on limited natural resources
required to meet rising consumer demand (Grace and Cohen 2005, 147). Industrialization, in
many developing countries, is booming as a result of both technology and globalization.
Consumers are becoming more aware of the environmental and social implications of their day-
to-day consumer decisions and are therefore beginning to make purchasing decisions related to
their environmental and ethical concerns. However, this practice is far from consistent or
universal.
[edit] Globalization and market forces
As corporations pursue growth through globalization, they have encountered new challenges that
impose limits to their growth and potential profits. Government regulations, tariffs,
environmental restrictions and varying standards of what constitutes "labor exploitation" are
problems that can cost organizations millions of dollars. Some view ethical issues as simply a
costly hindrance, while some companies use CSR methodologies as a strategic tactic to gain
public support for their presence in global markets, helping them sustain a competitive advantage
by using their social contributions to provide a subconscious level of advertising. (Fry, Keim,
Meiners 1986, 105) Global competition places a particular pressure on multinational
corporations to examine not only their own labor practices, but those of their entire supply chain,
from a CSR perspective.
[edit] Social awareness and education
The role among corporate stakeholders is to work collectively to pressure corporations that are
changing. Shareholders and investors themselves, through socially responsible investing are
exerting pressure on corporations to behave responsibly. Non-governmental organizations are
also taking an increasing role, leveraging the power of the media and the Internet to increase
their scrutiny and collective activism around corporate behavior. Through education and
dialogue, the development of community in holding businesses responsible for their actions is
growing (Roux 2007).
[edit] Ethics training
The rise of ethics training inside corporations, some of it required by government regulation, is
another driver credited with changing the behavior and culture of corporations. The aim of such
training is to help employees make ethical decisions when the answers are unclear. Tullberg
believes that humans are built with the capacity to cheat and manipulate, a view taken from
(Trivers 1971, 1985), hence the need for learning normative values and rules in human behavior
(Tullberg 1996). The most direct benefit is reducing the likelihood of "dirty hands" (Grace and
Cohen 2005), fines and damaged reputations for breaching laws or moral norms. Organizations
also see secondary benefit in increasing employee loyalty and pride in the organization.
Caterpillar and Best Buy are examples of organizations that have taken such steps (Thilmany
2007).
Increasingly, companies are becoming interested in processes that can add visibility to their CSR
policies and activities. One method that is gaining increasing popularity is the use of well-
grounded training programs, where CSR is a major issue, and business simulations can play a
part in this.[citation needed]
One relevant documentary is The Corporation, the history of organizations and their growth in
power is discussed. Corporate social responsibility, what a company does to in trying to benefit
society, versus corporate moral responsibility (CMR), what a company should morally do, are
both important topics to consider when looking at ethics in CSR. For example, Ray Anderson, in
The Corporation, takes a CMR perspective in order to do what is moral and he begins to shift his
company's focus towards the biosphere by utilizing carpets in sections so that they will sustain
for longer periods. This is Anderson thinking in terms of Garret Hardin's "The Tragedy of the
Commons," where if people do not pay attention to the private ways in which we use public
resources, people will eventually lose those public resources.
[edit] Laws and regulation
Another driver of CSR is the role of independent mediators, particularly the government, in
ensuring that corporations are prevented from harming the broader social good, including people
and the environment. CSR critics such as Robert Reich argue that governments should set the
agenda for social responsibility by the way of laws and regulation that will allow a business to
conduct themselves responsibly.
The issues surrounding government regulation pose several problems. Regulation in itself is
unable to cover every aspect in detail of a corporation's operations. This leads to burdensome
legal processes bogged down in interpretations of the law and debatable grey areas (Sacconi
2004). General Electric is an example of a corporation that has failed to clean up the Hudson
River after contaminating it with organic pollutants. The company continues to argue via the
legal process on assignment of liability, while the cleanup remains stagnant. (Sullivan & Schiafo
2005).
The second issue is the financial burden that regulation can place on a nation's economy. This
view shared by Bulkeley, who cites the Australian federal government's actions to avoid
compliance with the Kyoto Protocol in 1997, on the concerns of economic loss and national
interest. The Australian government took the position that signing the Kyoto Pact would have
caused more significant economic losses for Australia than for any other OECD nation (Bulkeley
2001, pg 436).On the change of government following the election in November 2007, Prime
Minister Kevin Rudd signed the ratification immediately after assuming office on 3 December
2007, just before the meeting of the UN Framework Convention on Climate Change. Critics of
CSR also point out that organisations pay taxes to government to ensure that society and the
environment are not adversely affected by business activities.
Denmark made a law on CSR. 16 December 2008, the Danish parliament adopted a bill making
it mandatory for the 1100 largest Danish companies, investors and state owned companies to
include information on corporate social responsibility (CSR) in their annual financial reports.
The reporting requirements became effective on 1 January 2009[23].
The information shall include:
• information on the companies’ policies for CSR or socially responsible investments (SRI)
• information on how such policies are implemented in practice and
• information on what results have been obtained so far and managements expectations for
the future with regard to CSR/SRI.
CSR/SRI is still voluntary in Denmark, but if a company has no policy on this they must state
their positioning on CSR in their annual financial report.
More on the Danish law on CSRgov.dk
[edit] Crises and their consequences
Often it takes a crisis to precipitate attention to CSR. One of the most active stands against
environmental management is the CERES Principles that resulted after the Exxon Valdez
incident in Alaska in 1989 (Grace and Cohen 2006). Other examples include the lead poisoning
paint used by toy giant Mattel, which required a recall of millions of toys globally and caused the
company to initiate new risk management and quality control processes. In another example,
Magellan Metals in the West Australian town of Esperance was responsible for lead
contamination killing thousands of birds in the area. The company had to cease business
immediately and work with independent regulatory bodies to execute a cleanup. Odwalla also
experienced a crisis with sales dropping 90 percent, and the company's stock price dropping 34
percent due to several cases of E.Coli spread through Odwalla apple juice. The company ordered
a recall of all apple or carrot juice products and introduced a new process called "flash
pasteurization" as well as maintaining lines of communication constantly open with customers.
[edit] Stakeholder priorities
Increasingly, corporations are motivated to become more socially responsible because their most
important stakeholders expect them to understand and address the social and community issues
that are relevant to them. Understanding what causes are important to employees is usually the
first priority because of the many interrelated business benefits that can be derived from
increased employee engagement (i.e. more loyalty, improved recruitment, increased retention,
higher productivity, and so on). Key external stakeholders include customers, consumers,
investors (particularly institutional investors), regulators, academics, and the media).
Corporate Social Responsibility - What does it mean?
One of the most frequently asked questions at this site - and probably for all those individuals
and organisations dealing with CSR issues is the obvious - just what does "Corporate Social
Responsibility" mean anyway? Is it a stalking horse for an anti-corporate agenda? Something
which, like original sin, you can never escape? Or what?
Different organisations have framed different definitions - although there is considerable
common ground between them. My own definition is that CSR is about how companies
manage the business processes to produce an overall positive impact on society.
Take the following illustration:

Companies need to answer to two aspects of their operations. 1. The quality of their management
- both in terms of people and processes (the inner circle). 2. The nature of, and quantity of their
impact on society in the various areas.
Outside stakeholders are taking an increasing interest in the activity of the company. Most look
to the outer circle - what the company has actually done, good or bad, in terms of its products
and services, in terms of its impact on the environment and on local communities, or in how it
treats and develops its workforce. Out of the various stakeholders, it is financial analysts who are
predominantly focused - as well as past financial performance - on quality of management as an
indicator of likely future performance.
Other definitions
The World Business Council for Sustainable Development in its publication "Making Good
Business Sense" by Lord Holme and Richard Watts, used the following definition. "Corporate
Social Responsibility is the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life of the workforce and
their families as well as of the local community and society at large"
The same report gave some evidence of the different perceptions of what this should mean from
a number of different societies across the world. Definitions as different as "CSR is about
capacity building for sustainable livelihoods. It respects cultural differences and finds the
business opportunities in building the skills of employees, the community and the
government" from Ghana, through to "CSR is about business giving back to society" from the
Phillipines.
Traditionally in the United States, CSR has been defined much more in terms of a philanphropic
model. Companies make profits, unhindered except by fulfilling their duty to pay taxes. Then
they donate a certain share of the profits to charitable causes. It is seen as tainting the act for the
company to receive any benefit from the giving.
The European model is much more focused on operating the core business in a socially
responsible way, complemented by investment in communities for solid business case reasons.
Personally, I believe this model is more sustainable because:
1. Social responsibility becomes an integral part of the wealth creation process - which if
managed properly should enhance the competitiveness of business and maximise the
value of wealth creation to society.
2. When times get hard, there is the incentive to practice CSR more and better - if it is a
philanphropic exercise which is peripheral to the main business, it will always be the first
thing to go when push comes to shove.
But as with any process based on the collective activities of communities of human beings (as
companies are) there is no "one size fits all". In different countries, there will be different
priorities, and values that will shape how business act. And even the observations above are
changing over time. The US has growing numbers of people looking towards core business
issues.
For instance, the CSR definition used by Business for Social Responsibility is: "Operating a
business in a manner that meets or exceeds the ethical, legal, commercial and public
expectations that society has of business���.
On the other hand, the European Commission hedges its bets with two definitions wrapped into
one: "A concept whereby companies decide voluntarily to contribute to a better society and a
cleaner environment. A concept whereby companies integrate social and environmental
concerns in their business operations and in their interaction with their stakeholders on a
voluntary basis".
When you review each of these, they broadly agree that the definition now focuses on the impact
of how you manage your core business. Some go further than others in prescribing how far
companies go beyond managing their own impact into the terrain of acting specifically outside of
that focus to make a contribution to the achievement of broader societal goals. It is a key
difference, when many business leaders feel that their companies are ill equipped to pursue
broaders societal goals, and activists argue that companies have no democratic legitimacy to take
such roles. That particular debate will continue.

A brief history of social reporting

An Article from Business Respect, Issue Number 51, dated 9 Mar 2003
By Alice and John Tepper Marlin
We are together teaching a course for MBA students at NYU's Stern School of Business on
"Models of CSR".� We cover in our class and our textbook the subject of corporate reporting,
so we were interested in the article describing a 1991 Shell Canada report as being the first-ever
new-style social/environmental report (Business Respect No. 49).� It suggested that this was
the first combined social and environmental corporate report, a few years ahead of the Body
Shop.� It said that in 1991 the terms CSR and "stakeholders" were not in common use.�
We respectfully take issue with this view of CSR history.� The term CSR was in common use
in the early 1970s (although seldom abbreviated), and the term "stakeholders" was used to
describe corporate owners beyond shareholders at least as long ago as 1989.� More generally,
the social/environmental report is a second-phase report and the third phase of CSR reports is by
far the most interesting for reasons that we shall suggest.�

The first phase of CSR reporting was composed of advertisements and annual-report sections in
the 1970s and 1980s that paid homage to the environment the way a person might throw a coin
into a fountain along with a wish.� The reports were not linked to corporate performance.�
Leaving aside the "green-wash" reports that were disinformative and were also labeled "eco-
pornography," there were a few isolated corporate efforts, such as that by Abt & Associates in
1972, to add an environmental report to its annual financial statements.�

The Abt report was pioneering, but it was also idiosyncratic.� Its concept of social
responsibility was strictly related to air and water pollution and its financial auditor disclaimed
any responsibility for the data on the basis that no standards had been introduced for such
audits.� It also rashly attempted to reduce everything to a dollar bottom line.� So one of us
(John Tepper Marlin) wrote an article for The Journal of Accountancy in February 1973
suggesting ways in which accountants could measure pollution; it included a model
environmental report and hypothetically added an Auditor's Opinion.� We also contributed a
joint article to the first issue of Business and Society Review suggesting how International Paper
could have handled and should handle environmental issues in its annual report.

The second phase of CSR reporting, of which the Body Shop and Shell Canada are examples
really began with Ben & Jerry's, which in 1989 commissioned a "social auditor" to work with the
B&J staff on a report covering 1988.� It was an extraordinary move by B&J.� The social
auditor" was given free rein to interview anyone in the company for two weeks, on any day or
night shift.� The social auditor visited not only the main ice cream factory but also a smaller
one that made "Peace Pops" and other special products.� The social auditor was also
encouraged to speak with suppliers such as their dairy processor, and with public and private
representatives of the community.�

This social auditor recommended that the report be called a "Stakeholders Report" (the concept
of stakeholders existed but this was possibly the first-ever report to stakeholders) and that it be
divided into the major stakeholder categories: Communities (Community Outreach,
Philanthropic Giving, Environmental Awareness, Global Awareness), Employees, Customers,
Suppliers, Investors.� Suppliers had not previously been thought of by B&J as a stakeholder.�
B&J prepared the Stakeholders Report with the social auditor's input and the social auditor then
appended a "Report of Independent Social Auditor" and signed it, saying it was his "opinion that
the Stakeholders Report fairly describes the performance of the company in the area of social
responsibility for the year 1988 with respect to the five stakeholder groups" (this social auditor
was John Tepper Marlin).�

To our knowledge, this is the first of what Mallen called the New Model corporate reports.� It
meets all your definitions of such a report.� After this first social audit in 1989, B&J continued
to issue annual social reports, rotating to different social auditors as they sought to develop the
concept.� Improvements were made both in B&J practices and in the annual social reports, but
as the firm grew year after year the ways in which it was strong and the ways it was weak, as
reported each year, in our view did not change greatly.� The social audits still lacked a set of
generally accepted standards against which B&J performance could be measured.� B&J's social
auditors were still individuals without external validation of their qualifications, or of the process
they used for their audits or of the standards against which they measured the company's
performance.

The third phase of CSR reporting is surely the most interesting because it introduces not only
third-party certification of the reports, but certification by bodies that are accredited to certify
against social or environmental standards.� It breathes life into standards and on-site inspection,
because social auditors are firms and people who are accredited by environmental or social
accreditation bodies (or by both).� The new phase makes the social auditor at the same time
both stronger and more circumscribed than the independent social auditor of the B&J vintage.�
The social auditor today has much more clout because large buyers are serious about wanting a
facility certified, because their customers care.� No certification, no business.� Because more
is at stake, the social auditing team in the new phase does not have the same latitude the first
B&J auditor did to interview and to interpret.� The standards are already determined before an
auditor goes in and the procedures are specified.� When a violation is found, the facility is
given a chance to take corrective action.� Some of the violations are considered small, some
enough to put certification in jeopardy; the auditor must say which it is.� The auditor returns to
see that required corrective actions are made.� Major problems are not allowed to remain year
after year.

The global leader of the new phase in the social area is Social Accountability International (SAI),
founded in 1997.� The first facility certified against its multi-stakeholder global standard was
an Avon factory in New York State, on January 1, 1998.� Other pioneers on the environmental
side were the Forest Stewardship Council, the International Federation of Organic Agriculture
and the Dutch Max Havelaar Foundation, now FairTrade.� Together, these groups have formed
the International Social and Environmental Accreditation and Labeling (ISEAL).� The
formation of ISEAL is very significant because it is an international group of standard-setting
and accreditation bodies that have joined together to help make social and environmental
standards meaningful, widely recognized and of a high quality.� SAI alone has so far accredited
nine certification bodies (organizations of auditors), with thousands of social auditors at their
disposal.�

The three phases of CSR reporting overlap with the dating of the three "waves" of media
coverage of CSR issues by Sustainability, because both were influenced by changing economic
conditions (the preoccupation of corporations with oil shortages and inflation in the late 1970s
preempted much progress on CSR issues) and by events (such as the Exxon Valdez oil spill).�

This social auditing work now adds up to a lot of business that accountants could have had if
they had followed up on the suggestions in the February 1973 article in The Journal of
Accountancy.� Not until 2002 did two of the Big Four accounting firms, KPMG and PwC,
jointly sign a Verification of the 2001 Shell Report.� But there was an obstacle in the way of
traditional accounting firms going this route.� The key to the new social audits is that
certification auditors are accredited, with regular on-site inspections of their certification
practices.� Financial auditors in the United States never have been subject to accreditation or
investigations of on-site practices by an accreditation body ("peer review" is not a long-term
substitute).� The new Accounting Oversight Board has the power to do what accreditation
bodies do, i.e., remove the right of an auditor to certify against a standard.� But until this new
Board asserts such power, financial accountants and auditors operate less rigorously than social
auditors.�

Thank you for inspiring us to review the history of CSR reporting.� We may not have it all
exactly right, but we think this is a marginal improvement on the perspective you provided in
your last Dispatch.� This is not to take anything away from the good work of Shell Canada or
Shell anywhere.� Shell has got the message, but we don't believe they were the first.
Alice Tepper Marlin, alice@sa-intl.org
John Tepper Marlin, Ph.D., jtm6@nyu.edu
Adjunct Professors of Markets, Ethics and Law
Stern School of Business, NYU

Their day jobs: Alice TM is President of Social Accountability International in New York
City.� John TM serves as Chief Economist for the currently� elected Comptroller of the City
of New York and held this position under the� two previous Comptrollers.

CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility (CSR) can be defined as the "economic, legal, ethical, and
discretionary expectations that society has of organizations at a given point in time" (Carroll and
Buchholtz 2003, p. 36). The concept of corporate social responsibility means that organizations
have moral, ethical, and philanthropic responsibilities in addition to their responsibilities to earn
a fair return for investors and comply with the law. A traditional view of the corporation suggests
that its primary, if not sole, responsibility is to its owners, or stockholders. However, CSR
requires organizations to adopt a broader view of its responsibilities that includes not only
stockholders, but many other constituencies as well, including employees, suppliers, customers,
the local community, local, state, and federal governments, environmental groups, and other
special interest groups. Collectively, the various groups affected by the actions of an
organization are called "stakeholders." The stakeholder concept is discussed more fully in a later
section.
Corporate social responsibility is related to, but not identical with, business ethics. While CSR
encompasses the economic, legal, ethical, and discretionary responsibilities of organizations,
business ethics usually focuses on the moral judgments and behavior of individuals and groups
within organizations. Thus, the study of business ethics may be regarded as a component of the
larger study of corporate social responsibility.
Carroll and Buchholtz's four-part definition of CSR makes explicit the multi-faceted nature of
social responsibility. The economic responsibilities cited in the definition refer to society's
expectation that organizations will produce good and services that are needed and desired by
customers and sell those goods and services at a reasonable price. Organizations are expected to
be efficient, profitable, and to keep shareholder interests in mind. The legal responsibilities relate
to the expectation that organizations will comply with the laws set down by society to govern
competition in the marketplace. Organizations have thousands of legal responsibilities governing
almost every aspect of their operations, including consumer and product laws, environmental
laws, and employment laws. The ethical responsibilities concern societal expectations that go
beyond the law, such as the expectation that organizations will conduct their affairs in a fair and
just way. This means that organizations are expected to do more than just comply with the law,
but also make proactive efforts to anticipate and meet the norms of society even if those norms
are not formally enacted in law. Finally, the discretionary responsibilities of corporations refer to
society's expectation that organizations be good citizens. This may involve such things as
philanthropic support of programs benefiting a community or the nation. It may also involve
donating employee expertise and time to worthy causes.
HISTORY
The nature and scope of corporate social responsibility has changed over time. The concept of
CSR is a relatively new one—the phrase has only been in wide use since the 1960s. But, while
the economic, legal, ethical, and discretionary expectations placed on organizations may differ, it
is probably accurate to say that all societies at all points in time have had some degree of
expectation that organizations would act responsibly, by some definition.
In the eighteenth century the great economist and philosopher Adam Smith expressed the
traditional or classical economic model of business. In essence, this model suggested that the
needs and desires of society could best be met by the unfettered interaction of individuals and
organizations in the marketplace. By acting in a self-interested manner, individuals would
produce and deliver the goods and services that would earn them a profit, but also meet the needs
of others. The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for
free-market economies in the twenty-first century. However, even Smith recognized that the free
market did not always perform perfectly and he stated that marketplace participants must act
honestly and justly toward each other if the ideals of the free market are to be achieved.
In the century after Adam Smith, the Industrial Revolution contributed to radical change,
especially in Europe and the United States. Many of the principles espoused by Smith were
borne out as the introduction of new technologies allowed for more efficient production of goods
and services. Millions of people obtained jobs that paid more than they had ever made before and
the standard of living greatly improved. Large organizations developed and acquired great
power, and their founders and owners became some of the richest and most powerful men in the
world. In the late nineteenth century many of these individuals believed in and practiced a
philosophy that came to be called "Social Darwinism," which, in simple form, is the idea that the
principles of natural selection and survival of the fittest are applicable to business and social
policy. This type of philosophy justified cutthroat, even brutal, competitive strategies and did not
allow for much concern about the impact of the successful corporation on employees, the
community, or the larger society. Thus, although many of the great tycoons of the late nineteenth
century were among the greatest philanthropists of all time, their giving was done as individuals,
not as representatives of their companies. Indeed, at the same time that many of them were
giving away millions of dollars of their own money, the companies that made them rich were
practicing business methods that, by today's standards at least, were exploitative of workers.
Around the beginning of the twentieth century a backlash against the large corporations began to
gain momentum. Big business was criticized as being too powerful and for practicing antisocial
and anticompetitive practices. Laws and regulations, such as the Sherman Antitrust Act, were
enacted to rein in the large corporations and to protect employees, consumers, and society at
large. An associated movement, sometimes called the "social gospel," advocated greater
attention to the working class and the poor. The labor movement also called for greater social
responsiveness on the part of business. Between 1900 and 1960 the business world gradually
began to accept additional responsibilities other than making a profit and obeying the law.
In the 1960s and 1970s the civil rights movement, consumerism, and environmentalism affected
society's expectations of business. Based on the general idea that those with great power have
great responsibility, many called for the business world to be more proactive in (1) ceasing to
cause societal problems and (2) starting to participate in solving societal problems. Many legal
mandates were placed on business related to equal employment opportunity, product safety,
worker safety, and the environment. Furthermore, society began to expect business to voluntarily
participate in solving societal problems whether they had caused the problems or not. This was
based on the view that corporations should go beyond their economic and legal responsibilities
and accept responsibilities related to the betterment of society. This view of corporate social
responsibility is the prevailing view in much of the world today.
The sections that follow provide additional details related to the corporate social responsibility
construct. First, arguments for and against the CSR concept are reviewed. Then, the stakeholder
concept, which is central to the CSR construct, is discussed. Finally, several of the major social
issues with which organizations must deal are reviewed.
ARGUMENTS FOR AND AGAINST
CORPORATE SOCIAL RESPONSIBILITY
The major arguments for and against corporate social responsibility are shown in Exhibit 1. The
"economic" argument against CSR is perhaps most closely associated with the American
economist Milton Friedman, who has argued that the primary responsibility of business is to
make a profit for its owners, albeit while complying with the law. According to this view, the
self-interested actions of millions of participants in free markets will, from a utilitarian
perspective, lead to positive outcomes for society. If the operation of the free market cannot
solve a social problem, it becomes the responsibility of government, not business, to address the
issue.

Exhibit 1
Arguments For and Against CSR

FOR AGAINST

The rise of the modern corporation Taking on social and moral issues
created and continues to create many is not economically feasible.
 FOR AGAINST

social problems. Therefore, the Corporations should focus on

corporate world should assume earning a profit for their
responsibility for addressing these shareholders and leave social
problems. issues to others.

In the long run, it is in corporations'

best interest to assume social
responsibilities. It will increase the
chances that they will have a future and
reduce the chances of increased
governmental regulation.
Assuming social responsibilities
places those corporations doing
so at a competitive disadvantage
relative to those who do not.

Those who are most capable

Large corporations have huge reserves
should address social issues.
of human and financial capital. They
Those in the corporate world are
should devote at least some of their
not equipped to deal with social
resources to addressing social issues.
problems.

The "competitive" argument recognizes the fact that addressing social issues comes at a cost to
business. To the extent that businesses internalize the costs of socially responsible actions, they
hurt their competitive position relative to other businesses. This argument is particularly relevant
in a globally competitive environment if businesses in one country expend assets to address
social issues, but those in another country do not. According to Carroll and Buchholtz, since
CSR is increasingly becoming a global concern, the differences in societal expectations around
the world can be expected to lessen in the coming years.
Finally, some argue that those in business are ill-equipped to address social problems. This
"capability" argument suggests that business executives and managers are typically well trained
in the ways of finance, marketing, and operations management, but not well versed in dealing
with complex societal problems. Thus, they do not have the knowledge or skills needed to deal
with social issues. This view suggests that corporate involvement in social issues may actually
make the situation worse. Part of the capability argument also suggests that corporations can best
serve societal interests by sticking to what they do best, which is providing quality goods and
services and selling them at an affordable price to people who desire them.
There are several arguments in favor of corporate social responsibility. One view, held by critics
of the corporate world, is that since large corporations create many social problems, they should
attempt to address and solve them. Those holding this view criticize the production, marketing,
accounting, and environmental practices of corporations. They suggest that corporations can do a
better job of producing quality, safe products, and in conducting their operations in an open and
honest manner.
A very different argument in favor of corporate social responsibility is the "self-interest"
argument. This is a long-term perspective that suggests corporations should conduct themselves
in such a way in the present as to assure themselves of a favorable operating environment in the
future. This view holds that companies must look beyond the short-term, bottom-line perspective
and realize that investments in society today will reap them benefits in the future. Furthermore, it
may be in the corporate world's best interests to engage in socially responsive activities because,
by doing so, the corporate world may forestall governmental intervention in the form of new
legislation and regulation, according to Carroll and Buchholtz.
Finally, some suggest that businesses should assume social responsibilities because they are
among the few private entities that have the resources to do so. The corporate world has some of
the brightest minds in the world, and it possesses tremendous financial resources. (Wal-Mart, for
example, has annual revenues that exceed the annual GNP of some countries.) Thus, businesses
should utilize some of their human and financial capital in order to "make the world a better
place."
THE STAKEHOLDER CONCEPT
According to Post, Lawrence, and Weber, stakeholders are individuals and groups that are
affected by an organization's policies, procedures, and actions. A "stake" implies that one has an
interest or share in the organization and its operations, per Carroll and Buchholtz. Some
stakeholders, such as employees and owners, may have specific legal rights and expectations in
regard to the organization's operations. Other stakeholders may not have specific rights granted
by law, but may perceive that they have moral rights related to the organization's operations. For
example, an environmental group may not have a legal right in regard to a company's use of
natural resources, but may believe that they have a moral right to question the firm's
environmental policies and to lobby the organization to develop environmentally friendly
policies.
All companies, especially large corporations, have multiple stakeholders. One way of classifying
stakeholder groups is to classify them as primary or secondary stakeholders. Primary
stakeholders have some direct interest or stake in the organization. Secondary stakeholders, in
contrast, are public or special interest groups that do not have a direct stake in the organization
but are still affected by its operations. Exhibit 2 classifies some major stakeholder groups into
primary and secondary categories.

Exhibit 2

Table based on Carroll and Buchholtz, 2003: p. 71

Primary Shareholders
Stakeholders (Owners)

Employees

Customers

Business
Partners

Communities

Future
Generations

The Natural

Environment

Secondary
Local, State, and
Stakeholders

Federal
Government

Regulatory
Bodies

Civic Institutions
and

Groups

Special Interest
Groups

Trade and
Industry

Groups

Media

Competitors

The owners of a firm are among the primary stakeholders of the firm. An organization has legal
and moral obligations to its owners. These obligations include, but are not limited to, attempting
to ensure that owners receive an adequate return on their investment. Employees are also primary
stakeholders who have both legal and moral claims on the organization. Organizations also have
specific responsibilities to their customers in terms of producing and marketing goods and
services that offer functionality, safety, and value; to local communities, which can be greatly
affected by the actions of resident organizations and thus have a direct stake in their operations;
and to the other companies with whom they do business. Many social commentators also suggest
that companies have a direct responsibility to future generations and to the natural environment.
An organization's responsibilities are not limited to primary stakeholders. Although
governmental bodies and regulatory agencies do not usually have ownership stakes in companies
in free-market economies, they do play an active role in trying to ensure that organizations
accept and meet their responsibilities to primary stakeholder groups. Organizations are
accountable to these secondary stakeholders. Organizations must also contend with civic and
special interest groups that purport to act on behalf of a wide variety of constituencies. Trade
associations and industry groups are also affected by an organization's actions and its reputation.
The media reports on and investigates the actions of many companies, particularly large
organizations, and most companies accept that they must contend with and effectively "manage"
their relationship with the media. Finally, even an organization's competitors can be considered
secondary stakeholders, as they are obviously affected by organizational actions. For example,
one might argue that organizations have a social responsibility to compete in the marketplace in
a manner that is consistent with the law and with the best practices of their industry, so that all
competitors will have a fair chance to succeed.
CONTEMPORARY SOCIAL ISSUES
Corporations deal with a wide variety of social issues and problems, some directly related to
their operations, some not. It would not be possible to adequately describe all of the social issues
faced by business. This section will briefly discuss three contemporary issues that are of major
concern: the environment, global issues, and technology issues. There are many others.
ENVIRONMENTAL ISSUES.
Corporations have long been criticized for their negative effect on the natural environment in
terms of wasting natural resources and contributing to environmental problems such as pollution
and global warming. The use of fossil fuels is thought to contribute to global warming, and there
is both governmental and societal pressure on corporations to adhere to stricter environmental
standards and to voluntarily change production processes in order to do less harm to the
environment. Other issues related to the natural environment include waste disposal,
deforestation, acid rain, and land degradation. It is likely that corporate responsibilities in this
area will increase in the coming years.
GLOBAL ISSUES.
Corporations increasingly operate in a global environment. The globalization of business appears
to be an irreversible trend, but there are many opponents to it. Critics suggest that globalization
leads to the exploitation of developing nations and workers, destruction of the environment, and
increased human rights abuses. They also argue that globalization primarily benefits the wealthy
and widens the gap between the rich and the poor. Proponents of globalization argue that open
markets lead to increased standards of living for everyone, higher wages for workers worldwide,
and economic development in impoverished nations. Many large corporations are multinational
in scope and will continue to face legal, social, and ethical issues brought on by the increasing
globalization of business.
Whether one is an opponent or proponent of globalization, however, does not change the fact
that corporations operating globally face daunting social issues. Perhaps the most pressing issue
is that of labor standards in different countries around the world. Many corporations have been
stung by revelations that their plants around the world were "sweatshops" and/or employed very
young children. This problem is complex because societal standards and expectations regarding
working conditions and the employment of children vary significantly around the world.
Corporations must decide which is the responsible option: adopting the standards of the countries
in which they are operating or imposing a common standard world-wide. A related issue is that
of safety conditions in plants around the world.
Another issue in global business is the issue of marketing goods and services in the international
marketplace. Some U.S. companies, for example, have marketed products in other countries after
the products were banned in the United States.
TECHNOLOGY ISSUES.
Another contemporary social issue relates to technology and its effect on society. For example,
the Internet has opened up many new avenues for marketing goods and services, but has also
opened up the possibility of abuse by corporations. Issues of privacy and the security of
confidential information must be addressed. Biotechnology companies face questions related to
the use of embryonic stem cells, genetic engineering, and cloning. All of these issues have far-
reaching societal and ethical implications. As our technological capabilities continue to advance,
it is likely that the responsibilities of corporations in this area will increase dramatically.
Corporate social responsibility is a complex topic. There is no question that the legal, ethical, and
discretionary expectations placed on businesses are greater than ever before. Few companies
totally disregard social issues and problems. Most purport to pursue not only the goal of
increased revenues and profits, but also the goal of community and societal betterment.
Research suggests that those corporations that develop a reputation as being socially responsive
and ethical enjoy higher levels of performance. However, the ultimate motivation for
corporations to practice social responsibility should not be a financial motivation, but a moral
and ethical one.
SEE ALSO: Ethics

The importance of corporate social

responsibility and its limits.(Report)
By Maria de-los Angeles Gil Estallo & Fernando Giner de-la Fuente & Carles Griful-Miquela |
International Advances in Economic Research - August, 2007

Print ShareThis Get the Mag Weekly Updates [-] Text Size [+]

Abstract Companies are, in a broad sense, a group of different agents that have a relationship
with shareholders, citizens, providers, and customers. In other words, they are known as
stakeholders. Corporate social responsibility may help to establish clear boundaries among the
different interests of the groups described above. In this paper, the authors will describe, analyze,
and formalize the critical responsibility parameters, as well as the variables that shape them.
Corporate social responsibility is proposed as a new management tool and not as a fashionable
concept. Furthermore, the advantages and limitations of corporate social responsibility will be
analyzed in order to define a management model for achieving responsibility among
organizations. Finally, the model limitations are presented, both in the verbal and the
mathematical formalizations.
Keywords Corporate social * Responsibility management
JEL M00
Antecedents and Commitments
Corporate social responsibility is becoming a relevant subject, and it appears repeatedly in the
vast majority of academic and professional journals. Most of them have dedicated a special issue
to it, and an increasing number of articles have been published concerning corporate social
responsibility. In this paper, the authors ask themselves whether this is simply a new fashionable
concept, as many others within the business argot, or, on the other hand, is it becoming a leading
principle of top management and entrepreneurs' behavior.
In the first part of this paper, different dilemmas concerning corporate social responsibility are
analyzed, and the authors' perception about it is depicted. Then, the authors will describe a
method for measuring and evaluating corporate social responsibility, as well as its limitations.
Corporate Social Responsibility Understood as a New Management Tool
In order to develop this proposal, it is necessary to define corporate social responsibility. It is
very important to thoroughly understand the concept of company, not from a macroeconomic
point of view as the economic science does (specially the neo liberal trend), but from the
business economy point of view.
Figure 1 represents--graphically and briefly--the concept of a company as many business
economists see it: this is a company understood as a transforming organ, thanks to social agents
(people) and technical and technological means, all of them working in a global and competitive
context. By looking at this concept of a company, the following is always present:
* People/human beings: employees, shareholders, providers, collaborators, customers,
competitors, and public agents (local, state, or federal).
* Context: the company develops its economic activity in a geographical area, within an
economic, social, and political context.
At this point, a question emerges: does the company, or even better, the company's top
management have any responsibility--implication or commitment--concerning the people and the
context where they develop its activity?
It is fair and reasonable--following the trend of those who consider shareholders as the main
human collective concerned--that top management within the company has to work driven by
shareholders interests, mainly focusing on the profit and loss account, trying to maximize profits
(Gil 2003, p. 51). In other words, "If management would accept the idea that they have a social
responsibility different from achieving the maximum profit for shareholders, it would be
undermining the foundation of our free society" (Milton Friedman 1966, p. 173). (1)
This point of view can be confusing for two reasons:
1. It does not take into account the fact that in order to make a profit, all the people described
before have to cooperate and perform their activities within a geographical space, regardless of
its size. If certain aspects are not attended to and if there is no responsibility toward these
collectives, a sustainable profit will not be reachable. Furthermore, competitive advantages will
not be achieved either.
2. Maximum profit is simply a mathematical concept. The formula can measure the quantity but,
in the real world, there is always the possibility of achieving a higher performance. What if fewer
salaries had been paid? What if training investment had been cut? What about misbehavior
concerning taxation? Probably the axiom of "cutting expenses or increasing turnover by
increasing prices will improve long term profits" is not always true.
[FIGURE 1 OMITTED]
In the current business context--extremely competitive, with a lot of information moving
quickly--companies have to treat every one of their human collectives responsibly, and the
context in which it is located, in order to grow and make profits. In other words, having a
corporate social policy and a responsible attitude toward stakeholders is necessary to achieve
great results. The World Business Council for Sustainable Development (WBCSD) defines
corporate social responsibility as "the commitment of the company to contribute to the sustained
economic development by working with employees, their families, the local community, and the
entire society in order to improve life quality" (Holliday et al. 2002 p. 103).
Corporate social responsibility can be defined as the assumption of rights and obligations due to
the economic, political, and social activity performed by organizations. In other words, this is to
create and develop values, such as protection, sustainability, compromise, and acting responsibly
and economically as far as the environment is concerned. This is also applicable to the people
and society in general, both short and long term, and independently of the distance (here it
applies "thinking locally and globally at the same time"). The final goal has to be the increase of
the humanity welfare (Gil Estallo et al. 2006).
If the WBCSD definition is accepted, and also the concept just depicted, a new proposition
emerges. This is different from former propositions, basically because of its extension--the
number of human collectives taken into account and the consideration of the physical context--
over which there is an interest to expand corporate social responsibility.
In the past, there was a concern about corporate social responsibility, (2) but it is only recently
that this concern strongly emerged. Mainly because of globalization, environment catastrophes,
(3) several known business misbehaviors that occurred previously by multinational corporations.
(4) It is at that point when the issue of corporate social responsibility came out, and the media
started to create an opinion related to the necessary revision of the commitment companies have
with the human collectives and environment.
Currently, several laws concerning this issue already exist. The starting point was the OECD
guidelines, (5) and also a high degree of social consciousness that acts and organizes itself
wherever an important meeting related to business is organized. For instance, the Davos or G-7
meetings. (6)
The Fashion Concept or Management Tool to Remain
The hypothesis establishing that corporate social responsibility (considering the WBCSD
definition and the authors' concept) appearing at the beginning of the 21st century as a
management tool, which will remain through time, is posed by the authors.
This hypothesis is supported by the following facts:
1. The globalization process is emphasized after the Berlin wall fell in December 1989. The three
zones of economic influence emerged: the US and its influential area; the European Union; and
Southeast Asia, including China and India. This phenomenon creates a certain social concern.
2. Despite the focus on different aspects, there is a huge law development within developed
countries. (7) So, there is still a long way to go in order to find a common and universal criterion
about corporate social responsibility. Moreover, it is necessary to develop a formal and
measurable model that is widely accepted. (8)
3. The larger companies are increasingly writing behavior codes and corporate social
responsibility memoranda. In Spain, the 35 companies included in the IBEX index are obliged to
write an annual report about the applied good corporate governance practices. (9)
4. Financial markets have also adopted corporate social responsibility by developing tools which
permit to reflect this concept within the price of shares. For instance, the concept of socially
responsible investment appears. This is to evaluate which is the position of the company, as far
as social and environmental behavior is concerned. With this information, investors may make a
better decision about which companies to invest in.
There are also several rating agencies which evaluate companies' commitment related to social
and environmental behavior. (10) In Spain there are several mutual funds that are taking
corporate social responsibility aspects into account. Currently, 12 of this kind exist, despite one
of them (BBVA Extra 5 II Garantizado) representing 83.5% of the total amount managed by
mutual funds. However, globally, it only represents 0.56% of the total amount. Therefore, it
seems that Spain is still at a starting point at investing into companies with ethical behaviors.
(11)
5. There is an increasing consciousness among human collectives in general. Non governmental
organizations (NGO's), fair trading organizations, as well as the media materialize this
consciousness. At the same time, information technology makes it widely visible.
Because of the previous reasons, the authors believe that corporate social responsibility will
remain definitely and permanently. There are two more reasons which emphasize this belief:

) Long term socially responsible behavior can yield higher levels of profit for companies, which
might become a competitive advantage.
b) In general, companies have legal behaviors. But those which do not have it normally have to
pay a small penalty with no further consequences.
Currently the market-millions of customers and employees, as well as the rest of human
collectives related to companies-has a powerful tool: information and communication
technologies. By using them, people have some power to make companies apply corporate social
responsibility practices.
A Business Proposal of Corporate Social Responsibility
After reasoning has been depicted, it is possible to conclude that developed societies are making
the means to permit corporate social responsibility to consolidate. This, despite the existence of
certain chaos, with a few points in common as criteria, principles, and range of the concept are
concerned.
Certain literature, of course not neo liberal, has often emphasized the need to establish the
previously mentioned tool. At times, it tried to give rules related to a proposed model or several
aspects to take into account as far as corporate social responsibility is concerned. Argandona
1997, p. 177) (12) lists several aspects found within a company ruled by ethical criteria:
* Entrepreneurs and management with a vision, who focus on the moral aspects of the company.
* Production of responsible products, as far as security, usefulness, and composition are
concerned. These products should respond to real customers and consumers' needs.
* To take into account the customers' opinions.
* Reducing bureaucracy, which leads to employees' empowerment.
* Emphasis on training the staff.
* Internal promotion.
* Management has to be conscious about which are its own limitations; thus, they have to relay
both in internal as well as external help. Moreover, they have to prepare their succession.
* It is necessary to plan how employees might take part to the company's stock.
* To give enough information to employees about the company situation and its future projects.
* To establish fair salaries, permitting the participation in company's profit and sharing the
productivity increases. It is necessary for a reduced range of salaries.
* To evaluate performance not only from an economic point of view.
* To be oriented to people at any level.
* To have a true interest in what is going on outside the company, cooperating to solve problems,
such as environment and local community. For instance, by means of creating a fund.
* These companies do not hide their ethical attitudes, but they do not make publicity about it
either.
* They are opened to cooperate with other companies.
* They avoid unnecessary expenses, and they try to convince customers and employees to be
austere.
* Quite often these companies establish written ethical codes.
* They are proactive when facing ethical problems (they do not simply clean the river after
having polluted it).
* They have a permanent dialog with all the stakeholders, especially when risks and dangers are
not perfectly known.
The final objective of this paper is to propose a system of corporate social responsibility and to
indicate its limitations. Based upon previously published work and the authors' own experience,
the system shown in Table 1 is proposed.
The left column of Table 1 shows who the company should be socially responsible for. This is
because of the potential influence the company may have on them, including their development
and evolution. The right column shows the critical responsibility parameters. In order to explain
and measure the parameters, they need to be split into several variables that will drive the
definition of measurement indicators.
Limitations of the Corporate Social Responsibility
Companies should not extend corporate social responsibility beyond the limits of Table 1. That
means taking into account the elements in the left column under the criteria defined in the right
column. Companies do not have to assume the roles reserved for governments (public powers).
Governments still maintain important missions, such as:
* Promoting and warranting health, education, and security services.
* Establishing clear policies, avoiding interventionism, in order to favor the companies' social
development. This implies not to influence the organization or management of the company.
* Promoting the civil society development understood as an essential counterpart element.
* Warranting freedom of speech, as well as meeting and demonstrating rights.
* Promoting disclosed information.
* Providing the basic infrastructures that permit developing a truly informative and
knowledgeable society.
In complex societies, such as today's societies, companies and governments are both important.
Companies should be conscious of their responsibility because of the influence they have on
many elements (employees, customers, shareholders, and the environment). Governments are
important, by abandoning the interventionist methods common in the past (or currently in many
countries), but also because they promote important policies and the legal framework which
clearly establishes which rules to follow.
Limitations of Corporate Social Responsibility and its Management Model
All kinds of organizations, both public and private, have a mission, a strategy, a policy and
several objectives (goals). On the other hand, these organizations have limited resources to
perform these things. Moreover, organizations have an area of actuation more or less defined,
and it is not possible to pretend that they will act beyond their own responsibilities.
Companies should take into account social responsibility in every decision they make: from
product design to selling and distribution; personnel recruitment until they leave the company;
and getting financial resources for investment. Mission, strategy, and company policies are more
or less verbal definitions, and it is difficult to express them within a mathematical and
quantifiable model.
From the objective point of view, the authors focus on the quantifiable ones, which are capable
to be evaluated and verified in the course of time. Moreover, they have to be easily evaluated
through indicators. Therefore, the first thing to do is to classify objectives into categories (from
the most abstract to the specific): political objectives; social objectives; economic objectives; and
business objectives.
The available resources the company might have at certain times will limit the former objectives.
These resources are: human resources, social resources, economic resources, and business
resources. These objectives and resources will make the evaluated results obtainable by using the
following indicators: economic indicators; social indicators; environmental indicators; and
business indicators.
Table 2 reflects the model mentioned previously. From this table, the formal model will be
described later on.
Taking the activity area as a starting point--the required information and what the indicators
(measurements) are which will reflect social responsibility--Table 2 shows briefly how to
measure social responsibility. What will be corporate social responsibility limits as far as its
agents are concerned? Where the limits established have to be? Where the environment will be
not harmed? Public opinion must be able to access transparent and ethical information.
Therefore, it should be shared and transferred. Social, economic, and business agents have to be
able to obtain their objectives without harming their providers, customers, staff, local
communities, and investors, both current and potential.
In order to establish this limitation, a "multi-criterion optimization model" is proposed. The
problem concerning the multi-criterion optimization of the whole group of indicators is posed. It
may be both in its general form:
Max (al, a2 ... p1, p2 ... m1, m2 ... b1, b2 .... c1, c2 ... e1, e2 ... v1, v2 ... s1, s2 ...) (13)
where al and a2 are for shareholders; p1 and p2 are for public administration; ml and m2 are for
customers; b1 and b2 are for cooperators; c1 and c2 are for competitors; e1 and e2 are for
employees; v1 and v2 are for the environment; and s1 and s2 are for providers.
On the other hand, if a desired level of the indicators is established, such as ([^.e]1, [^.e]2,...
[^.s]1, [^.s]2,..., [^.m]1, [^.m]2,.., [^.p]1, [^.p]2,...), then it must be treated as a goal
programming problem:
min |e1 - [^.e]1| + |e2 - [^.e]2| + .. + |s1 - [^.s]1| + ...
In both cases there are several restrictions which pose a limit to the potential values of the
available resources (x1, x2,... xn) involved in the calculation of the indicators seen before. This is
because of the existence of budget restrictions, as well as availability of resources. Therefore, the
feasible region F is defined; F is formed precisely by different combinations of available
resources:
([x.sub.1], [x.sub.2],... [x.sub.n]) [member of] F
Therefore, once the model was described, it is mathematically expressed by the equations and
their restrictions just seen. The complexity related with the multi-criterion method makes it
necessary to analyze the following problems:
* To independently maximize each one of the indicators in order to, from the different solutions
([x.sub.11], [x.sub.12],... [x.sub.1n]),... ([x.sub.41,1], [x.sub.41,2],... [x.sub.41,n]), obtain a single
point within the feasible region which will be as close as possible to the different optimums.
Thus, a compromise point among the different maximums will be obtained (discrepancy
method).
To directly maximize the sum of the indicators max (al + a2 + ... + p1 + p2+ .... + m1 + m2 + ...
+ b1 + b2 + .... c1 + c2 + ... e1 + e2 ... + v1 + v2 + .... s1 + s2 ...). The goal is, if possible, to
obtain the value of 41. On the other hand, it would also be possible to use the weighted sum of
the indicators, if some of these indicators would be prioritized.
Therefore a previous study is required in order to determine the following:
a) The resources' assignments (x1, x2,... xn) which may determine the indicators' value.
b) The formulation of each indicator depending on the available resources.
c) The formulation of the budgeting restrictions defined by the company. These restrictions will
shape the feasible region.
Once the model is formulated in each of the different approaches (multi-criterion, goals,
discrepancy, or indicators' sum), the decision maker will have enough tools useful to drive the
company to greater social responsibility levels. At the same time, the business requirements
included in the model are also taken into account.
Conclusions
When the idea to write this paper was born, the authors realized the increasing importance that
corporate social responsibility has on academia and management. First of all, the definition of
corporate social responsibility was important to clearly understand the implications of the
concept on the business world. As many of the new business concepts, there is not a single
definition, and the authors have tried to analyze and define which would be a useful definition as
far as the business economy is concerned. Following this reasoning, a business proposal of
corporate social responsibility has been described, taking into account its limitations.
Finally, a formal model was described. To do this, several key indicators (economic, social,
environmental, and business) were defined. The two ways for expressing the model were shown:
the multi-criterion optimization and the goal programming. In both cases, several restrictions
existed, and they were taken into account. The model showed a feasible region F, in which
different policies socially responsible are possible.
References
Argandona, A. y o. (1997). Etica y empresa: una vision multidisciplinar. Madrid: Fundacion
Argentaria.
Biblioteca Empresarial Cinco Dias (2005). Manual de la Empresa responsable. Madrid: Cinco
Dias.
Drucker, P. F. (2000). La productividad del trabajador del conocimiento: maximo desafio",
Harvard-deusto business review, 98, 4-16.
Friedman, M. (1966). Capitalismo y libertad. Madrid: Ediciones Rialp.
Gil Estallo, M. d. l. A., & Giner de la Fuente, F. (2003). Como crear y hacer funcionar una
empresa. Conceptos e instrumentos. Madrid: Esic Editorial.
Gil Estallo, M. d. l. A., Giner de la Fuente, F., & Griful Miquela, C. (2006). The strategic social
map of a nongovernmental organization. International advances in economic research, 1 (12),
105-114.
Holliday, C., Schmidheiny, S., & Watts, P. (2002). Walking the talk: the business cases for
sustainable development. Sheffield: Greenleaf.
Monografico Revista Economistas (2005). Empresa responsable. Madrid: Colegio de
Economistas Madrid, 106.
Nieto Antolin, M. (2004), Responsabilidad social corporativa: la ultima innovacion en el
management. Universia Business Review. Actualidad Economica, First Quarter, 28-39.
Published online: 6 June 2007
[c] International Atlantic Economic Society 2007
M. d. A. Gil Estallo ([mailing address])
Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain
e-mail: angels.gil@upf.edu
F. Giner de-la Fuente
Universidad de Alcala de Henares, Plaza San Diego s/n, 28801 Alcala de Henares, Madrid, Spain
e-mail: f.giner@uah.es
C. Griful-Miquela
Universitat Oberta de Catalunya, Sibelius, 10_12, 1_4, 08026 Barcelona, Spain
e-mail: cgriful@uoc.edu
(1) Friedman (1966). Capitalismo y libertad. Madrid: Ediciones Rialp.
(2) From Pope Leon XIII in Rerum Novarum (1891) to Centessimus Annus by John Paul II
(1991). Business economy authors, such as Peter F. Drucker, Herbert A. Simon, Boris
Ackerman, Saul Bouer, John Bowen, Richard M. Cyert and James G. March, Jim Collins, have
also made their contributions. See also Manual de la empresa responsable (2005), Biblioteca
empresarial. Madrid: Cinco Dias, 5. It is also necessary to mention the birth of trade unions in
the first quarter of the 20th century. They were born mainly as a reaction to the abuse upon
employees by property, as well as the precarious living conditions in that period.
(3) Bophal (1984), Exxon Valdez (1989), Prestige (2002)
(4) Use of child labor in the balloon manufacture by Nike in Indonesia (1993); Shell supported
the Nigerian dictatorship (1993); Monsanto producing genetically modified products (1997);
Enron fraud (1992), which also affected Arthur Andersen.
(5) http://www.oecd.org
(6) About legislation and organized social collectives; see Manual de la empresa responsable
(2005), Biblioteca empresarial. Madrid: Cinco Dias, 1 and Nieto Antolin 2004. Responsabilidad
social corporativa: la ultima innovacion en el management, Universia Business Review-
Actualidad Economica. pp. 28-39.
(7) There are only four models of corporate social responsibility in the European Union: the
partnership model, the company in the community model, the sustainable and citizenship model,
and the Agora model. It is also necessary to mention the application of the norm UNE EN ISO
14001 in Spain, related to environmental management systems within the company. See Manual
de la empresa responsable (2005), Biblioteca empresarial. Madrid: Cinco Dias, 6.
(8) In this respect, Global Compact Plus has developed a model based on the ten principles of the
World Agreement instigated by the UNO (principles related to human rights, working rules,
environment, and governability). This model develops several measurement indicators. The
collectives interested in it (employees, investors, consumers, etc.) might consult the rankings of
the different companies in http://i-ratings.innovestgroup.com. It is only necessary to register. See
El Pais, salmon pages, number 36 (October 16, 2005).
(9) The starting point in recommending the application of good business practices in Spain for
companies quoted in the stock exchange was the Olivencia report in 1998. This report tried to
adopt the rules applied in anglosaxon countries to Spain (Cardbury report in UK and the ALI-
ABA principles in USA). In 2002 the Aldama commission recommended the obligation, for the
35 companies of the IBEX index, to apply the good business practices mentioned. See Manual de
la empresa responsable (2005). Biblioteca empresarial. Madrid: Cinco Dias, I.
(10) See Manual de la empresa responsable (2005). Biblioteca empresarial. Madrid: Cinco Dias.
Madrid, 1
(11) See Biblioteca Empresarial Cinco Dias 2005, October 12, p. 12.
(12) Argandona 1997. Etica y empresa: una vision multidisciplinar. Madrid: Fundacion
Argentaria.
(13) When the objective consists of minimizing an indicator [i.sub.j], then -[i.sub.j] would be
maximized.

The Growing Importance of Corporate Social Responsibility

June 03, 2008
// BY Jerry Moskowitz

Once a niche investment strategy, Responsible

Investment (RI) has become a priority for individual and institutional investors globally. In the
wake of corporate scandals, and the tightening of carbon emissions standards over the past
decade, investors have begun to seriously evaluate the environmental, social and corporate
governance risks within their portfolios. In turn, companies are responding to investor demands
by re-examining the way they do business—from the reduction of emissions and energy
conservation to fair trade and labor standards.
As responsible investment standards continue to evolve, it becomes quite difficult for investors
to keep up to date on which companies in their portfolios have stringent corporate social
responsibility (CSR) policies. As a result, both institutional and individual investors are turning
to index-based investments to help them navigate the CSR landscape and take the guesswork out
of responsible investment. As a result, companies interested in capturing these investments are
striving to improve their CSR practices and policies in order to be included and remain in these
indexes.
FTSE4Good Index Series
FTSE first became involved in responsible investment due to the growing demand from investors
for tools to measure the numerous and varying global standards of corporate social
responsibility. The FTSE4Good Index Series was created in 2001 to offer a series of transparent,
rules-based and pre-screened benchmark and tradable indexes. Today, many companies use the
globally reputable FTSE4Good standards in developing corporate social responsibility strategies
and initiatives, and also as a measure for their success in meeting CSR goals.
One of the tenets of the FTSE4Good Index is to challenge companies to improve their corporate
social responsibility practices for the good of the environment and human rights. Each year, the
criteria evolve to reflect what constitutes good practice globally. Since its inception, FTSE4Good
has tightened its environmental, supply chain and anti-bribery criteria in order to raise the bar for
its constituent companies. In this way, FTSE4Good is able to maintain its reputation as the
leading global standard for determining and measuring responsible investment.
CSR: Good for Business
Inclusion in responsible investment indexes has its rewards. As responsible investment moves
from a niche to mainstream investment strategy, index invest-ment is steadily increasing.
Managers are now using RI indexes to create investable products—mutual funds, exchange
traded funds (ETFs) and other vehicles—in which the general public or institutions can invest. In
the U.S. market alone, RI accounts for an estimated $2.3 trillion in assets under management,
and research estimates by financial consultancy Celent predict that the RI market in the U.S. will
reach $3 trillion by 2011. Companies that uphold stringent CSR standards and are part of
responsible investment indexes are best poised to attract these assets.
Companies with high CSR standards, such as those included in FTSE4Good, are able to clearly
demonstrate responsibility to investors, legislators, shareholders, employees, customers and the
general public, and therefore manage risk and enhance their corporate reputation. By focusing on
and reducing their environ-mental impacts, they are also saving money on electricity bills,
resource use and waste removal. Companies with rigorous corporate responsibility standards are
also best positioned to attract and retain high quality staff, thereby reducing employee turnover
rates and recruitment costs.
Where to Begin
A recent study conducted by FTSE in conjunction with Insight Investment, one of the UK’s
largest institutional investors and Business in the Community, an association of companies
dedicated to CSR, sought to define and report on the role that corporate boards should play in
directing CSR. The study found that boards should be charged with:
• Setting values and standards
• Developing CSR strategy
• Being constructive about regulation
 • Using internal controls to assure and delegate responsibility
• Aligning performance management
• Creating a culture of integrity
Boards should ensure that CSR standards are explicitly stated, consistent with the values of the
business and effectively communicated to employees. They should take into account the
conditions, challenges and risks specific to their markets, and also define appropriate strategies
and responses to these problems. Rather than wait for imposed regulation, boards must support
self-regulatory standards and ensure that the company meets its own goals. They should put in
place internal audit systems to ensure compliance with these standards. Finally, responsible
behavior by executives and other employees should be rewarded over both the short and long
term, and corporate values should be cultivated from the top down by fostering a culture in
which responsible behavior is expected and irresponsibility is penalized.
Benefits of FTSE4Good Index Series
Investors
• A benchmark for responsible investment funds
• A basis for tracker funds
• A starting universe for actively managed funds
• A basis for a range of structured products
• For engagement strategies

Companies
• A framework for ‘responsible’ business management
• A ‘reputational’ badge in stakeholder communications
• To gain access to ethical and socially responsible investors’ funds

Non-Governmental Organizations (NGOs)

• A list to screen potential partners and donors
• A mechanism to contribute to the encouragement of responsible and
sustainable business practice throughout the world
• For use within their own investments (e.g. trusts, foundations & pension
plans)
FTSE’s Own CSR Practices
FTSE Group is active in managing its own corporate responsibility and defines its
stakeholders as six separate groups—employees, shareholders, suppliers, clients,
local communities and the environment—and is continually working towards
managing and minimizing risks and impacts in these areas. Environmental
conservation figures largely in FTSE Group’s practical commitment to socially
responsible issues. Over the last year, FTSE has recycled some 87 percent of the
company’s waste paper and the impact of savings in energy usage and waste
generation show that each FTSE employee saves the equivalent of 2.7 metric tons of
greenhouse gas each year. FTSE also works closely with UNICEF, contributing over
U.S. $2 million to the organization since the two began working together in 1999.

mportance of Ethics in Business

by Henry Posters - August 2003

Why are ethics important?

Recent events in corporate America have demonstrated the destructive effects that occur when
the leadership of a company does not behave ethically. One might wonder why highly educated,
successful, and business savvy corporate professionals at Enron, Tyco, WorldCom, and Adelphia
got themselves into such a big mess. The answer lies in a profound lack of ethics.

Running a business ethically is good for business. However, "business ethics" if properly
interpreted means the standards of conduct of individual business people, not necessarily the
standards of business as a whole.

Business leader are expected to run their business as profitably as they can. A successful and
profitable business in itself can be a tremendous contributor toward the common good of society.
But if business leaders or department managers spend their time worrying about “doing good”
for society, they will divert attention from their real objective which is profitability and running
an efficient and effective organization.

Applying ethics in business makes good sense. A business that behaves ethically induces other
business associates to behave ethically as well. If a company (or a manager) exercises particular
care in meeting all responsibilities to employees, customers and suppliers it usually is awarded
with a high degree of loyalty, honesty, quality and productivity. For examples, employees who
are treated ethically will more likely behave ethically themselves in dealing with customers and
business associates. A supplier who refuses to exploit its advantage during a seller's market
retains the loyalty and continued business of its customers when conditions change to those of a
buyer's market. A company that refuses to discriminate against older or handicapped employees
often discovers that they are fiercely loyal, hard working and productive.
It is my firm belief that a “good man or woman” who steadfastly tries to be ethical (i.e. to do the
“right thing", to make appropriate ethical decisions, etc.) somehow always overtakes his immoral
or amoral counterpart in the long run. A plausible explanation of this view on ethical behavior is
that when individuals operate with a sense of confidence regarding the ethical soundness of their
position, their mind and energies are freed for maximum productivity and creativity. On the other
hand, when practicing unethical behavior, the individual finds it necessary to engage in
exhausting subterfuge, resulting in diminished effectiveness and reduced success.

The best way to promote ethical behavior is by setting a good personal example. Teaching an
employee ethics is not always effective. One can explain and define ethics to an adult, but
understanding ethics does not necessarily result in behaving ethically. Personal values and
ethical behavior is taught at an early age by parents and educators.

I am quite certain that well-educated business professional like Kenneth Lay, Martha Stewart,
Dennis Kozlowski or the former CEO of General Motors who received a multi-million dollar
salary and bonus package in 1987 at a time when the company was closing plants and was laying
off thousands of people know and understand ethics. They either were too far removed from the
“nitty gritty” that ethical standards did not resonate with them or they simply did not care.

People at the top of an organization are expected to share the burden of cost reductions and belt-
tightening during difficult times. Senior executives of companies who freeze their salaries or take
a personal pay cut in a problematic year rather than lay off employees to cut costs deserve our
utmost respect. However, this does not mean that a company should lose flexibility in adjusting
its cost structure during bad economical times, replace old factories by new ones, or change
technology in ways that would require fewer people to do the work. Decisions like that should be
made with empathy and support (financially) to those who will be affected by it.

Conclusion
Ethics are important not only in business but in all aspects of life because it is an essential part of
the foundation on which of a civilized society is build. A business or society that lacks ethical
principles is bound to fail sooner or later.