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Chapter 1 Introduction
1.1. Introduction to the study Corporate social responsibility, abbreviated as CSR, is a major element of corporate governance. CSR in general terms means a companys liability towards the society, environment and its people. However, CSR is a voluntary approach used by company and is not legally enforceable.

Corporate Social Responsibility


2.1. Introduction to CSR Corporate social responsibility is a recently formed concept which influences organizations to voluntarily incorporate the social, economic and environmental issues in their business strategies, and in the interaction with the stakeholders. Canadian Business for Social Responsibility defines CSR as: A companys commitment to operating in an economically, socially and environmentally sustainable manner, while recognizing the interests of its stakeholders, including investors, customers, employees, business partners, local communities, the environment and society at large. Therefore, CSR is the relationships of the corporation with all its stakeholders. These not only include shareholders, customers, employees, owners, investors but also government, suppliers competitors and communities. Some of the elements of social responsibility include investment for the community benefits, better employee relations, creation and maintenance of employment and better financial performance.

2.1.1. Objective/Importance of CSR 1. To retain the old talents and attract and motivate the new talents from the market. 2. To manage and reduce the various risks associated with the business. 3. To improve operational and cost efficiency. 4. In order to obtain license to operate. 5. Development of new business opportunities.

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6. Development of prosperous working environments. 7. To contribute to the number of public policy objectives.

2.1.2. Characteristics of CSR Various characteristics of CSR can be listed as follows:

CSR is an integrated approach to business strategy and operations: it is about integrating social and environmental concerns into business strategy and operations.

CSR is a voluntary concept i.e. it is usually not forced by the inside or outside parties. An important aspect of CSR is how enterprises interact with their internal and external stakeholders (employees, customers, neighbors, non-governmental organizations, public authorities, etc.).

CSR covers social, economic and environmental issues. The subcategories of each of these categories are presented below in figure 1. Corporate social responsibility

Society

Environment

Economy

Public accountability Health and safety Human rights Community Employee

Reduction of resource use Impact of production

Fiduciary duty Contribution to economic prosperity

Waste minimization

Pollution control

Fig 1. Various stakeholders of company (CSR should reflect benefits these categories)

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2.2. History of CSR Though the term CSR wasnt coined until 1953, new research reveals the fact that CSR can be traced back to 20th century, to the editor of one of Americas most influential business magazine named, The Worlds Work. From its initiation in November 1900, The Worlds Work was devoted to social responsibility in the public interest. The Worlds Work: Arthur W. Page and the Movement toward Social Responsibility in Corporate Communications, 1913-1927, by Remund traces how The Worlds Works editorial vision reflected progress toward social responsibility in later corporate communications. Five themes of corporate and social responsibility were emerged. They included environmental protection, labor rights, consumer protection and education, child welfare and corporate transparency. From the post of The Worlds Work, the editor used to call for sustainability in logging practices, labor rights for African-American cotton workers, better safety measures for underground miners, greater consumer education about investment banking, an end to child labor, and more corporate transparency. A dozen or more editorials addressed this theme. 2.3. Criticisms of CSR CSR raises several questions and issues for its legitimacy. CSR may not always be for the purpose intended by the organization initiating them. It, almost at all times has a hidden motive to indulge in being socially responsible. For this very reason, CSR has been criticized and the bases for such criticism are discussed below which are:

1. Lack of regulations of CSR In practice, CSR is a voluntary corporate action that comes from within the organization. It goes beyond simple compliance with domestic regulations and laws. Both national and international laws1 have attempted to regulate CSR through some kind of framework. However, because of its voluntary nature and the lack of formal implementation of the framework, the information that companies provide to its stakeholders such as investors and consumers, is not standardized. Different multinational companies can be regulated by internationally designed laws, which are yet to be effectively followed in Nepal.

2. Misuse of CSR as a marketing ploy


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CSR is often found to be toyed by companies for their own benefit of generating publicity and free advertisement. It is also used by companies as a shield to cover up their irresponsible acts on the forefront of being socially responsible. Awards that were given to those companies who perform social activities were used as a medium to gain publicity, public relations and cheap form of advertisement. Environment Program/ Sustainability reporting award given by United Nations, was won by the British American Tobacco which was critiqued since the company was producing socially irresponsible products like cigarettes and tobacco.

3. Abuse of power through CSR CSR, being voluntary in nature and the lack of formal regulation, it inadvertently places more power in the hands of the decision-makers. This is because companies are given the liberty to shape and define CSR as they deem fit and how to practically apply it, increasing the risk of further opportunity for abuse of power. In one case, Tesco, the UK supermarket chain, on one hand had shed workers in its Manchester site in 2006 while on the other hand; it had trumpeted its CSR policy which, being one of the most important values was to treat people the way we would like to be treated. Then Tesco tried to achieve this by being a good employer and by playing their part in local communities.

4. Managers will divert the efforts from the real claimants and dual focus of managers Managers are the ones who are responsible for the management of the companys resources. And when the companies engage in socially responsible practices, there are chances that the managers would exploit the corporate resources from their rightful claimants, whether they are the firms owners or the employees. The basic motive of any company is to make profit and by involving the company in social activities, the right of the shareholders to receive dividend is being devoid in order to fulfill the societal activities. Also, by asking managers to focus on the societal aspect while doing business, the managers are being confronted with dual objectives. The psychological implications would be that the managers would have to divert their focus and resources to achieving both profit for the business as well as benefits for the society. 5. Complying with the rules, regulations and processes Every action taken on behalf of the society, however noble it may be has to be in accord with the procedures and processes creating subsequent accountability. By companies indulging in the

CSR activities, the role of the government to provide societal welfare is being encroached. It is the responsibility of the government to serve the society and the public. With corporate houses doing most of the governments work to serve the society, the authority of the elected official and bodies are not being used and are thus answerable to the public.

6. Burden for customers One of the most important stakeholders for the company is its customers because of which most of the socially responsible activities of the companies are related to benefit the customers which would ultimately benefit the company. This view relates to the fact that currently consumers are paying higher prices for dealing with social concerns.

7. Profit making versus CSR One of the widely discussed topics regarding the CSR is that if organizations are there to earn profits then why CSR should be followed by the organization which usually leads to the decrease in the profit made by the organization. A study by Margolis and Walsh found that out of 100 studies examined for the relationship between corporate social performance (CSP) and corporate financial performance (CFP) over the last 30 years, most studies point to a positive relationship between CSP and CFP. Of the 80 studies that examined whether CSP predicts CFP, 42 found a positive relationship, 19 found no relationship, 15 studies reported mixed results, and only 4 studies found a negative relationship. Not surprisingly, it is generally inferred that CSR does produce financial dividends for firms, but this conclusion needs to be treated with caution because there are major methodological problems associated with such studies and the case may be situational varying according to the business and stakeholders of the company. One very relevant case regarding this issue is the case of AIDS medicine distribution in developing countries. This issue was raised because of the action taken by South African government to allow the nations pharmaceutical to manufacture the patented medicine of HIV/AIDS.

Case study

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Four million people in South Africa are infected by HIV/ AIDS. It is said that every seventh people is the victim of Aids in South Africa. Therefore, in 1997 the South African government announced its plan that it would allow to manufacture the generic version of medicine of Aids which would cost as less as 1/50th of the cost (i.e. $12,500 per year per patient) that it has to pay if the drug has to be purchased from the pharmaceuticals which have got the patent rights for the medicine. However, this plan was violation against the governments obligations under the TRIPS (Trade Related aspects of Property Rights) agreement signed by the South African government. Also, this would cause the greater loss to the American pharmaceuticals company. In order to avoid these threats of their patent rights being violated and misused by other companies and nations, a consortium of drug companies sued against the government the following year. This led to wide criticism of the company for being excessively profit oriented and putting money before the lives of people. Therefore, the company withdrew the claim against the government in April 2001. The second largest pharmaceutical company GlaxoSmithKline (GSK) was the leader in the market and research and development (R&D) in the HIV/AIDS category and was the first company to introduce the medicine for HIV/AIDS. Following this case, pharmaceutical companies like GSK and others heavily discounted on their medicines of AIDS to the developing countries. The issue to be addressed here is that what happened was good or not? If we look at the short term, it is beneficial as the people in the poor nations got better health care facilities and hence an elongated life. However, analyzing from the other perspectives, pharmaceutical companies invests huge sum of money and many years of R & D to get success in its campaign. So, undoubtedly it will try to get return of those costs and then earn profit for its throughput. If the companies are enforced to be lenient for CSR then they may be unable to get their returns on investment along with profits within a reasonable time. Therefore, in the long run, if other dangerous disease like Bird Flu or Swine Flu, become prevalent then these pharmaceutical companies may not be willing to invest high cost on R & D to develop cure for such diseases as the costs they incurred may not be easily recoverable. Therefore, this ongoing debate on whether the CSR should be enforced or voluntarised should be dealt with great attention and care so that the society benefits not only in the short run but also in the long run.

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