How is CSR linked with Business Ethics?

The idea that business enterprises have some responsibilities towards society, besides its profit-making objective, its shareholders have been around for centuries. The article analyzes whether good CSR practices and norms in a company necessarily comply with ethical norms or vice-versa about two major corporate scams
Estimated Reading Time: 8 minutes

Introduction

The concepts of CSR and business ethics are often used interchangeably in present times, although each has a distinct meaning. Corporate Social responsibility (CSR) and ethical behavior can bring significant benefits to a business. The idea that business enterprises have some responsibilities towards society, besides its profit-making objective for its shareholders, has been around for centuries.[1] This partly accounts for why CSR’s notion has continued to grow in importance and significance. It is a core belief that business organizations have a social and ethical responsibility and an economic responsibility to create value for businesses’ shareholders.[2]

While the economic responsibilities are to produce goods and services for society at a price that can perpetuate its continuing existence, it also needs to satisfy its obligations to investors. On the other hand, ethical responsibilities are the company’s expected behavior and activities by its stakeholders, such as employees and society.

Whereas CSR is an integrative management concept that established responsible behavior within and company, its objectives, values and competencies, and the stakeholder’s interests, business ethics represents the moral principles and standards that guide a company’s behavior in the business world. Inability to demonstrate CSR and business ethics can damage a company’s reputation and make it less appealing to its concerned stakeholders.

Business ethics

Ethics indicates codes of values and principles that govern an individual’s action or a group of individuals’ action regarding what is right versus what is wrong. In terms of corporate governance, these ethics set standards for the company regarding good or bad organization conduct and decision-making.[3] Essentially, they deal with the company’s internal values that are a part of corporate culture and play a crucial role in shaping decisions concerning social responsibility towards society and the external environment.

In the business setting, incorporating ethical standards and values means applying honesty and fairness in the company’s relationships with its stakeholders and customers. Corporate ethics is a form of applied professional ethics that examines ethical principles and problems in a business environment. Corporate ethics is an umbrella term that governs all ethics-related issues that may arise in the course of company’s operation and hold the company to adhere the ethical principles in its daily dealing with its stakeholders such as customers, employees, suppliers, concerned community and society in general. An excellent ethical code of conduct in the company facilitates its business growth and guides the management and employees to perform as per ethical standards.

Corporate Social Responsibility (CSR)

The Stakeholder theory is the predominant paradigm governing corporate social responsibility. The corporations are now aware that they cannot survive and prosper without the support of society. The growing demand that corporations should look beyond their business interests and prioritize interests of society has made it clear that in the form of social responsibility, companies should look beyond their profit-making motive and make sustainable use of the environmental resources in which society has a significant interest.  Since businesses host their company’s operations in society, in return, society also expects the business to show responsibility for aspects of their operations. Managing a quality relationship with the key stakeholders is crucial for the success of a corporation. One of the company’s key stakeholders is its immediate communities that suffer the direct impact of its operation.

CSR is referred to the enterprises’ s responsibility for their operational impact on society; and the consequences of integrating social, environmental, ethical, and customer and human rights concerns into its core strategy and business operations in close collaboration with stakeholders.[4] Therefore, corporate social responsibility calls for a responsible behavior integrated into the management system that operates within society’s interests, sustainably using the environmental resources. It can be done by integration of corporate ethical standards and sustainable management practices in the corporation. In this view, CSR’s exercise must be consistent with the corporate objective of earning a satisfactory level of benefit, with an equal willingness to relinquish some degree of benefit to achieve its set non-economic goal.[5]

CSR and Business ethics

Managing corporate social responsibility should be seen in the context of an overall paradigm of business ethics. The normative stakeholder theory of corporate governance draws its philosophy from ethics. It means that business corporations are ‘morally’ responsible for looking after a larger group of stakeholders’ concerns. The theory says that an organization’s internal process affects its identified stakeholders and hence must be based on moral-ethical standards.

Does CSR practice necessarily involve business ethics?

The concept of CSR and business ethics has distinct identities, yet often they are used to refer to the same argument. But would compliance with the norms and regulations of corporate social responsibility practice necessarily mean that corporation is also following sound business ethical practice? Let’s understand whether the business activities of the firm in the context of CSR are necessarily related to business ethics:

As, Mallen Baker, a CSR specialists states that “CSR is no longer defined-if it ever really was-by the process of how much money a business gives away, but by how that business makes its money in the first place”.[6]

In 2001, Enron’s famed energy major, a leading proponent of CSR, collapsed, following a corporate scam in the company. It was a wakeup call for the observers of CSR to look deeper into CSR’s corporate claims and their compliance with legal procedures, in reality. Enron, which emerged as the USA’s seventh-largest company in mere 15 years, benchmarked a new success story which later turned out to be a false narrative. The company’s financial statements indicating profitability were false with the doctored accounts concealing overwhelming debts that toppled Enron over into a massive collapse.[7]

In its social and environmental report, the company listed its CSR practices efforts, including the environmental impact, and the CEO detailed Enron’s vision and values as mutual respect, integrity, and excellence. Further, the accomplishments listed by the CSR task force of the company proved out to be nothing but irony. Similar was the scenario in the Satyam scam of India.

Satyam’s CSR efforts were acclaimed universally, and the company received many prominent awards; however, it collapsed due to its management’s financial defrauding practices against the company and its stockholders. There was extensive falsification of accounts, showing large cash and fixed deposits in the company’s balance sheets when, in reality, the balance figures were a complete sham. In addition to Satyam, India also faced corporate scam of the National Stock Exchange Limited (NSEL), highlighting the need for built-in mechanisms for rewarding corporate governance norms and punishing those violating the same. The instances discussed suggest that no prior telltale signs of unethical practices in a corporation are visible until the ‘house of cards’ collapses.

Critical Analysis

The essence is that if giant technology companies such as Enron, Satyam, and NSEL, who have been leading CSR proponents in their industry sectors, have failed in their ethical practices, would there be a better mechanism to identify the business ethics in the actions of corporate? In stakeholder theory, CSR is said to be a subset of business ethics, because the theory is based on the assumption that ethical values and social responsibilities are necessarily and explicitly a part of doing business.[8] CSR is limited in its definition of the mandate and responsibilities of the business towards its identified stakeholders. The corporate enjoys the right of being a legal entity, but it carries with it related duties and responsibilities to the environment of which it is a subset. The firm’s duties and responsibilities should necessarily be part of the norms and code of conduct and be made a significant part of the institutional design.

The resource pool and the wider environment in which the business operates have an equal stake in its operations; therefore, the corporations must reciprocate their duty towards the environment for continued sustainable existence and environment.

In this context, corporate social responsibility (CSR) practice will not prove sufficient as it becomes mere recognition of the said duties and the implicit relationship between the corporation and the environment that facilitate its existence. The relationship between the corporation and its stakeholders (including the environmental ecosystem) cannot be solely calculated based on financial accounting standards’ economic criteria. Therefore, a more dynamic and inclusive approach should be taken into account that surpasses the monetary valuation of the company’s activities. Fulfilling the business ethics norms would need to be the framework within which the corporation pursues profits.

Good corporate governance enforces transparency, accountability, ethical business behavior, and social responsibility, the call to align CSR and business ethics in practice is crucial. While earlier, the focus was on reducing harm to the stakeholders’ interests, “it seemed to have shifted over time to the idea of” doing good “for society at large”.[9]

Conclusion

It is no longer acceptable for a business entity to gain economic prosperity at the cost of society’s interests and environment. That is why the integration of CSR and business ethics in the company’s management practises is the need of the hour when depletion of environmental resources is at high risk.

The article perceives that CSR and business ethics are significantly important for organizational growth and success. Whereas business ethics lead to a positive relationship of the corporation with its employees, customers, as well as with the concerned community, the incorporation of CSR results in building a standard corporate image of the company that ensures customer loyalty and a healthier community, being socially responsible.    

Though CSR and business ethics are significantly related to each other, when it comes to applying these norms in the business entities, the truth turns out to be something else. The ethical practice of the firms may not be obvious or easily quantifiable in most cases. Ethics in business cannot be defined or resolved through mere measuring and enforcing corporate social responsibility since the ethical violations are not so explicit.  A more profound dive action into the management practice’s actual working and compliance with legal and social responsibilities’ rules and regulations should be done stringently and consciously.


[1] Barry, N. P. (2000). Controversy: Do corporations have any responsibility beyond making a profit? Journal of Markets & Morality 3(1), 100-107.

[2] Carroll, A. (1989). Business and society: Ethics and stakeholder management. Cincinnati, Ohio: South Western.

[3] Sexty, R. (2011). Canadian business and society: Ethics and responsibilities (2nd Ed.). Toronto. McGraw-Hill Ryerson.

[4] European Commission (2011). A renewed EU strategy 2011-14 for Corporate Social Responsibility. Brussels: European Commission.

[5] John R.B. (2003). Ethics and the conduct of business (4th Ed.). Person Education, Inc., New Jersey: 373.

[6] http://www.mallenbaker.net/csr/CSRfiles/enron.html.

[7] Business Ethics and Corporate Social Responsibility- Is there a dividing line? https://www.researchgate.net/publication/263930805_Business_Ethics_and_Corporate_Social_Responsibility_-_Is_there_a_Dividing_Line.

[8] Freeman, R., E. (1999). Response: Divergent Stakeholder Theory. The Academy of Management Review , Vol. 24, No. 2 pp. 233-236.

[9] Schwartz, M. and Carroll, A. (2008) Integrating and Unifying Competing and Complementary Frameworks . Business & Society, 47, 156.

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