Tuesday, March 9, 2010

Multinational Corporations & The Idea of Corporate Social Responsibility

Through the progression and advancement of technology, individuals and businesses, as well as entire cultures and countries, are becoming increasingly interactive on a global scale. This phenomenon has been given the title of ‘globalisation’. Globalisation has allowed for the formation of multinational corporations, known as MNCs, who have become increasingly pressured by external groups, such as NGOs (non-governmental organisations), to operate with a higher level of social responsibility. This essay, with specific reference to the works of Milton Friedman, Michael Porter and Mark Kramer, will critically discuss whether or not multinational corporations have non-profit roles in society. This essay will endeavour to explain the reasons for the existence of corporate social responsibility, discussing the major advantages, as well as disadvantages, it presents to those MNCs who implement it in their corporate and business strategies. Overall this essay will argue the existence of, and necessity for, non-profit, socially responsible roles within the multinational giants. Finally concluding that the socially responsible multinational corporation is the business of the future.

The Arguments of Corporate Social Responsibility
The multinational corporation, as defined by many academics, is a large firm that has operations in more than one country (Hill, 2009; Knights & Willmott, 2007). MNCs have been the main source of a debate which has been waged since the time of Friedman in the early 1960s. Over the last few decades the debate has only increased in intensity, and there is no clear sight of any end to the issue. The argument is based around the idea of whether or not multinational corporations, such as Coca Cola, have a non-profit role in society. Specifically, this is referring to the notion of corporate social responsibility (CSR). Corporate social responsibility has been defined as “the firm’s considerations of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social [and environmental] benefits, along with the traditional economic gains which the firm seeks” (Davis, 1973). There are two clear sides to the debate. The first, which takes its point of view strictly from a monetary and profit-making attitude, suggests that the only social responsibility of business is to increase profits. The second point of view appears to be based predominately on an ethical perspective, seeing businesses as an instrument to create social value. Both arguments are supported by well respected businessmen and academics such as Milton Friedman and Edward Freeman, respectively. Regardless of the debate, however, multinational corporations are finding themselves been placed under ever increasing pressure from both internal and external groups to participate in non-profit roles in order to benefit society (Davies, 2003; Freeman, Pica, & Camponovo, 2001; Logsdon & Wood, 2002).

The Traditional Business Is Business View
While there are many academics that make persuading arguments for businesses to engage in non-profit roles within society, there are also those against the idea. Possibly the most avid supporter of the argument against businesses and multinational corporations having non-profit roles in society is Milton Friedman, claiming that the only social responsibility of a business is to increase its profits (1970). Therefore, logically, the expenditure on charitable causes should cease. Milton Friedman summed up his views and the views of those against CSR in one, six word, sentence: “The business of business is business.” This quote means that the only concern of a corporation should be the production and sale of the goods or services which they produce. According to Mark Kramer and Michael Porter (2002) the majority of companies feel compelled to give to charity, but executives are finding it hard, if not impossible, to justify the expenditures. This is because of the most important stakeholders in a multinational corporation are the shareholders, not the customers or general public (Hill, Jones, Galvin & Haidar, 2007). The main argument against corporate social responsibility suggests that a firm spending additional money on areas non-essential to the production and continuation of the business goes against the wishes and imperatives of the main stakeholders, giving the firm an economic disadvantage. Examples of MNCs which have adopted the view of Friedman’s “the business of business is business”, at least in some part, include Nike, which used sweatshops and child labour in their offshore operations (Knight & Greenberg, 2002), and Coca Cola, who are responsible for the rapid decline of water in water wells in South India (Woods, 2006). Both these cases primarily focus on human rights, however many businesses and MNCs show a disregard for the environment, for example a supplier Gap and Levi Strauss based in Lesotho has been found to be polluting the local river, drenching the plant life along the river banks with clothing dye, turning the grass and soil a dark shade of blue (3 News, 2009). The desire to satisfy the demands of a company’s shareholders is highly regarded by managers and the board of directors, especially with the threat of legal persecution if they fail to do so. Such an event occurred in 1985 where the directors of the Trans Union Corporation, according to a Delaware (US) court did not adequately fulfil their obligations to the shareholders (Hill, Jones, Galvin & Haidar, 2007). This fear of persecution as well as the personal monetary drive to achieve greater profits for the corporation can easily lead to a decision resulting in the withdrawal of all spending on non-profit aspects of the business. Another, less common, argument against CSR explains how multinational corporations already have a vast amount of power, including social power, and should not engage in activities that may give it more (Zu, 2009). However while the arguments against corporate social responsibility have some merit and basis to their reasoning they neglect to consider the ramifications of not engaging in non-profit roles within society.

Over the last few decades there has been a rise in social conscience. The extent of this rise of social conscience has reached the point in which a study presented evidence that many individuals would rather earn less than work for a corporation with a socially irresponsible reputation (Barbian, 2001). In this aspect, business has been somewhat slow to react, often placing monetary gain above the ideals of the societies in which they operate. This is a sign of a company which has aligned its values with that of Friedman. However, while some multinationals have gotten away with being social irresponsible, such as Coca Cola, other companies have suffered dramatically. According to Estes (1996) and Frooman (1997) the total social cost of corporate social irresponsibility in the US is estimated to be around two and a half trillion US dollars per annum. One such corporation to suffer from the exposure of corporate social irresponsibility is Nike. Accused of using sweatshops in its offshore operations, Nike was boycotted by many consumers and consumer groups. Only now just starting to recover from the effect of the allegation (Knight & Greenberg, 2002). The ramifications that Nike faced due to their business practices breaching the values of their customers indicate that while some multinational corporations do not currently have a non-profit role in society, they should, at the very least, consider the long term advantages of implementing a CSR strategy.

The Advantages of Corporate Social Responsibility
There are many arguments supporting the non-profit role of multinational corporations, and indeed all businesses, within society. These arguments supporting CSR (corporate social responsibility) primarily suggest that a corporation which engages in non-profit roles and functions within society will achieve greater market share and a higher level of employee satisfaction (Porter & Kramer, 2002; Barbian, 2001). Supporters of CSR argue that the overall impact of corporations showing a level of social responsibility increases their productivity and revenue, outweighing the monetary cost of expenditure on philanthropy. According to Barbian (2001) many individuals would gladly take a decreased salary to work for a socially responsible firm. Therefore a socially responsible corporation is more likely to attract applications from high quality candidates. The elevated quality of job candidates allows the multinational to raise the calibre of its goods or services, giving the company a superior product, likely to result in greater sales and market share. This finding is backed up by two separate studies done by Greening and Turban (1997; 2000) which suggest that the perception of a firm’s social performance influences an individuals desire to work for that firm. Another advantage of non-profit expenditure for multinational corporations, and perhaps the most obvious one, is company image (Hond, Bakker & Neergaard, 2007). This cause-related marketing, as termed by Porter and Kramer (2002), comes as multinationals are becoming increasingly aware of the relationship between their social image and consumer reactions to their products (Creyer & Ross, 1997; Sen & Bhattacharya, 2001). CSR has become a cost-effective form of public-relations and advertising, with philanthropy expenditure in the US up from $125 million US in 1990 to approximately $828 million US in 2002 (Porter & Kramer, 2002). Porter and Kramer (2002) continue on to explain that while these marketing campaigns provide support for worthy causes, they are intended to heighten company visibility and improve morale, strengthening the company’s long-term business prospects. Another argument for pursuing non-profit roles within society is the idea of securing a high quality work force for the future. Both Cisco Systems and DreamWorks SKG have devised a strategy which allows them to achieve economic gains directly from their social expenditure (Porter & Kramer, 2002). Cisco Systems’, Cisco Networking Academy, funded the education and training of computer administrators, alleviating potential constraints on future growth. DreamWorks SKG have a similar method, financing the training of low income students for a career in the film industry. Thus, Cisco Systems and DreamWorks SKG illustrate that MNCs can create social value while achieving direct economic gains. These arguments indicate the overwhelming advantages of CSR and display the essential need for MNCs to engage in non-profit roles within society, showing that a multinational corporation with a high level of corporate social responsibility is likely to gain a higher financial performance (Cornell & Shapiro, 1987).

Personal Opinion
In my own personal opinion I believe that multinational corporations, and all other businesses alike, should embrace the concept of non-profit roles in some form or the other. Whether the aim is to improve the standards of living, fight world hunger, cure cancer or even just to increase long-run profits through company image, the benefits of corporate social responsibility vastly outweigh the negative impacts of being exposed as socially irresponsible like Nike was in the 1990s. Support for NGOs from the general public is growing and the idea of CSR is certainly increasing rapidly, pushing businesses further towards their idea of a socially responsible corporation. This trend is only increasing the need for MNCs to act accordingly. As it is now, firms engaging in non-profit activities benefit in a magnitude of ways: increasing company image, avoiding additional governmental regulations, increasing long-run profitability, a lower level of labour problems, and alleviating constraints on future growth (Zu, 2009); the trend of the general public’s attitude towards CSR only indicates that in the future, those businesses that are deemed socially irresponsible will be completely boycotted, resulting in their death. Therefore it is within the best interest of multinational corporations, and indeed all other businesses, to have a non-profit role within society, and to embrace the ideals of corporate social responsibility.

While business academics such as Milton Friedman refuse to accept that corporate social responsibility is anything more than a firms’ duty to raise profits, the evidence for the existence of and increased philanthropy within multinational corporations strengthens as time continues forward. This evidence, demonstrated in the works of Barbian, Porter, Zu and many others, illustrates the need for businesses to act upon the growing demand of the societies in which they operate. As well as adhering to the demands of society, they must also satisfy the desires of NGOs, like the WTO (World Trade Organisation) and ILO (International Labour Organisation), which have enough political and social power to cause even the biggest of the multinationals financial difficulties. From the examination of the arguments for and against the non-profit roles of business in society, it is clear that the economic and social gains of implementing a strategy incorporating CSR, and the potential ramifications for not doing so, vastly outweigh any benefits argued by those who disagree with the idea that MNCs, and other businesses, should participate in non-profit actions for the good of man-kind and the environment. Through the works of business academics, including Frooman, Greening and Turban, this essay has shown that many businesses, such as Cisco Systems and DreamWorks SKG, embrace the notion of corporate social responsibility, giving back to the community. This essay has also proven that while non-profit roles already exist within several corporations, the demand for greater social responsibility is likely to increase year by year. It is possible that the demand for CSR will become so great that those companies that fail to live up to the standards of their community will perish. Overall this essay has exposed that multinational corporations have, and most likely will do in the future, a non-profit role in society.



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