AUDITING & CORPORATE GOVERNANCE

TOPIC: MODELS OF CSR (CORPORATE SOCIAL

RESPONSIBILITY)
Meaning of CSR
The World Business Council for Sustainable
Development in its publication Making Good
Business Sense by Lord Holme and Richard Watts,
used the following definition:
“Corporate Social Responsibility is the continuing
commitment by business to behave ethically and
contribute to economic development while
improving the quality of life of the workforce and
their families as well as of the local community and
society at large.”
Arguments in Favor of Corporate Social Responsibility:

1. The Iron Law of Responsibility: The institution of business exists only because of its invaluable services
to the society. Therefore if a business intends to operate, it must respond to the needs and expectations of
the society. The inputs of a business and outputs are regulated by the society and these must be acceptable
to the society. This is called iron law of responsibility. If power is not used responsibly in the long run it
is bound to be lost.
2. Achievement of Long-term Objectives: Business entrepreneurs understand that it is in their interest to
fulfill the demands and expectations of the society. Since business has been given economic power and
access to productive resources of society, they are obliged to use those resources for the welfare of the
society. Technical resources of the business if applied to social problems can resolve them better. This
results in:
(a) Easier labor recruitment
(b) Reduced employee turnover and absenteeism
(e) Dependable creditors and debtors
(f) Easier access to foreign capital and technology.
Certainly a better society provides a conducive environment in which the business gains long-term profit
maximization.
3. Social Responsibility avoids Government Intervention: When corporation voluntarily responds to social
expectations, the intervention of government is no more needed to control business activities. Regulation
and control restrict flexibility of doing the business. Once government control is established it is never
done away with. The prudent course hence is to have socially responsible behavior and thereby give
government no opportunity to intervene.
4. CSR recognizes Socio-cultural Norms and Respects Social
Consciousness: Since an enterprise operates within a framework of socio-
cultural norms it has to work within the desirable limits set by the society.
The society certainly expects good quality product, fair trade practices, and
safety measures at work, and labor welfare into consideration and this is
automatically taken care of in the CSR orientations.
5. Improved financial performance: Research has shown a positive
relationship between CSR activities and financial performance of the firms
6. CSR Increases Sales and Customer loyalty: There is empirical evidence
which shows relationship between companies that are socially responsible
and growing market for their products and services. Business has to satisfy
customers on key criteria such as price, quality, availability, safety and
comfort.
Arguments against Corporate Social Responsibility

 1. CSR is a Vague Concept: The concept of CSR has no clear definition. It has multiple
interpretations. The nature and scope of CSR has no definite boundaries. Since
everything that has negative impact can be put in the purview of CSR, enterprises are
rather afraid of it.
 2. Dilution of Profit Maximization: Economic wealth creation is the objective of any
economic institution. If the managers start bothering about other objectives they are
bound to lose their focus.
 3. The "Taxation Argument": Investors according to the "taxation” argument entrust
their money to the managers of the corporation in order to make profits for the
shareholders. Spending money to pursue social ends is a form of taxation.
 4. Conflicting Considerations: Two conflicting considerations wealth maximization and
social responsibilities could leave business managers in confused state. As a result it may
lead to poor management.
 5. CSR could be a reason of "Market Failure": Social responsibility assumes that
markets are not perfect and market mechanism is not the appropriate way to allocate
scarce to alternative uses. Thus an alternative mechanism should exist. This will lead to
loss of productivity and efficiency in business.
MODELS OF CSR
The Classical Model or Shareholder Value Theory

Shareholder Value Model holds that only social responsibility of business is making profits and
shareholder value maximization is the supreme goal for corporate governance and business
management. Other social activities which companies could undertake would be acceptable if
either prescribed by law or these contribute to the maximization of shareholder value.
Milton Friedman, the main protagonist of the model wrote 'the only one responsibility of
business towards the society is the maximization of profits to the shareholders, within the legal
framework and the ethical custom of the country'. The theory has been quite common in the USA
and other Anglo-Saxon countries until the mid-twentieth century. This model of CSR goes along
the agency theory of corporate governance in which owner or the shareholders are regarded as the
principal and managers as the agents. Friedman’s argues that corporate executives are acting in
their official capacity and not as private persons and are agents of the stockholders of the
corporation. Management of the corporation have an obligation to make decisions in the interests
of the stockholders, who are their employers. He further argues that to say that corporate executives
have a social responsibility implies that they should act in a manner that is not in the interest of his
employers. For example he should not increase the price of his product in social interest even if the
price of inputs is going up. A corporate should not be spending someone else's money for a general
social interest. Corporate cannot be allowed to become civil servants because they are not elected
by political process instead are selected by stockholders of private business firms.
 The classical view recognises intervention by the government for the public welfare. It is not that
corporations are allowed to act in a socially irresponsible manner but are relieved of thinking about
it.
The classical view about the nature of the corporation is explained by James W. McGuire in three
basic propositions:
1. Economic behaviour is separate and distinct from other types of behaviour and business
organizations are distinct from other organizations even though same individuals are involved in
business and non-business affairs. Business organisations do not serve the same goals as other
organisations in a pluralistic society.
2. The primary criteria of business performance are economic efficiency and growth in production
of goods and services including improvements in technology and innovations in goods and services.
3. The primary goal and motivating force for business organizations is profit. The firm attempts to
make as large a profit as it can, thereby maintaining its efficiency and taking advantage of available
opportunities to innovate and contribute to growth.

The classical view argues that corporations should engage in economic activities and activities
surrounding these. Social concerns are given no importance and are the prerogative of the State.
This view thus confines the role of corporations to the economic aspect only.
Trusteeship Model

Mahatma Gandhi's philosophy of trusteeship is concerned with social

responsibility of business. Since in large corporations management and
ownership are diverse, managers are the trustees of business. Even the
supplier of capital should not treat the wealth as their own but consider it
as capital held in trust for the society. Thus corporate management is an
inclusive concept and includes labour, consumers, government and society
besides the management. Directors have been traditionally considered as
trustees of the shareholders and should use the corporate resources
judiciously. Gandhi ji did not mean trustee only in the legal sense but
implied a good deal on moral grounds. His theory of trusteeship makes no
distinction between private and non-private property. All property is
considered to be held in trust irrespective of who possesses it and what is
its nature and quality. The theory of trusteeship applies to tangible and
transferable property and also to intangible, non-transferable property,
power and position.
Carroll's Model of CSR

 Archie B. Carroll introduced "The Social Performance Model' in 1979. The model
regards CSR as a multi-layered four inter-related aspects joined together into one
Corporate Social Performance, Carroll stated four-dimensional definition which
describes the social responsibility of business in more exhaustive and complete way
than previous definitions.
 "The social responsibility of business encompasses the economic, legal, ethical and
discretionary expectations that society has of organizations at a given point of time."
This suggests that responsibility of the business encompasses not only basic
responsibilities such as economic and legal ones but also ethical which goes beyond
regular activities of companies and philanthropic acts which although voluntary, are
desired by the society. The definition consists of all social expectations for the business.
Carroll regards CSR as a multi-layered four inter-related aspects:
 (a) Economic,
 (b) Legal,
 (c) Ethical, and
 (d) Philanthropic responsibilities.
The four aspects of CSR are presented in layers
within a pyramid which can be seen as follows:
The CSR firm should strive to make a profit, obey the law, be ethical, and be a good
corporate citizen. For example, a Food Company which has decided to produce healthy
yogurts and donate part of the sales income to the destitute in an area. This is an example
of the action which falls under every single responsibility suggested in the model. These
can be explained as follow.

Economic Responsibility: The satisfaction of economic responsibility is required of all

corporations. These include:
1) Using economic resources efficiently
2) Having sound commercial practices
3) Generating internal funds
4) Keeping economic interests of investors or shareholders.
5) Fairly paid jobs
6) Good quality products at a fair price.

Legal Responsibility: Since the State has predominant role in regulating corporate
practices, legal responsibility is the basis of social responsibility. These include:
1) Paying taxes, licence fees and fines in time
2) Follow economic and labour laws of the nation
3) Provide necessary information required by the government of the host and home
country.
 Ethical Responsibility: The corporate agenda regarding social issues are located in the area of ethical
responsibility. Since there is so much of business criticism, there is a constant reaffirmation of their social
legitimacy. Hence it is needed that the business follows:
1) Fair trade practices
2) Anti-pollution steps
3) Reasonable prices and good quality products
4) Safeguard interests of the community at large.
Philanthropic Responsibility: These are more or less discretionary responsibilities of the corporation. The
business has discretion to assume the following responsibilities:
1) Contribute to the welfare of local communities
2) Contribute to healthy environment
3) Generate employment for the population of place where the business operates
4) Help weaker sections of the society.

Corporate Social Performance Model is helpful to understand that social responsibility is not a separate issue
from an economic performance. As per the model, the fully responsible company is that which meets all four
categories of responsibility (economic, legal, ethical and discretionary one), is involved in social issues which
are relevant to the industry and the time that company operates and its actions are the responses to the actual
social expectations in the given point of time. Responsible company is able to integrate corporate social
responsibility, corporate social responsiveness and urgent social issues with its operations. In conclusion,
socially performing company can effectively and successfully operate in the social environment because it is
able to recognize social expectations, issues and react in the proper way to prevent social discontent. The
implementation of these responsibilities may vary depending upon the firm's size, management's philosophy,
corporate strategy, industry characteristics, the state of the economy, and other such mitigating conditions.
Modern View: Stakeholders Model

 The stakeholders approach to CSR has primarily been developed by Edward Freeman in
1980s. It provides an alternative to the view that stockholders are the nucleus of a
corporation. The stakeholders approach is that corporations are operated or ought to be
operated for the benefit of all those who have a "stake" in the enterprise including
employees, customers, suppliers and the local community. A stakeholder includes all
those groups who are vital to the survival and success of the corporation and any groups
or individuals who can affect or is affected by the achievement of the organizations
objectives.
 The stakeholder approach starts by looking at various groups to which the corporation
has a responsibility. The underlying thought is that corporations have to be managed in
the interests of whole range of groups that have legitimate interest in the corporation
rather than shareholders alone. To find out which are the groups who have legitimate
interest Evans and Freeman suggest two principles:
 1. Principle of corporate rights which requires that a corporation is obliged not to violate
the rights of others.
 2. Principle of corporate effect, which requires a company to be responsible for the
effects of their actions on others.
Thus range of stakeholders differs from company to company and from
one situation to another. The stakeholders can be seen as:
 Thus we have seen that a corporation has responsibility towards different stakeholders. This can
be listed as follows:

Responsibility towards Shareholders

Shareholders are the true owners of the corporation. These investors expect a high rate of return
and appreciation of their capital. The responsibility of corporation towards them is:
 1. Safety of investment of funds needs to be ensured.
 2. Assets of the business have to be safeguarded.
 3. Financial position of the company is to be strengthened. This will then result in capital
appreciation.
 4. A regular return on the investment of shareholders is to be provided.
 5. Financial position of the company should be informed with utmost transparency.

Responsibility towards Employees

Following obligations should be fulfilled by a firm towards employees:
 1. Salaries or wages are true motivation for any employee. Hence reasonable wages must be
paid.
 2. Hygienic working conditions have to be ensured.
 3. Service benefits such as housing, medical etc. are to be provided.
 4. Positive human relations are to be established within an organization.
 5. Adequate opportunities have to be provided so that workers develop skills through training
and education.
Responsibility towards Customers
Consumer satisfaction is and has to be the main objective of any business enterprise to survive in
the long run. Hence a corporation has to ensure the following:
 1. Provide goods which meet the needs of the consumers of different categories.
 2. Goods and/or services are of the best possible quality.
 3. Goods have to be provided at a fair price.
 4. Regular supply of goods is to be ensured.
 5. Adulteration can be the worst thing so it should be avoided.
 6. Misleading and deceptive advertisements have to be avoided under all circumstances.
 7. Fair trade practices are what the consumer always expects from any business.

Responsibility towards Suppliers

To ensure that the suppliers keep on regularly supplying goods and services, it is essential that a
business enterprise creates healthy relations with them. This can be done by:
 1. Ensuring fair terms and conditions regarding
 (a) Price
 (b) Quality
 (c) Delivery of goods
 (d) Payment.
 2. Regular payments should be made to the suppliers
 3. Small scale suppliers have to be encouraged and brought to the main network.
 4. Exploitation of suppliers needs to be avoided.
 5. Suppliers should be given positive feedback to improve the quality of the product.
Responsibility towards Government
Business has always had the obligation to abide by the laws of the State. It is also the
responsibility of the business to do the following:
 1. To conform to the policies, guidelines, rules and regulations of the country.
 2. To pay taxes, fees and fines in time.
 3. No attempt should be made to corrupt government employees.
 4. Fair dealing in foreign trade is must for any country.
 5. Fair trade practices should be followed to have healthy business environment.

Responsibility towards Society

Business has obligations to the society at large in which it operates.
It has to be responsible in all its actions and activities.
Some of these can be listed as:
 1. To provide balanced growth of various regions.
 2. Ensure safety of local surroundings.
 3. Not to pollute or degrade the environment.
 4. To generate employment opportunities.
 5. To provide safe, healthy and good quality products to the society.
 6. Provide for schools, dispensaries and low cash housing in the area of business
 7. Avoid all types of unfair and anti-social practices.
 8. Not to support any political or illegal activity.
Limitations of Stakeholder Model

1. Employing the stakeholder model will not necessarily result in long-term

profitability. There are companies that have failed, despite of their commitment to
their stakeholders.
2. In its normative use, the interests of all groups other than shareholders constitute
"constraints" on corporate activities rather than goals.
3. Satisfying employees, customers, suppliers and general public are means of
achieving the end of making a profit.
4. "Responsibilities" and "Objectives" are not the same. Responsibilities are
obligations that limit the achievement of the main objectives.
5. This model cannot be used as an action guide for business. This is because it
implies that benefits of one group must be balanced against a loss to another. There
may often be problem of colliding stakeholder rights. In a situation, for instance,
when the interests of stockholders and employees do not align, how does one make
management decisions may be intriguing.
6. To structure the corporation to ensure the well-being of all the corporate
constituencies is a difficult task.