effect of CSR and business ethics on an organization’s performance

 effect of CSR and business ethics on an organization’s performance

Business ethics and corporate social responsibilities are two related subjects that explain how businesses should act ethically and the responsibilities they have to the societies in which they exist. A business is started with the aim of making profit, but in the location where its premises are, the business has a role to play in ensuring that it maintains a good public image since this brings about benefits to the company. This brings out the corporate social responsibility of an organization. The benefits are many, and customers, employees, and investors bring them about. According to Michaels and Gruning (2018), having the development of up to date society and economy, corporate social responsibility has turned out to be a progressively crucial topic. The company should be not only responsible for the profit of shareholders and consumers, but also take social authority. The responsibility that a company is supposed to have to its stakeholders such as the environment, consumers, as well as the community when attaining profits is known as Corporate Social Responsibility (CSR). CSR demands that companies should not take for granted the traditional ways of getting profits as the only aim and highlight the company for the right of individuals in the process of production, as well as stresses the authority to the social environment (Michaels and Gruning, 2018). In accordance with Huang and Zhao (2016), Corporate social responsibility has been utilized continuously in several countries across the globe. Ethical business behavior involves the way a firm does its business activities while considering the individuals who are business partners and the ones who will be affected by the services or the products offered by the firm. The aim of this paper is to examine the effect of CSR and business ethics on an organization’s performance that is profitability and shareholder or the market value of a firm’s activities.

Corporate Social Responsibility

The Carroll’s corporate social responsibility pyramid gives a good theoretical framework about the responsibility, particularly its relationship with other obligations of the firm. Buccholtz and Carroll (2009) assert that firms face lots of expectations and have multiple roles it should perform to meet the expectations. These obligations fall into four categories: philanthropic, ethical, legal, and economical. CSR, as an initiative of a firm, must fulfill all the obligations, but most crucially, the economic responsibility, which is the building block of every other role. Profit is important for an organization, but the firm has a wider purpose and social responsibility.

The theory of agency tries to explain the role and position of the management as well as major decision-makers of a company and the nature of agency associations. It is crucial to put in mind that such a part in the context of views of the philosophy of what ought to be the main role of a company so that the agents can carry out their main role. In accordance to shareholder value view (Manchiraju & Rajgopal, 2017) Corporations, as entities of making profit, are created by the shareholders primarily for attaining profit, and profitability, as well as other shareholder value-adding result, is major to make a judgment whether the company attains its objective (Iwu-Egwuonwu, 2010).

In view of this theory, while the firm pursues CSR for myriads of reasons and for the benefit of different stakeholder categories, it is more crucial that they safeguard shareholder value in terms of realization of financial success (especially profitability). The Agency theory enjoins the management of corporations (as agents of the corporation, and by extension the owners of the corporation-shareholders) to safeguard the best interest of the shareholders (the principals) in every management decision they make (Omar et al., 2017). Taking CSR initiatives should be viewed by the firm as a management decision which its shareholder maximization value should be subjected to the extent to which it furthers financial performance of the firm, and ultimately sustained profitability that can not only assure shareholder’s return but also meet the supporting obligation of the firm such as philanthropic, ethical and legal duties) (Lee & Kim, 2017). Emphatic call for CSR without evaluating its impact on the financial performance of a firm would be detrimental to the life cycle and core role of the firm, not just because it risks undermining investment motivation, but also because adverse financial performance could be paralyzed in meeting its operational, strategic and growth needs.

Some scholars give some view that CSR has a non-effect on firm performance. Chen and Lee (2017) point that when a company’s value is not high enough, the investing of CSR would just increase the cost of firms; it has no obvious influence on a firm’s financial performance. Krunic (2017) believes that CSR has a negative relationship with the data of ROS and EPS, and it has not a significant influence on firm performance. Choongo (2017) collected some data from the developing country –Zambia, to find that corporate social responsibility has less relationship with the firm reputation and employee commitment. There have some other scholars believe that CSR has an obvious influence on firm performance. Lin (2017) thinks that firm reputation resulted from CSR would increase customer’s confidence about a firm’s innovation, and it can help make better performance. Cheng et al. (2015) give some evidence from China that CSR would affect firm financial performance and firm reputation. Organizations that use CSR can help improve firm performance. Cheng et al. (2015) examine the relationship between CSR report and firm performance, find that CSR has a positive effect on firm performance, and appeal to the market participants to change the attitude to CSR.

Business Ethics

Organizations have a number of ways that aid it in their view of being an ethical organization when it comes to corporate social responsibility or other operations of the organizations. The first way is holding on to its values, especially shareholder values. These values are beneficial to an organization in that they aid in building good relationships with stakeholders. Stakeholders include shareholders, employees, the government, and the community. As such, organizations should have set guidelines for proper conditions of employment in their activities. Many organizations apply a code of conduct when it comes to maintaining ethicality in its internal processes. A code of conduct generally states on the rights and the working conditions of its employees. This also aids the organization when carrying out business activities. A code of behavior entails core values and standards. The code of practice also has details of human rights and how things are expected to run in an organization.

Organizations tend to engage stakeholders in the decision-making process. The stakeholders are crucial since they affect the running of the organization. This entails involving them in decision-making, and this enables a firm to better understand the perspectives and priorities of its external business environment. Any organization that behaves ethically has costs to incur and also accrued benefits. One disadvantage of a business behaving ethically is the reduced freedom of the organization to maximize its profit. A business may decide to operate in a developing country in order to reduce costs. However, the organization may not achieve this since practices like child labor, poor health and safety, low wages, and use of force on employees may be acceptable in the country, but this is against the norm in an ethical organization. The organization will, therefore, have to engage in improving the employees’ working conditions and other issues like health, and this will reduce the amount of cost savings that the group generates.

Higher overhead costs are another cost that an organization will incur in embracing ethical practices. These overhead costs are brought by financing activities involving ethical practices. If the organization decides to offer training and communication of the ethical policies, it has to incur costs that may not, in return, bring profits as desired by the group. This leads to a loss in the group since the costs are more than what the business will generate from its sales. An organization also enjoys some benefits by behaving ethically. One of them is better employee motivation. When an organization acts morally, the employees are motivated since they work in a healthy business environment, and hence more people will be willing to work in an organization that is ethical since it is better. The organization will, therefore, also have an easier time recruiting new employees while also working well with the existing ones.

An organization that behaves ethically also gets new sources of finance. Funding is important to any organization since all the business activities that the group carries out the need to be funded. By behaving ethically, an organization gets new finances from ethical investors. These are investors who are interested in the company due to the excellent reputation that the group portrays. By getting these investors the group benefits since it can quickly expand and also run its business activities comfortably. (Machan, 2011)

External stakeholder relationships are one of the components of the Svensson and Wood business ethics model. Stakeholders are the people who take part in the running of the business activities or are affected by the business. They include customers, suppliers, and investors. By relating well with its stakeholders, the organization enjoys some benefits. The benefits include attracting more customers, increased employee loyalty, and also, more investors are attracted. By getting more customers, the organization will increase its sales and hence its profits. Increased employee loyalty comes about with reduced labor turnover, and this, in turn, increases the productivity of the organization. More investors to the organization mean that the company’s share price will be kept high and hence the business will avoid the risk of being taken over (Svensson & Wood, 2008)

Conclusion

Despite the critical nexus between CSR and business ethics (as embodiments of managerial initiative and outcome) and firm performance, the relationship between the two variables is not conclusively established. Some studies suggest that firms in the business process that just focus on the profit and do not pay attention to the issue of social responsibility development do have an adverse financial outcome, especially in the long term. Such outcomes are linked to the fact that CSR is a form of stakeholder empowerment that can affect the operation of firms, the economic capabilities of firms, the performance of corporate markets, and also affect the current social environment which needs to be conducive for firms’ successful operations. Some studies, however, find no significant relationship, while others still find a negative relationship between CSR and financial performance.