Picture this! You are a CEO of a listed company and you love to swim.  To make you happy, your managers suggested holding an annual swimming meet.  To make it socially right, your managers suggest that this meet should be a charity event.  They also suggest that the firm will donate $1 for every $5 raised from the public.  To honor the ceremony, a high government official will be invited to thank you and your company for the generous donations.

The firm eventually spends $1million a year of resources on the meet and another $1m on donations.  When we think of this event, your company always comes to people’s mind.

Is this really an act of Corporate Social Responsibility (CSR) or is this fundamentally an agency issue?  This article aims to discuss the issues surrounding CSR.

What is the Principle of Corporate Social Responsibility?

While I liked the definition given by Ganesh in his article “Corporate Social Responsibility – Old Wine in New Bottle” (dated 15 Dec 2003), I prefer the explanation provided by Wikipedia:

“Corporate social responsibility (CSR, also called corporate responsibility, corporate citizenship, responsible business and corporate social opportunity) is a concept whereby organizations consider the interests of society by taking responsibility for the impact of their activities on customers, suppliers, employees, shareholders, communities and other stakeholders, as well as the environment. This obligation is seen to extend beyond the statutory obligation to comply with legislation and sees organizations voluntarily taking further steps to improve the quality of life for employees and their families as well as for the local community and society at large.”

The principle is a good guide to understanding management’s intention when undertaking CSR activities.  While I understand that CSR activities go beyond just charity, I will use mainly charity as examples in this article to make things simpler and reduce confusion.

Why do people want to do good?

Before answering the question of whether companies should undertake any CSR activities, let’s explore why people want to do good in the first place.

A Person’s “want to do good” stems from two behaviors - empathy and pain avoidance.  Human’s special ability to feel other people’s pain means that a simple sight or thought of someone suffering would send shivers down their spin and cause their stomach to turn.  It is human nature to want to remove such sensation.

If we could remove these negative sensations by just buying a packet of tissue paper from that poor old lady, donating some cash to those poor hungry children, or even spending a day cleaning up some poor family’s house, we will want to do it. 

Some would therefore argue that CSR activities should be undertaken even if it does not add value to the firm because it will help shareholders remove or reduce their pain derived from empathy.  But before we could accept that view, we must also consider the fact that the level of empathy and the ability to endure the pain varies across the population and therefore not everyone one will be willing to give up the same amount of resources – or wealth – to manage their empathy.

CSR - an Excuse for Personal Gain?

Am I arguing that firms should not adopt CSR? No I am not, but I have a deeper issue to discuss and that issue is related to the situation I have mentioned in the introduction of this article: Are current CSR activities undertaken by firm really for the good of the firm and its shareholders?

Here are a few examples of some events ran by some firms:

1. Using the firm’s money to donate to charity of the chairman’s choice.  For the few millions of dollars of donating, the chairman gets a dinner with some top government representative to thank him for the contribution.

2. Using the firm’s resources to run annual charity sports event because the sport is the CEO’s favorite. 

3. Using the firm’s resources to run annual charity sports event in crowded town area on a weekday during rush hour because that event catches attention that the top management is doing a good deed.

Here is the question: do these activities add value to the firm or do they simply add value or utility to some individuals in the firm.  All the three events mentioned did not add value to the firm, instead they are resources spent to satisfy the ego of some people in the firm.  Jensen and Meckling (1976) coin this phenomenon as “agency theory”.

Sacrifice the Society or Employees – CSR Principle Provides No Answer.

Here is another question: In the event that a firm is facing a financial challenge, should it continue its CSR activity and retrench its staff or should it suspend its CSR.

This is a tricky question.  Under the principles of CSR a firm should consider the welfare of its staff as well as the local community and society at large.   To continue to with the CSR activity would continue the cause of the firm to help society at large but affected employees would face financial hardship if they are retrench.  Unfortunately, the CSR principle provides no guiding light to solving the issue.

Could we make the application of CSR clearer by ranking the importance of stakeholders accordingly? For example we put shareholders first, then employees, communities, and finally society.  The question then is “what are the guiding principles behind the ranking decisions?”  This would add further complications to principles that are already unclear.

The Basic Tenet of a Firm.

Should the firm choose to fire employees or continue CSR? Should the CEO’s favorite hobby be the main driver behind CSR?  Should firms give some profits to donations or return it back to its shareholders?  Should the firm give donations to charity or invest the money to growth the firm?  These are questions that CSR principles are not able to answer.

The answer to these question could be simply answered if managers adopt a simple objective in managing the firm - maximize the value of its shareholders.  Once managers of a firm understand and align their interest to this basic tenet, then most decisions will be clear.  Why do you suspend donations rather then retrench employees? Because it’s a temporary economic shock and the cost to rehire when the economy recovers is higher than the cost to manage the reputation risk.

Can CSR be part of this strategy?  If it leads to the achievement of this objective, then there is really no reason why it cannot be part of a firm’s strategy but it should be discarded if it adds unnecessary complications to the process of decisions making.

Is there a Way for Management to Do a Good Deed Yet Fulfilling Its Basic Tenet?

Is there a way to let management do a good deed yet fulfill its responsibility to maximize shareholders’ wealth?  Yes, the method is simple – separate the matters.

Since the main objective of the firm – or management – is to maximize the value of the shareholders, rather than deciding on behalf of the shareholders on what donation to make, the management could simply dividend (special or normal) the money back to the shareholders.  At the same time, management could announce its intention to conduct some charity event and ask their shareholders if they would like to donate these dividends to the cause.

If top management wishes to do good on their own will, they could choose to personally match donations made by their shareholders or top up any discrepancies between the funds raised and target set.  That would avoid potential agency issues by management while doing charity.

Its Okay Not To Do CSR But Don’t Create CSI!

So CSR is really an attempted extension of the basic tenet of maximizing shareholders’ value.  While the intention of extending the principles and actions that firms should undertaken when maximizing shareholders’ value is noble, it has added much unnecessary complication to managing a firm and even created excuses for some to “tunnel”.

I would like to discuss one last issue.  Of the three events I have listed above, the last event is worth highlighting. Not only was event not value adding to the firm, it also created inconvenience to the community.  This annual charity jogging event is held every year at the heart of the city during evening rush hour.  To facilitate the event, main roads were closed which leads to massive jams for hours till late in the night.  Though the firm is aware of the inconvenience they have cause, they simply shrug it aside with the excuse that “it’s for charity”. 

But if we refer to the above, CSR suggests that organizations “voluntarily take further steps to improve the quality of life for employees and their families as well as for the local community and society at large”, the event is an example of “Corporate Social Irresponsibility” (CSI).

So it is fine if a firm does not undertake CSR but please, don’t use CSR as an excuse to be irresponsible.