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Why Should Managers Be Socially Responsible?

socially-responsible

By Antonio Argandoña

Why should managers put Corporate Social Responsibility (CSR) into practice? The so-called legal, ethical, social and business cases provide several reasons. In this paper we discuss these arguments, and we add new reasons that make up the ‘management case.’ By exploring why CSR is good management, this paper explains why CSR make the firm more human and the task of the manager more humanizing.

Introduction
In the last years a growing number of academics and practitioners have promoted Corporate Social Responsibility (CSR) as a means of shifting the paradigm of the firm away from a purely economic model oriented to maximizing shareholder value, toward another model that takes ethical, social and humanistic variables into account and is oriented to a broad spectrum of stakeholders.

This is certainly a step forward in the theory of the firm, but an unsteady step – at least with regards to the reasons for why companies are supposed to be socially responsible. In this article we propose that companies must be socially responsible not only because it is demanded by society, or because it increases profits, but above all because CSR is part of good management. That is to say, a socially responsible company is a good company, and a manager who manages in accordance with social responsibility criteria is an excellent manager, or at least is in a good position to become one.

In what follows we look first at the traditional arguments in favor of social responsibility in companies, namely the legal, social, moral and business case. After that, we examine what we mean when we say that a company is socially responsible. Finally, we present the management case and the conclusions.

Arguments for Corporate Social Responsibility
Why must companies be socially responsible? The arguments put forward in the literature can be summed up as follows:1

The legal case
The law defines the responsibilities that directly or indirectly attach to certain acts and their effects, as when we say that a person is responsible for the injuries her dog caused to another person, perhaps because she failed to take the necessary precautions to prevent the attack. However, it is widely agreed that CSR is voluntary and goes beyond the law, which means that the legal case is not a good explanation for why companies must act in a socially responsible way.

“Companies must be socially responsible not only because it is demanded by society, or because it increases profits, but above all because CSR is part of good management.”

The social case
According to many accounts of CSR, society expects or demands certain behavior from individuals and organizations, whether as simple citizens, or as bearers of a particular status or role in society (politicians, managers, etc.), or as organizations (firms, unions, political parties, etc).2 The important thing, however, is not that these demands exist but why they create a responsibility for companies. If they do, it is probably for one of the following reasons:

  1. Because these societal demands create a moral duty (e.g., because acting responsibly is part of companies’ contribution to the common good),3 or because they define that moral duty in specific situations (e.g., they specify what constitutes employment discrimination in a given society at a given time).
  2. Because meeting those expectations or demands is a civic responsibility, similar to the rules of behavior among individuals, backed not by the coercive power of the State but by the pressure of society itself. Corporate responsibility is sometimes said to be ‘social’ on the grounds that companies need a ‘social license’ to operate; or that they have an obligation to contribute as good ‘corporate citizens’ to society.4
  3. Because CSR prevents costs or brings benefits, economic or otherwise, to the company in the form of lower costs, stronger customer and employee loyalty, higher productivity, enhanced reputation, lower financial costs, etc., which leads into the business case, discussed further below.

The moral case
Responsibility is an ethical term. “To say that a person is responsible […] for a given action is only to say that it is appropriate to take it as a basis of moral appraisal of that person”.5 Ethical responsibility appears when an action and its effects are attributed to a person as a ‘moral’ agent, when she is accountable for her actions and their consequences, not only to herself but above all to others, and not only for what she does, but also for the reasons for which she does it. This responsibility is social, open to others, owed to the community, and it is subject to the normative standards required of interpersonal behavior – external scrutiny, evaluation and sanction – and implies duties of disclosure and transparency.

The business case
The business case argues that a socially responsible company is also profitable, and probably more profitable than other firms. In recent years numerous empirical studies have been carried out relating diverse measures of corporate social performance to financial performance. Many of them come to the conclusion that the relationship is positive; a few find a negative relationship; and others find no statistically significant relationship at all.

The most likely conclusion from these studies is that there appears to be a positive relationship between CSR and profitability, but this conclusion is not definitive, as the relationship depends on other variables,6 and much published research displays major theoretical and empirical limitations.7 On the other hand, the fact that social performance and financial performance are correlated does not necessarily mean that the causality goes from CSR to profits: it may be that CSR actions consist of distributing profits among stakeholder.8

In any case, a company is unlikely to decide to implement CSR policies simply because empirical studies show that such policies have a positive impact on financial performance. More direct arguments, addressing the details of the relationship between the two variables for a particular sector, location and company, will be needed. Especially where the focus is on the business case, the CSR literature usually mentions a series of advantages enjoyed by responsible companies. First, there are external advantages: socially responsible companies are believed to have a favorable legal environment, smoother relations with regulatory agencies, or a say in the drafting of new regulations; less risk of complaints and fines; better relations with governments (e.g., preferential access to contracts); an active role in spreading their good practices; a better image, brand and reputation, and more loyal customers, who may be willing to pay more for the companies’ goods and services because it is respectful of the environment or human rights. And they may have better relations with society, fewer disputes, less risk of negative advertising and boycotts, better relations with the media, and so on.

“Socially responsible companies are believed to have a favorable legal environment, smoother relations with regulatory agencies, better relations with governments; an active role in spreading their good practices; a better image, brand and reputation, and more loyal customers.”

Socially responsible companies are also likely to have internal advantages. For instance, they may well have an edge when it comes to attracting, retaining and motivating the best employees; greater transparency, morale and trust in relations with their internal stakeholders, more satisfactory employment relationships, a better working atmosphere, better supervision of the supply chain, and so on.

All these internal and external outcomes may translate into better financial and economic performance. For instance, they may give a company a strategic advantage over its competitors in the form of higher or more stable sales, product differentiation, a higher price, and so on.9 They may also run fewer risks and reduce finance and operating costs (e.g., those arising from wastage of resources). A policy of honesty is likely to reduce litigation, complaints and fraud costs, enhance employee productivity (through higher motivation and commitment, or self-selection of the best workers), or attracting socially responsible investors, etc.

But even if CSR generates greater value for all its stakeholders, that value is just as likely to be captured by employees (in the form of higher wages or other benefits), customers (in the form of lower prices) or other stakeholders as it is by the owners of the company.

The business case has acquired a new dimension in recent years as CSR is winning legitimacy: academics make efforts to show that CSR is profitable, while managers claim to believe in it, and try to justify this belief in the hoped financial results of CSR. This has led to the development of a big ‘industry,’ ranging from consultants and professors to communication and PR experts, auditors, certification agencies, and CSR professional associations. To sell their products and services, all of these participants need to prove that CSR ‘pays.’ Ultimately, the attitudes of academics, shareholders, managers and CSR players are mutually reinforcing.

Nevertheless, the soundness of the business case has not been proved – and probably cannot be proved once and for all, because if socially responsible companies achieve better financial results, the non-responsible companies can always reproduce these practices, making those better results to vanish. But this conclusion will not hold if CSR is not just a list of external, easy to imitate practices, but has an impact in the principles and practices of management, as we will show below.

“Academics make efforts to show that CSR is profitable, while managers claim to believe in it, and try to justify this belief in the hoped financial results of CSR.”

The ‘management case’
An organization is a group of people who coordinate their actions to serve a common purpose aimed at achieving certain results that they all consider desirable, albeit for different reasons, and that they can achieve only through joint action.

These people (owners, managers, employees) who accept being part of the organization are moved by different motivations, which those who coordinate their activity (i.e. managers) must take into account. The managers’ job is ultimately to ensure, first, that the motivations of the company’s members (economic remuneration, a pleasant environment, satisfactory social relationships) are reasonably satisfied; second, that the desired results are achieved; third, that this is done efficiently; and fourth, that this is done in a way that at least does not work against the company’s long-term survival.10

This list of managers’ tasks combine different arguments: economic (the creation of value for the stakeholders), psychological (the provision of meaningful jobs and the learning of knowledge and abilities), social (the legitimacy of the company) and ethical (the preservation of the ability of the company’s members to take better decisions in the future). This means that decisions in companies, also CSR decisions, cannot be justified by any one argument, be it social, ethical or economic. Indeed, overemphasizing any one case may well have undesirable consequences. The social case, for example, may turn the company into a provider of funds for all sorts of social initiatives, even if remote from the company’s goals, and the business case may prompt opportunistic behavior, aimed at obtaining short-term profits.

All the above suggests that being socially responsible is a good way to manage a company – or rather, it is the only way to manage a company well. But how does this come about?

“If CSR is “the responsibility of enterprises for their impacts on society”, a responsible manager will take into account the impact of all his decisions on himself and others, without confining himself to profitability but without neglecting it either.”

If CSR is “the responsibility of enterprises for their impacts on society”11, a responsible manager will take into account the impact of all his decisions on himself and others, without confining himself to profitability but without neglecting it either. He will seek what is best in each case and find the means to do it; this will enable him to perceive reality in all its facets, specially the consequences of his actions on others and on himself. Before, let’s say, ordering a subordinate to tell a lie for the benefit of the company, he will be able to appreciate all the consequences of that action: he is undermining the employee’s self-esteem, and possibly causing indignation, and he himself is learning to treat his employees unjustly. Similarly, the discovering and assessment of the alternatives will be different. He will develop the capacity to resist the temptation to give in to short-term extrinsic satisfactions, and act with a view to the long term.

The responsible manager’s decisions are also cast on other stakeholders. He will be aware of his own limitations, the capabilities of others, and the opportunities for personal development that arise from dialogue. And through dialogue he will know what kind of stake each stakeholder has in the company, why each collaborates, how each can contribute to the company’s goals12 and how to build trust.

Furthermore, participation will flourish. CSR will be a shared responsibility13, which implies giving responsibility to the different stakeholders, so that they also feel responsible for developing and applying their own capabilities to achieve their own objectives or motivations, within the framework of the common goals of the company.

“Being ethical and socially responsible is a way – the only way – to be an excellent manager.”

Conclusions
The literature on the behavior of socially responsible managers points to a set of duties with respect to their stakeholders and to society; for example, when discussing the duties to customers we find mention of truthfulness in advertising, product safety, a fair price, and so on. This way of addressing issues is attractive because it specifies companies’ responsibility to their stakeholders. However, it confines itself to CSR defined as a responsibility or obligation.

What we have tried to do here is present CSR as an opportunity. We discovered that for managers, acting in a socially responsible way makes possible to capture aspects of reality that without this view would remain undetected. The responsible manager focuses her interest in people, starting with the manager herself, which allows her to develop her operational and evaluative capabilities, to create trust and collaboration, to improve the organization’s core competencies and so contribute to long-term results, including economic results. Then, the expected outcomes of the business and the social cases are possible, but now they are more the achievements of the ethical managers than the extrinsic responses of other persons to the socially responsible actions of the company.

“The responsible manager focuses her interest in people, starting with the manager herself, which allows her to develop her operational and evaluative capabilities, to improve the organization’s core competencies and so contribute to long-term results.”

By understanding CSR as an ethical responsibility, we are able to propose a ‘management case’ for CSR, namely that being ethical and socially responsible is a way – the only way – to be an excellent manager. Beyond the business, the social or the moral case, the ‘management case’ is, we believe, the best case argument that can be made to persuade managers that they must be socially responsible.

About the Author
Antonio Argandoña is Professor of Economics and holder of “la Caixa” Chair of Corporate Social Responsibi-lity and Corporate Governance, IESE Business School, University of Navarra. He is a member of the Royal Academy of Economics and Finance, chairperson of the Professional Ethics Committee of the Catalan Economics Associa-tion, a member of the Anti-Corrupt-ion Committee of the International Chamber of Commerce (Paris) and of the Committe on Standardizat-ion in Ethical Management of Aenor (Madrid). He has been a member the Executive Committee of the European Business Ethics Network (EBEN).

References
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