Corporate social responsibility: the capitalist’s dilemma

January 2018 | EXPERT BRIEFING | FRAUD & CORRUPTION

financierworldwide.com

Corporate social responsibility (CSR) has fast become an evolutionary concept with different writers positing varying theories regarding the interface between CSR and businesses. For context, there exists a school of thought which believes that the sole objective of a company is strictly profit maximisation; and another school which believes that a company should balance profit maximisation with CSR. No view is entirely right or wrong.

Defining CSR

Since there is no acceptable definition of CSR, we can rely on definitions provided by various organisations and attempt a working description of the basic components of CSR. The World Business Council for Sustainable Development defined CSR as: “The continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large”. AB Carroll, a leading expert on CSR, defined CSR as involving “the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive. To be socially responsible then means that profitability and obedience to the law are foremost conditions when discussing the firm’s ethics”.

When the various definitions are juxtaposed, a working definition of CSR arises as anything which allows a company to be socially, legally, ethically, economically and environmentally responsible; values its stakeholders and focuses on sustainable development activities.

Profit maximisation v. CSR: the manager’s dilemma

What do managers have a duty to? The age-old concept of corporate law provides that corporate managers have only one duty: profit maximisation for the benefit of their shareholders. Any act which contravenes this duty has been frowned upon by the courts in various jurisdictions. In the case of Dodge v. Ford Motor Co., the Supreme Court of Michigan held that a company is run in the interests of its shareholders rather than stakeholders. In this case, Mr Ford had suspended the payment of an annual special dividend to the shareholders of Ford Motors and reduced the costs of Ford cars. He claimed that the company needed the money for expansion and he did not wish the cost of growth to be borne by customers in the form of more expensive cars. The court ordered Mr Ford to pay the special dividends to the shareholders and noted that his altruistic motives were irrelevant. Similar views were propagated by the economist Milton Friedman, who stated that a corporation’s assets are to be used solely for the benefit of shareholders and not for social purposes. Perhaps this explains why some companies which focus solely on profit maximisation, slowly degenerate into corporate scandals and corporate crimes.

Do companies and managers have a duty to stakeholders?

The question of whether a corporation has a duty to its stakeholders has provoked discourse among corporate lawyers and academia. The American Law Institute’s ‘Principles of Corporate Governance and Structure: Analysis and Recommendations’ provides that a company should be run with the objective of profit maximisation and shareholder gain. However, this is subject to the company acting within the boundaries of the law and ethical considerations relevant to a business. The principles also provide that the company may devote its resources to public welfare, humanitarian, educational and philanthropic purposes. Interestingly, the Nigerian Companies and Allied Matters Act provides that directors are to weigh the interests of employees and shareholders when making corporate decisions.

From the foregoing, it is clear that managers have a legal duty to their shareholders to ensure profit maximisation, but that is not the full extent of their duties. Managers should also have a duty to the society where they operate. Although this duty may not be backed by the force of law and should not be, it is important that a company is not entirely focused on profit making to the detriment of society.

Can businesses ‘do well by doing good’?

Companies need to understand that in undertaking CSR activities they may still perform optimally. It is easy for CSR writers to posit freely that companies should not be focused solely on profit maximisation without considering other stakeholders. However, when you situate events within a certain context, the picture becomes clearer.

On whether the sustainability practices of a company is a consideration for consumers when making purchasing decisions, a study conducted by the Nielsen Company polled 30,000 consumers in over 60 countries and found that 55 percent of global respondents were willing to pay a premium for goods and services sold by companies that were committed to making a positive social and environmental impact. The study published in June 2014 saw an increase from 50 percent in 2012. The poll constitutes an interesting context when juxtaposed with the Volkswagen (VW) and the Guaranty Trust Bank’s (GTB) adopt-a-school initiative case study.

The Volkswagen case study

On 11 September 2015, VW released a press statement signed by its CSR spokesperson stating that it was the world’s most sustainable automotive group, based on a leading sustainability ranking – the Dow Jones Sustainability Index (DJSI). VW had surpassed almost all matrixes, scoring 100 points in climate strategy, compliance and anti-corruption and 80 points in ecological sustainability, among others. Professor Winterkorn, chief executive of VW, noted that it was a great success for the VW team and confirmation that VW was on its way to establishing itself as the world’s most sustainable automaker.

Shortly thereafter, the Federal Trade Commission (FTC) in the US charged the American arm of VW for its false marketing campaigns targeted at environmental-conscious consumers. VW cars were fitted with illegal emission software devices designed to mask high-level emissions during government tests. The FTC instituted legal action against VW for the compensation of consumers who bought the affected cars between 2008 and 2015 and filed an injunction preventing VW from engaging in any further similar act.

As a result of the scandal, VW was delisted from various DJSI indices, it lost its status as an industry group leader in its sector, the company’s chief executive resigned, its stock price fell and so did the prestige of its brand. Presently, parties have settled for over $11.2bn in compensation under the settlement agreement between the FTC, private plaintiffs and VW. This, plus the reputational damage to VW, could well have been directed toward investing in research and development targeted at actually building cars with low-level emissions. VW is a clear example of what happens when a company pays lip service to CSR. Ultimately, it paid the price for its misadventures.

Guaranty Trust Bank’s case study

GTB has a number of CDR initiatives some of which are education-focused. A significant share of the bank’s earnings has been directed toward this goal because it recognises the importance of quality education for individual and societal advancement. The ‘Adopt a School’ Initiative is one of such CSR initiatives and over the years, the bank has adopted about 12 government schools in Nigeria. Once it has adopted a school, the bank undertakes building renovations and general infrastructural repair of the school, among other measures. By financial standards, it is doing as well as its peers, if not better. For example, the Business Day market intelligence report, which analysed the first quarter results for Nigerian banks released in 2017, stated that GTB was among the top five best performing Nigerian banks, with N104bn in revenue. In terms of profits after tax or net income available to shareholders, GTB was leading the class at N41.5bn, followed by Zenith Bank at N37.5bn. As a testament to GTB’s performance in the banking sector, it has won a number of accolades, such as African Bank of the Year 2017 and Nigeria’s Best Bank 2017.

The GTB case study is an example of how a company can have a socially responsible approach to business and still show strong financial performance. However, the VW case study indicates that the converse can also apply.

Conclusion

From the above, it is clear that with respect to CSR, the capitalist’s dilemma is impressively complex. The capitalist is working between two tight ropes – the desire to maximise profit for the benefit of shareholders and at the same time, must consider, albeit in varying degrees, depending on his or her philosophical standpoint, other stakeholders in the business. Even in this mix, the capitalist has to be responsible, socially, legally, ethically, economically and environmentally speaking, and may seek to integrate corporate philanthropy or strategic CSR in his or her duties.

Regardless of whatever strategy the capitalist manager deploys in achieving the objective of profit maximisation, albeit with or without a CSR mindset, he or she will be judged for it one way or the other – favourably or not.

Theresa Emeifeogwu is an associate at Olaniwun Ajayi LP. She can be contacted on +234 8180461753 or by email: temeifeogwu@olaniwunajayi.net.

Theresa Emeifeogwu

Olaniwun Ajayi LP