Corporate Social Responsibility: Intersecting Political and Business Economics Perspectives
Giulia Tessadri (Head Researcher MI G.E.O. Politics)
Marco Zecchillo (Head Researcher MI G.E.O. Economics)
Introduction
As corporate social responsibility gains global relevance, it is crucial to adopt a multifaceted approach to the analysis of it. The aim of this paper is to provide an overview from both political and economic perspectives on CSR, including its ethical bases, the institutional measures adopted for its implementation and the economic effects on businesses that rank high in CSR-related indicators. As scholarly research approaches these themes, many issue areas are still under discussion, calling for a thorough and multidisciplinary reflection on this subject, as not to overlook one of the three CSR’s dimensions.
I. History of CSR
Corporate Social Responsibility (CSR) is becoming more and more important and a key aspect that companies have to consider when developing their strategies. Particularly, a survey published by the World Economic Forum shows how globally 9 citizens out of 10 want to live in a more sustainable and fair world and 72% of people believe in a transformation of their own lifestyle in opposition to returning on how it was before Covid-19 (World Economic Forum, 2020).
It is not easy to define Corporate Social Responsibility and the concept is quite new compared to topics such as the role of business. The first definition of CSR was developed in the 1950s by Howard R. Bowen in the book “Social Responsibilities of the Businessman”. Bowen’s goal was to address questions such as the responsibilities of businesses to contribute positively to society, the benefits of these responsibilities and ways to implement them. More specifically, Bowen defines Corporate Social Responsibility as “the obligations of businessmen [and businesswomen] to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society” (Bowen, 1953). It is possible to notice how the focus is on the businessman, seen as the central figure, yet the definition is very important, since the idea is that a business firm has to be in line with values and principles of the society.
Another important contribute is the one elaborated by Friedman in the book Capitalism and Freedom: “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”. His work and views represent an important piece in the CSR studies.
In 1991 Carrol elaborated that CSR can be divided into four primary components that can be visualized as a pyramid.
Source: Carroll, 1991.
The base of the pyramid is represented by the economic component, in fact companies should “be profitable”; secondly, there is the legal component, in fact business have to “obey the law”; thirdly, there is the ethical component, in fact companies should “be ethical”; lastly, there is the philanthropic component, in fact business should “be a good corporate citizen” (Carroll, 1991). The pyramid model is very important as it encompasses economic, legal, ethical and philanthropic responsibility. The main problem with this definition is that a pyramid is linked to hierarchy. Therefore, in 2003 Carroll together with Schwartz proposed another definition: the Three-Domain Model of CSR.
Source: Fonte: Schwartz, Carroll, 2003.
This definition can be defined as more comprehensive since it considers the legal, economic and ethical dimensions at the same time and level. Moreover, it allows the presence of aspects that cannot be purely located in one component and are encompassed in intersections.
In addition to the above mentioned definitions, the European Union addressed the topic too. Specifically, the European Commission defined Corporate Social Responsibility as "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (Preuss, 2013). È chiara la sempre maggiore rilevanza della CSR nel mercato globale, in virtù della maggiore consapevolezza e sensibilità delle persone rispetto ai temi della sostenibilità economica e ambientale.
II. Directives
According to the European Union, the lives of citizens are impacted by the actions of companies in regard to many aspects, such as job and opportunities, working conditions, human rights, health, environment and education (European Commission). The European Commission encourages companies to adhere to international principles and guidelines on CSR. In this framework, in 2011 the strategy on CSR was updated.
2.1 Sustainable Finance Disclosure Regulation
On March 10th, 2021 the European Regulation 2019/2088 became effective and it imposes mandatory ESG disclosure obligations for financial operators - both market participants and asset managers. The SFDR was introduced alongside the Taxonomy Regulation, aiming at aligning CSR regulations. The goal is for financial players to consider sustainability risks, adverse sustainability impacts in their investment processes and the presentation of information related to sustainability in regard to financial products (KPMG, 2021).
2.2 The Corporate Sustainability Reporting Directive
On January 5th, 2023, the Corporate Sustainability Reporting Directive entered into force, showing European commitments towards the creation of a stricter framework aiming at increasing a company's responsibilities on sustainability reporting and at the adoption of standards. The directive strengthens the rules in relation to social and environmental information that companies have to report, this updating in a more comprehensive approach the Non-Financial Reporting Directive (NFRD). The directive applies to a broader set of large companies and SMEs and the rules will have to apply for the first time in the financial year 2024 for reports published in 2025. In addition, the directive will ensure the access to information to assess risks related to climate change and sustainability issues. Moreover, a culture of transparency about the impact of companies on the society and environment will be created (European Commission).
2.3 Corporate Sustainability Due Diligence Directive
On 23rd February, 2022 the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. The proposal shows the European efforts to strengthen its sustainability targets and commitments. The directive’s goal is to foster responsible and sustainable corporate behavior throughout global value chains (European Commission, 2023). More specifically, companies will be required to identify, prevent and end/mitigate the adverse impacts resulting from their activities on human rights and on the environment.
The Directive will apply to:
- EU companies: a) with more than 500 employees and more than EUR 150 million in net turnover b) with more than 250 employees and more than EUR 40 million in net turnover, but operating in high impact sectors.
- Non-EU companies operating in the EU with the turnover threshold above mentioned.
The clear implication is that the rules will not apply to small and medium enterprises.
In addition, the proposal applies not only to the company’s own operations, but also to their subsidiaries and their value chains (European Commission, 2023).
To sum up, this directive, if implemented, will lead to a more effective protection of human rights and the environment, in full respect of international conventions.
III. CSR-Virtuous Firms and Effects on Financial Indicators
An extensive literature examining the effects of corporate social responsibility actions exists, backed by empirical evidence. Within the following lines, attention will be paid to the general consequences of corporate social responsibility both on firm-level characteristics and on social outcomes. The relevance of sound corporate practices is increasingly more important.
In this matter, two strands of the understanding of CSR effects have developed. One of the two is centered on firm-level outcomes that can be correlated with a higher performance in CSR. The second, instead, focuses on the social outcomes, which relates to the employee’s allegiance to the company and their feeling of belonging to the firm they work in (Wickert, 2021). This dual nature for the study of the outturns of CSR is also reflected in the way the discipline has evolved.
As far as firm-level characters are concerned, it is found that often, there is a positive relationship between high CSR involvement and figures associated with a successful financial performance.
An important aspect to consider in future analyses could be the differentiation of firms according to their size, to verify whether these beneficial effects on company indicators are robust to changes in how big they are.
Orlando (2020) carried out econometric analyses to evaluate how economic performance is positively correlated with high CSR engagement on a firm level. The author identified some key indicators associated with a good financial outcome as the dependent variable and CSR-related figures as the independent variable. By sampling hundreds of listed companies, it is found that in the post-2008 scenario, CSR-embracing players have outperformed peers, by displaying higher ROAs (Return on Assets as the ratio between Net Income and Total Assets), ROEs and Tobin’s Qs (the ratio between market valuation and intrinsic value of assets, or their cost of replacement) (Orlando, 2020). Usually, it can be believed that making a company go public (i.e., it is listed and its stocks are purchasable on the secondary market) ruins a long-term vocation of a given company, which succumbs to short-term realisation of profits by its investors (the shareholders). It is not a given, conversely, that shareholders and stakeholders always have diverging interests and that short-term realisation is incompatible with long-term satisfaction. In an ideal state of the world, guaranteeing, for instance, environmental protection without renouncing to profit-making go hand in hand.
In the case of investors, a substantial stream of survey research has been conducted for understanding why economic agents take the decision to be more socially responsible. A key question to answer to, in this scenario, is how firms choose to undertake CSR. A line of studies appears to have found the answer in the existence of peer pressure (TIAS, 2015; Liang et Rennebok, 2021; Liang et Teo, 2019). Other studies have attempted to trace the origin of the decision to follow CSR principles, and it is debatable whether it stems from a formal corporate choice or whether it is inevitable as soon as some conditions appear.
A perennial debate in this field of business is that of the role of a firm. Should they mind only about the optimisation of their profits or should companies have an interest in optimising overall societal welfare? The answer to the question depends on the conception of current global economic affairs of the responding person. Briefly, a vision of the economy as an entangled playground with different actors that are interconnected to each other, willing or not willing, is likely to embrace the idea that maximising overall welfare of society plays a decisive role in bolstering corporate profits.
As far as societal forces are concerned, CSR’s impact can be estimated by, for example, analysing employees’ attitudes through surveys. In this regard, it is of fundamental importance to be able to differentiate between employees in a low-CSR firm and those belonging to a high-CSR enterprise. This appears to be challenging to say the least, given the absence of a clear-cut definition of what the term means in a quantitative term (e.g., a lower amount of emissions). Perhaps, the very act of finding employees that admit to be generally “happier” in a company rather than in another is the definition of CSR itself. Employees not only feel “happier”, but they may also feel proud (a feeling of belonging to a firm that does good), whose effects on a firm’s profitability are deserving of further study (by paying attention to endogeneity, as more profitable firms may be themselves inclined to have more satisfied employees).
This is to underline how different disciplines interact and it is, at this point, impossible to find a univocal answer to a phenomenon by using only one lens. CSR is a by-product of companies, which are not just economic actors operating in a profit-maximisation logic and only in a “market”. If a market is a circumscribed ideal place, this has evolved to include politics, as well. And the relationship between a firm and governments acquires an important weight for linking the firm-level aspect of CSR and its social aspect. If the survival of a company with a given importance in the political scene depends on the goals of CSR, the latter will employ considerable resources to have the sustainability of their business preserved and translated into actual policies or laws. The line between business, politics (intended as political bargaining, or even diplomacy) and the economy is narrow, if it exists at all, and defining which influences which appears to be utterly challenging.
IV. Case Study for a CSR-Virtuous Firm: Patagonia
The California-born enterprise “Patagonia” always shows at the very top of the chart when virtuous actors in corporate social responsibility are concerned. Even though CSR is, conventionally, constructed by the three pillars of environmental, social and corporate sustainability, an effective approach is to believe that advancing progress in one domain leads to positive spillovers on the others. The latter point is especially true when figuring the long term interactions between social and environmental sustainability, which surely has important consequences on the sustainability of a given corporate or business model (Kortum, 2018). Patagonia has taken an all-round approach to CSR and it has applied its initiatives and activism in a peculiar and singular manner.
Since 2012, it has become a registered “benefit corporation” or a B-corporation, which is a peculiar company structure provided for by the Law of the United States in which shareholders evaluate the non-economic performance of a firm. It has aligned its subsidiaries (Patagonia Incorporated, Great Pacific Iron Works, Patagonia Provisions Incorporated and Fletcher Chouinard Designs Incorporated) in following clear CSR-relevant principles (Patagonia, 2021).
For instance, the company has financed the creation of a movie already in 2014, a production called “DamNation”. This movie stands as a critique to the building of dams, which are found to be the cause behind ecosystem degradation, especially in the United States.
For some commentators, Patagonia’s behaviour bridges two dimensions. These two can appear to be similar, but the underlying players are fundamentally different. The two are the roles a firm would play when committing to corporate social responsibility and a different way of acting typical of bottom-up social activism (Moscato, 2014). Additionally, the enterprise’s online resources endow an idea of transparency and an ease to retrieve information .
These ideas are in accordance with the reasoning enclosed in the previous paragraph, which see businesses not only as economic actors, but also as players with a political weight. There is an extensive strand of International Political Economy scholarships on this given topic, including one of the founding figures of this mixed Politics-Economy approach, Strange (Strange, 1996).
The American enterprise has undertaken an approach aimed at increasing the publicity of their practices, as many other firms have done. Essentially, a large portion of their narrative to the audience stresses the idea of “consistency” in undertaking responsible business (Cahill, 2014).
Another fundamental dimension of corporate social responsibility is the very concept of Sustainability. The two are inseparable factors which could mutually reinforce each other and the concept’s mainstream definition can be applied to the three pillars of CSR (i.e., the social, governance and economy aspects) as a guiding principle for a firm when taking a decision on a given course of action. From this standpoint, each business decision comes with its own ethical side, especially in intertangled world affairs, in which the too-short-blanket problem can easily surface at each choice.
Even if belonging to a different strand of the economic discipline (e.g., the sustainability of debt for a government in times of rising interest rates), the idea of forgoing excessive consumption of resources in the present to avoid future generations lowering theirs is a typical concept in economics that could be applicable, with all the due differences, to CSR.
This reasoning is mirrored in Patagonia’s idea of passing clothes from generation to generation.
Sustainability is a term which is largely used in international politics. Take, as an example, the Sustainable Development Goals or the older initiative of the Global Compact. Since 1999, the latter has engaged corporations to undertake clear-cut actions on four main pillars: Human Rights, the Environment, Labour and Anti-Corruption (UN, 2022).
As a last remark on the discourse on Patagonia, an ideal reversal of perspective is the cornerstone of the mission statement of the company. “We’re in business to save the planet”. Substantially, this little sentence furnishes a deep teleological meaning which certainly provides food for thought, even on an existential field.
V. Conclusions
This paper underlines the importance of bridging political and economic factors for the analysis of CSR. Namely, numerous legal provisions were highlighted, especially in the European context, such as the Corporate Sustainability Reporting Directive and the Non-Financial Reporting Directive. These factors could shape the environment businesses operate in and alter the rules of the game for the future, as abiding by corporate social responsibility becomes increasingly more definitive for ensuring a successful entrepreneurial initiative. While some studies underline how CSR-friendly firms present improved financial performances, the concept shall be seen in a long-term perspective and not driven by immediate shareholder gains.
Complying with the newly established legal framework for CSR might allow companies to improve their reputation, have a higher voice in political debates to shape policy outcomes, boost financial status and, most importantly, work for the overarching goal of rendering the planet a sounder place to live. A further degree of reflection is to be exerted to discern whether these forces can synergically be mutually reinforcing. The paper suggests, therefore, to integrate legal, socio-political and economic studies in the context of globalisation to make sense of this complex phenomenon.
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