Corporate Social Responsibility & Reputation Risk
CSR may be defined as the long-term commitment of firm to follow business ethics and economic development at the same time, and to take care of all the stakeholders in the business environment including employees, investors, customers, society, culture, etc (Worthington, Ram & Jones,). CSR brings business and environment on the same page to contribute positively towards societal well-being (Kotler & Lee).
Reputation is widely defined concept of shared social notions spreading across the dimensions of economics and strategic management (Scott and Walsham). According to Fomburn (1996) who described reputation as a strategic asset benefitting the firm tangibly by lowering cost of labor and capital, enhancing employee loyalty, offering premium product pricing, providing a range of decision alternatives and lastly by creating a goodwill for crises (Little and Little). But Robert and Dowling (2002) classified it as intangible asset to create value for firm. Reputation is developed on the basis of firm’s prior actions and evaluations. According to Formburn & Van Riel (1997), building a reputation helps in hard times but it should be kept in mind that the more time it takes to develop, the more harder it will be to maintain it and will be damaged in no time, creating a reputation risk (Scott and Walsham). Reputation risk results in loss of firm’s value due to a decline in firm’s reputation in social circles (Bebbington). Reputation earned by the company over the time is a result of its shared interests with the stakeholders. It is created when company’s managers affect employee commitment, gain investor’s confidence to buy shares, target their customer group and make analysts praise their success; but the reputation declines when the confidence of all these stakeholders is shattered. Reputational risk is of two types: 1) Situational risk i.e. difficult to anticipate a natural calamity; 2) Expected risk i.e. avoidable risk (Vizcaino). Expected risk is the one that is dependent on the expectations of company’s stakeholders and it can be minimized through CSR practices (Wagner et. al.). CSR not only helps in generating reputation for future prospects but also save the firm from on-going crisis (Knox and Maklan).
Theoretical Perspective
Management guru “Peter F. Drucker (1984)” coined the phrase “win win for all”. According to his perspective, intelligent businesses convert social dilemma into economic prospects and benefits, by increasing production capacity, enhancing employee competence and offering pay-raise making them wealthy and the business wealthier. It is argued that the competitive business is the one that creates a sustainable economic, social and strategic value by engaging all stakeholders (Wheeler et al.).
On the other side, Egoism states that only those actions are considered morally acceptable that maximize the profits only for the moral agent i.e. the company itself (Crane and Matten). According to this theory, CSR should only be practiced or the company should only care for its employees, customers and community if it is in the personal interest of the company.
Similarly, Peter Drcukler, ‘Father of the Modern Management’ gave the principle of ‘Primum Non Nocere’, meaning ‘Above all, do no harm’. He said that most of the organizational leaders actually, do good to the company and the environment at a cost of lesser harms. This principle ensures that leaders should avoid following in the ethical traps of ‘good’ and ‘bad’ and should go for the activities which ensure ‘great good and least harm’ to the target audience(Humanresourcesiq.com).
Financial Implications: Meta analyses of more than 100 research studies conducted in the last 3 decades, on the relationship between corporate social responsibility and the financial performance of firm, the ended at conflicting results(Dimson et al.). Recent research studies have concluded that firms pursue only those CSR activities that maximize their profitability (Gillan et al., 2010). CSR not only impacts profits but also positively affects firm’s market value (Fatemi and Fooladi). According to Servaes & Tamayo (2013), customer orientation of firms positively affects value through CSR. If the firm is highly concerned about its reputation and image, it will be more attracted towards CSR practices and get a chance to enhance their firm’s value (Dimson et al.). Firms engaged in CSR practice efficient and cheap equity financing (El Ghoul et al.).
Impact On Market Performance: According to Paine (1991), company’s market performance in response to CSR refers to focus all of company’s efforts to build a value-based image of its products/services and brands in minds of customers, suppliers and partners to earn their trust. The most important concern for the company to avoid reputation risk is to prepare itself for customer expectations and think how stakeholders perceive the company’s values (Paine, 1991). If the customers think that the company is following ethical practices they will be more attracted towards its products and services. Investors will take this positive brand image as their opportunity to buy some stakes in the company and thus reducing risk of losing reputation.
Failure To Get Good Employees: Companies with good reputation get the benefit of a motivated workforce. It attracts best people, creating a talent pool to increase company’s performance. CSR helps in improving productivity and enhances employee loyalty. Employees like to associate themselves with socially responsible companies (Smith). CSR increases employee commitment thereby reducing turnover, and minimizing cost of recruitment and training new employees (Turban & Greening). According to study done by Kotler and Lee (2005), more than 80% of employees don’t like to affiliate themselves with the firms following unethical practices.
Cost of Deflecting Negative Publicity: Companies follow ethical business practices and provide good working conditions to their employees to avoid any risk of negative publicity. Labor wage rates designed by federal authorities are followed to avoid any negative comment from business analysts and bring a risk to company’s reputation. All these practices increase company’s overall costs but result in increased productivity and positive image in society (Moskowitz).
Lower Earnings/Share Price According to Alexander & Buchholz (1978) CSR practices and firms’ stock market performance yield mixed results and no suggestive conclusions can be drawn. But Spicer (1978) also examined impact of CSR practices on share price over a certain time period and found them significantly related to each other. A recent study done by Anwar (2010) tested and compared the share price and volume before and after the announcement of CSR practice awards named “ISRA” and found that investor didn’t consider company’s ISRA ranking.
Works Cited
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