Corporate Social Responsibility & Governance: an Examination of Shareholder Relations

Introduction

Corporate social responsibility, CSR, is an aspect of organizational management where a firm seeks to show appreciation to all its shareholders for their participation in business. Shareholders include both internal and external communities of the organization whose interactions enable the organization to attain its objective. The internal community mainly involves the employees, while the external community includes a host of groups, such as consumers, the neighboring community, government, as well as the stockholders of the company. A company must always ensure that it maintains good relations with these communities for the sake of continuity of business. By ensuring that their life quality is good, the organization is assured of available consumers in the future. This paper seeks to discuss the whole issue of corporate social responsibility, and will in particular dwell on the subject of shareholder relations.

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The meaning of CSR

According to Sims (2003), businesses need to continuously commit themselves in acting ethically as well as making a direct contribution in economic development. In all these activities, the main corporate focus should be seeking to better the standard of life led by the workforce, their immediate families, and the overall community. Businesses have been roundly criticized over the years for their actions and activities, a situation that has led to improved corporate concern for the need to involve with society in managing social environment and pursuing a changed social contract.

There is no any universally accepted definition of CSR because many corporate bodies tend to describe it in a way that specially suits and addresses their own concerns. Some organizations, for instance, view it more in terms of a system, where the main sections are divided into internal as well as external shareholders of the organization. For others, CSR is simply a voluntary exercise that targets to improve the profile of the company in the eyes of the shareholders (Zu 2009). However, most societies have come up with government guidelines which specifically seek to control how CSR is done by corporate bodies. Such a kind of framework does not leave to the company’s administration and management to choose on how to conduct their CSR but rather lays out the overall CSR procedure.

CSR follows a number of principles which, if adhered to the latter, will likely bring positive results to the organization. Ensuring the organization manages the environment in a way that mitigates its resultant operation effect is one of the basic ideals of the program. Companies must also ensure they remit their taxes to the authorities accurately, and on time to enable the governments undertake their mandated jurisdictions effectively without any delay. Equally important, organizations must accord respect to their workforce by paying them promptly and in a commensurate manner. In all their business dealings, like outsourcing of materials, companies must ensure that their partners also adhere to sound practices in terms of their environmental and labor practices. The dealings of the organization with the outside world should particularly follow ethical practices and codes (Mullerat & Brennan 2011).

CSR versus capital

CSR captures the voluntary corporate actions that are meant at improving social conditions. These actions are not compelled by law but are willingly done in order to further social good to communities as the firm extends over explicit transactional interests. Thus, CSR’s voluntary nature implies that the activities can generally be looked at as grants or gifts extended to the numerous stakeholder groups by the corporation (Gottschalk 2010, p. 191). Nevertheless, CSR gifts come with attached strings. As noted by sociologists and anthropologists alike, the ‘strings’ emanate from ‘intangible requitment’ process, or, ‘unspecified reciprocity’ which generally underscores gift giving as an aspect of buying respect.

Additionally, CSR plays the role of rules maintenance by virtue of sending the firm’s information to different social actors that eventually lowers search, as well as evaluation costs. In this regard, it can be argued that CSR symbolizes willingness by the organization to act in an altruistic manner and not to simply act in an agonistic way. The shareholders, in determining the altruistic orientation of an organization, look at the CSR activities as part of the signals (Crane, 2008, p. 138). Further, businesses’ macro-institutional norms, in any case, are to make profits. This is what all general public actors existing in capitalistic societies accept and live with. In order to make profits, behaviors that are self-serving, self-considering, and self-dealing are highly required. Together, these realities are what define a firm’s orientation of being either substantially or completely altruistic.

To the managers of the firm, the idea behind CSR and its effect is not really to showcase altruism in its complete fullness but rather to show how the firm is not wholly self-interested. It also aims at passing the information that the company’s leaders consider social good in whatever decisions they make. Whenever such signals are portrayed to the external stakeholders, the organizations accrue positive attributions in return, or what is referred to as moral capital. As such, the outsiders visualize their organization as being too much preoccupied in activities that aim at bolstering their social and moral lives (Fernando 2007, p. 22).

CSR activity has two features which, together, work towards determining the potential value or strength. Firstly, the activity must be in the knowledge of the public, either through the firm doing the actual reporting itself or through the analysis and reporting done by others. Secondly, CSR activities must be well substantiated to the extent of creating a declaration that is both unselfish and reasonable. Once a company’s CSR activity gets coverage by the media, as well as the outside evaluators, it goes to show that the investment by the company is substantial enough that it can be recognized as commitment which is also credible. Thus, a noteworthy or substantial CSR is one that attains both criteria (Ihlen, Bartlett & May 2011, p. 374).

Insurance created by moral capital

There are moments when business activity still impacts negatively to stakeholder groups. This is despite the many efforts put in place by the company or firm to compliment the various shareholders. Some negative impacts, such as putting a halt to the distribution of a particular product or service, can be described as benign. Some consequences, such as closing down a plant, could be termed as local. Equally, some other negative impacts could be as a result of global activities, such as environmental disasters or market-destabilizing fraud. When such negative events occur, the response from the stakeholders often is to react by punishing the organization. These could be by way of sanctions, where boycotts or badmouthing could be employed. In a more severe response, stakeholders could resort to such actions as revoking the firm’s right to conduct business. Such sanctions, however, ought to follow an approach that is legal in both derivation and application. In meting out their punishment to the firm, stakeholders consider the negative effects of the firm’s act, as well as the offender’s intentions and perceived state of the offender’s mind. In instances where shareholders feel the firm has committed very bad acts, punishments are also likely to be severe. Many theorists in this area argue that the engagement of a company in CSR generates economic value since the moral capital derived as a result offers a mitigating factor as far as law process of attribution is concerned (Angwin, Cummings & Smith 2011, p. 48). The resulting goodwill should in itself be able to scale down the overall severity created by sanctions through the encouragement of stakeholders to offer some benefit of doubt to the firm. This is particularly in case ambiguity overrides the existing motive. In other words, CSR-based moral capital generates value if it, in turn, assists stakeholders to attribute or put a connection between negative impacts of the firm to managerial maladroitness, instead of malevolence.

Although it could appear difficult to measure the mental processes of stakeholders, it is possible to observe whether these shareholder groups, on the other hand, behave in a manner that is consistent with an attribution process put down in theory. Such consistency would go on to showcase the ‘insurance-like’ protection that CSR activity generates.

CSR engagement and the resultant effects

CSR’s economic value can reasonably be termed or proposed to be contingent. By engaging in social activities, the firm signals a non self-serving course. Where a negative event occurs, however, the investors must act in a speedy manner to anticipate what the potential actions of the other stakeholders will turn out to be. That is, how are customers, employees, suppliers, and regulators likely to react? What sanctions could they use to banish the organization in return? How severe could their actions be? In any case, negative events, however much they are unanticipated, or even if partially anticipated, will end up generating stock price reactions that are negative because investors are anticipating the stakeholders will react in a way that is negative (Freeman, Harrison & Wicks 2008).

To the investors, CSR activity will signify the incidence of moral capital which could also potentially temper with sanctions. Firms that lack CSR activity can be said to lack this kind of buffering goodwill, a scenario that exposes them a lot to impacts with even greater outcomes. In this case, therefore, CSR activity is a signal to investors that tries to explain the probable ways through which stakeholders are likely to react.

Stakeholder characteristics

Different scholars have attempted to draw a distinction line between the numerous stakeholder groups for firms. For instance, Freeman et al. (2008) identify primary stakeholders with groups that perform all essential activities supporting the operation of the organization. On the other hand, he points out secondary stakeholders have the necessary potential to influence the primary stakeholders of the firm. The primary stakeholders have the power to make legitimate claims, compelling the managers to act in a manner that addresses their interests. They have the power and urgency to ensure their claims are enforced. Secondary stakeholders, on the other hand, enjoy legitimate claims although they do not have urgency and the power enjoyed by primary stakeholders.

By virtue of their position to enjoy power and urgency advantages, primary shareholders are likely to be induced by CSR activities to an extent that they increase exchanges with the organization. The firm’s main reason would be to forestall the negative economic consequences, or allow their managers a free and flexible room to pursue strategies with indirect interests of the primary stakeholders. When a firm is planning for CSR activities, it should ensure the activities produce exchange capital for the primary stakeholders. This will increase the firm’s potential to create advantageous exchanges with its primary stakeholders. However, such CSR activities have a limited likelihood of generating moral capital since the actions could only be regarded as being consistent with the profit-making interest of the firm. They can simply be viewed as selfserving and not other-regarding behaviors.

Nevertheless, CSR activities targeting the secondary stakeholders have a very opposite profile. Because they do not enjoy urgency and power advantages to further emphasize their claims to the managers of the firm, it is less likely that the activities of the firm will seem to be self-interesting, and designed to enhance exchange prospects with the primary stakeholders. The acts are more likely to be envisaged as voluntary social beneficence, whose basis is on normative, as well as pragmatic appeals. Thus, the managers can be looked at people with the concerns and plight of others at heart, compared to the case of primary stakeholders.

An exploratory factor analysis conducted by Mattingly and Berman (2006) uncovers a similar data pattern in as far as CSR activities targeting primary stakeholders are concerned. The writers refer to CSR activities targeting primary stakeholders as technical CSR, abbreviated as TCSR, while those directed towards secondary stakeholders as institutional CSR, ICSR. In actual sense, though, CSR activities are not different inherently. It is the difference among CSR stakeholders that brings about the perception in as far as the organization and its management is concerned.

The characteristics of the firm

It is evident that the level of a firm’s intangible assets is likely to impact its CSR activity and value. This is in as far as the shareholder values discussed so far, and the risk management activities are concerned. Insurance, which is taken as a way of managing against risk, grows in value when the cost of financial distress also increases. Negative events that lower the cash flow of a firm, or those that raise the risk level may resultantly generate greater financial distress levels to an extent of compelling the shareholders to react in ways that raises risk levels. For instance, customers may decide to devalue the brand, while the key employees may quit altogether. For suppliers, their actions may range from increasing cost of capital, to tightening the terms of trade. In general, CSR activities that discourage stronger punitive responses should be more valuable to firms, particularly where the intangible assets realized and the stakeholder relationships play a significant role in value creation.

Size of the firm in relation to CSR

Size plays a more significant role in as far as CSR activities of a firm are involved. The size of the firm influences the risk faced in the sense that those with a market presence that is large are likely to incur more risk. Size can either be looked at in form of its features, its dimension, or context within the operation of managers. When being regarded as a feature, a larger market presence would mean more transactions. More transaction, on the other hand, implies heightened probability of experiencing negative events. In other words, negative outcomes attract more opportunities. In this regard, therefore, larger firms should engage more in CSR so as to put a check on the increased risk as compared to smaller firms.

CSR engagement will also be of more value to a larger firm especially when size is considered to be the basis upon which managers operate. Larger firms, in contrast to smaller ones, face greater scrutiny and coverage from the media, stakeholders, as well as other special interest groups. Additionally, larger firms enjoy comparatively higher profiles, a scenario that increases negative action risk from outside constituents. The negative events that are likely to be faced by a larger firm will, in turn, occasion a situation where the firm’s CSR will be considered by the numerous groups and individuals. Larger firms engaging in CSR are likely to consider the value because of the frequency with which it will be used (Gössling 2011, p. 43).

Negative social impacts

These impacts may occur as a result of numerous reasons; it could either be because of a company’s membership to a certain industry, such as tobacco or nuclear power, or it may result from the actions of the firm that have gone on for a longer period of time. The moral capital that arises from engaging in CSR activities emanates from the non-self-serving intentions. The combination of the self-serving interests and the consideration of others’ interests end up weakening the commitment intensity that is perceived by the shareholders in the presence of the organization’s strong evidence.

Firms that already have negative social impacts may find it difficult deriving any benefits from their CSR activity because the general perception would be that the company in attempting to atone for previous sins. It could be assumed to be a compliment or substitute for the continued act of performing other negative practices. For instance, tobacco companies are viewed in this light whenever they try to offset the negative image that is associated with their products during their generous philanthropy acts. In such instances, the overall CSR value may be diminished, or worst still, just looked at as an attempt to ingratiation.