PASSI CITY COLLEGE

City of Passi, Iloilo

SCHOOL OF INFORMATION AND COMMUNICATION TECHNOLOGY

COURSE NUMBER: IT ELECT 5

COURSE TITLE: SOCIAL RESPONSIBILITY
MODULE: 3

OVERVIEW:

We take a look at the role of ethics and social responsibility in business decision making. First, we
define business ethics and examine why it is important to understand ethics’ role in business. Next, we
explore a number of business ethics issues to help you learn to recognize such issues when they arise.
Finally, we consider steps businesses can take to improve ethical behavior in their organizations

MODULE OUTCOMES

At the end of this module, the students must have:

• Explain how the prominence of CSR implemented
■ Describe various approaches to the changing emphasis in companies
■ Explain how sustainability importance in society
■ Become familiar with environmental issues and their effects and implications
■ Be able to create a externalizing cost

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IT ELECT 5 – SOCIAL RESPONSIBILITY MODULE NO. 3
 2.1 Introduction

In the last chapter we outlined the three main principles upon which CSR is based. As we
explained, this gives a basis for the measurement and evaluation of performance while also giving
flexibility for an organisation to consider its own socially and environmentally significant factors and
plan accordingly without being compared favourably or unfavourable with organisations with
different priorities. In this chapter therefore we are going to look at these principles in more detail.

2.2 The prominence of CSR

It is quite noticeable how much more prominent corporate social responsibility (CSR) has become
– not just in the academic world and in the business world but also is everyday life. We can highlight
a lot of factors which have led to this interest – such things as:

• Poor business behaviour towards customers

• Treating employees unfairly

• Ignoring the environment and the consequences of organisational action.

Since then other things have also featured prominently in popular consciousness. One of these
which has become more pronounced is the issue of climate change and this has affected concern
about CSR through a concern with the emission of greenhouse gases and particularly carbon
dioxide. Nowadays it is quite common for people to know and discuss the size of their carbon
footprint whereas even three years ago people in general did not even know what a carbon footprint
was.

Another thing which has become prominent is a concern with the supply chain of a business; in
other words with what is happening in other companies which that company does business with –
their suppliers and the suppliers of their suppliers. In particular people are concerned with the
exploitation of people in developing countries, especially the question of child labour but also such

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 things as sweat shops.

So no longer is it acceptable for a company to say that the conditions under which their suppliers
operate is outside of their control and so they are not responsible. Customers have said that this is
not acceptable and have called companies to account. And there have recently been a number of
high profile retail companies which have held their hands up to say mea culpa2 and taken very
public steps to change this.

Interestingly the popularity of companies increases after they have admitted problems and taken
steps to correct these problems. In doing this they are thereby showing both that honesty is the
best practice and also that customers are reasonable. The evidence suggests that individual
customers are understanding and that they do not expect perfection but do expect honesty and
transparency. Moreover they also expect companies to make efforts to change their behaviour and
to try to solve their CSR problems.

2.3 Changing emphasis in companies

Companies themselves have also changed. No longer are they concerned with greenwashing –the
pretence of socially responsible behaviour through artful reporting. Now companies are taking CSR
much more seriously not just because they understand that it is a key to business success and can
give them a strategic advantage, but also because people in those organisations care about social
responsibility.

So it would be reasonable to claim that the growing importance of CSR is being driven by
individuals who care – but those individual are not just customers, they are also employees,
managers, owners and investors of a company. So companies are partly reacting to external
pressures and partly leading the development of responsible behaviour and reporting. So
accountability – one of the central principles of CSR – is much more recognised and is being
responded to by increasing transparency – another of the principles of CSR.

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 2.3.1 Sustainability

The third principle of CSR is that of sustainability and this is a term which has suddenly become
so common as to be ubiquitous for business and for society. Every organisation mentions
sustainability and most claim to have developed sustainable practices. A lot of this is just rhetoric
from people who, we would claim, do not want to face the difficult issues involved in addressing
sustainability. There is a danger therefore that sustainability has taken over from CSR itself as a
target for greenwashing. Nevertheless although the relationship between organisations and society
has been subject to much debate, often of a critical nature, evidence continues to mount that the
best companies make a positive impact upon their environment.

Furthermore the evidence continues to mount that such socially responsible behaviour is good for
business, not just in ethical terms but also in financial terms – in other words that corporate social
responsibility is good for business as well as all its stakeholders. Thus ethical behaviour and a
concern for people and for the environment have been shown to have a positive correlation with
corporate performance. Indeed evidence continues to mount concerning the benefit to business
from socially responsible behaviour and, in the main, this benefit is no longer questioned by
business managers. The nature of corporate social responsibility is therefore a topical one for
business and academics.

2.3.2 Recognising CSR

Most people initially think that they know what CSR is and how to behave responsibly – and
everyone claims to be able to recognise socially responsible or irresponsible behaviour without
necessarily being able to define it. So there is general agreement that CSR is about a company’s
concern for such things as community involvement, socially responsible products and processes,
concern for the environment and socially responsible employee relations (Ortiz-Martinez & Crowther
2006).

Issues of socially responsible behaviour are not of course new and examples can be found from
throughout the world and at least from the earliest days of the Industrial Revolution and the
concomitant founding of large business entities (Crowther 2002) and the divorce between ownership

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 and management – or the divorcing of risk from rewards (Crowther 2004). According to the
European Commission CSR is about undertaking voluntary activity which demonstrates a concern for
stakeholders.

But it is here that a firm runs into problems – how to balance up the conflicting needs and
expectations of various stakeholder groups while still being concerned with shareholders; how to
practice sustainability; how to report this activity to those interested; how to decide if one activity
more socially responsible that another. The situation is complex and conflicting. In this book
therefore the contributors are concerned with different aspects of CSR, both with theorising and
with implementing CSR in practice.

2.4 Environmental issues and their effects and implications

When an organisation undertakes an activity which impacts upon the external environment then
this affects that environment in ways which are not reflected in the traditional accounting of that
organisation. The environment can be affected either positively, through for example a landscaping
project, or negatively, through for example the creation of heaps of waste from a mining operation.

These actions of an organisation impose costs and benefits upon the external environment. These
costs and benefits are imposed by the organisation without consultation, and in reality form part of
the operational activities of the organisation. These actions are however excluded from traditional
accounting of the firm3, and by implication from its area of responsibility. Thus we can say that such
costs and benefits have been externalised. The concept of externality therefore is concerned with
the way in which these costs and benefits are externalised from the organisation and imposed upon
others.

Such externalised costs and benefits have traditionally been considered to be not the concern of
the organisation, and its managers, and hence have been excluded from its accounting. It must be
recognised however that the quantification of the effect of such externalisation, particularly from an
accounting viewpoint, is problematical and not easy to measure4, and this is perhaps one reason for
the exclusion of such effects from the organisation’s accounting. It is probably fair to state however

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 that more costs have been externalised by organisation than benefits.

Hence a typical organisation has gained from such externalisation and the reported value creation
of such an organisation has been overstated by this failure to account for all costs and benefits.
This is achieved by restricting the accounting evaluation of the organisation to the internal effects.
Indeed one way in which an organisation can report, through its accounting, the creation of value is
by an externalisation of costs, which are thereby excluded from the accounting of the organisation’s
activities.

2.5 Externalizing costs

As far as the externalisation of costs in concerned it is important to recognise that these can be
externalised both spatially and temporally.

2.5.1 Spatial externalization

Spatial externalisation describes the way in which costs can be transferred to other entities in the
current time period. Examples of such spatial externalisation include:

• Environmental degradation though such things as polluted – and therefore dead – rivers or
through increased traffic imposes costs upon the local community through reduced quality of life;

• Causing pollution imposes costs upon society at large;

• Waste disposal problems impose costs upon whoever is tasked with such disposal;

• Removing staff from shops imposes costs upon customers who must queue for service;

• Just in time manufacturing imposes costs upon suppliers by transferring stockholding costs to
them.

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 In an increasingly global market then one favourite way of externalising costs is through transfer
of those costs to a third world country. This can be effected by a transfer of operational activities, or
at least those with environmental impacts, to such a country where the regulatory regime is less
exacting. In this respect it should be noted that the arguments regarding reducing labour costs are
generally used for such a transfer of operational activities but at the same time less exacting
regulatory regimes also exist.

2.5.2 Temporal externalization

The temporal externalisation of costs describes the way in which costs are transferred from the
current time period into another - the future. This thereby enables reported value creation, through
accounting, to be recorded in the present. Examples of temporal externalisation include:

• Deferring investment to a future time period and so increasing reported value in the present;

• Failing to provide for asset disposal costs in capital investment appraisal and leaving such
costs for future owners to incur;

• Failure to dispose of waste material as it originates and leaving this as a problem for the
future;

• Causing pollution which must then be cleaned up in the future;

• Depletion of finite natural resources or failure to provide renewable sources of raw material
will cause problem for the future viability of the organisation;

• Lack of research and development and product development will also cause problems for the
future viability of the organisation;

• Eliminating staff training may save costs in the present at the expense of future

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 competitiveness.

It can be seen that such actions have the effect of deferring the dealing with problems into the
future but not of alleviating the need to deal with such problems. In this respect it must be
recognised that it is not always apparent in the present that such costs are being temporally
externalised, as they may not be recognised as a problem at the present time. For example, the
widespread use of asbestos in the 1930’s to 1960’s was considered to be beneficial at the time and
was only later found to be problematic.

This temporal externalisation of costs, through causing the clean up problems and costs to be
deferred to a later time period, was therefore incurred unintentionally. Equally such costs may at the
present time be in course of being transferred into the future through actions taken in the present
which will have unanticipated consequences in the future. Nevertheless it is reasonable to suggest
that such actions may be taken in the present for cost minimisation purposes with little regard for
possible future costs.

We can see therefore that if we take externalities into account that the decisions made and
actions taken by firms may be very different. We can equally see that the recognition of the effect
upon these externalities of actions taken by an organisation can have significant impact upon the
activities of the organisation and that the way in which an organisation chooses to internalise or
externalise its costs can have a significant impact upon its operational performance.

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 2.6 The Social Contract

In 1762 Jean-Jacques Rousseau produced his book on the Social Contract which was designed to
explain – and therefore legitimate – the relationship between and individual and society and its
government. In it he argued that individuals voluntary gave up certain rights in order for the
government of the state to be able to manage for the greater good of all citizens. This is of course a
sharp contrast to the angry rhetoric of Tom Paine, shown above. Nevertheless the idea of the Social
Contract has been generally accepted.

More recently the Social Contract has gained a new prominence as it has been used to explain the
relationship between a company and society. In this view the company (or other organisation) has
obligations towards other parts of society in return for its place in society.

This can be depicted thus:

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 Fig 2.1
The Social Contract

This in turn led to the development of Stakeholder Theory, which we will consider in the next
chapter.

1.1 Conclusions

As we have seen. CSR has gained in prominence in recent years. It has also changed in nature as
different issues have become more prominent. We have considered these changes and looked in
particular at environmental issues and the way in which the effects and associated costs can be
externalised away from the company itself. This is of particular significance when we consider
stakeholders in the next chapter.

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 REFERENCES:

1) Carroll A B (1979); A three-dimensional conceptual model of corporate performance; Academy of

Management Review 4 (4), 497-505
2) Dahl R A (1972); A prelude to corporate reform; Business & Society Review, Spring 1972, 17-23=
3) Friedman M (1970); The social responsibility of business is to increase its profits; New York Times 13
September
4) Hetherington J A C (1973); Corporate Social Responsibility Audit: A Management Tool for Survival;
London; The Foundation for Business Responsibilities

SUGGESTED READINGS:

1) Dictionary of Corporate Social Responsibility: CSR, Sustainability, Ethics and Governance

by Samuel O. Idowu & Nicholas Capaldi & Matthias S. Fifka & Liangrong Zu & René
Schmidpeter
2) CSR strategies : corporate social responsibility for a competitive edge in emerging markets
by Urip & Sri
3) Corporate Social Responsibility by Christine A. Mallin

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 SCHOOL OF INFORMATION AND COMMUNICATION TECHNOLOGY

Last Name : ______________________________________ First Name :_________________ M.I.: _________

Course, Year & Section : _______________________

Module 2

I. Answer the following questions:

1. What has led to the current interest in CSR?

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2. What is greenwashing?

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3. What is cost externalization? Why does it happen?

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4. What is the Social Contract? Why has it become prominent in CSR?
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