AUDITING & CORPORATE

GOVERNANCE

TOPIC: MODELS OF CSR

(Corporate Social Responsibility)

Submitted by:
Taniska Sarma
Roll no. 21/89135
Bcom hons, Section: B
  The World Business Council for Sustainable Development in its
publication Making Good Business Sense by Lord Holme and
Richard Watts, used the following definition:
“Corporate Social Responsibility is the continuing commitment by
business to behave ethically and contribute to economic development
while improving the quality of life of the workforce and their families as
well as of the local community and society at large.”

Arguments in Favor of Corporate Social Responsibility:

Corporate social responsibility is the commitment of business to behave
ethically and to contribute to sustainable economic development by
working with all relevant stakeholders. Following arguments are in favor
of CSR:
1. The Iron Law of Responsibility: The institution of business exists only
because of its invaluable services to the society. Therefore if a business
intends to operate, it must respond to the needs and expectations of the
society. The inputs of a business and outputs are regulated by the society
and these must be acceptable to the society. This is called iron law of
responsibility. If power is not used responsibly in the long run it is bound
to be lost.
2. Achievement of Long-term Objectives: Business entrepreneurs
understand that it is in their interest to fulfill the demands and expectations
of the society. Since business has been given economic power and access
to productive resources of society, they are obliged to use those resources
for the welfare of the society. Technical resources of the business if
applied to social problems can resolve them better. This results in:
(a) Easier labor recruitment
(b) Reduced employee turnover and absenteeism
(e) Dependable creditors and debtors
 (4) Easier access to foreign capital and technology.
Certainly a better society provides a conducive environment in which the
business gains long-term profit maximization.
3. Social Responsibility avoids Government Intervention: When
corporation voluntarily responds to social expectations, the intervention of
government is no more needed to control business activities. Regulation
and control restrict flexibility of doing the business. Once government
control is established it is never done away with. The prudent course
hence is to have socially responsible behavior and thereby give
government no opportunity to intervene.
4. CSR recognizes Socio-cultural Norms and Respects Social
Consciousness: Since an enterprise operates within a framework of socio-
cultural norms it has to work within the desirable limits set by the society.
The society certainly expects good quality product, fair trade practices,
and safety measures at work, and labor welfare into consideration and this
is automatically taken care of in the CSR orientations.

5. Improved financial performance: Research has shown a positive

relationship between CSR activities and financial performance of the firms

6. CSR Increases Sales and Customer loyalty: There is empirical

evidence which shows relationship between companies that are socially
responsible and growing market for their products and

services. Business has to satisfy customers on key criteria such as price,

quality, availability, safety and comfort.

Arguments against Corporate Social Responsibility

The criticism of CSR is for the following reasons:
1. CSR is a Vague Concept: The concept of CSR has no clear definition. It
has multiple interpretations. The nature and scope of CSR has no definite
boundaries. Since everything that has negative impact can be put in the
purview of CSR, enterprises are rather afraid of it.

2. Dilution of Profit Maximization: Economic wealth creation is the

objective of any economic institution. If the managers start bothering about
other objectives they are bound to lose their focus.

3. The "Taxation Argument": Investors according to the "taxation”

argument entrust their money to the managers of the corporation in order to
make profits for the shareholders. Spending money to pursue social ends is a
form of taxation.

4. Conflicting Considerations: Two conflicting considerations wealth

maximization and social responsibilities could leave business managers in
confused state. As a result it may lead to poor management.

5. CSR could be a reason of "Market Failure": Social responsibility

assumes that markets are not perfect and market mechanism is not the
appropriate way to allocate scarce to alternative uses. Thus an alternative
mechanism should exist. This will lead to loss of productivity and efficiency
in business.

MODELS OF CSR
Some of the approaches or models of CSR are:

The Classical Model or Shareholder Value Theory

Shareholder Value Model holds that only social responsibility of business is
making profits and shareholder value maximization is the supreme goal for
corporate governance and business management. Other social activities
which companies could undertake would be acceptable if either prescribed by
law or these contribute to the maximization of shareholder value.
 Milton Friedman, the main protagonist of the model wrote 'the only one
responsibility of business towards the society is the maximization of profits
to the shareholders, within the legal framework and the ethical custom of the
country'.The theory has been quite common in the USA and other Anglo-
Saxon countries until the mid-twentieth century. This model of CSR goes
along the agency theory of corporate governance in which owner or the
shareholders are regarded as the principal and managers as the agents.
Friedman’s argues that corporate executives are acting in their official
capacity and not as private persons and are agents of the stockholders of the
corporation. Management of the corporation have an obligation to make
decisions in the interests of the stockholders, who are their employers. He
further argues that to say that corporate executives have a social
responsibility implies that they should act in a manner that is not in the
interest of his employers. For example he should not increase the price of his
product in social interest even if the price of inputs is going up. A corporate
should not be spending someone else's money for a general social interest.
Corporate cannot be allowed to become civil servants because they are not
elected by political process instead are selected by stockholders of private
business firms.
The classical view recognises intervention by the government for the public
welfare. It is not that corporations are allowed to act in a socially
irresponsible manner but are relieved of thinking about it.
The classical view about the nature of the corporation is explained by James
W. McGuire in three basic propositions:
1. Economic behaviour is separate and distinct from other types of behaviour
and business organizations are distinct from other organizations even though
same individuals are involved in business and non-business affairs. Business
organisations do not serve the same goals as other organisations in a
pluralistic society.
2. The primary criteria of business performance are economic efficiency and
growth in production of goods and services including improvements in
technology and innovations in goods and services.
3. The primary goal and motivating force for business organizations is profit.
The firm attempts to make as large a profit as it can, thereby maintaining its
efficiency and taking advantage of available opportunities to innovate and
contribute to growth.
The classical view argues that corporations should engage in economic
activities and activities surrounding these. Social concerns are given no
importance and are the prerogative of the State. This view thus confines the
role of corporations to the economic aspect only.

Trusteeship Model
Mahatma Gandhi's philosophy of trusteeship is concerned with social
responsibility of business. Since in large corporations management and
ownership are diverse, managers are the trustees of business. Even the
supplier of capital should not treat the wealth as their own but consider it as
capital held in trust for the society. Thus corporate management is an
inclusive concept and includes labour, consumers, government and society
besides the management. Directors have been traditionally considered as
trustees of the shareholders and should use the corporate resources
judiciously. Gandhi ji did not mean trustee only in the legal sense but implied
a good deal on moral grounds. His theory of trusteeship makes no distinction
between private and non-private property. All property is considered to be
held in trust irrespective of who possesses it and what is its nature and
quality. The theory of trusteeship applies to tangible and transferable property
and also to intangible, non-transferable property, power and position.
 Carroll's Model of CSR
Archie B. Carroll introduced "The Social Performance Model' in 1979. The
model regards CSR as a multi-layered four inter-related aspects joined
together into one Corporate Social Performance, Carroll stated four-
dimensional definition which describes the social responsibility of business in
more exhaustive and complete way than previous definitions.
"The social responsibility of business encompasses the economic, legal,
ethical and discretionary expectations that society has of organizations at a
given point of time." This suggests that responsibility of the business
encompasses not only basic responsibilities such as economic and legal ones
but also ethical which goes beyond regular activities of companies and
philanthropic acts which although voluntary, are desired by the society. The
definition consists of all social expectations for the business. Carroll regards
CSR as a multi-layered four inter-related aspects:
(a) Economic,
(b) Legal,
(c) Ethical, and
(d) Philanthropic responsibilities.
The four aspects of CSR are presented in layers within a pyramid which can
be seen as follows:
The CSR firm should strive to make a profit, obey the law, be ethical, and be
a good corporate citizen. For example, a Food Company which has decided
to produce healthy yogurts and donate part of the sales income to the destitute
in an area. This is an example of the action which falls under every single
responsibility suggested in the model. These can be explained as follow.
Economic Responsibility: The satisfaction of economic responsibility is
required of all corporations. These include:
1) Using economic resources efficiently
2) Having sound commercial practices
3) Generating internal funds
4) Keeping economic interests of investors or shareholders.
5) Fairly paid jobs
6) Good quality products at a fair price.
Legal Responsibility: Since the State has predominant role in regulating
corporate practices, legal responsibility is the basis of social responsibility.
These include:
1) Paying taxes, licence fees and fines in time
2) Follow economic and labour laws of the nation
 3) Provide necessary information required by the government of the host
and home country.
Ethical Responsibility: The corporate agenda regarding social issues are
located in the area of ethical responsibility. Since there is so much of
business criticism, there is a constant reaffirmation of their social legitimacy.
Hence it is needed that the business follows:
1) Fair trade practices
-2) Anti-pollution steps
-3) Reasonable prices and good quality products
4) Safeguard interests of the community at large.
Philanthropic Responsibility: These are more or less discretionary
responsibilities of the corporation. The business has discretion to assume the
following responsibilities:
1) Contribute to the welfare of local communities
2) Contribute to healthy environment
3) Generate employment for the population of place where the business
operates
4) Help weaker sections of the society.
Corporate Social Performance Model is helpful to understand that social
responsibility is not a separate issue from an economic performance. As per
the model, the fully responsible company is that which meets all four
categories of responsibility (economic, legal, ethical and discretionary one),
is involved in social issues which are relevant to the industry and the time
that company operates and its actions are the responses to the actual social
expectations in the given point of time. Responsible company is able to
integrate corporate social responsibility, corporate social responsiveness and
urgent social issues with its operations. In conclusion, socially performing
company can effectively and successfully operate in the social environment
because it is able to recognize social expectations, issues and react in the
proper way to prevent social discontent. The implementation of these
responsibilities may vary depending upon the firm's size, management's
philosophy, corporate strategy, industry characteristics, the state of the
economy, and other such mitigating conditions.

Modern View: Stakeholders Model

The stakeholders approach to CSR has primarily been developed by Edward
Freeman in 1980s. It provides an alternative to the view that stockholders are
the nucleus of a corporation. The stakeholders approach is that corporations
are operated or ought to be operated for the benefit of all those who have a
"stake" in the enterprise including employees, customers, suppliers and the
local community. A stakeholder includes all those groups who are vital to the
survival and success of the corporation and any groups or individuals who
can affect or is affected by the achievement of the organizations objectives.
The stakeholder approach starts by looking at various groups to which the
corporation has a responsibility. The underlying thought is that corporations
have to be managed in the interests of whole range of groups that have
legitimate interest in the corporation rather than shareholders alone. To find
out which are the groups who have legitimate interest Evans and Freeman
suggest two principles:
1. Principle of corporate rights which requires that a corporation is obliged
not to violate the rights of others.
2. Principle of corporate effect, which requires a company to be responsible
for the effects of their actions on others.
Thus range of stakeholders differs from company to company and from one
situation to another. The stakeholders can be seen as:
Thus we have seen that a corporation has responsibility towards different
stakeholders. This can be listed as follows:
Responsibility towards Shareholders
Shareholders are the true owners of the corporation. These investors expect a
high rate of return and appreciation of their capital. The responsibility of
corporation towards them is:
1. Safety of investment of funds needs to be ensured.
2. Assets of the business have to be safeguarded.
3. Financial position of the company is to be strengthened. This will then
result in capital appreciation.
4. A regular return on the investment of shareholders is to be provided.
5. Financial position of the company should be informed with utmost
transparency.
Responsibility towards Employees
Following obligations should be fulfilled by a firm towards employees:
1. Salaries or wages are true motivation for any employee. Hence reasonable
wages must be paid.
2. Hygienic working conditions have to be ensured.
3. Service benefits such as housing, medical etc. are to be provided.
4. Positive human relations are to be established within an organization.
5. Adequate opportunities have to be provided so that workers develop skills
through training and education.
Responsibility towards Customers
Consumer satisfaction is and has to be the main objective of any business
enterprise to survive in the long run. Hence a corporation has to ensure the
following:
1. Provide goods which meet the needs of the consumers of different
categories.
2. Goods and/or services are of the best possible quality.
3. Goods have to be provided at a fair price.
4. Regular supply of goods is to be ensured.
5. Adulteration can be the worst thing so it should be avoided.
6. Misleading and deceptive advertisements have to be avoided under all
circumstances.
7. Fair trade practices are what the consumer always expects from any
business.
Responsibility towards Suppliers
To ensure that the suppliers keep on regularly supplying goods and services,
it is essential that a business enterprise creates healthy relations with them.
This can be done by:
1. Ensuring fair terms and conditions regarding
(a) Price
(b) Quality
(c) Delivery of goods
(d) Payment.
2. Regular payments should be made to the suppliers
3. Small scale suppliers have to be encouraged and brought to the main
network.
4. Exploitation of suppliers needs to be avoided.
5. Suppliers should be given positive feedback to improve the quality of the
product.
Responsibility towards Government
Business has always had the obligation to abide by the laws of the State. It is
also the responsibility of the business to do the following:
1. To conform to the policies, guidelines, rules and regulations of the country.
2. To pay taxes, fees and fines in time.
3. No attempt should be made to corrupt government employees.
4. Fair dealing in foreign trade is must for any country.
5. Fair trade practices should be followed to have healthy business
environment.
Responsibility towards Society
Business has obligations to the society at large in which it operates. It has to
be responsible in all its actions and activities. Some of these can be listed as:
1. To provide balanced growth of various regions.
2. Ensure safety of local surroundings.
3. Not to pollute or degrade the environment.
4. To generate employment opportunities.
5. To provide safe, healthy and good quality products to the society.
6. Provide for schools, dispensaries and low cash housing in the area of
business
7. Avoid all types of unfair and anti-social practices.
8. Not to support any political or illegal activity.
Freeman has added two perspectives to the shareholders theory which leads it
to the stakeholder theory:
1. Legal Perspective: A corporation has legally binding contract to suppliers,
employees or customers. There is whole range of dense network of laws and
regulations enforced by any society.
2. Economic Perspective: From long term profitability point of view it is
essential to take care of customers, employees or suppliers. Shareholders
cannot be made the main focus because often their perspective is short-term
speculation and not long term growth.
Limitations of Stakeholder Model
1. Employing the stakeholder model will not necessarily result in long-term
profitability. There are companies that have failed, despite of their
commitment to their stakeholders.
2. In its normative use, the interests of all groups other than shareholders
constitute "constraints" on corporate activities rather than goals.
3. Satisfying employees, customers, suppliers and general public are means
of achieving the end of making a profit.
4. "Responsibilities" and "Objectives" are not the same. Responsibilities are
obligations that limit the achievement of the main objectives.
5. This model cannot be used as an action guide for business. This is because
it implies that benefits of one group must be balanced against a loss to
another. There may often be problem of colliding stakeholder rights. In a
situation, for instance, when the interests of stockholders and employees do
not align, how does one make management decisions may be intriguing.
6. To structure the corporation to ensure the well-being of all the corporate
constituencies is a difficult task.