1
ANALYSIS OF HOW CORPORATE
SOCIAL RESPONSIBILITY (CSR) POLICIES
CREATES VALUE-ADDED FOR
COMPANIES
Dissertation August 2013
MBA in Finance
Beatriz Jaenicke 1670035
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Table of Contents
Acknowledgements ……………………………………………………………………………………………………. 5
Abstract
…………………………………………………………………………………………………………………….. 6
Chapter 1: Introduction
……………………………………………………………………………………………….. 7
Chapter 2: Literature Review ………………………………………………………………………………………. 8
2.1 Concept of CSR
………………………………………………………………………………………………… 8
2.2 The Shareholder vs. Stakeholder Concept
…………………………………………………………… 10
2.3 Different perspectives of CSR
…………………………………………………………………………… 14
2.4 Need for CSR …………………………………………………………………………………………………. 15
2.5 Concept of Value …………………………………………………………………………………………….. 16
2.6 The Triple bottom line of CSR ………………………………………………………………………….. 17
2.6.1 Economic dimension ………………………………………………………………………………… 20
2.6.2 Social dimension ……………………………………………………………………………………… 22
2.6.3 Environmental dimension
………………………………………………………………………….. 23
Chapter 3: Methodology
……………………………………………………………………………………………. 25
3.1 Research Questions and Hypothesis
…………………………………………………………………… 26
3.2 Structure of Research Method …………………………………………………………………………… 27
3.2.1: Positivism ……………………………………………………………………………………………….. 27
3.2.2: Deductive
………………………………………………………………………………………………… 28
3.2.3: Case study
……………………………………………………………………………………………….. 29
3.2.4: Multi- Method Quantitative Research …………………………………………………………. 30
3.2.5: Survey
…………………………………………………………………………………………………….. 30
3.2.6: Cross Sectional. ……………………………………………………………………………………….. 31
3.3: Sample ………………………………………………………………………………………………………….. 31
3.4 Ethics …………………………………………………………………………………………………………….. 32
3.5 Limitation ………………………………………………………………………………………………………. 33
3.6 Assumption to research ……………………………………………………………………………………. 33
Chapter 4: Research Findings
…………………………………………………………………………………….. 34
4.1 Economic Dimension ………………………………………………………………………………………. 34
4.2 Environmental Dimension
………………………………………………………………………………… 45
4.3 Social Dimension
…………………………………………………………………………………………….. 52
Chapter 5: Conclusions
……………………………………………………………………………………………… 68
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Recommendations for Future Research
……………………………………………………………………….. 70
Self Reflection on own Learning and Performance……………………………………………………….. 77
Bibliography ……………………………………………………………………………………………………………. 76
Appendix ………………………………………………………………………………………………………………… 82
Content of Tables and Figures
Figure 1. Sustainability
……………………………………………………………………………………………… 19
Figure 2.Research’s Hypothesis …………………………………………………………………….. 25
Figure 3. Research Method
………………………………………………………………………………………… 27
Figure 4.Revenue
……………………………………………………………………………………………………… 37
Figure 5. Net income ………………………………………………………………………………………………… 37
Figure 6. Return on Equity (ROE)………………………………………………………………………………. 38
Figure 7. Return on Assets (ROA) ……………………………………………………………………………… 39
Figure 8. Comparison ROE and ROA ……………………………………………………………………… 39
Figure 9. Economic Value Added (EVA) ……………………………………………………………………. 41
Figure 10. Stock Market Price
……………………………………………………………………………………. 43
Figure 11. Performance …………………………………………………………………………………………….. 43
Figure 12. Energy Reduction vs. Energy Policy Target …………………………………………………. 48
Table 1. Environmental &Energy Goals ……………………………………………………………………… 51
Figure 13. Awareness of CSR policies
………………………………………………………………………… 54
Figure 14. Good corporate citizen ………………………………………………………………………………. 55
Figure 15 Good reputation
…………………………………………………………………………………………. 56
Figure 16 Retention and Attraction of Employee
………………………………………………………….. 57
Figure 17 Pride of work
…………………………………………………………………………………………….. 58
Figure 18 Job Satisfaction ………………………………………………………………………………………… 59
Figure 19 Social Involvement ……………………………………………………………………………………. 60
Figure 20:Aligment with the CSR policies…………………………………………………………………… 62
Figure 21 Environmental Involvement
……………………………………………………………………….. 62
Table 2. Cross Tabulation
………………………………………………………………………………………….. 63
Table 3. Employee commitment & engagement …………………………………………………………… 65
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Figure 22.Sales per Employed
……………………………………………………………………………………. 66
Figure 23.Net income per Employed
…………………………………………………………………………… 66
Figure 24. CSR value curve
……………………………………………………………………………………….. 67
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Acknowledgements
I would like to express my sincere gratitude to my supervisor Andrew Quinn for his
useful comments, remarks and engagement throughout the learning process of this
master’s dissertation. Furthermore, I would like to thank all the participants in my
survey who have shared their precious time. I would like to thank friends and family,
who have supported and encouraged me throughout the entire process.
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Abstract
The world changes dramatically as each decade passes. These changes affect the
population as a whole. The business world is no different. Resource scarcity, power
outages and more complex labour unrest means that companies have to adapt
expeditiously to survive presently. With the current gloomy economic climate it seems
even more important for companies to take extra precautions to survive. Sustainability
and corporate responsibility have gained greater meaning for the successful companies
presently because of this volatile climate. They have become paradigms in their own
right which companies must follow in order to transition to a new paradigm.
Corporate behaviour and responsibility is an area that must change. Presently, it is
drafted into many companies’ business strategies as excessive exploitation of resources
and environmental damage is being severely punished.
Owing to all these factors, CSR is now a necessity and there is widespread acceptance
of this fact between major corporations. Change and transition to a new paradigm is
pivotal. Companies need to do with less without causing environmental harm, otherwise
survival would prove challenging.
An increasing amount of studies have been completed regarding the benefits of CSR.
However, most studies concentrate on the benefits to society, while less attention is paid
to the creation of value for organisations. In order to better understand CSR effects on
value-added for the company, this study explores the impact of the triple bottom line of
CSR (economic, environmental and social dimension) in a company case study,
Covidien.
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1. Introduction
The current economic climate has forced corporate bodies to reevaluate all strands of
their operations. An analysis of corporate social responsibility as a method of creation
of value is therefore very important as part of this reevaluation.
There has been a tendency in all organisations to downgrade the priority of CSR and to
treat it once again as a side activity, a form of philanthropy, that only leads to an
increase in costs. This is a misjudgement which this research aims to prove wrong.
This debate over CSR has existed since companies first assimilated responsibilities
beyond what was required of them by law. However globalisation and the growth in
multinational corporations has made this debate increasingly complex. Operating
globally confronts companies with a wide range of new issues which requires
adaptation in their CSR strategy e.g cultural and regulatory differences, labor and child
labor standards, bribery and corruption, health crises, human rights, deforestation, etc.
Scherer & Palazzo (2007) pointed out that globalisation “is eroding established
(primarily national) institutions and procedures of governance”. This a challenge which
companies must meet or it will force a downgrade in the importance CSR due to the
increasing complexity.
Another key issue, particularly for those opposed to CSR, is that the vagueness of its
definition allows huge leeway in what is proposed and accepted as CSR, how resources
are allocated to meet obligations and how the results of CSR are interpreted.
The existence of doubt and lack of clarity within the debate over CSR justifies increased
research. Thus, this research is undertaken fill gaps in areas of insufficient study.
Particularly there is a lack of information on the impact of CSR from the business
perspective, as the majority of the research comes from the perspective of the
stakeholders interests.
Recently several companies have been involved in social and environmental disasters
and as a result their legitimacy has been challenged (Palazzo & Scherer, 2006). As
a consequence, citizens are increasingly demanding corporations justify and legitimise
not only their economic actions, but their social and environmental actions in the
general public sphere (Christopher & Kirby, 2010).
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In order to achieve this, corporate social responsibility activities must encompass all
corporate social practices – economic, social, and environmental simultaneously
addressed and implemented in order to increase the conformity between corporate
behavior and the social expectations of stakeholders (Archie Carroll, 2013)
Several researchers have shown the relationship between a firm’s engagement with CSR
and its economic performance, the well-known “doing well by doing good argument”
(Bhattacharya &Sen, 2004; Orlitzky et al., 2003; Wood, 1991).
This research tries to tackle these factors from the perspective of business itself, by
measuring the value created (“the doing well”) for the firm through the implementation
of CSR policies (“the doing good”). In order to measure this value the researcher will
analyse the correlation between the three dimensions of the CSR (the triple bottom line-
people, planet, profit) with their three corresponding value indicators (economic, social
and environmental indicators) within the company.
Interest in measuring the specific impacts and outcomes of CSR, has increased.
Motivations for this focus are a need for internal justification of CSR budgets and to
enable companies to report CSR outcomes to internal and external stakeholders
(cebcglobal.org, 2005).
2.Literature Review
2.1 Concept and Evolution of CSR
There are many different definitions of CSR, but the most common view according to
the Green paper is, “CSR is a concept whereby companies integrate social and
environmental concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis.” (European communities, 2001).
CSR evolved as a concept in the 1950’s when the references to social conscience among
management practitioners and theorists were noted. Carroll credits Howard R. Bowen,
1953 author of the book “Social Responsibilities of the Businessman”, as the “Father of
corporate Social Responsibility”
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As early as the 1950’s businesses were beginning to be thought of as having a
responsibility to society as a whole by writers such as Keith Davis, who hypothesized
that the rewards of profit was not to be a tool for furthering divides in society between
rich and poor. By the 1970’s these divisions were becoming increasingly evident
through several examples of major corporations contempt for the environmental and
societal effects of their actions. This led to CSR, on a larger scale being seen as a
serious issue for the first time and Davis’s earlier work in the area began to show its
importance. In the 1960’s Joseph W. McGuire echoed Davis’s stance in his book
Business and Society(1963), he stated, “The idea of social responsibilities supposes that
the corporation has not only economic and legal obligations but also certain
responsibilities to society which extend beyond these obligations”(p.144)
The definition of corporate social performance is one which has evolved from this time
in an attempt to address the ethical responsibilities and how business responds to
changing pressures from society. This evolution has been seen in the writings of Sethi
(1975), Carroll (1979), and Wartick and Cochran (1985), each taking the idea of
corporate social performance and attempting to redefine and refine it for the challenges
which were being faced and were rapidly changing over the subsequent decades from
Davis’s time.
Four decades later CSR theory began to make new ground through the work of Michael
Porter and Mark Kramer. In their 2002 article in the Harvard Business Review they
attempt to again redefine this corporate obligation to society; “in the long run…social
and economic goals are not inherently conflicting but integrally connected” (p. 5). They
remodelled the ideas of CSR, showing that social investment had in itself a substantial
economic return. They revealed that social return and economic return were not in fact
separate entities but exist hand in hand with each other and encouraged businesses to
emphasize the significance of both forms of return.
Further expanding on this idea, Porter and Kramer explained that for companies to reap
any economic return from social investment they must invest in areas that provide a
long term impact rather than simply ‘throwing their money at any good cause’ and that
this impact must provide a competitive advantage for the company. This was a
development of the “sticking to your knitting” strategy outlined by Peters and
Waterman in 1982, which claimed that companies should focus on areas that they
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already provide expertise rather than stretching out of their portfolio into areas of
unfamiliar territory, where they have little know how. Porter and Kramer re-emphasise
this strategy by recommending that businesses ‘stick to what they know’ by using the
basic fundamentals of corporate strategy to develop and support benevolent areas that
benefit both society and the company itself.
In 2005 Rowe, while analysing the evolution of CSR over the preceding forty years
stated that there has been an increase in the popularity of CSR in recent times. Rowe
stated that this was not only due to the global justice movement or what he terms the”
second wave” of public outcry over corporate malfeasance’, but also due to the increase
of environmental awareness, increasing scarcity of resources and the demand for
transparency of operations.
Some of the more traditional CSR practices of enterprises were perceived not to be
credible, i.e. to be more public relations than real substance, then this could in the
longer term actually compound the problem of the trust gap between corporations and
society. Therefore measuring the effectiveness of particular CSR (the object of this
research) is extremely important in ensuring that it benefits society which in turn should
add value to the company through better public image.
2.2 The Shareholder vs. Stakeholder Concept
Two major theories on the design of the modern business firm exist, both laying out
similar blueprints for the policies and procedures of corporate governance, executive
compensation policies and the economic and social duties of businesses. Shareholder
theory focuses on the economic standpoint of these procedures, a firms’ duty to create
wealth rather than focusing on the significance of the firm to society and takes a view
that limits its responsibilities to shareholders, creditors, employees, customers etc.
Stakeholder theory expands upon this first theory, sharing to an extent the idea that the
importance of wealth creation is at the core of the firm but emphasises the central role
which the firm plays in interacting with those groups contiguous with the firm and
society as a whole (M.Pfarrer, 2010).
Shareholder theory has been developed from the evolving ideas started almost two
hundred and fifty years ago with Adam Smith’s ‘The Wealth of the Nations’ in 1776,
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through to the “Chicago School” of economics, where the likes of Milton Friedman
have laid out what is the current form of the theory.
As was alluded to above this theory focuses on the profit generating capabilities of a
firm to maximise the wealth of the shareholder. Smith’s influence is clear, as his
writings on the importance of “free” markets, the “invisible hand of self-regulation;”
and the importance of “enlightened self-interest”, dominate shareholder theory. The
theory espouses the belief that markets are best regulated through the mechanism of the
invisible hand, refuting the idea that there is a need for government or regulatory
intervention in business. This idea is based upon the belief that society will in fact
benefit despite or because of a firm working for its own self-interest to maximise
profits. Shareholder theorists state that regulation of business is unnecessary as illegal or
unethical behaviour undertaken by firms is controlled, or dealt with by the markets
themselves in the form of ‘the invisible hand’ and as a result these firms will suffer for
their behaviour.
For the last forty years the “Chicago school” have promoted the idea of a clear
separation in responsibilities; the state being responsible for social problems, and
businesses being responsible for maximising profit whereby never the two should meet.
These theorists believe that this separation is so strong that even the idea of corporate
philanthropy or any action by firms that does not aim to increase profit is in fact a waste
of shareholders money and as such could be seen as a form of theft from the
shareholder. (M.Pfarrer, 2010) As Friedman stated ‘the business of business is
business’. He maintains the belief that issues of morality or social reform are for
governments and NGOs to deal with, people who are trained to deal with these
problems and not to be laboured through by businessmen as an afterthought or
distraction from the work they are specialised in. Friedman believed that by redirecting
firms away from the work they specialised in it would ultimately have a detrimental
effect on society and put them in conflict with the duties of those whose role it was to
address such issues, namely democratically elected officials.
From this standpoint, Friedman was of the belief that firms that may have been seen as
lacking a social conscience were in fact acting more ethically or morally by staying
away from such areas of interest. He highlighted the importance of governments and
society in creating and maintaining such boundaries. He argued that with these
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boundaries in place shareholder wealth maximisation could take place in a moral,
ethical, and legal environment.
Shareholder Theory today:
The most recent and important shareholder-based theories are: “transaction cost
economics” (TCE) and “agency theory.” Both draw on the shareholder theory approach
to maximising a firm’s efficiency. However both also highlight a pessimistic view of
human self-interest, seeing people as being basically opportunists who put their own
interests first, possibly to the detriment of the firm.
TCE is based on the existence of strong corporate hierarchies and systems being in
place to reduce self-interested behaviour from employees. Agency theory is based
around the principal vs. agent, or in other terms, shareholder vs. manager relationship in
firms and how to balance the interests of each to create the most value for the firm.
(Oxford Handbook of Human Capital).
Stakeholder theory is a more contemporary approach than that of the aforementioned
shareholder theory and focuses on incorporating a responsibility of firms on
stakeholders other than just its owners. Both theories emphasise the basis and strategies
of the firm to maximise its potential in relation to competing firms, so despite their
many differences, they have similar objectives. The key differences lie in how a firm
can achieve these goals.
One difference lies in the belief by stakeholder theorists that the most efficient means of
achieving such competitive advantage is not necessarily through maximising
shareholder wealth. This theory bases competition and wealth gains of a firm through
utilising all resources including those which exist outside its own shareholders (Oxford
Handbook of Human Capital).
Stakeholder theory has its roots in the late 1970’s through theorists such as A. Carroll
and E. Freeman. They wrote at a time when classical economic theory and in particular
shareholder theory was increasingly being seen as out of date and needed a broader
approach that encompassed sociological, philosophical, psychological and management
thinking. They believed that a firm could perform better by taking all stakeholders into
account in the running of a firm.
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Carroll sought to redefine the understanding of where a firm’s responsibilities lay,
highlighting four areas of which different degrees of responsibility could be ascribed to
each. These areas were ‘economic (to generate shareholder wealth), legal (to obey laws
and regulations), ethical (to recognize that the firm is part of a community, and thus has
obligations to, and an impact on, others), and discretionary (to engage in philanthropy)’.
As with shareholder theory, economic responsibilities maintained their position as being
the most important responsibility of any firm. Where it differs however is in the role of
the firm outside its shareholders, where Freeman and Carroll believe that the benefits to
stakeholder and shareholder are virtually interlinked, in short what is good for one is
good for the other. Furthermore, by taking this broader, multi-dimensional approach
that takes stakeholders into account, firms are in a better position to achieve their full
potential.
Stakeholder theory today:
The term stakeholder is a used in this context to include a wide range of groups that are
influenced or affected by the firm, from consumers and competitors, right up to
governments.
Stakeholders can be assigned to three categories: capital market stakeholders (e.g.,
financiers and shareholders); product market stakeholders (e.g., customers, suppliers,
communities); and organizational stakeholders (e.g., employees)(M.Pfarrer, 2010)
This broadened structure, incorporating more than just the firm itself has led to much
debate in how to order which interested parties are more important than other, known as
the “hierarchy of salience” (M.Pfarrer, 2010). This hierarchy and the many complexities
within it lead to a firm needing to be able to judge competing claims from its
stakeholders and manage the interests of one of these groups over the other. As a result
of this dilemma there has been an increase in interest from public relations and
communications researchers, attempting to dissect how these firms manage interactions
with these stakeholders. From this research new ideas such as “symmetric
Communications” theory has emerged which highlight the interdependence of a firm to
its environment. This theory emphasises the necessity for a firm to balance stakeholder
and self-interests in as symmetrical an approach as possible even when those interests
are opposed.The obligation to find a compromise or balance falls to both the firm and
the stakeholders, finding a middle ground where all parties benefit. Firms do still
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maintain to push for their own self-interest and garner as much advantage as they can
but doing so which taking regard for the needs of the stakeholders.
The “stewardship theory” is a more recent take on stakeholder theory and provides the
counter argument to agency theory, claiming that humans can in fact put the interests of
others ahead of their own. L.Donaldson and J. Davis have been at the forefront of
promoting this more optimistic approach to corporate governance.
CSR is itself a stakeholder-related theory, with the obvious dimensions of a firms
interactions with its environment being central to CSR. “CSR can mean promoting
environmental integrity, economic development, and social justice as part of the firm’s
overall strategy to gain competitive advantage.” (M.Pfarrer, 2010).
2.3 Different perspectives of CSR
There are many authors who argue in favor of and against the implementation of
policies of CSR in the companies
Of the arguments against CSR, The most influential are -profit maximisation and free
choice – competitive disadvantage costs and the free-rider issue – the lack of requisite
skills among business people – the lack of accountability (Chartered Accountants
Ireland)
For those opposed to CSR profit maximisation is seen as the only social responsibility
of a business. Paying taxes, providing employment and complying with all relevant
legislation and regulation is seen as sufficient social responsibility. Also, profit is a key
measure of managerial effectiveness and a clearly defined managerial goal of profit
maximisation allows a manager’s performance to be assessed easily. It is especially
important in companies with professional manager without an owning interest.
The final case in the argument against CSR comes from marketing guru Theodore
Levitt who argued that “sentiment is a debilitating influence in business that fosters
leniency, inefficiency and sluggishness. The governing rule should be that something is
good only if it pays. Otherwise it is alien and impermissible.”
Many advocates of CSR including, Henry Mintzberg, Michael Porter and Dave Packard
view CSR as the essence of a developed society and as essential to business
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strategy. Packard wants businessmen to see that companies exist to deliver something
more than profits to society. Doing good for society has also been shown to deliver
more for shareholders. Michael Porter believes that CSR can deliver a competitive
advantage to businesses (Chartered Accountants Ireland).
It has been argued that a business receives its legitimacy from society and that this
charter permits a business to operate within a society. It is important therefore that
Business must deliver something back to society if it wishes to survive and flourish in
the long-run. The result of these efforts is a better environment for business which
makes it easier to recruit customers, staff, investors and make profits
Furthermore, if corporations voluntarily exceed their regulatory obligations then the
need for interference of government in business affairs is diminished. This leaves
business free to concentrate on maximising commercial returns and keeping investors
happy.
Taken together the arguments for and against CSR can be considered as not being
entirely opposing. Opponents of CSR argue about the need for focus on profit
maximisation and regard CSR as a sideshow. However if a more structured and
measurable link can be found between efficient CSR strategies and a company’s bottom
line the both viewpoints will be satisfied.
2.4 Need for CSR
CSR makes exceptional business sense especially when one considers the consequences
that social and environmental responsibility can have for the business. For example,
businesses exist in a reciprocal relationship with their external environments where their
dealings with the larger environment determines to a significant extent how successful
they are in their quest for profits
The Resource Based View identifies the strength of this environmental relationship with
the business and how the exchange of inputs and outputs with the environment
determines the quality of business processes. It can therefore be implied that socially
responsible business practices can only be viewed as a positive asset and that recent
arguments that have been made against investing in CSR do not hold water.
(Management Study Guide)
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Given the weight of evidence now supporting CSR, it seems logical that businesses
should be embracing it wholeheartedly, rather than reluctantly applying aspects that suit
them.
Promotion and explanation of corporate responsibility among the media, businesses and
customers will be necessary if the concept is to enter mainstream thinking. This will
involve changing its perception as merely another business cost. Likewise, those
advocating this method must fight to avoid its adoption as little more than a PR exercise
for companies. CSR must be widely accepted and woven tightly into the fabric of
businesses if it is to have the long-term strategic effects of producing a compassionate,
socially and environmentally conscious new capitalism (Management Study Guide).
Therefore, a lot of work remains to be done before proponents of CSR can rest assured
that corporations will automatically regard these methods as being more than just a fad.
The message needs to be stated and restated so that CSR becomes an integral part of the
modern business environment as a process of voluntary acceptance by corporations,
rather than being adopted as a necessity due to societal and environmental pressures as
they arise.
2.5 Concept of Value
Mutually dependency between the success of a company and the health of the
communities around it is the basis behind creating shared value. Recognising and
building on these links between economic and societal progress and has potential to
stimulate growth and the prospect reshaping capitalism.
The concept of value has changed markedly from a focus on the creation of shareholder
value to a notion of value linked to the stakeholders interest.
The concept of Creating Shared Value (CSV) is a business concept first introduced
in Harvard Business Review article Strategy & Society: The Link between Competitive
Advantage and Corporate Social Responsibility. This value will be everything that
allows the company to obtain a benefit or contribute or to enrich, not only to the
shareholders, but all of the stakeholders
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The demand for value added in all aspects of the company becomes a new economic
factor to be taken into account in a company’s strategy. It means investing in the
processes, products and human capital, with the aim to improve the quality of the
product or service offered to the market
To develop a socially responsible economic dimension, without abandoning the goal of
creating value for the company, we must evaluate the expectations of different interest
groups. As CSR has evolved, enterprises have started to explore ingenious solutions to
maximise their positive impact while also introducing strategies to minimise negative
impacts. While originally seen as a means for value protection (primarily risk and
reputation management), businesses have found that CSR can also provide opportunities
for new value creation (European Competitiveness Report, 2008).
Research shows CSR policies has an effect on six determinants and indicators of value
creation: cost structure, human resource performance, customer perspective, innovation,
risk and reputation management, and financial performance (European Competitiveness
Report, 2008).
CSR adds value because it enables companies to not only differentiate themselves from
competitors, build reputation and brand image but also to reduce costs. With adequate
management, a CSR approach creates simultaneous value for business and society. This
tests the hypothesis of the positive correlation between the company´s investment in
CSR and the creation of a better image for the firm
However, there are some limitations on this hypothesis as firms which engage in
socially responsible activities will not always be more successful. A single factor cannot
explain why any specific organisation is successful or unsuccessful. The overall success
of any organisation is a result of its entire portfolio of management practices and
policies, combined with industry and economic conditions, plus a certain degree of luck
(Cochran, 2007).
2.6 The triple bottom line of CSR
The term ‘triple bottom line’ (also known as ‘3BL’, ‘TBL’ and even ‘people, planet,
profit’) was coined with by John Elkington in 1998 even though its concepts has been
around for much longer.
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The ‘triple’ facet refers to the net financial, social and environmental achievements of a
business.
Traditionally, only the financial ‘bottom line’ result was considered when evaluating
business success, this referring to the income statement (formally the Profit and Loss
account) which shows the net profit after tax that the company has made during that
trading period. Older companies who were profit driven would prioritise processes that
made a greater contribution to the ‘bottom line’( E. Cohen, The CSR Reporting Blog)
The higher ‘bottom line‘meant ‘economic growth’. However, older generations gone by
were unduly concerned about the culture, society values, beliefs and the impact of
human activity on the environment. Organisations were free to operate as they pleased.
Recycling was an alien concept, social responsibility was unheard of as business existed
in a profit driven era.
During the 1980’s and 1990’s there was an ever increasing focus on environmental
matters when news concerning ‘the hole in the ozone layer’ took centre stage. The
impact of industry and transportation on the atmosphere now had to be factored in.
Business activities, of course, had to be profitable but also had to be sustainable from an
environmental point of view. The balance of Environmental Stewardship and Economic
Growth had to be viable (WCED Report).
The impact for businesses was that when natural resources were consumed, they had to
be replenished to ensure that in future, resources will be available. Business activities
had to be sustainable in relation to its impact on the environment. Companies within the
Economic Growth circle meant that production was not environmentally sustainable
(either through significant pollution or depletion of resources at a greater rate than they
could be replenished) (Report of WCED). On the other hand, being within the
Environmental Stewardship circle would mean that companies activities would lack
financial sustainability. An example of a ‘viable’ organisation would include production
of goods and services while minimising waste and incorporating possibly more
expensive but biodegradable packaging in the production process.
It is noteworthy to consider a third dimension in the mix. Widespread media coverage
brought companies such as ‘Nike’ to the forefront. Their use and exploitation of
‘sweatshop workers’, extremely low pay and torrid working conditions in developing
19
countries were highlighted.(R.Balko 2004). Stakeholders began to question the
activities of these businesses and ask questions about the social responsibility that
‘Nike’ and other similar companies had. Businesses are now obliged to act in a more
‘Equitable’ way. The Fair Trade Initiative is a high profile example of how companies
like Cadbury showed greater equitability to its suppliers by offering them fair prices for
their goods and services. Nowadays, failure to show such equitability would prove
unsustainable; a lack of perceived social responsibility demonstrated would lead to a
lack of competitiveness, as consumers and suppliers would move to other more
responsible competitors, hence that company losing profits. A truly equitable company
ensures that there is no exploitation in any section of production by monitoring their
whole process.
This triple bottom line approach of Environmental Stewardship, Social Responsibility
and Economic Growth ensures that business activity co-ordinates and accommodates
the needs of the stakeholders and consumers alike.
In current business reporting, it is often seen that detailed CSR reports identifying social
and environmental impacts in addition to the annual financial reports of an organisation
are published.Often, businesses struggle for sustainability through core activities (figure
1), and they sometimes rely on their CSR programme to ‘right the balance’ and push
them into the sustainability category.
Figure 1. Sustainability
The ‘Triple Bottom Line’ focuses on the three independent scales already mentioned:
Economic, Social and Environmental sustainability. Organisations weigh their actions
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on these three facets as part of the moral community and they are all aimed at long term
sustainability.
If businesses calculate their gains and losses based on this tripartite theory, actions
taken would benefit both the business and the community. However, it can be easy to
ignore the social and environmental dimensions when big profits are seen, as usually
expected costs are calculated and only then are other factors considered. When
incorporating the ‘Triple Bottom Line’ approach, all elements are thought of at the
beginning of a decision process. The impact of a decision, when all factors are
considered equally, determines the total honesty and correctness of that decision.
In summary, the triple bottom line refers to an extension of the criteria used to measure
organisational success. Business success (or failure) was measured traditionally solely
in terms of its economic performance. Successful businesses generated a sufficient
financial return from its investments to satisfy shareholders and finance growth. The
triple bottom accounts for three criteria for assessing organisational performance;
economic, social and environmental (Small Business NSW Commissioners).
2.6.1 Economic dimension
A company’s CSR activities must be analysed from the point of view of their economic
effects. It is often wrongly assumed that this only involves the internal workings of the
company, as set out in a responsibly compiled corporate responsibility report, and that
this economic aspect is therefore the easiest of the three pillars of the temple to apply. In
actuality, it should involve an analysis of how the company’s stakeholders and
surroundings are directly and indirectly affected economically by the company’s
activities. Corporate economic responsibility is based on this concept (M.Uddin, Md.
Hassan&K.Tarique, 2008).
The Multiplier Effect: Stakeholders are strongly impacted by the success or failure
economically of an enterprise. If a company performs well and can afford to invest in its
employees and their wellbeing this will be felt in the surrounding community as the
effects of increased salaries and tax revenues permeate outwards. As would be expected,
this multiplier effect is greater in the case of as company which is a major employer in
an area.
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Contribution through taxes: While it is tempting for companies to avoid paying
corporate taxes to the best of their abilities, responsibility theory would suggest that
while legal, such actions have direct and indirect negative impacts on community
wellbeing and this realisation should negate that temptation to an extent.
Avoiding Actions that Damage Trust: The trust of the people of the communities in
which a company operates is vital, especially given the power shift that has taken
towards the private sector and the attendant responsibilities. The company should be
mindful of avoiding economically irresponsible practices which harm the community’s
perception of its activities. Examples of such practices include corruption, tax
avoidance, lack of fair distribution of rewards within the company, and lack of
consultation when changing company location or operating procedures.
The financial success of an organisation is the easiest of these three criteria to accurately
evaluate. Economic criteria can then be used to determine flows of resources in a
business and assess monetary values in terms of generation and expenditure. They can
be used also to value the net worth of the business at a given point in time.
CSR must be seen as an argument of economic self-interest for business (Werther
&Chandler, 2011). CSR creates value because it enables business to take into account
the needs of their various stakeholder groups. This allows a firm to retain its support of
society and maximise its financial viability over the medium to long term.
Socially responsible behavior as evidenced in Porter and Kramer, 2003 can help
improve the environment in which the company develops its activity and, at the same
time, strengthen its competitive position by the greater acceptance of its image, thereby
reducing its reputational risk. Investors also prefer to invest in those companies that
practice good management of CSR in considering the reputational risks of corporate
governance (de la Cuesta, 2004)
The creation of value of the company is reflected in the market price of the shares of the
company. “The cost of having a high level of corporate social responsibility is minimal
and that firms may actually benefit from socially responsible actions” (Wu, 2006, p.
168)
In order to measure the economic dimension of the CSR policies the researcher will
analyse the following economic value indicators within the company: Return on Equity
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(ROE), Return on Assets (ROA) and Economic Value Added (EVA). The relationship
between the company’s reputation and its economic performance is measured by these
economic indicators.
2.6.2 Social dimension
The social performance of an organisation is more difficult to define and measure. The
triple bottom line accounts for the impact that a business has on people within the
business (employees) and people outside of the business (the community). A business
applying CSR policies will act in a way that benefits the community and will ensure that
people are not being exploited or endangered by the operation of the business. Social
factors to be considered include labour utilisation and wages, working conditions and
the contribution to community living standards (Small Business NSW Commissioners).
The social dimension should be understood as the set of possibilities that enrich the
company and in the end leads to the creation of value, since it affects all the interest
groups and affects the whole value chain. As a result of this long-term vision of
dedication to CSR, shareholders will reap the benefits.
In addition, CSR allows all of the employees of a responsible company to feel that they
have made a positive difference to their world. A positive feeling about the brand is
created among the employees and loyalty may be increased as a result. Rational self-
interest and a measure of selfishness are pervasive driving factors in business, but the
pride and satisfaction of doing good for society and the environment while also
allowing the business to prosper financially is certainly a worthy aspiration (R.Vance,
2006))
Positive public perception of the organisation among customers, the media and
competitors is generated by CSR. Thus these practices are of reciprocal benefit for the
wider community’s wellbeing and for the company’s bottom line. However, CSR
practices should be deeply ingrained in the company’s ethos and not used simply as a
short-term PR exercise.
Potential employees often inquire about a firm’s CSR policy and having a
comprehensive policy can be advantageous in attracting the best qualified staff,
motivating them and retaining them. CSR does this through improving the perception of
a company among its staff, particularly when staff can become involved through payroll
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giving, fundraising activities or community volunteering (Ravichandra, Beena &Regan,
2009).
CSR has been found to encourage customer orientation among frontline employees. The
research literature proves the social dimension of CSR does have a positive impact on a
company´s value. Hence, this hypothesis is tested to measure how the companies’
human resources policies affect the employees’ satisfaction.
To measure the satisfaction of employees’ different factors must be taken into account
the competence of the staff, good working climate and the nature of work itself.
2.6.3 Environmental dimension
In Carroll’s (1999) literature review, the environmental dimension was not included in
the early definitions, although nowadays Environmental concern and Sustainable
development are crucial concepts of the CSR model and have been discussed in great
detail by the business world over the past three decades.
There has been huge progress since realising the environmental impact of businesses,
but now, the 21st century brings its own new challenges (WCED Report)
Environmental Impact: Corporate business activity can affect the environment in many
key ways. Such environmental impacts can include: depletion of nonrenewable
resources, pollution wastage, degradation of biodiversity, deforestation and eventual
climate change etc. These impacts can extend across borders and therefore affect the
global environment. Corporations, under CSR policies, should take the following steps
to lessen these impacts:
Measuring Environmental Impact: There are numerous methods of doing this:
Ecological footprint compares the amount of a natural resource consumed in a year to
the total available amount.
Life cycle assessment or eco-balance traces the environmental impact of an individual
product from its initial processing from raw material through to the product’s disposal.
Material input per service (MIPS) of a product is found by dividing the total material
displaced and used in production by the values and benefits brought by the material or
service (M.Uddin, Md. Hassan&K.Tarique, 2008).
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Environmental Management: Operational changes must take place within a company
for it to fulfil its environmental aspirations. These changes should emphasise more
efficient use of resources, cleaner production and consultation with stakeholders.
Environmental management strategies can be integrated successfully with quality
control and health and safety procedures.
Environmental Responsibility: Win-Win: It has been found that efforts to improve
environmental performance can lead to lower operational costs through reducing
material waste and streamlining processes. In addition, in evaluating how environmental
processes can be improved, other weak points in operations, eg, in the area of risk, may
be identified. Customers may also be attracted by the company’s efforts at being
environmentally responsible. Thus such policies are win-win: Beneficial to both the
company and to the environment. (M.Uddin, Md. Hassan&K.Tarique, 2008).
.The EU’s Sixth Environmental Action programme sets out how the EU and the
governments of its constituent states can aid business in identifying and following
through on win-win investments. In tandem with this a compliance assistance
programme was set up to help businesses to abide by the terms of the programme and
systems of reward have been set up to encourage voluntary commitments and
agreements. (M.Uddin, Md. Hassan&K.Tarique, 2008).
In summary, environmental performance is concerned with a business’ total impact on
the natural world. Companies which follow Triple bottom line strategies aim to improve
their surroundings where feasible, or at the very least, limit their negative ecological
impact. It is necessary for organisations to examine more than just obvious issues such
as pollution but also to consider the total lifecycle impact of their products and services
There is a growing tendency for companies to implement programs of Eco-efficiency
(defined by World Business Council of Sustainable Development): “eco-efficiency is
achieved by the delivery of competitively priced goods and services that satisfy human
needs and bring quality of life, while progressively reducing ecological impacts and
resource intensity throughout the life-cycle to a level at least in line with the Earth’s
estimated carrying capacity”.
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Most of the studies about the environmental dimension are from the perspective of its
impact on the planet. This research aims at gaining more information on results for
business. The research literature proves that ecologically sound practices do have a
positive impact on company’s financial position. This hypothesis is tested to measure
the significance of ecological corporate policies of the company like recycling, use of
ecological products, achievement of environmental certificates (Forest Stewardship
Council (FSC), ISO 14001, Eco-Management and Audit Scheme (EMAS) and Planet
Positive) that affect the company’s value overall.
3. Methodology
The concept of CSR is not easy to measure and after considering the research
limitations and the type of analysis desired the most appropriate procedure of
measurement is the quantitative multi-method eventuate in a single case company. The
quantitative methodology chosen increases the researcher’s ability to determine the
correct answer.
Figure 2. Research’s Hypothesis
