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Corporate Social Responsibility: Merits and Missed Opportunities

By JONATHAN ANDREWS 12/02/2015

Corporate ResponsibilityCorporate social responsibility (CSR) -community and environment-targeted projects funded by corporate firms, such as providing funds to charities and creating social enterprises in disadvantaged economies to equip these communities with business skills – and diversity – ensuring the company’s employee makeup represents wider society as best it can, considering issues such as race, gender, sexuality and disability – are dimensions of business experiencing a great amount of investment at present, given the recent evidence that both have far more power to win over new customers, motivate employees and increase profits than previously thought. Given consumers’ tendency to report consideration of CSR when making spending decisions, and the evidence that diversity benefits business, it’s clear that implementing these initiatives shouldn’t be a hassle for firms. Yet when considering the developing world, there is ample reason to be less optimistic – the ‘diversity culture’ doesn’t seem to be spreading.

In developed nations, at least, there’s evidence that corporate social responsibility is becoming of increasing economic importance to firms. Much has already been written on the tendency of millennials (generally defined as those born between the early 1980s and early 2000s) to favour businesses based on a sense of shared values. A 2014 Brookings paper, ‘How Millennials Could Upend Wall Street And Corporate America’ (Winograd and Hais, 2014), detailed how the group generally places moral issues over financial ones when making economic decisions. It found that 90 percent of participants reported partially basing buying decisions on the actions of specific companies, with 63 percent calling for their employers to make charitable contributions.

Meanwhile, a Global Tolerance report found that 62 percent of millennials want to work for a company which makes a positive impact, while 53 percent agree they would “work harder if it made a difference to others.” But it’s not just millennials – across all ages, 64 percent state companies must go further than merely claiming to be ethical, they must truly demonstrate it. 50 percent of respondents also say they would prefer to work for companies which “made a positive impact upon the world,” while a third (31 percent) say they would pay more for products produced by ethical companies. It follows, then, that economic advantage lies within reach for firms that best display themselves as CSR-friendly.

Although these findings are very promising, the picture is very different in developing countries. For the sake of brevity, I will only focus on the economy of one developing nation here – India. Indian companies spend only 1.4 percent of annual profits on CSR in 2012-13, far lower than average –  lower, if fact, than the 2 percent of net profits before tax mandated to be spent on CSR by India’s Companies Act 2013. And the telecom and media sectors – India’s largest industries – were the worst performers by percentage when it came to CSR, spending only 0.4% on initiatives, also far lower than the stipulated target.

Of course, the fact that the Indian CSR law remains unenforced – to date, no legal action has been taken against companies which have under-invested – as well as the fact that India is the only country with specific CSR legislation, highlight the tendency for growth in CSR to be more culture-driven than legislative. Take UK firms’ interest in diversity and CSR, for example. One could make the argument that the UK’s Corporate Governance Code, last updated in February 2010, was the instigator since it was the first update to clarify, unequivocally, that a company’s duties extend beyond its shareholders: section A.1 of the resolution states, “The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met” (emphasis mine). But the code does not refer explicitly to CSR or diversity, and is not specific enough to be binding. Others have traced the increased diversity interest to the Companies Act 2006, which requires directors to consider community and environmental issues alongside their duty to promote success for their company, but if so, why was the shift gradual, not sudden after 2006?

The answer might be difficult to grasp for those who view increasing diversity within a firm as a charitable add-on to business – one which is so unprofitable that legislation is required to enforce it. However, there is a large amount of evidence that the promotion of diversity really is beneficial, both to the economy and decision-making in large firms. Research from the Center for Talent Innovation has found that companies with high levels of “two dimensional diversity” – a combination of “inherent diversity”, meaning differences among staff in gender, race, sexuality, disability, socio-economic status, age etc., and “acquired diversity”, meaning additional language skills and an awareness of other cultures – perform far better when it comes to output. Publicly traded companies with two-dimensional diversity were on average 45 percent more likely to have expanded market shares over 2012-13, and 75 percent more likely to have captured a new market.

Similarly, Deloitte’s 2012 report ‘Waiter, is that inclusion in my soup?’ identified an 80 percent increase in large businesses’ economic  performance when levels of diversity and inclusion were high. And in addition to the above evidence that millennials favour companies that show commitment to wider society, several studies have also found that more diversity in decision-making processes means the concerns of more sections of society are considered, minimising the risk of a company inadvertently releasing a product or service which offends, upsets, or simply doesn’t enthuse a demographic group they hadn’t consulted. Such a move could be very costly. In the US, for instance, LGBT spending power is estimated to reach $712, while the UK’s 11.9 million disabled people collectively boast an annual disposable income of £80 billion, and evidence also shows that people will instinctively shop more with companies which represent people like them. Such a steady stream of evidence of diversity’s benefits has no doubt contributed to the fact that a vast majority of CEOs believe diversity to be beneficial to business, which has instigated this cultural change.

It therefore appears logical to argue that Indian companies’ reluctance to invest in CSR initiatives are holding them back, and that further investment, both in general CSR,diversity and inclusion, would increase their profits and perhaps give a slight boost to India’s growth even further. Indeed, the culture of collective individualism ascribed to Indian millennials appears strikingly similar to that of millennials in the UK: while very diverse and individualistic in opinion forming, they are also committed to community-building, and concerned about the cultural and economic footprint of their employers. More effort on the part of Indian firms – as well as firms in other developing countries – could well ensure even greater prosperity for them. But such a change cannot be forced through with legislation – it requires a cultural shift, and to shift business culture, economic arguments need to be made. Meanwhile, when it comes to developed economies, such a bridge has already been crossed, and the danger comes instead from the other side – it may be that diversity and CSR become such strong buzzwords that firms begin presuming an economic advantage where one might not exist in that particular case.

JONATHAN ANDREWS

Jonathan is a 3rd year BA English Literature and Language student at King’s College London. His interests lie in approaching political issues with an economic angle, which he feels is too often ignored.

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