Read On the Link between Strategic Option and Corporate Social Responsibility: Empirical Evidence from Chinese Private Firms text version

On the Link between Strategic Option and Corporate Social Responsibility: Empirical Evidence from Chinese Private Firms

Chen Honghui

Lingnan (University) College, Sun Yat-sen University, P.R.China, 510275 Abstract Corporate social responsibility (CSR) has emerged as an inescapable priority for business leaders in every country since 1990s. Unfortunately, however, lots of firms' CSR efforts are counterproductive because there is not a close link between strategic option and corporate social responsibility. Based on October 2006 ~ February 2007 surveys of Chinese private firms, this study focused on exploring the private firm owners' attitudes, drivers and strategic options when they faced the CSR decisions. Results indicate that private firms' managers have perceived CSR as a central component of good business practice and they adopted utilitarianism with respect to CSR issues. Moreover, compulsive strategy and reciprocal strategy to CSR are more popular in Chinese private firms. These results support the contention that should pay keen attention to the matters of CSR and integrate social considerations more effectively into core business operations and strategy. Keywords Strategic option, Corporate social responsibility, Stakeholder

1 Introduction

Researchers and practitioners have devoted considerable attention to firms' social responsibilities (hereafter referred to as corporate social responsibility (CSR)) for decades. Professor Carroll (1999) traced the evolution of the CSR construct beginning in the 1950s, which marks the modern era of CSR. Since 1999, society's expectations for CSR have grown in many countries. Many companies have been working to improve their CSR performance by expanding their CSR efforts, investing in staff and integrating CSR into corporate strategy. Consequently, corporate social responsibility has emerged as an inescapable priority for business leaders in every country. Unfortunately, however, according to strategic management guru Michael E. porter, CSR efforts are counterproductive. The fact is, the prevailing approaches to CSR are so "fragmented and disconnected" from strategy as to obscure many great opportunities for companies to benefit society (Porter & Kramer, 2006). Extremely similar things happened on Chinese companies. In the past near 30 years, Chinese economy boomed increasingly and Chinese private firms played more and more important roles. An exciting phenomenon is that an increasing number of Chinese private firms have embraced a culture of CSR and gotten a real recognition of doing socially responsible deed. But an emergent question is how to undertake socially responsible activities. Some owners of the private firms perceive social responsibility just as damage control or a public relation campaign, never understand it strategically. The purpose of this paper is to identify what strategies with respect to CSR can be used, and to demonstrate our survey results in terms of the private firm owners' attitudes and conducts when they faced the CSR decisions. The remainder of this paper is organized as follows. Firstly, we briefly review the literature on CSR and strategic management as a general backdrop and describe four possible strategies from the literature that a firm could use to take on corporate social responsibility. We then describe the empirical procedures used and reports the results. Finally, after briefly summarizing the research, we present our conclusions and propose some expected issues for further research.

2 Literature review

It's a spiny task to give a definition of CSR. A typical one is CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis (the European Commission's Directorate-General for Employment and Social Affairs, 2002). Although there is no precise definition, Carroll (1979) argues that economic and noneconomic responsibilities are not separate issues but, rather, are part of corporate

This research has been supported by National Natural Science Funds of China (Rationale, Measurement and Evaluation of Corporate Social Performance: A Research Based on Stakeholder Theory, No: 70602022), Natural Science Funds of Guangdong Province (No: 5300593), Fork Ying-Tung Education Foundation (No: 1010083) and Research Funds of Lingnan College.

social responsibility (CSR). Carroll (1979 defines CSR as encompassing "the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time". Enderle (2004) suggests firms have three responsibilities to society: economic, social, and environmental. There is an impressive history associated with the evolution of the concept and definition of corporate social responsibility (Carroll, 1999). Decades ago, Milton Friedman, the elder statesman of "Chicago School" economics, hit the most basic of questions: Should corporations engage in CSR at all? According to Friedman (1962, 1970), the only "social responsibility of business" is to "increase its profits"; the business entity is accountable only to its stockholders; its sole social responsibility is to maximize the value of the firm. Adhering to this traditional view of the role of business, much of the research examining manifestations of CSR has focused on the association between perceived CSR and measures of financial performance, hypothesizing that greater levels of CSR would lead to reduced levels of financial performance (Pava and Krausz, 1996; Gelb & Strawer, 2001). In contrast to the traditionalist view, Freeman (1984) advanced the argument that systematic attention to stakeholder interests is critical to firm success. In other words, the corporation should take on corporate social responsibility for all stakeholders. According to Freeman's now-classic definition, "A stakeholder in an organization is any group or individual who can affect or is affected by the achievement of the organization's objectives" (Freeman, 1984: 46). Although debate continues over whether to broaden or narrow the definition (see Mitchell et al., 1997), lots of researchers insist that management must pursue actions that are optimal for a broad class of stakeholders rather than those that serve only to maximize shareholder interests(Jawahar & McLaughlin, 2001). In an influential article, Clarkson (1995) argues that "the economic and social purpose of the corporation is to create and distribute increased wealth and value to all its primary stakeholder groups, without favoring one group at the expense of others" (1995: 112). Similarly, Jones and Wicks (1999) argue that "the interests of all (legitimate) stakeholders have intrinsic value, and no set of interests is assumed to dominate the others". Consequently, a significant body of literature is focused on the nature of and motivations for corporate social responsibility and empirical study on the hypotheses above. Although some strongly oppose any responsibility of the firm beyond the economic, lots of research does suggest that CSR beyond just the economic "pays"(Griffin & Mahon, 1997; Margolis & Walsh, 2001; Orlitzky et al., 2003). That is, CSR does have a positive financial benefit to firms. Conversely, ignoring CSR can have dire consequences. For example, the total social costs that must be born by US businesses due to socially irresponsible behavior (e.g. pollution, faulty/dangerous products resulting in consumer injuries, worker accidents due to poor safety conditions) is estimated at two and half trillion dollars per year / well over two trillion dollars per year (Estes, 1996). Such findings suggest that CSR is an area of corporate concern that can not be overlooked (Galbreath, 2006). Generally speaking, the work of Carroll (1979), Freeman (1984), Enderle (2004), among other scholars, are extremely important because they offer insight into what constitutes a firm's responsibilities. However, their work offers limited guidance as to what types of strategies a firm might choose to pursue with respect to CSR. Lots of companies can not make a close link between its core strategy and the CSR activities they undertook. The result is, in Michael E. Porter's words, "oftentimes a hodgepodge of uncoordinated CSR and philanthropic activities disconnected from the company's strategy that neither make any meaningful social impact nor strengthen the firm's long-term competitiveness"(2006:81). In the field of standard strategic management, most conceptualizations of strategic management suggest that there are three levels of strategy formulating: corporate strategy, business unit strategy, and functional strategy. Corporate strategy determines what industry, businesses or activities to be in and to be not in, or is concerned with the scope of the firm in terms of the industries and markets in which it competes. Comparatively, business unit strategy is concerned with how the firm competes within a particular industry or market with particular products, functional strategy focus on how to manage particular activities along the value chain, e.g. R&D, manufacturing, operations, marketing, or finance, to match the two above strategies. For the purpose of this paper, "strategic option" is perceived as the corporate level strategy. As a matter of fact, a few of scholars studied the strategies with respect to CSR. Kenneth Andrews, a pioneer of strategic management, argues that with respect to corporate strategy, strategists address what the firm might and can do as well as what the firm wants to do (Andrews, 1971). However, he also argues that strategists must address what the firm ought to do. The "ought to do", in Andrews' parlay, refers to CSR (Galbreath, 2006). Ultimately, CSR is a strategic issue, one that can not be separated from a firm's overall strategy (Andrews, 1971; Carroll & Hoy, 1984). If CSR and corporate strategy are integral, and if ignoring one's social responsibility can render deep financial consequences (Estes, 1996;

Frooman, 1997), firms need to understand what its options are with respect to CSR strategies and decide on the type of CSR strategy they will pursue. Several scholars have suggested that an organization could adopt different approaches to deal with each primary stakeholder group (Carroll, 1979; Clarkson, 1988, 1991, 1995; Gatewood & Carroll, 1981; Wartick & Cochran, 1985). Borrowing from Wilson (1974), Carroll (1979) proposed that organizations could use the strategies of reaction, defense, accommodation, and proaction to address their economic, legal, ethical, and discretionary responsibilities. Wartick and Cochran (1985), following Carroll (1979), used the terms reactive, defensive, accommodative, and proactive to characterize corporate strategy toward social responsiveness. Clarkson (1991, 1995) developed the RDAP scale to measure the four strategies and has successfully used the scale to describe strategies used by organizations to deal with stakeholders. Moreover, Clarkson (1995) adds a posture or strategy element to this framework in order to aid in defining the level of responsibility accepted for managing stakeholder issues. The responsibility posture or strategy for proaction is to anticipate responsibility, for accommodation to accept responsibility, for defense to admit responsibility but fight it, and for reaction to deny responsibility (Jawahar & McLaughlin, 2001). Galbreath (2006) described four strategic options to CSR: shareholder, altruistic, reciprocal, and citizenship strategy. The shareholder strategy represents an approach to CSR as an overall profit motive, one that is focused exclusively on maximizing shareholder returns. The altruistic strategy, on the other hand, is one based on "giving back" to the community in the form of monetary donations to various groups and causes. The reciprocal strategy takes a more strategic approach to CSR in that it views social responsibility as good business. That is, by taking on broader social responsibilities, the firm not only offers improved benefits to society, but it also benefits in the form of financial and other tangible rewards. Lastly, the citizenship strategy, the most strategic one, requires a firm to identify and dialogue with its stakeholders as part of input to corporate strategy formulation. By targeting social responsibility towards specific stakeholders, the goal is to increase long-term value creation for those stakeholders as well as for firm's financial and reputation position in the market. Although there were certainly might be variations, these four options offer a baseline view of specific CSR strategies (Galbreath, 2006). In sum, a rich literature on CSR has emerged and the practice of CSR has become accepted as a legitimate and important function of a business entity. While businesses have awakened to the risk of ignoring CSR, they are much less clear on what to do about them. In fact, the most common corporate response has been neither strategic nor operational but cosmetic: public relations and media campaigns, the centerpieces of which are often glossy CSR reports that showcase companies' social and environmental good deeds (Porter & Kramer, 2006).Consequently, in the future firms will expend more effort and resources in selecting and implementing CSR practices.

3 Data and methodology

Data on the strategic options with respect to CSR were collected by an investigation through October 2006 ~ February 2007. We randomly distributed 200 questionnaires to the private firms among 6 provinces in china and Surveys were completed by 103 respondents. The response rate was approximately 52%. Among them, there were 92 valid responses, 88.5% validity ratio. Tab.1 displays the sample composition, which shows that we consider primarily three factors influencing the decision-making of private firms' managers with respect to CSR issues: scale of the company, stage of organizational life cycle, and location of the company.

Tab.1 Sample Composition (N=92) Scale of the Frequency % company small 43 46.7 medium 28 30.4 large 21 22.8 Total 92 100 Stage of organizational Frequency life cycle start-up 35 emerging growth 25 maturity 22 decline 10 92 % 38.0 27.2 23.9 10.9 100 Location chemical mechanical telecom others Frequency 16 34 20 32 92 % 17.4 37.0 21.7 34.8 100

The questionnaire contained 28 questions, which are designed to identify (1) the attitudes of the managers toward CSR; (2) the drivers of CSR activities; and (3) different types of CSR strategies used by the firms. We are convinced that Identifying and describing strategies an organization might use to

deal with those corporate social responsibilities issues is or should be the essence of any related studies in the field of CSR and strategic management. Borrowing from Carroll (1979) and Galbreath (2006), we propose four strategic options a firm can use to address CSR issues: reactive, compulsive, reciprocal, and proactive strategy. At the two ends of the spectrum, we use the reactive and proactive strategies developed by Wilson (1974), Carroll (1979), Wartick & Cochran (1985), Clarkson (1991, 1995), among others. Whilst the strategy of reaction involves either fighting against addressing a stakeholder's issues or completely withdrawing and ignoring the stakeholder, proaction involves doing a great deal to address a stakeholder's issues, including anticipating and actively addressing specific concerns or leading an industry effort to do so. In the middle of the list, we add a compulsive strategy, which means a company is forced to do some good deeds by some institutions such as media, community, local government, and so forth. We observed that this is a popular phenomenon in Chinese companies, especially in private firms that are reluctant to undertake socially responsible activities, but they have to do so under some tangible and intangible pressures. Lastly, we adopt reciprocal strategy proposed by Galbreath (2006) to represent such a viewpoint: by taking on broader social responsibilities, the firm not only offers improved benefits to society, but it also benefits in the form of financial and other tangible rewards.

Tab.2 CSR Strategic Options Type of strategy Reactive strategy Compulsive strategy Reciprocal strategy Proactive strategy Goal Profit Vehicles Rationalization; Self interest Benefactor Shareholders Time frame Short-term vision

Least social Escape expenditure Public relation; Mutual benefit Cause related marketing Be accountable Governance; Stakeholder for the society dialogue; Applied ethics

The compulsionist Intermittent Both the firm and Medium-to-long the community term planning Long-term The wider society horizon

Although there maybe some changes to these strategies, we believe that these four CSR strategic options serve as a good guide, especially to Chinese private firms. Tab.2 summarizes some characteristics of these strategies. Definitely, however, neither every firm should utilize the CSR strategies that perfect match these options nor necessarily maintain one option over time. Actually, a firm must change its strategic option as the internal resources and external environment changed.

4 Results

4.1 The attitudes of the managers toward CSR According to Andrews (1971), Carroll & Hoy (1984) and Galbreath (2006), CSR is argued to be essential to a firm's overall strategy. Thus managers should pay keen attention to the matters of CSR and their attitudes are extremely critical to the actions of the firms. Borrowing from The State of Corporate Citizenship in the U.S.: Business Perspectives in 2005, a survey report provided by The Center for Corporate Citizenship at Boston College (BCCCC) and The U.S. Chamber of Commerce Center for Corporate Citizenship, we asked the private firms' managers six questions in order to understand their attitudes toward CSR issues.

Tab. 3 Attitudes of the Private firms' Managers toward CSR Issues Mean Many companies promote CSR, but are not truly committed to it CSR should be completely voluntary, no laws or regulations should govern it CSR makes a tangible contribution to business' bottom line The public has a right to expect good CSR actions from companies Many companies do a great deal more for their communities than is talked about or known CSR needs to be a priority for companies 2.30 4.38 3.16 3.87 3.30 4.21 Std D. Agree Strongly Total Agree 1.26 1.96 0.98 1.52 2.01 1.05 36% 64% 40% 54% 38% 44% 6% 11% 12% 14% 18% 27% 42% 75% 52% 68% 56% 71%

* Question asked: "Please indicate how much your company would agree with the following statements." 5-point scale ranged from "strongly disagree" to "strongly agree".

The

Tab.3 shows that managers see CSR as a central component of good business practice. Specifically, 81% believe that CSR needs to be a priority for the private firms, yet 75% agree it should not be enforced through additional laws and regulations. Sixty-eight percent of managers agree that the public has the right to expect good CSR actions, and 52% believe that CSR can make a tangible contribution to a business' bottom line. Interestingly, this result is very similar to the study findings of the report provided by BCCCC in 2005. 4.2 The drivers of CSR activities CSR has been becoming one of the most important challenges for organizations, most of which are working to improve their CSR performance by expanding their CSR efforts, investing in staff and integrating CSR into corporate strategy. We asked some questions to clarify the drivers of CSR activities in Chinese private firms (See Tab.4).

Tab.4 Drivers of CSR Activities Very Total Great It fits our company traditions and values 29% 7% 36% 2.06 0.79 It improves our reputation/image 4.01 1.78 40% 13% 53% It's part of our business strategy 2.22 1.16 29% 11% 40% It's important to our customers/consumers 2.41 1.32 28% 15% 43% It helps to recruit and retain employees 2.02 1.56 27% 6% 33% It's expected in our community 1.47 0.45 17% 3% 20% It responds to laws and political pressures 2.19 1.11 28% 7% 35% * Question asked: "To what extent do each of the following factors motivate or drive your company's efforts to take on CSR?" The 5-point scale ranged from "not at all" to "very great." Mean Std D. large

Inconsistent with the findings of BCCCC report in 2005, over one third Chinese private firms report external pressures and demands from government or laws as drivers for engaging in CSR activities (Only 14% in the report mentioned). Instead, it is not clear that the internal considerations serve as the principal drivers. Only 36% firms respond upholding business traditions and values drives their company's efforts to be socially responsible. Specifically, the top three drivers of CSR activities are reputation/image (53%), the perceived importance of the customers/consumers (43%) and business strategy (40%). In contrast, these firms are less likely to experience motivating impulses centered on their relationship with key stakeholders, such as employees and community. Consequently, we can bring forth such a blurry proposition: utilitarianism is a dominant trend in Chinese private firms when they engaged in CSR activities. 4.3 Different strategic options with respect to CSR In Lisbon Summit of March 2000, hold by the European Strategy for Sustainable Development, it was said that CSR can therefore make a contribution to achieving the strategic goal of becoming, by2010, `the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion'. We pray the managers to make a list among the 4 categories of CSR strategic options mentioned above, giving a clear definition for each one. The most applicable strategies labeled 1, the least one labeled 4.

Tab.5 CSR Strategic Options of Chinese Private Firms Type of strategy Mean Std D. 1 point 2 point

Total

Reactive strategy 23% 11% 34% 2.54 1.28 Compulsive strategy 1.67 0.97 57% 16% 73% Reciprocal strategy 1.20 0.84 69% 12% 81% Proactive strategy 3.41 0.46 5% 7% 12% * Question asked: "Please give us your order of the applicability of the 4 CSR strategies in your company"

The result of Tab.5 reveals that reciprocal strategy is the most popular strategy when Chinese firms

engaged in CSR activities. Perhaps best viewed as "enlightened self-interest", this CSR strategic option is pragmatic in that it has an interconnected, two-fold purpose: to benefit society while providing an economic benefit to the firm. The reason why Chinese firms favored this strategy maybe they seek to resolve the conflicts between economic objectives and intense social, moral, and environmental expectations of society. The next one is compulsive strategy, which means that lots of private firms are reluctant to take on CSR. Ironically, both reactive and proactive strategy is perceived as important option. The utilitarianism of Chinese private firms works once again and Porter's declaration is particular correct here: Corporations are not responsible for all problems, nor do they have the resources to solve them all. Each company can identify the particular set of societal problems that it is best equipped to help resolve and from which it can gain the greatest competitive benefit" (Porter, 2006).

5 Conclusion and research implication

For 37 years, Milton Friedman has argued that social initiatives are "fundamentally subversive" because they undermine the profit-seeking purpose of public companies. But nowadays most business leaders have acted so different course than Friedman suggested, and few would consider their approach subversive. Similar things are here in Chinese private firms. Our empirical evidences indicate 3 important conclusions: firstly, private firms' managers have perceived CSR as a central component of good business practice; secondly, utilitarianism is a dominant trend in Chinese private firms with respect to CSR issues; finally, compulsive and reciprocal strategy to CSR are more popular in Chinese private firms. To conclude, for a large and growing share of Chinese private firms, the question isn't whether they should adopt a robust approach to take on CSR. They have already answered with a resounding "yes". For them, the question has already shifted from "if they should" to "how they can" formulate and implement appropriate corporate citizenship practices. Apparently, our results are far from conclusive. As a matter of fact, lots of deep studies are not accomplished because the data collected are not abundant enough. For example, by including different industries, different regional areas, and different scales and stages of firm growth, analysis could reveal more exciting results. So, for scholarly consideration, we suggest researchers develop more means of testing the various CSR strategies outlined in this paper and seek more evidence examining the CSR-firm performance association, which is an important area of research according to some scholars.

References

[1] Carroll A B. A three dimensional conceptual model of corporate social performance. Academy of Management Review, 1979, 4 (4): 497-505 [2] Clarkson M. A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 1995, 20(1): 92-117 [3] Freeman R E. Strategic Management: A Stakeholder Approach. Boston: Pitman, 1984. 78 [4] Friedman M. Capitalism and Freedom. Chicago: University of Chicago Press, 1962. 6 [5] Friedman M. The social responsibility of business is to increase its profits. New York Times Magazine, 1970-9-13: 32-33, 122, 126 [6] Galbreath J. Corporate social responsibility strategy: strategic options, global considerations. Corporate Governance, 2006, 6(2): 175-187 [7] Gelb D S, Strawer J A. Corporate social responsibility and financial disclosures: an alternative explanation for increased disclosure. Journal of Business Ethics, 2001, 33(1): 1-13 [8] Jawahar I M, McLaughlin G L. Toward a descriptive stakeholder theory: an organizational life cycle approach. Academy of Management Review, 2001, 26(3): 397-414 [9] Pava, M L, Krausz J. The association between corporate social responsibility and financial performance: the paradox of social cost. Journal of Business Ethics, 1996, 15(3): 321-357 [10] Porter M E, Kramer M R. The competitive advantage of corporate philanthropy. Harvard Business Review, 2002, 80(12): 5-16 [11] Porter M E, Kramer M R. Strategy & society: the link between competitive advantage and corporate social responsibility. Harvard Business Review, 2006, 84(12): 78-92 [12] Simon Brooks. Corporate social responsibility and strategic management: the prospects for converging discourses. Strategic Change, 2005, 14 (7):401-409

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