Corporate Social Responsibility

Corporate social responsibility (CSR) has become a much more dominant objective for many companies in recent times. Whereas once profit maximisation at whatever cost seemed to be the priority of many businesses, now there seems to be much more consideration taken into account of how a company effects all stakeholders that are influenced by it's operations, not just shareholders. This blog aims to affirm the theory that profit maximisation does not need to be sacrificed by a business in the pursuit of operating in a socially responsible manner.

My previous blog regarding foreign direct investment briefly touched on the subject of CSR. Nike and Apple and their controversial operations in their Asian factories were discussed, highlighting the bad publicity that was gained when the poor working conditions in which many of their workers were subjected to, was discovered.

There have several other instances of firms that have hit the headlines for all the wrong reasons. One notable example is that of Body Shop. For a company that prided itself on being a ideal model of a social responsible company, it came a shock to many when certain discoveries showed that in fact they weren't such a leading example. The Body Shop had tried to maintain the image of a cosmetic company that only used natural products, yet it was revealed in a groundbreaking article in 1994 that many of their products contained extensive amounts of artificial colourings. Furthermore, the company had insisted that it gave much of it's profits to charity, but it was later discovered that this was not that case and that during the first 11 years of trading it donated nothing, with very insignificant amounts given after that period. The misleading image shown by the company had a very negative effect on it's share price, with the market value of the shares dropping by 50% once the story broke. This is a perfect example of the increasing importance of companies having to consider how they operate, not focusing purely on making healthy returns. It is clear from this example that indeed not operating in an ethical manner can have a dramatic effect on the image and value of a company.

The company has since dramatically transformed it's image, to be known as a prime example of a company that holds CSR as an integral part of it's strategy.

From an investment point of view, there is some ambiguity regarding what is considered as social responsible investing (SRI). Differing opinions as to whether a company operates in an ethical manner or not can often be an issue. Additionally, there maybe differences in opinion as to what extent a company is responsible for operations in which it is involved with. For example, an investor who maintains strict principles against investing in tobacco companies because of the obvious health implications that are associated with smoking may face a dilemma when considering whether or not to invest in a company that sells tobacco products despite not being involved directly in the manufacture of them. I think it ultimately relates to personal opinion, and some decisions regarding investing in social responsible companies will easier to make than others.

An example of a company that has undoubtedly shrived from maintaining a social responsible stance is Pret a Manger. This company considers the impact of every level of its operations, from using recycled materials in its packaging to shipping ingredients as opposed to using air freight in an attempt to cause less damage to the environment. Pret's popularity has without doubt been effected by it's socially responsible efforts. It is fair to suggest that if they tried to cut costs by operating in a less ethical manner that they would notice an negative effect on sales. This again goes to show that considering CSR is something that companies will clearly benefit from, as well as having an obvious positive effect on many other stakeholders in the process.