Table of Contents
This paper examines the effects of corporate social responsibilities (CSR) in an organization and how the CSR affects organizations. Organizations are focusing on various CSR activities with the aim of improving their image in the society. Although there is some cost involved in the implementation of CSR activities studies have shown that organization that relates well to the community achieve more than the organizations which focus on profit maximization goals only. This document has established that CSR helps the organization to become more profitable. When the organization shows more concern for the society, it engages in cost-reducing strategies, reduces waste, attracts more customers, and attract and retain competent employees. Customers are willing to pay higher prices for goods and services of the companies that engage in ethical activities. Also, the organization saves the cost of hiring and recruiting employees because the rate of employees’ turnover is low. Furthermore, a company that relates well to the society is less like to experience legal disputes hence it can save some expenses that would be incurred in solving disputes in the court. Another benefit of CSR is the low cost of equity. A socially responsible organization reduces information asymmetry and attracts more investors resulting in a reduction of cost of equity. The case study of Qatar Bank in this document demonstrates the various benefits an organization can achieve by engaging in CSR activities. Finally, the document includes a recommendation for the organizations to focus on CSR activities seeking to promote the interests of all stakeholders to achieve sustainability.
CSR is an approach to the organization to show its concern for the environment and achieve sustainability goals. In the modern society consumers and other stakeholders have become more conscious about the activities of the firms and how they impact the society (Denis, 2001). Consequently, organizations are engaging in CSR activities to influence how various stakeholders perceive them. This paper examines the merits and demerits of the CSR activities of an organization, the effects of CSR activities on the business profitability and cost of equity. Also, it examines the case study of CSR in Doha Bank of Qatar to establish various activities used by the bank and how they influence the organization’s performance. Some organizations believe that implementing CSR activities is an unnecessary cost while others consider it as a necessary practice to promote sustainability of the business.
Advantages and disadvantages of CSR
Corporate social responsibility is an implication of how organizations should be accountable to the community through their actions and operations. Corporations are becoming socially responsible by adopting policies that focus on showing respect to the people they interact with, showing concern for the environment and communities, and upholding standards of moral value (Crotty, 2009). Being a socially responsible corporate has both advantages and disadvantages.
Advantages of CSR
Improves corporation value and image
CSR improves organizations value and profitability. The corporations are seeking to be a socially responsible focus on reducing resource use and waste by increasing efficiency of operations, reducing the cost of operations, reusing or recycling waste, increasing accountability and transparency with all stakeholders such as media, shareholders, local community and the financial analysts (Denis, 2001). A corporation that presents itself as being socially responsible corporation can attract potential investors and win loyal customers that increase its value. Consequently, its performance will improve and reflect in the improvement of it share prices in the market.
Most customers expect companies or businesses to be socially responsible on how they address environmental issues and relate with their workers. Customers are willing to pay higher prices to purchase the products and services of companies they perceive as socially responsible (Crotty, 2009). Therefore, a socially responsible corporation develops good relations with its customers which help the company to gain a competitive edge over their competitors.
Attraction and retention of competent employees
The corporations that implement CSR policies provide good care for their employees and establish a good working environment (Jackson & Aguilera, 2003). They can attract and retain more competent employees because every employee wishes to work in a good environment where they felt respected and cared for. Such organizations motivate their employees financially and non-financially, giving employees opportunity to advance their careers and personal development (Johna & Senbet, 1998). The employees will want to work longer in the organization and attract new employees. The organization keeps employees happy and will not incur huge cost of hiring and recruiting new employees every time.
Efficient use of resources
An organization adds value and benefit to the entire society by engaging in CSR activities. The organization becomes efficient with how it uses its resources and commits its resources to activities that create value for the society (Bolt-Lee & Moody, 2010). Those companies avoid unhealthy competition and focus on fair business competition. They use efficient processes and minimize waste thus benefiting the entire community.
Disadvantages of CSR
CSR is a costly affair
Some corporate managers believe that engaging in aspects of corporate social responsibility diverts their focus on the main goal which is to maximize shareholders wealth. They argue that a corporation that seeks to be socially responsible must engage in certain activities that result in a reduction of profit (Crotty, 2009). The practices could include forgoing some projects that could result in huge profits, but ones considered unethical. Also, engaging in activities such as investing inexpensive materials that generate less waste to the environment could increase investment cost. Therefore, being socially responsible organization may seem as futile
Diverts shareholders resources
A corporation purporting to be socially responsible uses some of its resources to provide charitable activities to the society (Bolt-Lee & Moody, 2010). Also, they spend substantial resources in promoting the welfare of the society including employee’s motivation. The resources spent on corporate social activities reduce the shareholders returns hence it is a cost to the shareholders.
The CSR program can undermine company’s reputation
A company that is pursuing CSR program is required to disclose any fault on its products in case of violation of CSR programs (Jackson & Aguilera, 2003). For instance, a company producing smartphones may have to call back the faulty gadgets they had sold for replacement or refund the customers which adversely affect the image of the company.
How CSR Affects Firm Value
In a very competitive business environment, CSR plays the critical role in communicating the company’s value to the community. It demonstrates the quality of the product because companies that implement CSR policies focus on improving the quality of their products (Crotty, 2009). Because such companies do not portray themselves as profit-oriented firms, the CSR activities convince the public that the products of those companies are of superior quality and customers are willing to pay a higher price for the products. Furthermore, companies that invest in CSR activities can attract many loyal customers (Johna & Senbet, 1998). Consequently, the socially responsible companies become more competitive and profitable because they attract more customers and sell their products at competitive prices.
Through CSR activities of the organization the company creates customer awareness about its existence and the products they offer. In some cases, people get to know about the company and its products through its CSR activities such charitable activities in the society (Bolt-Lee & Moody, 2010). The companies engage in ethical activities and avoid engaging in activities that conflict with laws. Through positive advertising, the companies attract positive media popularity which adds value to the society. With the support of the community and adherence to the laws companies that implement CSR activities can expand the value of their assets and profitability.
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How CSR Affects Profitability of Firms
There is always a concern about why some companies are focused on implementing CSR activities while others engage in unethical behavior (Crotty, 2009). Some managers pursue shareholders policy which aims at maximizing profit for the shareholders with less regard of the impact of their activities on other stakeholders. Such companies avoid CSR activities because they perceive such activities as adding unnecessary cost to the organization to the detriment of the shareholders (Johna & Senbet, 1998). On the other hand, the managers who focus on stakeholders policy focus on activities that create value and benefit all stakeholders including investors, the employees, customers, the government, the general public, investment advisors and the media (Jackson & Aguilera, 2003). Though implementing the CSR activities involves huge cost, and individual commitment focused on ensuring the interests of all stakeholders are taken care of. Organizations that implement CSR activities expect to improve their profitability in many ways.
CSR promotes sustainable business profitability. First, the company can attract more investors because the public perceives the organization as being ethical and the best place to commit resources (Bolt-Lee & Moody, 2010). The investors have respect and confidence that their resources will be efficiently managed to create more resources for the investors. The organization utilizes the wide resource base to invest in more projects and contribute to the growth of resource and profits.
Also, the company with firm CSR policies focuses on sustainable projects that increase efficiency and reduce costs of the organization. For instance, the companies invest in efficient and sustainable machines and another production process which reduce consumption of energy and reduce cost (Jackson & Aguilera, 2003). Cost is an important component in the operations of the company, and when engaging in the efficient and cost-saving process, the organization improves its profitability in the long-run. Furthermore, a socially responsible organization is involved in recycling of waste and energy saving activities that promote organizations profitability.
Organizations that engage in CSR activities of integrating values and strategies are profitable because they are more innovative and produce quality products and services compared with unethical companies (Crotty, 2009). They are focused on promoting the welfare of various stakeholders through sustainable means. Consequently, various stakeholders give their support to the organization because in doing so they also promote individual interests. CSR activities promote business profitability through sustainable operations. Being ethical organizations, there are fewer or litigations that would otherwise result in court fines and reduction in profit of the organization.
The CSR activities attract the support of the loyal customers, competent employees, good relationship with the government and positive media publicity that promote a sustainable and profitable working environment (Jackson & Aguilera, 2003). When various stakeholders work together, they achieve more than what one stakeholder can achieve individually. For instance, the organization produces products and services the consumer require, the local community support the business activities of the organization without posing resistance, motivated employees work towards achieving higher performance, suppliers are willing to associate with the organization and supplier the quality products on time and consumers enjoy buying the product of the company at a higher price (Johna & Senbet, 1998). As the company becomes more competitive, it is able to increase its revenue and reduce cost by enjoying economies of scale hence increase profitability.
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How CSR Affects the Cost of Equity
The cost of equity refers to the return an organization gives to the shareholders or equity investors as a return for the risk of their capital investments in the organizations. Investors offer their financial resources to support the growth of the organization and in return, they are rewarded with the share of the gains from the investments (Bolt-Lee & Moody, 2010). Firms must take consideration of the cost of capital when determining the cash flow of the business operations because the higher cost of equity reduces the value of the company’s investments. The CSR activities of the business affect the equity cost of the organization.
The cost equity is affected by the information asymmetry between the investors and managers of the organizations. Managers are assumed to have more information that the investors are creating information asymmetry (Crotty, 2009). Depending on the size of the organization the investors and organization benefit more from the disclosure of financial information. The financial analysts and media focus more on providing disclosure of information regarding the company’s operations to reduce the information asymmetry. If an organization makes more disclosure of financial information attracts more investors and buyers thus increasing the value of the company (Johna & Senbet, 1998). Although all investments carry some risks, many investors fear firms which they have little or no information about. Firms with more disclosure attract more investors and expand the base of their investments which consequently lowers the cost of equity (Crotty, 2009). However, a company that makes a voluntary disclosure of financial information reduces the cost of capital equity compared with organizations that depend on financial analysts and the media to mine data for disclosure of financial information. Therefore, large organizations that engage in more CSR activities have a lower cost of equity because of increased asset base financed by the investors.
Case of CSR in Qatar
The Doha Bank has been involved in CSR activities for years. It continues to sponsor the talents of the youths and development activities through direct involvement of employees and donations of finances. The banks CSR activities have contributed to the tremendous growth of the bank in the country as the most trusted bank that investors and clients wish to associate with (Corporate Social Responsibility report, 2012). Its commitment to CSR activities reflects the bank’s firm belief that community engagement drives value to the business performance. The Doha Bank’s CSR activities focus on “environmental protection and awareness, Youth and human development, and Economic diversification and promoting standards.”
Doha Bank Group is the major advocate of environmental protection and sustainability in the Gulf Corporation Council (GCC) (Corporate Social Responsibility report, 2012). The bank is committed to engage practices of efficient environmental practices in its day-to-day operations to achieve sustainability and reduce the impact of product and services on the environment. In this endeavor the bank has incorporated Customer Services, Customer Education and Customer Advisory Service to enhance customer satisfaction and loyalty. In 2010, Doha Bank received the award for being the best bank in customer service in Middle East (Corporate Social Responsibility report, 2012).
The commitment of the bank to emerge as the leader of responsible corporate citizenship has seen Qatar Bank implement various strategies focused towards achieving sustainability (Corporate Social Responsibility report, 2012). The bank believes that by helping to create a healthy nation the organization creates demand for the products and improves the business environment. Consequently, a health nation provides competent workers, create wealth, pay taxes, purchase the local goods and create job opportunities.
As a corporate social responsible bank, Doha Bank has partnered with various stakeholders to provide community services through its CSR activities. It partners with the government and other environmental institutions to protect the environment. The bank supports the SMEs to achieve sustainability, innovation and development (Corporate Social Responsibility report, 2012). Due to its commitment to CSR activities the bank has attracted various investors from various parts of the country that has led to the bank’s growth into a prominent bank in the region.
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Recommendations and policy implications
Most organizations avoid CSR activities because they do not have clear information of how such activities can benefit the organizations. However, the analysis of various organizations and their respective CSR activities can enhance understanding of the perceived, and actual benefits and organization get by focusing on CSR activities.
I would recommend every organization to engage in CSR activities in their everyday operations to promote a benefit for the organization and all stakeholders. Based on the stakeholders’ theory, the organization cannot achieve much by focusing on one stakeholder and ignoring other stakeholders. For an organization to achieve sustainable profitability and development, it has to take into consideration of the interests of all stakeholders who reciprocate by ensuring the success of the organization in the long-run. The organization should develop sustainability policies that promote the interest of each stakeholder. For instance, the policies on producing quality goods will require the organization to motivate employees and improve their efficiency, deliver quality products to customers, minimize waste and in turn increase profit for the investors.
CSR is a great concern to the organizations and other stakeholders. Although businesses are established with the main goal of generating profit from its transactions, it cannot survive without other stakeholders. The CSR activities enable the organization to show concern for the society and the environment. The benefit of CSR surpasses its cost. The CSR improves business profitability by attracting competent workers which result in improved organization performance, attracts more customers and investors thus enhancing business performance. Also, CSR activities minimize the unnecessary cost of legal mitigation, invest in efficient technology, attract more investors, improved company reputation and create market opportunities for organization resulting in better performance. Additionally, CSR activities reduce the cost of equity because of the free disclosure of financial information by the organizations that reduce information asymmetry and attract more investors resulting in an increase of the company’s asset base. The Doha Bank in Qatar is a classic example of how organizations benefit from CSR activities. Through deliberate policies to become the leader in Green Banking institution by supporting the development and environmental protection Doha Bank has enhanced its performance to become the largest bank in Qatar.
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