Corporate Social Responsibility

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Corporate Social Responsibility
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CSR

• Business Ethics
• Legal compliance
• Philanthropy and community investment
• Environmental management
• Sustainability
• Human and animal rights
• Workers rights and welfare
• Market relations
• Corporate governance

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What is Sustainability?
Sustainable development is development that
meets the needs of the present without
compromising the ability of future generations to
meet their own needs. - The Brundtland
Commission, 1987
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Percentage of private companies citing factor as
important
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Relevance LostThe Rise and Fall of Management
AccountingTom Johnson Robert Kaplan
The record of the past eighty years certainly
suggests that giant enterprises are capable of
efficient and acceptable behavior. - 1987
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Some Questions about CSR

• Do you agree with the Brundtland Commission
  definition of sustainability? Can you offer an
  alternative definition that you prefer?
• Do you agree with the quote from Relevance Lost?
  Why or why not?
• Is the goal of achieving sustainable business
  practices compatible with the goal of maximizing
  profits.
• Do you think corporate business strategies can
  accommodate multiple long-run objectives? If so,
  can you cite examples?

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What is Sustainability?
Sustainable development is development that
meets the needs of the present without
compromising the ability of future generations to
meet their own needs. - The Brundtland
Commission, 1987
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What is Sustainability?
It contains within it two key concepts the
concept of needs, in particular the essential
needs of the worlds poor, to which overriding
priority should be given and the idea of
limitations imposed by the state of technology
and social organization on the environments
ability to meet present and future needs. -
The Brundtland Commission, 1987
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Some Questions about CSR

• Do you agree with the Brundtland Commission
  definition of sustainability? Can you offer an
  alternative definition that you prefer?
• Do you agree with the quote from Relevance Lost?
  Why or why not?
• Is the goal of achieving sustainable business
  practices compatible with the goal of maximizing
  profits.
• Do you think corporate business strategies can
  accommodate multiple long-run objectives? If so,
  can you cite examples?

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Relevance LostThe Rise and Fall of Management
AccountingTom Johnson Robert Kaplan
The record of the past eighty years certainly
suggests that giant enterprises are capable of
efficient and acceptable behavior. - 1987
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Some Questions about CSR

• Do you agree with the Brundtland Commission
  definition of sustainability? Can you offer an
  alternative definition that you prefer?
• Do you agree with the quote from Relevance Lost?
  Why or why not?
• Is the goal of achieving sustainable business
  practices compatible with the goal of maximizing
  profits.
• Do you think corporate business strategies can
  accommodate multiple long-run objectives? If so,
  can you cite examples?

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Sustainable Timber Practices?
2010s
2020s
2030s
2040s
2050s
2060s
2070s
2080s
2090s
2110s
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Where is the value of the company?
The first twenty years
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The last eighty years
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Some Questions about CSR

• Do you agree with the Brundtland Commission
  definition of sustainability? Can you offer an
  alternative definition that you prefer?
• Do you agree with the quote from Relevance Lost?
  Why or why not?
• Is the goal of achieving sustainable business
  practices compatible with the goal of maximizing
  profits.
• Do you think corporate business strategies can
  accommodate multiple long-run objectives? If so,
  can you cite examples?

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Who Needs Multiple Objectives?

• Educators and Students
• City governments
• The National Forest Service and Park Service
• Middle management
• Factory workers

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Examples of Multiple Objectives in the Corporate
World

• TIAA-CREF Social Choice Fund
• Working Assets Long Distance
• Credit Cards with a Mission
• Credit Unions
• Corporate Charitable Giving

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How does Corporate Social Responsibility fit in?

• Socially-responsible behavior is a means to an
  end.

• Socially-responsible behavior is an ultimate
  corporate objective.

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How does Corporate Social Responsibility fit in?

• Socially-responsible behavior is a means to an
  end.

• Socially-responsible behavior is an ultimate
  corporate objective.
• It coexists with other objectives, like
  generating profits and obeying laws.

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Accounting Theory
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When we model the behavior of firms, we will
want to describe the objective as profit
maximization and the constraints as technological
constraints and market constraints.
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Success is usually judged by value
Shareholders are made better off by any decision
which increases the value of their stake in the
firm.
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The Financial Accounting Paradigm in the U.S.
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• General purpose external financial reporting is
  directed toward the common interest of various
  potential users in the ability of an enterprise
  to generate favorable cash flows.
• Thus, the objectives in this Statement are
  focused on information for investment and credit
  decisions.

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The Financial Accounting Paradigm Worldwide

• Now, because of the U.S. work in the 1970s and
  1980s, the fundamental foundations of accounting
  worldwide are based on the conceptual bases laid
  down in the USA.
• Sir David Tweedie
• Testimony to U.S. Senate
• 2002

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Management accounting measures, analyzes, and
reports financial and nonfinancial information
that helps managers make decisions to fulfill the
goals of an organization.
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There are perceived or real limitations, imposed
by U.S. corporate law, to what managers can do in
the name of corporate social responsibility.
These limitations derive from case law that
defines managements fiduciary responsibility to
shareholders.
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How does Corporate Social Responsibility fit in?

• Socially-responsible behavior is a means to an
  end.
• It saves costs in the long run.
• It wins customers and earns customer loyalty.

• Socially-responsible behavior is an ultimate
  corporate objective.

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Percentage of private companies citing factor as
important
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Nike Corporate Responsibility Report
Corporate responsibility must evolve from being
seen as an unwanted cost to being recognized as
an intrinsic part of a healthy business model, an
investment that creates competitive advantage and
helps a company achieve profitable, sustainable
growth.
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How does Corporate Social Responsibility fit in?

• Socially-responsible behavior is a means to an
  end.
• It saves costs in the long run.
• It wins customers and earns customer loyalty.

• Socially-responsible behavior is an ultimate
  corporate objective.
• It coexists with other objectives, like
  generating profits and obeying laws.

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The Moskowitz Prize

• The only global award recognizing outstanding
  quantitative research in the field of socially
  responsible investing (SRI).
• Launched by the Social Investment Forum (an SRI
  trade association), but now housed in the Haas
  School of Business (U Cal., Berkeley).
• Awarded annually since 1996.
• Awarded for
• practical significance to practitioners of SRI
• appropriateness and rigor of quantitative
  methods
• novelty of results.
• Sponsored by approximately six investment firms.

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Key studies on social investing Russo and
Fouts (1997) (a Moskowitz prize winner) Finds
that, after adjusting for everything imaginable,
companies with better environmental records
appear to have better-than-average returns on
assets.
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McWilliams and Siegel (1999) Finds that many
event studies of socially responsible investing
have been marred by statistical errors. Their
analysis forced a reassessment of many studies
reporting returns to social variables, and put
authors of future event studies on notice that
considerable care must be exercised in the use of
this methodology. Dibartolomeo and Kurtz (1999)
Dibartolomeo does not agree that there might be
an SRI effect at work. His model finds no
unexplained performance.
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Teoh, Welch, and Wazzan (1999) (a Moskowitz prize
winner) Finds that the South Africa boycott, the
largest shareholder boycott to date, had minimal
impact on South African securities and securities
of U.S. companies doing business in South Africa.

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Bauer, Koedijk, and Otten (2002) (a Moskowitz
prize winner) Measures the risk-adjusted
performance of 103 German, U.S., and U.K.
screened mutual funds for the 1990-2001 time
period, and finds no significant differences
between their returns and those of unscreened
funds.
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Orlitzky, Schmidt, and Rynes (2003) (a Moskowitz
prize winner) Performs a meta-analysis of past
studies of corporate social performance, and
finds a statistically significant positive
association with corporate financial performance.
Hong and Kacperczyk (2006) Shows that tobacco
stocks have outperformed market averages for
decades, and demonstrate that this is true even
after accounting for market risk, size, and
valuation effects.
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Edmans (2007) (a Moskowitz Prize winner) Finds
that stocks of firms on Fortune magazine's '100
Best Companies to Work For' list outperformed
market averages, even after accounting for market
risk, size, momentum, and style effects.
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But wait a minute

• If commitment to CSR improves financial
  performance, what is there to talk about?
• Were companies too dumb to realize that energy
  conservation reduces costs?
• At the most fundamental level, economic theory
  indicates that financial incentives cannot be
  sufficient to induce a commitment to CSR.
• Negative externalities and the tragedy of the
  commons
• So what drives the empirical results?

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The TIAA-CREF Social Choice Fund

• McDonalds 1.0

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The TIAA-CREF Social Choice Fund

• McDonalds 1.0
• Hershey Co. 0.1

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Hershey, like other major chocolate firms, signed
the Harkin-Engel protocol and maintains it is
working. "The protocol's value is seen in
measurable progress on the ground," says Kirk
Saville, a Hershey spokesman. "It has created
greater community awareness of child welfare
issues and increased incomes for family farms and
access to education." But Hershey has no direct
role in implementing reforms in Ivory Coast.
Instead, the protocol required the industry to
create a foundation to oversee certification.
That body is the International Cocoa Initiative,
headquartered in Geneva and funded by the
chocolate industry to the tune of about 2
million a year.
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The foundation began its work in Ivory Coast in
2003, and it claims to have six pilot projects
underway there. "We are doing high quality,
scalable work," says Peter McAllister, ICI's
executive director. "We've not yet had a
significant effect, but it's a journey." He is
unfazed about the looming July 2008 deadline "We
don't see it as ending in 2008. Our process
works, and we're committed for the long term."
But the foundation has only one staff member in
Ivory Coast, Robale Kagohi, and his activities
appear limited.
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The TIAA-CREF Social Choice Fund

• McDonalds 1.0
• Hershey Co. 0.1
• Caterpillar 0.4

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The TIAA-CREF Social Choice Fund

• McDonalds 1.0
• Hershey Co. 0.1
• Caterpillar 0.4
• The GAP 0.1

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'The reality is that most major retail firms are
in the same game, cutting costs and not
considering the consequences. They should know by
now what outsourcing to India means.
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The TIAA-CREF Social Choice Fund

• McDonalds 1.0
• Hershey Co. 0.1
• Caterpillar 0.4
• The GAP 0.1
• FedEx 0.4

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We do have a fiduciary responsibility to our
shareholders - FedEx Management Many major
initiatives simply arent money-savers
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How does Corporate Social Responsibility fit in?

• Socially-responsible behavior is a means to an
  end.
• It saves costs in the long run.
• It wins customers and earns customer loyalty.

• Socially-responsible behavior is an ultimate
  corporate objective.
• It coexists with other objectives, like
  generating profits and obeying laws.

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Reputation Incentives

• César Chávez and the Lettuce Boycott
• Apartheid in South Africa
• Sweatshops in the shoe industry
• But what about child slave labor in the chocolate
  industry?

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Harvard Business Professor Lynn Sharp Paine
Recent attempts to make an economic case for
corporate attention to human rights have a
shoehorned quality. It strains credulity to
suggest that Nike would have benefited
financially from requiring its suppliers to meet
higher standards at the inception of its
then-novel overseas manufacturing program
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How does Corporate Social Responsibility fit in?

• Socially-responsible behavior is a means to an
  end.
• It saves costs in the long run.
• It wins customers and earns customer loyalty.

• Socially-responsible behavior is an ultimate
  corporate objective.
• It coexists with other objectives, like
  generating profits and obeying laws.

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Figure 1 Corporate Sustainability Model
Inputs
Processes
Outputs
Outcomes
External Context
Sustain-ability perfor-mance (may be both an
output and outcome)
Sustain-ability strategy Sustain-ability
structure Sustain-ability systems, programs and
actions
Stake-holder reactions
Long-term corporate financial perform-ance
Internal Context
Leader-ship
Business Context
Human Financial Resources
Marc Epstein, Strategic Finance, January 2008
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Figure 1 Corporate Sustainability Model
Inputs
Processes
Outputs
Outcomes
External Context
Sustain-ability perfor-mance (may be both an
output and outcome)
Sustain-ability strategy Sustain-ability
structure Sustain-ability systems, programs and
actions
Stake-holder reactions
Long-term corporate financial perform-ance
Internal Context
Leader-ship
Business Context
Human Financial Resources
Marc Epstein, Strategic Finance, January 2008
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William Nordhaus Professor of Economics Yale
University A Review of the Stern Review on the
Economics of Climate Change
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Pure Rate of Social Time Preference(Time
Discount Rate)
2097
2067
2037
2007
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A Paradigm of Stewardship

• Accounting is not necessarily confined to the
  situation of measuring gains and losses.
• Accounting reports serve a great number of
  purposes. Accountability is the real basis for
  financial reports.
• It is basically a means of meeting the
  requirement that custody and management of
  property carries with it an obligation to account
  for it.
• Vatter, 1950

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That scientists do not usually ask or debate
what makes a particular problem or solution
legitimate may indicate that neither the
question nor the answer is felt to be relevant to
their research.