Business Ethics and Corporate Social Responsibility Debunked

Ethics and corporate social responsibility (CSR) have become watchwords for the governance industry in recent years. Growing pressure on businesses and companies’ ambitions to ‘do better’ regarding ethical and corporate social responsibility has pushed the issue to the top of board agendas. Despite this, the concepts of corporate social responsibility and ethics are not always fully understood by businesses.

What is the connection between ethics and corporate social responsibility? How should boards approach the two, and what are the crucial steps to operationalizing your CSR and ethics strategy? This article explores the issues.

Two board members engaged in a discussion about ethics and corporate social responsibility.

What is Corporate Social Responsibility in Business Ethics?

Corporate social responsibility (CSR) describes initiatives or strategies organizations implement to make themselves more socially accountable. Practicing corporate social responsibility can make an organization more aware of its impact on society.

CSR can be one facet of an organization’s broader business ethics; as Investopedia notes, it is a broad concept that can take many forms depending on the company and industry.’

CSR is often erroneously used interchangeably with ESG (environmental, social and governance), which describes a more tightly defined set of criteria around which businesses build their ethical strategies. While CSR and ESG are connected — and more on that connection later — they are not the same.

CSR has been a recognized element of business ethics for many years; the publication of Archie B Carroll’s ‘CSR pyramid’ in 1979 is generally accepted as the advent of today’s definition of corporate social responsibility. Carroll posited that CSR and business are not mutually exclusive, but companies must address their commercial obligations before seeking ethical or philanthropic ones.

Sometimes, this interplay between commercial and ethical imperatives is referred to as the ‘triple bottom line,’ an accounting framework that considers three aspects — social, environmental (or ecological) and financial — to give organizations a fully rounded view of their performance.

How Do Ethics Differ From Corporate Social Responsibility?

Generally, it’s accepted that ethics is a broader concept than CSR. While business ethics and corporate social responsibility are closely intertwined, CSR is focused more specifically on an organization’s obligations to society. Business ethics is a broader construct encompassing obligations to employees, shareholders, customers, suppliers and other stakeholders.

And corporate social responsibility itself is a pretty wide-ranging concept — which brings us to a third construct, ESG.

Regarding CSR, a key consideration is whether, as a term and a concept, it’s specific enough to hone in on the core issues. ESG — environmental, social and governance — is a term that is increasingly being used interchangeably with CSR. But strictly speaking, the two are different.

Stakeholder intelligence expert Alva sums this up nicely: ‘Without CSR, there would be no ESG, but the two are far from interchangeable. While CSR aims to make a business accountable, ESG criteria make its efforts measurable.’

In some cases, the potential breadth of issues covered under CSR and the lack of tangible ways to measure CSR efforts have meant that companies’ corporate social responsibility initiatives have failed to achieve their potential. The number of projects that potentially fall under the CSR banner can make it difficult to manage or quantify in terms of value. ESG can offer a more defined and measurable focus for corporates’ ethical activity.

We have three related but distinct terms: ethics, CSR and ESG. The three have subtle differences that boards will want to understand and bear in mind when deciding on the focus of their socially and environmentally focused activity.

Why Should Businesses Act Ethically?

Aside from the obvious answer that we all — individually and collectively — have a moral duty to act ethically, there are some specific reasons that businesses should aspire to the highest levels of corporate ethics.

The importance of corporate social responsibility (CSR) has undoubtedly grown over the last decade. When looking at why corporate social responsibility is increasingly important, the impact of CSR on all elements of corporate life should be considered.

Alongside the generous drivers — the growing recognition of the importance of corporate social responsibility to society — organizations are also acknowledging the importance of corporate social responsibility in business.

CSR’s impact on a brand’s image has been evident in recent years, with numerous examples of a company’s supply chain, employment practices and environmental performance having the potential to derail its reputation.

The growing public awareness of CSR issues has led to an expectation that the companies we spend money with are ‘doing the right thing’ regarding their social citizenship. The value of corporate social responsibility (CSR) is demonstrated when the approach of a business mirrors the priorities of its customers.

All too often, though, there remains a mismatch between public preferences and corporate performance. The Telegraph reports that in 2019, while 59% of consumers expected companies to take a stand on climate and environmental issues, only 16% of business leaders cited CSR as their top three business concerns.

Because of mounting pressure on corporates in recent years to evidence the steps they are taking to reduce their carbon footprints, positively impact the communities in which they operate and ensure their internal practices meet the highest compliance and governance standards, issues like environmental sustainability have risen to the top of the board’s agenda.

A more proactive approach to corporate social purpose is typically driven by a desire to demonstrate a commitment to social purpose to shareholders and, in turn, a belief that this will impart a competitive edge. This is a key reason why companies engage in corporate social responsibility.

Overlaying all this is the growing practice of organizations being given ESG ratings by third parties. Increasingly, third-party rating and reporting organizations provide these ratings to assess businesses’ investment potential — giving companies another business-related imperative for improving their ethical performance, specifically around environmental and social factors.

Better ethics can also drive better decisions. Diversity and inclusion (D&I) is one aspect of corporate social responsibility that organizations are increasingly focused on and vocal about — and can deliver real results in decision-making.

A board and leadership team of similar people can lead to group think, where poor decisions are made due to the similarity in thought processes and assumptions among the people involved. Improving your board’s diversity is not just the ‘right’ thing; it can help improve your business performance.

The Principles of Corporate Social Responsibility and Business Ethics

The two concepts are clearly intertwined when we examine the principles of business ethics and corporate social responsibility.

The ISO quality standard ISO2600-2010: Guidance on Social Responsibility includes ‘ethical behavior’ among its seven key principles of socially responsible behavior:

  • Accountability
  • Transparency
  • Ethical behavior
  • Respect for stakeholder interests
  • Respect for the rule of law
  • Respect for international norms of behavior
  • Respect for human rights

In their book Corporate Social Responsibility, David Crowther and Güler Aras posit that ‘There are three basic principles’ which together comprise all CSR activity,’ two of which mirror the ISO principles:

  1. Sustainability
  2. Accountability
  3. Transparency

The American Society for Quality defines corporate social responsibility as an approach that ‘pertains to people and organizations behaving and conducting business ethically and with sensitivity towards social, cultural, economic, and environmental issues.’

There’s a consensus on ethics and corporate social responsibility and a strong overlap between the underlying principles.

Ethics and Corporate Social Responsibility in Strategic Planning

Suppose a corporate social responsibility strategy aims to ensure that strategic decisions are taken ethically. In that case, it stands to reason that strategic planning must incorporate ethical considerations.

Embedding a code of ethics into your strategic decision-making is one way to ensure your organizational strategy is aligned with your business values.

This should apply to all aspects of your CSR activity; goals around environmental sustainability and strategy must work together. For example, your investments and operations must mirror your stated environmental commitments. Similarly, strategic decisions about appointments must reflect your goals around diversity and inclusion, and planning for new premises needs to take on board local community considerations.

Your strategic plans should be informed by your approach to CSR and ethics and drive forward your ambitions to be a more socially conscious, sustainable and ethical business.

Daniella Foster, Senior Director of Corporate Responsibility at Hilton, sums it up well in a Forbes article: ‘Sustainable and inclusive growth is good business, and the companies that have aligned their business growth strategies to their ethics will be a step ahead in future-proofing their business.’

The Benefits of Organizational Ethical Behavior

Our analysis above shows that organizational ethics and a responsible social obligation approach can demonstrate significant benefits. Advantages to the business extend beyond the reputational benefits of a sustainable or socially conscious strategy: there can be a tangible impact on the bottom line.

The benefits of corporate social responsibility and ethics can include:

  • Enhanced corporate reputation
  • Differentiation from competitors
  • Better relationships with investors and other stakeholders
  • More rounded strategic decision-making
  • Improved ESG ratings from third-party rating and reporting organizations
  • Easier access to investment
  • Lower costs due to more sustainable approaches
  • Closer alignment with customer and employee priorities
  • Ease of compliance with TCFD (Taskforce on Climate-related Financial Disclosures) and other reporting requirements

CSR as a Vehicle for PR

Can CSR be a vehicle for positive PR? Of course, you can use your achievements around corporate social responsibility and business ethics to support your marketing and PR efforts — improved corporate reputation is a recognized benefit of a CSR strategy.

Businesses that are rightly proud of their CSR efforts should be encouraged to shout about them as an example to others of what can be done as much as for their recognition.

For some businesses, though, CSR is seen only or primarily as a PR opportunity. These businesses will likely come unstuck as their efforts are exposed as ‘greenwashing,’ the practice of overstating achievements for their own ends. It’s recognized today that ESG obligations cannot be met within a greenwashing report that merely ticks the box for addressing environmental or social issues.’

As Prezly states, there’s undoubtedly a ‘complex relationship between corporate social responsibility and PR.’ The order of events is perhaps the most important aspect here: While CSR provides an excellent story for corporates seeking positive publicity, the story should be secondary to a genuine concern for ethics and a desire to fulfill their social responsibility.

In other words, there’s nothing wrong with publicizing your CSR wins, but seeking to ‘do’ corporate social responsibility only for the PR benefits or exaggerating your successes for PR purposes is likely to backfire because consumers, investors and the wider public see through your attempts.

Transparency: The New Normal

This need for honesty dovetails neatly with an ever-growing spotlight on business transparency — which is supremely important regarding ethics and CSR. As noted above, transparency is recognized as one of the core principles of corporate social responsibility.

The trend towards transparency is seen across the industry, from consumers demanding provenance information on the clothes they buy, pressure on businesses to declare their ownership, and fee transparency in the asset management sector. As we’ve noted, when it comes to CSR, greenwash won’t cut any ice; customers and investors alike want to see honest evaluations of achievements, with candid reporting on goals and progress.

Considering Stakeholders in CSR and Ethics

As we’ve mentioned already, stakeholders are a key consideration for corporate social responsibility and ethics — and a significant driver for companies’ increased focus on CSR/ethical behavior. Engaging with stakeholders —your employees, customers, shareholders, suppliers or the wider community in which you operate — will enable you to identify and prioritize your key actions.

Stakeholder Analysis

Stakeholder analysis, sometimes called stakeholder mapping, is an essential first step in your stakeholder engagement process. Consulting a broad spectrum of stakeholders – from the engaged to the skeptical, those close to the business, and those more tangentially impacted by your actions – provide diverse viewpoints to inform your approach.

This analysis and feedback can uncover opportunities and challenges. It also helps to align your actions with the top-of-mind issues among your key stakeholders.

Transparency is the foundation here, as with reporting. Being honest about your objectives, the challenges that may impede your progress, and the organization’s issues in adopting CSR and ethical behaviors is vital if you want your stakeholders to trust in the process.

Ongoing communication between the stakeholders and those responsible for CSR within the business is the glue that will hold together this stakeholder engagement; communication should be two-way, regular and transparent.

Ethical Leadership and Management

Underpinning all this activity — from setting an ethical course for the business to stakeholder engagement and publicizing your achievements — requires ethical leadership.

A robust and honest approach to CSR relies on buy-in from the highest levels of the organization. For some businesses, a shift toward a more ethical, CSR– and ESG–focused strategy can be a major change in direction. Strong leadership is vital.

Your board and senior management must understand CSR’s role and purpose and fully believe in its benefits; managerial ethics are key here. They must be prepared to invest in initiatives and behave in a way that demonstrates and endorses ethical behaviors. They need to support champions throughout the business who can disseminate the corporate social responsibility message. And they need to lead from the front when it comes to measuring and reporting on CSR progress, being frank about disappointments and being honest about drivers, objectives and challenges.

Managerial ethics and corporate social responsibility actions speak louder than words; with CSR making ever-more–frequent appearances on board agendas, it’s essential to have leadership that publicly supports corporate efforts.

The Next Step for Business Ethics and CSR? ESG

Companies are looking to establish this ethical leadership and management as the norm increasingly looks beyond ethics and corporate social responsibility.

Why? Because there are trends in ethical behavior that are more easily addressed by the clearly defined concept of ESG than by the more nebulous CSR. Corporate strategy and the leadership approaches that support it rely heavily on data to set goals and measure progress —data that ESG is far more able to deliver.

The aforementioned Forbes article highlights this need for measurement, noting that as more quantitative data on CSR becomes available, the expectation grows for companies to measure their impact. Further, it claims that as “investors continue to prioritize impact [of CSR], measurement becomes a competitive advantage.”

ESG has a clear advantage over CSR here; it can be easier to define, with a finite list of issues that can fall under its umbrella. While CSR can be a slightly imprecise and wide-ranging concept, with gains difficult to pin down, ESG lends itself more to clarity and measurement.

With reporting requirements around ESG issues — the TCFD reporting on climate issues, for instance — growing, this is an increasingly urgent priority for boards and senior management. Ways to implement ESG and capture its impact are exercising leaders’ minds in ways that were not apparent just a few years ago.

To achieve their aims, organizations and their leaders need to operationalize their CSR and ESG strategies, putting theory into practice — in consultation with stakeholders — to devise a clear roadmap for CSR success.

Diligent’s ESG Roadmap is an invaluable tool for boards struggling to take the first step. If you are wondering where to start on CSR and ESG, the roadmap provides information on measuring ESG, pinpoints the data you need to focus on, and outlines priority actions. Contact us today to find out more on how Diligent can bring a higher level of governance to your organization.

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