37
Chapter 2
2. The strategic importance of CSR
The impact that CSR has on business strategy, its relevance, the benefits it brings in terms of strengthening the competitive advantage and its costs, represented a question to which the public management scholars have tried to answer for years.
It is all about analyzing the pros and cons that a socially-responsible company has to manage and adequately explaining what advantages and disadvantages this orientation towards CSR entails.
As anticipated by the literature review presented in the previous chapter, as companies themselves face the challenges of a changing environment in the context of globalization and in particular the internal market, they are increasingly aware that corporate social responsibility can be of direct economic value. Although “the prime responsibility of a company is generating profits, companies can at the same time contribute to social and environmental objectives, through integrating corporate social responsibility as a strategic investment into their core business strategy, their management instruments and their operations” (Green Paper,2001:5).
As a matter of fact CSR is a tool that, if coherently integrated into the business strategy, can be much more than a cost, a constraint, or a charitable action, it can become in fact a source of opportunity, innovation and competitive advantage, so it has to be considered as a strategic investment that creates long- term value, much like quality management. If the company’s socially-responsible actions are implemented with the idea in mind that there is a strong relationship between company and society, and at the same time CSR is deeply entrenched in the company’s strategy and its activities, then companies can thereby have an inclusive financial, commercial and social approach, leading to a long-term strategy minimizing risks linked to uncertainty and the principle of "shared value"
might be pursued.
38 The mutual dependence that exists between business and society allows obtaining benefits for both the parties involved. In this sense we can speak of CSR as a win-win-win strategy that creates value for the enterprise for the environment and the society. Explanatory is a quotation dating back to 2006:
“CSR is not merely the right thing to do but also the smart thing to do” (Xueming Luo and Bhattacharya, 2006:4).
In this chapter the different types of benefits that a company can gain from a well-planned CSR strategy will be analyzed, as well as its costs and the main CSR tools that companies have at their disposal.
2.1. Benefits deriving from CSR
It lies within managers’ responsibility to succeed in reconciling the main company’s economic objective, namely the maximization of profit, and the adoption of a CSR-based strategy. It can in fact be demonstrated how the adoption of socially responsible behaviors can lead to economic advantages by achieving considerable benefits. The difficulties in measurements and the presence of intangible resources rise, however, a number of complications related to the detection of the advantages and their estimate in terms of contribution/value for the company.
The main problem is represented by the intangible goods: this term identifies the non-material goods (therefore distinct from the physical and monetary resources), of which the company holds a direct ownership or potential access, and which constitute sources of value, as they are able to contribute to the generation of future income flows and, in the case of listed companies3, the increase in value on the stock exchange.
3 Company whose shares are traded on an official stock exchange. It must adhere to the listing requirements of that exchange, which may include how many shares are listed and a minimum earnings level.
39 In general, the most significant advantages related to socially responsible behaviors are:
1. Improvement in terms of risk management: a company that chooses to adopt behaviors that complement the focus on social and environmental issues in all business processes is almost forced to continuously and systematically monitor all the processes underway. In particular, these behaviors can help prevent:
- Risk of catastrophic events: environmental disasters and social scandals that may negatively affect a company’s image and reputation, encouraging consumers to turn to the competitors.
- Risks related to the workplace: in particular, injuries and accidents in the workplace. The adoption of behaviors that go beyond the mere compliance with legal obligations can guarantee a reduction in risks in the workplace, leading to a resulting reduction in insurance costs as well as in the costs related to possible compensation and replacement of injured employees.
2. Improvement in terms of financial performance
The link between CSR and any improvement in terms of financial performance seems possible if it can be demonstrated that the adoption of socially responsible behaviors will improve business results, as this has a considerable impact on the company’s dividends and the value of its shares.
In particular, the benefits of CSR and the consequent improvement of the financial performance are to be primarily intended as long-term results.
3. Reduction in operating costs
The adoption of CSR-oriented policies can help reduce company’s operating costs. These include:
- Environmental initiatives that reduce waste and improve operational efficiency;
- Programs aimed at creating a healthy and peaceful work environment in order to improve the business climate by reducing the rate of absenteeism;
- Targeted programs to improve quality that save on manufacturing costs and on any possible interventions on after-sales service.
40 4. Strengthening image and reputation
The adoption of socially responsible behaviors can help strengthen the image and improve the company's reputation because activities that demonstrate transparency, integrity, ethical behavior, stakeholder satisfaction, all contribute to increase confidence, reputation and consensus on the enterprise.
5. Increase in quality and productivity
Companies indulging in socially responsible behaviors can benefit from a substantial increase in their productivity rates and at the same time they can help reducing errors and waste arising from operational activities.
6. Increased ability to attract and retain employees
Socially-oriented businesses seem to be attracting the best professional profiles on the market and to be reducing employee turnover.
7. Improvement in terms of relations with public authorities
A company that proves to have integrated CSR in its strategic plan will be subject to definitely fewer controls by national and local authorities and it will benefit from a reputational advantage (confidence and honesty) in the relationship with these authorities.
8. Easier access to credit and lower cost of money
Socially responsible companies enjoy easier access to credit and at a lower cost than competitors who conversely are not adopting socially responsible behaviors.
Before moving on to the costs associated with the implementation of CSR practices, I will more specifically analyze the potential reputational and legitimization benefits attributable to CSR and in the following subparagraph also the operational advantages will be listed and described.
41 2.1.1. Reputational and legitimization benefits
Paine (2003) argues that companies cannot be taken separately from society, and because of this strong relationship between the business and the environment , also a moral and ethical dimension needs to be added to the decision making process. The reason behind the author's decision to write the book was the growing attention paid to moral and ethical values by most of the companies: this tendency is referred to as “the turn to values”.
Not long ago values were considered to be irrelevant to the business, whose sole responsibility was to create profits for its shareholders. As time went by, however, tables have turned and they have become a key success factor for business differentiation. Many businesses have, in fact, striven to implement measures to strengthen their reputation and to become more mindful of their stakeholders’ needs and interests.
A classification proposed by Paine of CSR initiatives that an enterprise may adopt, is shown in figure 4 below. He distinguishes comprehensive initiatives that can be applied to the company as a whole from focused initiatives.
The initiatives are then divided according to the orientation, which indicates the stakeholders affected by their implementation.
42 Figure 4 CSR Corporate Initiatives (Paine, 2003: 25).
The main reasons underlying the implementation of ethical policies by companies are to be linked to their stage of corporate development. Managers of large companies that have, for example, stable business activities typically act with the aim of protecting the reputation or their corporate brand, while business owners or entrepreneurs are understandably more oriented to building a reputation or to the affirmation of a new brand. Moreover, in addition to the company’s size and its stage of development, some others social factors played an important role in this phenomenon of growing attention to values.
US managers, for instance, are mostly involved in ethical issues because they are virtually compelled to by the law and by the huge impact that media have on reputation, as opposed to managers operating in emerging markets. This is not
43 surprising, when one considers the strength of these institutions in American society and their weakness in underdeveloped countries.
Despite managers' answers are so different depending on the business situation in which they operate, Paine recognizes in the motivations that push them to act, some recurring themes, which he groups in five main areas:
• reasons related to risk management,
• reasons related to organizational functioning,
• reasons related to market positioning,
• reasons related to civic positioning,
• reasons related to the "better way" idea.
As far as the first group is concerned, some managers have shown this growing attention to values in order to manage and, ideally, eliminate a certain type of risk, in particular those associated to the negligence and to corporate insensitivity. Focusing on the values that guide people's behavior, they hope to minimize the incidence of such conduct and its negative consequences, as in the case of different companies, whose reputation and stakeholder's core relations were smashed into smithereens, due to severe crisis and scandals that undermined their reputation among stakeholders and the general public.
This situation occurs when inappropriate behaviors undermine public confidence in the company or its products and they urge consumers to look for other suppliers. Often a bad business conduct can be a threat to individual employees, who even if not personally accused, may be damaged by their indirect involvement in the allegedly “criminal” situation. In some cases managers’
concern is addressed to individual inappropriate conduct, as in the case of employees who pursue their own personal interest and not the company's one.
In the United States, to provide an example, this type of individual behavior costs businesses approximately 6% of annual revenues.
The third group of motivations (market positioning) fuels the idea that this change in conceiving the values is a market-oriented tendency. Managers who support this vision are in fact focused on the importance that values have in
44 shaping the identity and corporate reputation, in building the brand and in gaining the consumers, suppliers or other business partners’ trust. According to this view, it is of paramount importance to worry about the expectations that the different stakeholders hold with respect to the enterprise in terms of products and services offered.
Conversely, the motives underlying the civic positioning argue that the return to values has something to do with corporate citizenship. The main issue at stake here is the positioning and reputation of the company within the community, not only in the market in which it operates. Managers motivated by reasons of this kind are constantly seeking to establish their own company as a force that progressively contributes to the social well-being. Other senior managers, on the other hand, aim at establishing positive relationships with institutions such as governments, NGOs and local communities, whereas few of them compare a company to a citizen who fulfills his duties, in compliance with the law, paying taxes and respecting ethical standards.
These three groups of motivations that lead to the implementation of CSR strategies fall into what Hooghiemstra (2000) defined as “Legitimacy theory".
According to the author, the common feature of these reasons is the influence of the perception of the enterprise by the public; CSR policies are the response to external pressures and help diverting the media’s attention on the organization, with the aim to reduce the exposure of the firm to the social and political environment. Specifically, CSR "represents a strategy to alter the public’s perception about the legitimacy of the organization" (Deegan, 1999:13).
Central to legitimacy theory is the concept of social contract, which implies that the survival of a company depends on the manner in which it operates within the bounds and norms of the society (Brown and Deegan, 1998:38). The limits imposed by society and regulations change in time, and a company must constantly prove that its actions are legitimate and that its behavior mirrors a good citizen’s one. This purpose is precisely achieved through the implementation of CSR policies, namely the CSR communication policies.
45 Corporate communication is defined as “an instrument of management by means of which all consciously used forms of internal and external communication are as effectively and efficiently as possible, to know to create a favorable basis for relationships with groups upon which the firm is dependent" (Deegan,1999:31).
Hooghiemstra suggests the study of corporate communication as a means to analyze socially responsible reporting stressing the fact that the corporate image and the corporate identity are central.
• Corporate identity is described as “the strategically planned and operationally applied internal and external self-presentation and behavior of a company “(Van Riel, 1995: 246). It then refers to the way in which the company presents itself in front of the general public. A company's behavior is thus the most effective means to create its own identity. Subsequently, the target stakeholders will judge the company through the actions that it undertakes or through the information they receive about its conduct. The company may therefore influence the evaluation, emphasizing particular aspects related to their behavior through a precise communication strategy.
• Corporate image, or reputation, is defined by Van Riel (1995:342) as "a set of meanings by which an object is known and through which people describe, remember and relate to it. That is the result of the interaction of a person’s beliefs, ideas, feelings and impressions about an object". So this feature depends on "what people think is true and feel is important." Reputation can be a source of competitive advantage for businesses: organizations that have a positive corporate image can afford to charge a premium price, improve their access to capital markets, attract investors more easily, and have better credit ratings, which usually require a lower interest rate. The existence of a relationship between two aspects of the company is then undeniable.
Corporate image can be interpreted as a projection of its identity; in particular the way in which the company presents itself to an audience can influence the perception of the public towards the company. Conversely the way the audience perceives the company influences the presentation of the company
46 to the public because the media play a significant role in influencing a company's identity.
This strong connection between the two characteristics shows that resorting to CSR reporting tools can be considered as a means of corporate communication to influence public perceptions. This aspect, according to the author, takes on significant importance especially in a high degree of risk areas, such as chemical or oil industry. Companies also may focus on communication made by the media to "compensate" negative information by building a picture that emphasizes the positive aspects of their identities.
Hooghiemstra's thesis, which sees CSR as a communication tool to influence the perception of the enterprise and to obtain legitimacy among stakeholders, was expanded by Fassin in 2008. The author claimed that the ideal framework developed by CSR academics does not necessarily represent a realistic description of the implemented CSR practices (Fassin, 2008: 12-14). In fact,
"CSR reports do not guarantee that the discourse is in congruence with practices throughout the whole company" (Perrini, 2006: 26). Very often the positive messages that result from social reports of big enterprises are in complete contradiction with the reality. External pressures may explain this worrying trend, but a main factor affecting this trend is the remuneration system focused on business performance, which urges employees to neglect CSR principles expressed by the top managers.
Porter and Kramer (2006) purport that CSR proponents took four arguments in support of their thesis: the moral obligation, sustainability, the license to operate and reputation. Each of these represents a step forward in the still-untapped world of CSR but no one offers sufficient guidance in view of the difficult choices that corporate leaders are facing.
• Reference to morality, that is to say the fact that companies must be good citizens and they must "make things right", consists in achieving economic success by delivering ethical values and respecting individuals, the community and the environment.
47 Moral obligations, however, are by nature absolute imperatives, while most of the firms' social choices involve the quest for a balance between values, conflicting interests and costs. For example, moral principles do not suggest a pharmaceutical company in what proportion it should allocate its revenues in order to subsidize care for poor people, or to develop new therapies for the future and the distribution of its dividends to investors.
• Sustainability places the focus on the protection of the environment and the community and plans to ensure current needs without compromising the ability of future generations to meet their own needs. It can be argued that transparency is more sustainable than corruption; that satisfactory working conditions are more sustainable than slums where many are forced to work; that philanthropy contributes to the society’s sustainability. These statements do not provide an adequate basis to assess a company's long-term goals or to organize them by costs involved. This line of reasoning still raises a number of questions without providing, though, a reasonable answer.
• The concept of license to operate comes from the fact that any company must obtain a permit by the government, by the local community and its stakeholders to do business. This approach offers all enterprises a practical way to identify social issues to which its stakeholders give more importance and take decisions in this regard. It also promotes a constructive dialogue with legislators, with the local citizens and activists. Probably this is the reason why such an approach prevails among companies that rely on the consent of governmental institutions (e.g. mining companies) and among those based on tolerance of their neighbors (e.g. working in hazardous industries, as chemicals companies).
While trying to satisfy its stakeholders, however, the company leaves to external actors the main control of the activities it undertakes in the field of CSR. These external actors are not able to fully understand the characteristics of the company, its competitive positioning, or the choices that must be taken. The companies that consider CSR a way to appease external pressures often find their approach to be
48 reduced to a series of short-term defensive reactions, with a very limited value to society and without any strategic business benefit.
• Ultimately many companies take advantage of their reputation to justify the initiatives related to CSR, arguing that they will improve their image, strengthen the brand and will raise their stock values. Even in this case, the initiatives are aimed at satisfying the external public.
In consumer-oriented companies, on the other hand, this approach often results in the implementation of high profile marketing campaigns.
In the most exposed areas, however, CSR initiatives are a form of insurance policy, in the hope that their reputation as socially conscious business practitioners can mitigate criticism coming from the public opinion in case of crisis. Again the impact on society and the benefits to the business are difficult, if not impossible, to determine.
2.1.2. Operational Advantages
It wouldn't be exhaustive to conclude here the description of the advantages that a company could obtain by implementing appropriate CSR policies without mentioning the operational advantages.
The return to values that we mentioned earlier can not only be linked to the company's willingness to prevent missteps but rather to the corporate organization management. The motives related to the organizational functioning do not simply refer to the implementation of defensive measures, but they rather constitute a positive contribution to building a well-functioning company. In this regard, values are essential to encourage cooperation, to inspire a greater commitment, to nurture creativity and innovation and to galvanize the members of the organization by proposing a positive image of themselves.
The ideals sought after by these managers are respect, honesty and the construction of a strong and widespread corporate culture. Finally, for some managers the return to values is not attributable to managerial reasons but for them the idea of value evokes rather something like an end in itself, something
49 aimed at “following the right path”. The reasons behind this shift in perspective are related to responsibility, to humanity and to the corporate citizenship. Sticking to these principles can bring along economic benefits to the company, but the real motivation of putting emphasis on these values has much deeper roots.
As it can be seen from these different profiles, approaches to values are numerous and different from each other. Some companies are pushed to returning to core values by crises or scandals, others follow a much logical line of reasoning, and others are driven by the search for economic opportunities.
In general, most of the companies are moved by a set of factors, both negative and positive. Whatever the motivation, however, an increasing number of companies are abandoning the traditional idea of conceiving the management as a "value-free science" and it is paying increasing attention to the values thought as integral part of the business, which extend to all the company’s activities. Many scholars argue that this evolution is not a weakness for the enterprises on the market but rather a resource that reinforces the company and supports it while doing business.
Arenas, Lozano and Vilanov (2008) explore the nature of the relationship between CSR and competitiveness. It is defined from them as "the strength of an organization in comparison with its competitors" (Arenas, Lozano and Vilanova, 2008: 58). Traditionally, many authors have considered productivity as a good indicator of a company's competitiveness but this performance proved to be inadequate as it does not take into account the competitiveness in intangible form, namely knowledge, relationships, reputation or talent.
50 Figura 5 Competitiveness dimensions (Arenas, Lozano, Vilanova, 2008:60).
As shown in the figure, the authors propose a framework to define the competitiveness with its five dimensions:
• performances, including financial measures like revenues and profitability;
• quality, not only of products and services, but also the ability to meet the public's expectations;
• productivity, in terms of higher production volumes as opposed to a minor use of resources;
• innovation, referring not only to products and services, but also to the processes;
• image, which includes the corporate brand in terms of building trust and reputation in the relationship with stakeholders.
The main argument put forward by Vilanova, Lozano and Arenas (2008) is the existence of a strong link between CSR and the dimensions of competitiveness, although the nature of this relationship is not clear.
Analyzing the websites of the most innovative companies in the world, the authors noted that the majority of those companies claimed to be devoting considerable effort to the implementation of CSR practices, such as sustainability reports, codes of conduct and policies in defense of the environment. The very few companies that did not make use of specific CSR strategies, like Google, argued that human rights and sustainability values were deeply rooted in the identity of the organization and they were integrated into numerous business processes.
51 The key point is then to assess what strategies and CSR policies to implement to actually strengthen the competitiveness of an enterprise.
Three alternative strategies have been identified, reflecting different connections between CSR and corporate competitiveness.
The first two show reputational benefits and benefits associated to the license to operate, while the third one leads to the achievement of a different kind of advantages:
• image and reputation: managers consider the corporate reputation as the driving factor to integrating CSR into the company;
• license to operate: a reactive approach to CSR is applied, which is usually implemented as a result of a scandal or conflict;
• the integration and the acceptance of CSR can result in some unexpected transformations in terms of values and business processes, such as a change in mission, the identification of certain risks or the generation of new products and services.
The framework proposed by the authors to represent the connection between CSR and competitiveness is shown in the figure below.
Figure 5 The connection between CSR and Competitiveness (Arenas, Lozano, Vilanova, 2008: 64).
52 Image and reputation are the chain ring between the three management processes:
strategy, stakeholder and accountability. Adopting a CSR strategy has an impact on the identity and the corporate brand, which in turn affect the competitiveness because it obliges to include sustainable development in the vision through business strategy. This situation allows to better understand the competitive environment, to strengthen the relationships with stakeholders, and, ultimately, to increase the transparency of the organization through the introduction of accountability management processes.
Reputation and image also generate opportunities for innovation in terms of corporate branding, which, in turn, helps to build the reputation, the image and the corporate identity. Reputation, then, becomes a key driver not only to kick off the development of new approaches to CSR in the business, but also to guide the company's internal processes.
The definition of the role of the company within the society from the CSR point of view includes the definition of a vision and the understanding of the processes underlying the practices adopted. The question, then, is not how to put into practice a particular management strategy, but rather how to integrate CSR in the corporate vision, with the goal of establishing a corporate identity based on well-defined objectives and values, while business strategies and practices must constantly adapt to a changing world. In other words, the kind of change needed to integrate CSR requires reinventing the company, creating new rules and processes instead of modifying old ones.
The importance of reputation to obtain operational benefits for the company is also stressed by Carlisle and Faulkner (2005).
In their essay "The strategy of reputation" they identify three main areas of CSR where the application of good practice has the potential to obtain benefits for the company:
• "economic leg": the economic CSR practices (such as increase in employees' salaries who work in developing countries) allow to enhance the reputation of the
53 enterprise, but may also result in a substantial increase in costs and a reduction in corporate performance;
• "environmental leg": the implementation of good environmental practices results in higher costs for the enterprise, but supports continuous innovation, which reduces power consumption and energy losses;
• "social leg": the adoption of policies that guarantee equal opportunities to employees, for example, can allow the company to have more loyal and dedicated workers. In addition, the implementation of social CSR measures can make an enterprise more attractive and able to easily retain more talent.
A final contribution to the definition of benefits for the enterprise has been offered by Hooghiemstra (2000).
He mentions a number of advantages that a company with a good reputation may enjoy, such as:
• the ability to upload a premium price for their products,
• easier access to capital markets,
• new investors can be attracted more easily,
• improvement of business ethics ratings, which imply lower interest rates,
• and an increase in consumption, which implies an increase in revenues.
(Hooghiemstra, 2000:112-116)
2.2. Costs deriving from CSR
The costs attributable to the implementation of responsible policies take on very different forms and, at the same time, turn out to be difficult to measure, especially in advance. This problem is reflected in the uncertainty with which decisions relating to CSR are taken.
Before analyzing in detail the costs related to the adoption of socially responsible behaviors, some negative repercussions on business performance that can result from a mismanagement of CSR strategies should be born in mind.
These are essentially poorly-managed investments in sustainable activities that not only keep the company away from the opportunity to obtain the desired
54 benefits, but also can be perceived as additional costs and significantly negative results for the company. In particular, the most common danger that the company can be exposed to is a loss in terms of company's reputation and/or image, caused for example by the public’s perception of the purely formal nature of the interventions related to the CSR.
Negative effects can also be caused by the creation of an ethical code without the direct involvement of management or even when the code itself is not being adequately supported by rules and by a properly integrated system of sanctions.
Additional negative aspects that can lead to mistrust and resentment among the employees and the community are the existence of annual reports that do not satisfactorily express the company’s strategic objectives and which do not include actions taken or to be taken by the company in the imminent future.
The adoption of a socially responsible initiative carried out during a period of unsatisfactory operating results can also be perceived in a negative way by the shareholders and employees, because it could be seen as an activity designed to divert resources from the company’s priorities related to survival and development.
Unfavorable situations for the adoption of socially responsible behavior can also be selected from the following cost items:
1. Investments realized to satisfy social and environmental expectations
These investments have an impact on the annual depreciation increase. The investments made to reduce water and air pollution emissions caused by the production processes are a case in point.
2. Increase in operational costs
These are costs associated with choices that meet the needs of employees who are offered additional services or higher costs for buying raw materials, semi-finished products or services from special suppliers.
3. Employment of non-monetary corporate resources
4. Too much attention and time required to senior and mid-level managers
55 The adoption of social policies "diverts" time to problems associated with other so-called traditional business activities to which more attention used to be paid.
5. Limitation to strategic alternatives
A choice guided by social criteria restricts the adoption of behaviors such as:
- Entering into certain business fields because they are characterized by polluting production processes, a high degree of corruption, as well as products and services judged to be unethical;
- Operating investments for productive and commercial purposes in geographic areas considered incompatible for political, cultural and legal reasons;
- Forging alliances with partners considered unethical.
The cost/benefit combination can create different scenarios according to which a greater or minor convenience in adopting CSR policies within companies can be determined.
In particular, these are the four possible scenarios:
1. Situation where the benefits > costs
In this first case a deep social commitment promises to be affordable in economic terms, as the benefits appear to be greater than the costs.
In this situation the label "social investment" is adopted: the word investment is used to underline the existence of an economic return while the adjective social makes reference to the underlying orientation that the company keeps faithful to.
For a company starting its socially responsible business activity, in this case, adopting CSR practices can only be beneficial in terms of positive economic performances.
2. Situations in which the benefits < costs
The opposite situation arises when the adoption of responsible behaviors has higher costs than revenues.
Undertaking such a path would be a liability and not an opportunity for the company because the costs related to social commitment are significant and immediate as opposing to the uncertain nature of benefits.
56 3. Uncertain situations
The third case represents a situation of uncertainty. The adoption by the company of CSR oriented behaviors is said to be convenient because the benefits are not easily computable.
It is not possible, in fact, to make a judgment of convenience and this situation calls for managers’ utmost discretion to take appropriate strategic decisions.
4. Convenience up to a certain threshold
The fourth and last situation is the one that identifies a form of inverted U.
Engaging in social and environmental responsible behaviors seems to be convenient up to a certain threshold beyond which the costs begin to outweigh the benefits. In this case it is appropriate that senior managers carefully meditate on the possibility of starting CSR activities because in the first years the chance of gaining economic benefits could be dauntingly canceled by the significant costs that those CSR practices will require. It is therefore recommended in this situation that no kind of strategic activities is undertaken by the company to that effect.
Furthermore to efficiently assess the economic convenience of CSR, additional indexes are brought to the fore, such as:
- Profitability indexes (PIR, VIR);
- Risk indicators related to financial structure (measured by the level of debt and liquidity ratios);
- Stock market performance indicators (if the company is listed);
- Indicators that combine share performance and values of assets (Price/ Earning, Price/ Book Value).
The detection of the cost effectiveness of CSR takes into account a highly variable time span, ranging from cases where the time horizon is one to two years, to periods of five years, reaching in some cases decades.
57 Companies have considerable discretion as to if and how to engage in CSR practices and to decide the most suitable modality to its business needs.
2.3. CSR instruments
The prerequisite to defining corporate objectives and strategies in terms of sustainability is that the guiding social responsibility principles are tangibly present in the values, the vision and mission of the company. An accurate planning activity is thus required in order to carry out strategic decisions that will cast no doubts on the position that the company intends to acquire and its stance on social issues. Corporate values should therefore be consistent with the basic strategic orientation that the company deploys in the construction of its identity.
In order for these values to be completely molded into the culture and identity of the company, use is made of specific instruments:
- The charter of values - Ethical codes
- Corporate Social Responsibility Reports
2.3.1. The Charter of Values
The charter of values is a document that allows “converging the internal and external stakeholders’ personal vision on how you intend to do the business, which is to say on the values and principles underlying the management, beyond the mere objectives and the results that can be obtained “(Hinna, 2004: 231).
This instrument is a sort of a public declaration of the company’s commitment in pursuing its ethical and socially sustainable objectives in the fulfillment of its corporate mission. It is a kind of collection of "business commandments" and it represents the integral part of the mission statement, i.e. of that tool that helps explaining the company's mission by making clear to all stakeholders, and then to employees, suppliers, customers, competitors, institutions, the way in which the company will try to achieve its social goals and how those values will be taken into account.
58 The identification process, the synthesis and the formation of the values that will inspire the company's culture is a complex operation that requires accurate reasoning. The recognition of these values confirms the orientation towards corporate social responsibility and the importance that CSR policies play in the company's philosophy.
The charter of values is based on the statement of the following principles:
- The central role played by human beings and the respect for human rights;
- Respect and protection of the environment and natural resources;
- The correctness of management systems and their compliance to the law;
- Conventions and ethical principles;
- The constant commitment to research and development;
- Public disclosures.
Once approved, this instrument becomes in all respects an important document for the company; in short, it is a "social contract" that the company signs with both its internal and external stakeholders.
2.3.2. The Ethical Code
The ethical code is a "social contract" signed between the company and its various stakeholders, with the function of legitimizing the strategic role of the company towards them, by publicly announcing that it is aware of its citizenships obligations and that it has developed policies and business practices which are consistent with the values defined within the code.
The widespread use of ethical codes is partly linked to the change in the legislative and judicial perspective, as a result of blatant bankruptcy cases for fraud, like the Enron scandal4, which prompted the harshening of sanctions imposed on companies convicted for administrative offenses and the possibility
4 Revealed in October 2001 it led to the bankruptcy of the Enron Corporation, an American energy company based in Texas. The company managed for some time to hide the financial losses of its trading business by making use of mark-to-market accounting. The company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn't made profits from it. If the revenue from that asset was less than the projected amount, instead of taking the loss, the company would then transfer these assets to an off-the-books corporation, where the loss would go unreported. The mark-to-market practices led to schemes that were designed to hide the losses and make the company appear to be more profitable than it really was.
59 of reducing sentences if the company adopted an effective program to prevent any possible future law infringement. In this perspective, the adoption of ethical codes is an investment for companies to protect themselves from opportunistic behavior coming from inside the organization.
The drafting of the code should be the result of a consultation between senior managers and both internal and external stakeholders.
Operationally speaking, the code should provide:
• the full list of all key stakeholders;
• the general guiding ethical principles that the company looks up to.
These principles could / should be: principle of trust (the relationships between employees shall be based on trust and values sharing), the principle of fairness and completeness in contract drafting (drafting contracts with counterparts that do not create information asymmetries), the principle of fairness in the execution, in the management and in the reformulation of contracts, the principle of transparency in case of conflicts of interest (there should be no conflict of interest, and if so, they should be clearly disclosed), the principle of legality (the pursuance of personal and business profits must be subject to the compliance with current regulations), the confidentiality principle (commitment to respecting the confidentiality of employees and business partners’ information and the commitment to transparency with respect to its stakeholders), the fair competition principle (refusal to collusion and cartels), the principle of autonomy and integrity of the employees (protection of the employees’ individuality, autonomy and their physical and moral integrity), the principle of loyalty (respect for the assigned tasks and transparency in communications with managers and stakeholders), the principle of good citizenship (the company should act in the public interest, while dealing with the public administration and the whole community) and the principle of protection of the environment;
• ethical principles guiding the relationships with the stakeholders;
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• rules and standards of conduct, setting out how to behave in the critical areas of relationship with stakeholders, such as the OECD rules or the Global Compact of the UN to fight corruption;
• the enforcement and monitoring procedures, providing for the appointment of a committee in charge of imposing sanctions and supervising on the right application of the code;
• the regular review of the ethical code’s procedures.
Since the ethical code itself is a self-regulatory and controlled process, a collaborative approach to the drafting process is thought to favor the involvement and the internal sharing of values.
The main advantages of the introduction of an ethical code therefore seem to be:
• employees feel to be part of the big team of the company. To emphasize this aspect, employment contracts often require the formal signing of the code of ethics beforehand;
• processes of social control and self-regulation are triggered, that relate to the acceptance of principles that limit opportunism and strengthen the vision of the corporation as a group that is intended to jointly achieve several social and economic goals;
• the perception of the corporate image among suppliers and all external stakeholders appears to improve: not rare are cases in which a partnership is bound by the sharing of ethical codes of some sorts.
As opposed to those blatant benefits deriving from the implementation of an ethical code, some disadvantages should be accounted too, and those include:
• the daunting task of drafting, which is by all means a complicated and tedious process;
• the lack of commitment both at a managerial and employee level, because the code tends to reshape the various areas of expertise and responsibility;
• real risk of low elasticity, especially in the absence of appropriate periodic review;
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• the drafting is a one-way commitment process: that is to say, the company promulgates it independently and this may create a problem of excessive subjectivity in the choice of content, making it difficult for external stakeholders to control it.
Organizations that consider ethical codes too costly or risky tend to prefer a simple statement of purpose, undoubtedly less expensive and binding but also less effective from a communicative point of view.
2.3.3. The CSR report
The most widely used instrument for social reporting is the corporate social responsibility report, a public document in which the company accounts for all its social and environmental responsibility activities. The CSR report may also be inclusive of an economic, environmental and social performance monitoring system. It is by all means a voluntary reporting instrument used by organizations to ideally speak to different categories of stakeholders, both internal and external, and , of course, to account for the results, effects and impacts generated by their business activities.
Despite its name recalls the classic financial report, it looks completely different from the traditional one because it is different in structures, methods, purpose and level of compulsoriness. The adjective "social" emphasizes the attention paid to all stakeholders i.e. all those people holding stakes in the business gravitating around the company.
The CSR report is a "management tool" because it allows measuring the economic, social and environmental aspects of the organization and it provides, at the same time, performance information to improve business operations in social and ethical terms. This document also represents an efficient "means of communication" as it allows detecting the expectations, the degree of satisfaction and consensus among stakeholders.
More specifically, the CSR report is expected to perform the following purposes:
62 - to provide information on the company's properties;
- to highlight the features of the corporate culture by communicating the reference values of the company’s system;
- to make the company appear as a profitable organization, which operates in compliance with the environmental conditions and the expectations of internal and external stakeholders;
- to illustrate how much shared-value has been produced and how it has been distributed among those who contributed to the production process;
- to advertise and publicize the technological innovation, the training process, the health and safety procedures at work, the prevention of environmental risks.
The publication of a CSR report brings numerous internal and external benefits to the company:
• it guarantees a communication on non-economic matters but that have a huge impact on economic performance;
• it allows to compare the employees’ and the company’s ethical standards;
• if the CSR report is integrated with a sustainability report, it provides a much bigger picture of the whole corporate vision, together with company’s prospects, economic trends, social and environmental issues, and it could also be helpful in a potential comparison between CSR performances of different companies.
63 2.3.3.1. The Global Reporting Initiative
All CSR reports must be drafted in accordance with precise guidelines and the best and most up-to-date guidance for effective sustainability reporting is the G4 guidelines.
The Global Reporting Initiative (GRI) is an international initiative aimed at developing and disseminating guidelines for the drafting of a document that integrates the economic information with the environmental and social ones. The first GRI guidelines were published in 2000 and later updated in 2002. The latest version called G4 was published in May 2013.
The Sustainability Reporting Guidelines set out the principles for drawing up the perfect sustainability report and the contents that should be included in that document. The model proposed by the GRI guidelines identifies a number of key principles to produce a balanced and reasonable report on economic, environmental, and social structures of a company. These principles relate to the general framework of the report, and they are criteria such as: transparency, inclusiveness and auditability, completeness and relevance, and other criteria such as clarity, accuracy, neutrality and comparability with other reports.
Therefore the vast majority of the companies, while drafting their own CSR report, pays particular attention to the checklist provided by the GRI, and in particular to the sections:
• Vision and strategy, with regard to the manner in which the company reacts to economic and social stimuli coming from the business field in which it operates;
• Profile of the company, with a precise description of the company structure, its activities and the persons directly or indirectly involved in the management;
• Governance and management system, with an overview of the general lines of action and the management policies that the company implements with individual stakeholders;
• Economic performance indicators;
• Environmental performance indicators;
64 The purpose that leads companies to following the guidelines defined by the GRI is mainly to make it easier to measure their results, to make them more understandable in the eyes of each person or group involved in the business thanks to a greater clarity and transparency of data provided in the report.
Here below the basic stages of the reporting process:
• definition of the scope of reporting;
• definition of the Report Team;
• sorting out of the reporting files by performance and by business sector:
- use of common and clear rules for the transferability of the notions;
- identification of quantitative and qualitative indicators;
• assessment of the applicability of the indicators for each business sector, because the indicators defined by the GRI are generic and very often do not fit, unless appropriate modifications are made, to the different business sectors;
• benchmarking and search for the most appropriate methodologies;
• data collection and aggregation process;
• internal audit on the reliability of the data.
In order for this process to be effective, a collaborative approach is highly required, with each and every organizational level being involved. (www.globalreportinginitiative.org, accessed on 27 July 2016)
