CSR Drivers

The Business Case and the CSR Cycle
Globalization appears to be encouraging a market-driven cycle of CSR pressures that stimulate voluntary social, environmental and ethical improvements at the firm level.  This cycle affects all firms differently and has lead to a broad debate about whether there is a “business case” for CSR; are there benefits from engaging in CSR that outweigh the cost to the firm? 

The business case is an outcome of a dynamic process that starts with the existing economic reality which is then shaped by a range of stakeholders who generate a set of market incentives, sanctions and risks that comprise the drivers for CSR action on the part of the firm.  A broader set of stakeholders participate in the process of CSR implementation, through partnerships with firms, provision of services (auditing, consulting advisory services, etc.), and auditing in an era where arms-length transactions require credible, independent verification services. The final element of the business case is determined by the ability of a company to realize the rewards, mitigate the risks, or transcend the sanctions through its CSR activities.  The cost-benefit equation that makes up the business case is therefore determined by activities and stakeholders both internal and external to the firm.

Learn more about the business case for multinational enterprises or domestic small & medium enterprises.

Risks & Incentives

Incentives, Sanctions and Risks
Firms are motivated to improve labor standards and working conditions, or CSR, for a variety of reasons, but are unlikely to do so unless managers perceive that it is in the interest of the company.  Therefore, the first step in unlocking the business case in a particular industry sector requires identifying the following:

• The presence of CSR drivers (i.e. incentives, sanctions and risks)
• The magnitude of the CSR drivers
• The relative concentration of CSR drivers (level playing field among companies within an industry sector)

An obstacle frequently cited by multinationals is their challenge pursuing a successful CSR strategy in the face of uneven playing field among firms within the same industry. For example, activists frequently target the highest profile brands as a strategy for indirectly compelling other companies into action.  As a result, a few “lead” companies have been shouldering the burden of CSR while other companies have remained under the radar screen escaping scrutiny through participation in broad initiatives while making minimal meaningful investment in CSR. This imbalance can create short term competitive disadvantages for firms engaging in CSR, particularly as CSR best practice is still under development. The learning curve along the path to best practice is derived from experimental efforts which often involve greater investments on the part of the “lead” companies.

Is the capacity to implement present?
The extent to which the drivers are present is only one factor in the larger calculation of evaluating the business case for CSR. The next issue is whether the firm has the capacity, expertise, resources, or access to the necessary support to implement CSR as demanded by its stakeholders.  This is a very real issue for most developing countries that do not have a broad base of local expertise in issues related to CSR, e.g. health and safety experts, professionally trained managers and operations specialists, human resource professionals, etc. Furthermore, the institutions necessary to support the implementation of CSR are frequently underdeveloped.  For example, the lack of local bodies to provide credible verification and auditing services has led to a reliance on expensive international firms.  Institutions also provide a mechanism for reducing the cost of CSR by pooling the resources of a group of companies with common CSR needs or interests.

Underdeveloped resources for implementation have created a significant bottleneck for CSR implementation.  Similarly, there are areas where industry collaboration would reduce the cost of CSR implementation, but sensitivities over collaboration with competitors and other obstacles has prevented broader support for this approach.  Other costs associated with implementation relate to underdeveloped capacity within firms suddenly faced with enforcing labor standards in areas outside their traditional sphere of influence.  Similarly, CSR support institutions are still in their infancy and there is a dearth of qualified expertise, particularly in developing countries, but also within MNCs.

Are the rewards attainable? Can risks be successfully mitigated or sanctions overcome?
Even when companies successfully implement CSR, there is no guarantee that they will be able to realize the benefits of engaging in CSR, i.e. meet the demands or overcome the negative perceptions of key stakeholders that contributed to creating the CSR incentives, sanctions, or risks in the first place.  This element of the “CSR Cycle” is closely linked to the issue of drivers (incentives, sanctions, and risks).

Whether the rewards are attainable, and at what cost, depends upon a company’s ability to achieve the following:

• Effectively and credibly communicate CSR achievements to key stakeholders
• Distinguish itself from free riders and non-performers in the arena of CSR
• Acknowledgement from key stakeholders

A major challenge associated with the realization of risk relates to the current debate over globalization and the allocation of responsibility to the private sector in developing countries. In the long term, many of the costs and services  currently associated with CSR will be more efficiently managed through collective efforts rather than individual companies, and  therefore ultimately require public sector involvement.

Regarding attainment of benefits, overcoming past misconduct with a genuine CSR response is a particular challenge. Among MNCs, most of the current leaders in CSR were once the prominent “bad boys” of industry; shaking the image of the past has proven a largely elusive quest.  For firms in developing countries, this is similarly challenging partially in those industry sectors characterized by an abundance of suppliers, e.g. apparel; violators of CSR are punished when retailers withdraw contracts and are unlikely to be enticed into returning to previously discarded suppliers once replacements have been found.

Examples of companies that have made a significant investment in corporate social responsibility, but who continue to be the focus of many high profile activist campaigns include Shell Oil, Nike, and the Gap.  Similarly, factories in Cambodia have had difficulty overcoming the negative publicity they received following a popular television documentary highlighting factory conditions in that country.

Conclusions
The scarcity of hard data that is publicly available on the business benefits of CSR pose a challenge for companies who are trying to calculate the extent of their investment in CSR.  The hesitancy on the part of firms to collect or disclose data justifying CSR investments reflects the tensions between those, including many activists, that view CSR as an ethical issue that should be removed from the realm of profit and those that understand CSR as a business imperative.

Among firms in developing countries, management performance indicators for CSR are often not even on their radar screen and they remain focused on trying to fulfill order, manage demand, and grapple with the many challenges associated with global competition.  For the immediate future, given the nature of the intangible benefits associated with CSR, the business case is likely to remain vague. Despite the significant anecdotal evidence that exists today, more firms are unlikely to undertake CSR in the absence of a simple and credible framework for analyzing the business case, and quantifying the costs and benefits of CSR.

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