What is Corporate Social Responsibility?

Corporate social responsibility is like volunteering to help clean up your neighborhood…

When you pick up litter on your walk to work or volunteer to collect trash at a local park, you’re helping to improve your community. Corporate social responsibility involves companies doing the same thing but on a larger scale. Companies can sponsor small initiatives like a local clean-up, but they can also use their economic resources to effect more significant changes.

Corporate social responsibility (CSR) is the idea that companies have more obligations than producing goods and generating as much profit as possible.

Under the traditional capitalist model, companies are beholden to investors or shareholders, and the actions they take should directly benefit those stakeholders. Companies can do this by increasing profits, improving the potential for future growth, or providing value in the form of dividends or stock buybacks (when companies use their extra cash to buy their own shares, which reduces the number of shares in circulation and typically increases their value).

Supporters of CSR believe that companies must not just operate for the benefit of shareholders. Instead, they should also work to benefit all stakeholders, including investors, employees, customers, and the public. This can mean anything from efforts to reduce pollution to committing to buy only from suppliers who follow ethical practices.

The idea of business leaders donating money to support good causes isn’t new. Wealthy magnates from John D. Rockefeller to Bill Gates have been known for their philanthropy. What differentiates CSR from this kind of charitable giving is that it’s tied to the company’s business activities rather than the private giving of business owners. The concept of CSR emerged in the 1950s and has gained currency since then.

Proponents of corporate social responsibility argue that CSR is essential because the practices fulfill the social contract that is implicit in running a business. They say that companies should benefit not just their owners, but the whole of society.

From the perspective of businesses, CSR provides an opportunity to differentiate from competitors and attract socially conscious customers and retain them long-term. Many consumers are conscious of the impact their purchases have and want to support companies that follow ethical practices. Some consumers are willing to pay a premium if they know that a portion of their money will fund a good cause. Even if some CSR practices increase costs, they can also potentially push up sales by enough to maintain or grow profits.

CSR can also increase employee engagement and retention. Socially conscious people want to work at companies that operate ethically, so a commitment to CSR can help companies recruit and keep committed workers.

Investments in CSR can also build a culture of innovation. In the effort to find a way to produce products with less waste or using more sustainable materials, companies may discover processes that can be widely adopted or invent entirely new products.

Some types of CSR can reduce costs. One common example is curbing waste by cutting back on energy use or excess packaging. Reducing waste can not only cut down on pollution, but also slash costs by reducing the raw materials required to produce the same quantity of goods.

One of the most obvious drawbacks to corporate social responsibility is cost. Changing suppliers and switching to more sustainable production processes often costs money. There is no guarantee that increased sales will offset these expenses. Higher costs can also make it difficult to compete with companies that don’t implement CSR practices. Even CSR activities unrelated to changing production practices, like donating to environmental initiatives, increase business expenses.

Shareholders can also get upset at what they see as a failure to focus on their interests over those of non-shareholders. This can cause investors to sell off a company’s stock, reducing its value.

Publicizing CSR can also backfire, making a company look like it’s only doing good for the sake of appearances. Many consumers want to support companies that genuinely care about their impact, not those seem like they’re only making superficial changes to appear trendy.

CSR strategies can also cause a backlash, especially if an initiative does not work out as expected. If a company promises to change its practices by a certain date and doesn’t, it can draw criticism from consumers and lose out on brand trust and loyalty.

One of the simplest forms of corporate social responsibility is direct philanthropy. Companies can donate money to charity or start their own foundations to support social causes. One example is Ronald McDonald House Charities. The non-profit started by providing housing to families of children who were staying in local hospitals and expanded to offer additional services to children and families, such as mobile healthcare facilities.

Another common strand of CSR is environmental sustainability. Many companies have taken steps to reduce their carbon footprints and curb pollution. Examples of this include banks encouraging customers to receive electronic statements instead of paper ones or Walmart’s use of renewable energy to power its stores.

CSR can also come in the form of ethical business practices. Many countries have laws that require businesses to offer a minimum wage or paid medical leave, but other aspects of business are not as heavily regulated. One example is Ben & Jerry’s commitment to using Fair Trade Certified ingredients in its ice cream.

Finally, companies can practice CSR by focusing on their economic responsibility to all their stakeholders. This can come in the form of paying certain suppliers, especially smaller ones, a higher rate or giving employees benefits like parental leave or additional paid time off.

Many well-known companies have made corporate social responsibility a focus. In 2018, 86% of companies on the S&P 500 published corporate sustainability reports, compared to just 20% in 2011. Google, for example, has used only renewable energy, such as solar and wind power, to run its data centers and offices since 2017. The company now purchases more renewable energy than any other business in the world. It also offers matching dollars when its employees make a personal donation to a charity.

Beyond using Fair Trade Certified ingredients, Ben & Jerry’s has a long history of doing good. For example, the ice cream maker stopped using milk from cows raised with Recombinant Bovine Growth Hormone (rBGH), which increases their milk production, because of what it perceives as “unacceptable social and environmental costs.” The company also founded the Ben & Jerry’s Foundation, which matches charitable donations from employees, supports social justice initiatives, and donates to communities in Vermont.

In 2011, Levi Strauss & Co., the apparel retailer, updated its manufacturing processes to use less water when producing jeans, saving more than 3 billion liters of water since. The company also supports causes that employees are passionate about. For example, an AIDS Action Group that employees founded in the 1980s has volunteered and raised funds for groups that support those living with the disease.