MM4513 | CSR and its Impact on Shareholder’s Wealth

Answer:

Corporate Social Responsibility and its impact on shareholder’s wealth

Every business organisation use the resources of the society in which it operates. Therefore, it has some responsibilities towards such society and environment, to fulfil in order to survive and grow smoothly. The concept of corporate social responsibility is not new and is in existence since late 1960s and early 1970s after the concept of stakeholder’s management was adopted by the large multinational corporations. Stakeholders are the parties which are influenced by the activities and performance of the company. In the recent times, the concept of CSR has grabbed huge attention of the regulatory bodies. Though, consideration of CSR has its positive sides for the firm but still it is said to have some negative side in context of corporate objective of wealth maximisation. There could be a wide range of reasons due to which firms undertake CSR initiatives in the course of their business which are discussed in the further section.

Corporate social responsibility is a concept that is applied by the companies in order to produce a positive impact on the society and environment in which they are operating their business. CSR is considered as the tool to aid the mission of the company and to guide the company as to what stands for its customers. ISO 26000 is an internationally recognised standard for the CSR (Carroll, 2015). It is generally regarded as the tool to balance the socio-economic and environmental imperatives of the business and the stakeholder’s expectation from the company. CSR is not merely a philanthropy exercise which covers the act of charity but it is the concept which is quite broader than mere charity (Prasad, Sharada & Kumar, 2001). Corporate social responsibility is typically referred to the integration of social welfare programs into the business models and the culture of the companies. CSR is generally regarded as one of the key management concept. Nowadays, it is used as a business approach to contribute positively and effectively to the sustainable development of the environment through the delivery of economic, social as well as environmental benefits to all the stakeholders of the entities. There is no particular definition of the concept of CSR and also there is no specific set of activities which are constituted as the CSR initiatives (Cadbury, 2006.

In context of CSR, two differing views are generally proposed. Firstly, the shareholder’s wealth maximisation view and the second is the shareholder’s expense view. As per the first view i.e. the shareholder’s wealth maximisation, it is generally observed that the CSR activities positively contribute to the wealth of the shareholders. While performing the CSR activities, the firms focus on protecting the interests of the other stakeholders of the firm and this enhances the willingness of such stakeholders to support the operations and activities of that firm. When firm operates efficiently, it is able to generate more returns which ultimately increase the wealth of the shareholders of the company. The wealth maximisation of the shareholders of the company is considered as one of the main objectives of business as shareholders constitutes to be the major most stakeholders of the company and regarded as its financial catalyst. The shareholders of the company are entitled to the share in the profits of the company by way of dividend in return of their investment in the company. As they invest their surplus funds for the economic growth and development of the company, they expect maximum returns from the company. The firms that are highly focused on performing the CSR activities are found to have stronger reputation which satisfies large base of its stakeholders. For the finance providers of the company, annual reports forms the most basic document to assess the financial health of the firm which is seeking funds. It enables them to learn about the financial as well as non-financial performance of the business. In today’s world, the financial institutions and banking corporations are more inclined towards the companies that have a good sense of their social responsibilities. Even The integrated reports of the company contain the information regarding the CSR initiatives taken up by the company during a particular period of time (Tai & Chuang, 2014). Moreover often it is seen that many financial institutions set out CSR initiatives on part of the client as the mandatory condition to meet the eligibility criteria for the financial assistance. Further, the employees who perform their functions for the company which is socially responsible, automatically gains more respect and trust for their employing organisation as they find themselves secured in such organisation where human rights, employees health and safety and other such factors are given due importance and value. The employees feel motivated and tend to sustain for longer term in such companies. Moreover, the adherence to the CSR principles allows the company to builds sound public image of the company and hence it helps in creating sound goodwill for the firm for the longer term (Lindgreen & Swaen, 2010). The fulfilment of CSR objectives safeguards the company from any legal or regulatory actions against the company. Further, the entity that performs its functions in the socially responsible manner is supported more by the society in various manners as the CSR initiatives of any firm reflects the degree of respect and value it has for the host society. Therefore, the CSR initiatives of the company positively contribute to attract new and satisfy the existing stakeholders of the company (Matten & Moon, 2008).

Therefore, on the one side, an entity’s CSR policy works as a means of increasing its overall profitability of the business in long run as it creates trust about the business in the eyes of society and builds confidence of various other stakeholders of the company especially the customers (Garriga &  Melé, 2004). The entities that perform their business functions in the most socially responsible way are generally found to be more attractive to the potential customers and investors in the market. Therefore, CSR helps in creation of wide customer-base for the company which ultimately leads to high profitability of its business (McWilliams & Siegel, 2001). When a firm is able to generate higher profits, it is more able to maximise the wealth of its shareholders by offering them higher returns by way of dividend.

From the real world, the case of Unilever sets a classic example of incentives of CSR initiatives. The company is a large multinational corporation and hence it has a large number of stakeholders (Thompson, 2017). Through the adoption of CSR strategy, Unilever has been consistently ranked as the ‘Food Industry Leader’ in Dow Jones Sustainability World Indexes since last 11 continuous years. Also, it has been ranked at 7^th position among the top 100 companies that are sustainable across the globe. One of the major initiatives that contributed to its leadership is the sustainable tea programme which is its key part of its CSR policy (Unilever, 2017). The CSR initiatives of Unilever have allowed the company to achieve strong financial position in terms of profitability and thereby enabled it to maximise the wealth of its shareholders.

Though, it is generally found that CSR initiatives brings various advantages to the company but on the other side, it is also argued by the critics of CSR that such activities diverts the focus of business managers from their core business activities which are necessary for the generation of revenue for it. The shareholders expense view supports the fact that managers of the entities engage themselves in the performance of CSR activities to satisfy other stakeholders at the cost of its shareholders (Deng, Kang, & Low, 2013). Companies divert some proportions of their annual operating profits in CSR activities such as providing employment opportunities to the people who belong who are below poverty line at considerable wage compensations, providing free or nominally charged health care facilities to the average sections of the society, providing education facilities to the weaker sections of the society, arranging food campaigns for such sections of the society, promoting plantations and waste management activities and other environment friendly activities etc.

For instance, if a company adopts the stringent standards in relation to pollution control, the rigidity of these standards can put the company at a competitive disadvantageous position because these standards will force the company to spend more of their economic resources on the activities that are non-productive for the business. These activities in turn lead to reducing the overall profitability of the firm and ultimately it impedes the wealth of the shareholders of the company.

Therefore, it is important for the companies to maintain a proper balance between its basic objective of shareholder’s wealth maximisation and its obligations towards the society to which they belong. It must ensure that each of the aspect is given due importance and none of them is significantly affected because of laying excessive focus on the other objective. It must be ensured that the companies clearly understand their responsibility towards the society from which it seeks various resources to operate this business the shareholders who invest their huge sums of money in the company to finance its daily operations and assets that are required to carry out the business. Only a proper trade-off between the CSR and shareholder’s wealth maximisation objective can lead to a successful business of an entity.

References:

Cadbury, A., 2006. Corporate social responsibility. Twenty-First Century Society, 1(1), pp.5-21.

Carroll, A.B., 2015. Corporate social responsibility. Organizational dynamics, 44(2), pp.87-96.

Deng, X., Kang, J.K. and Low, B.S., 2013. Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of financial Economics, 110(1), pp.87-109.

Garriga, E. and Melé, D., 2004. Corporate social responsibility theories: Mapping the territory. Journal of business ethics, 53(1-2), pp.51-71.

Lindgreen, A. and Swaen, V., 2010. Corporate social responsibility. International Journal of Management Reviews, 12(1), pp.1-7.

Matten, D. and Moon, J., 2004. Corporate social responsibility. Journal of business Ethics, 54(4), pp.323-337.

Matten, D. and Moon, J., 2008. “Implicit” and “explicit” CSR: A conceptual framework for a comparative understanding of corporate social responsibility. Academy of management Review, 33(2), pp.404-424.

McWilliams, A. and Siegel, D., 2001. Corporate social responsibility: A theory of the firm perspective. Academy of management review, 26(1), pp.117-127.

Prasad, C.A.I.S., Sharada, C.S.S.C. and Kumar, C.A.S., 2001. Corporate social responsibility. Available at:  https://www.icsi.edu/portals/22/Invitation%20-%20CSR%20Seminar.pdf Accessed on 31.08.2018.

Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.

Thompson, A., 2017. Unilever’s Corporate Social Responsibility & Stakeholders https://panmore.com/unilever-corporate-social-responsibility-stakeholders. Accessed on: 31.08.2018.

Unilever, 2017. Annual Report: CSR Initiatives. Available at: https://www.hul.co.in/Images/hul-annual-report-2017-18_tcm1255-523195_en.pdf Accessed on: 31.08.2018.