Corporate Social Responsibility

Definition of Social responsibility• Social responsibility

– Broader than just responding to shareholders– Retrenchment & relocation to low-labor costs countries

affect shareholders, but also» workers » communities and customers

– Serving the general interest• To cut the price of a good to prevent inflation• To invest in pollution-reducing equipments

Prentice Hall, Inc. © 2008 3-3

Carroll’s 4 Responsibilities

Archie Carroll and Managers’ 4 responsibilities

• Economic– A firm must repay its creditors and shareholders

• Legal– Non-discriminatory policies among employees and suppliers– Compliance with law and regulations

• Ethical (expected contributions)– Concern for the community, protection of natural resources,

using recycling materials, safety of neighborhoods

• Discretionary policies

Economic and Legal responsibilities get prioritySome ethical contributions may become legal responsibilities

Responsible to Whom ? Primary Stakeholders

• Employees

• Customers

• Shareholders

• Suppliers

• Creditors

Secondary Stakeholders

– Contrary to primary stakeholders, relationships with secondary stakeholders, is not covered by any written or verbal agreement

– Are not monitored by the company in a systematic fashion

– Have long term impact on profitability (e.g. loss of reputation) rather than short-term (competitors)

Secondary Stakeholders: Examples

Guidelines when dealing with stakeholders

• To estimate the impact of a decision on each stakeholder group– How much will each stakeholder lose or gain ?

• To prioritize stakeholders– Based on loss or gains experienced by each stakeholder

• To involve stakeholder in strategic decisions

• To inform stakeholders in advance so that they can make necessary adjustment (e.g. plant closure)

Why do people bend rules?

• 70 % of executives bend the rules. Why ? a), b) or c)

a) Pressure from others and “everybody is doing it”

b) Organizational performance requires it

c) Rules were ambiguous or outdated

Why people do not bend rule ?• Kohlberg’s Levels of Moral Development:

– Preconventional level: behaviors depends on personal interest (avoiding punishment)

• Small children

– Conventional level: Actions depends on an external code of conduct (e.g. society law or norms)

• Most people

– Principled level of development: Looking beyond norms or laws to find universal value

• 20 % of the population

Benefits of Being Socially-Responsible

Corporate Social Responsibility’s Concerns Today

Corporate Social Responsibility and the Market for Pollution Permits

Policy 1: Regulation• Acme, US Electric each emit 40 tons SO2, total of 80

tons.

• Goal: reduce emissions 25% (to ?)

• Suppose cost of reducing emissions is $100/ton for Acme, $200/ton for US Electric.

• If regulation requires each firm to reduce 10 tons,

Total cost of achieving goal =

Marketable Pollution Permits – “Cap and Trade”

• This approach involves creating a “market for the right to pollute”• Potential polluters given a permit that allows them to create a fixed amount of

pollution. – These permits can be resold

• Government can reduce the volume of permits available over time – to gradually reduce total pollution emissions

• As the supply of permits falls, so the permits become more valuable (as their market price rises)

• The EU announced in December 2002 that it was to set up a market to trade pollution permits for carbon dioxide (CO2)

– Polluters in energy, steel, cement, glass, brick making, paper and cardboard – have been able to buy and sell emission quotas since the start of 2005

• Policy choice: • Issue 60 permits, each allows its bearer 1 ton of SO2

emissions – Total emissions = 60 tons

• Give 30 permits to each firm • Establish market for trading permits

• Each firm can choose among these options: Emit 30 tons of SO2, using all its permits, or Emit < 30 tons, sell unused permits, or Buy additional permits so it can emit > 30 tons

Market-Based Policy 2: Tradable Pollution Permits

Suppose market price of permit = $150

One possible equilibrium:

Acme – spends $???? to cut emissions by 20 tons– has ??? unused permits, sells them for ???

» net cost to Acme:

US Electric

Total cost of achieving a 20 tons reduction in pollution:

Suppose market price of permit = $150

One possible equilibrium:

Acme – spends $2,000 to cut emissions by 20 tons (20 x $100)– has 10 (or 30-20) unused permits, sells them for $1,500

» net cost to Acme: $500

US Electric– emissions remain at 40 tons– buys 10 permits from Acme for $1,500

» net cost to US Electric: $1,500

Total cost of achieving a 20 tons reduction in pollution: $2,000

• A system of tradable pollution permits achieves goal at lower cost than regulation. – Firms with low cost of reducing pollution

sell whatever permits they can.– Firms with high cost of reducing pollution

buy permits.

• Result: Pollution reduction efforts are concentrated among firms with lowest costs.

Market-Based Policy 2: Tradable Pollution Permits