Corporate Social Responsibility and Education

Dr. Muhannad Atmeh
Accounting
Talal Abu-Ghazaleh Graduate School of Business (TAGSB)

Corporate Social Responsibility (CSR) is a matter of great concern and has a growing importance in today’s world. This concept is now introduced in business education, and it overlaps between accounting, management, finance, marketing, and other business fields. At Talal Abu-Ghazaleh Graduate School of Business, each instructor is required to fill a course assessment report at the end of the semester and needs to mention in this report whether the course covered CRS issues. So, what is CRS and how does it incorporate in business?

CSR still lacks a commonly accepted definition, but it could be perceived as integrating social, environmental and financial concerns in business strategy and operations, and reporting about these issues using financial and non-financial key performance indicators.

According to CSR, managers are not judged only by their financial performance anymore but also by their positive actions towards their stakeholders (employees, creditors, suppliers, customers, banks, government, community, etc…) and the natural environment.

CSR and the fundamentals of business science:

It is assumed in the capitalist economic system that CSR is the role of governments, and the only social responsibility of business is to increase its profits while following legal rules. To what extent can this concept (CSR) be integrated in the main business fields; accounting, finance, and marketing (which have all developed in a capitalist system)?

In accounting, the agency theory indicates that the owners of the corporation are its shareholders, and managers as agents have fiduciary duty to serve the interest of shareholders by maximizing shareholders’ income. If managers are judged by actions towards stakeholders and not only stockholders, how are the managers, for example, going to balance between higher wages to employees (stakeholder), lower product costs to customer (stakeholder), and income to stockholders? Higher wages to employees means more expenses and less income to shareholders, and lower product selling prices results in less revenue and less income to shareholders. Hence, implementing CSR may open a conflict of interest between stakeholders and stockholders, and may also result in reducing the reported income, which gives bad indications about management performance.

The current reported income in accounting measures the performance of the management by determining the economic benefits accrued to the owners of the corporation without considering any benefits/sacrifices accrued to other members of the society. This approach is the implementation of the “separate entity” accounting assumption, which indicates that the entity is separable from the owners and other parties participating or dealing with the entity. Thus, any damage could be caused by the entity to the environment or other stakeholders is not qualified to be recorded in the accounting books as long as this damage does not initiate any liability against  the entity. Apparently, CSR offers a different model; it trades-off between pursuing economic income and pursuing social and environmental objectives. It is clear that the current conceptual framework of accounting can’t serve for CSR without a radical change that takes the impact of process on the stakeholder, society and environment.

Little work has been conducted in this area: some writers suggest reclassifying and rearranging the information presented in the income statement in order to be compatible with CSR. They proposed a two parts income statement. The first part shows the difference between the sales  revenue and its costs (which is the profit or the value added), and the second part shows the sharing out of the value added between different sections of society- employees, government, owners, etc. In this format, employees’ benefits, for example, is considered as profit distribution rather than expenses. This format focuses on the benefits that the firm brings to the society as a whole. It stresses entity performance from a society viewpoint not by focusing on individualistic entity performance from owners’ viewpoint. In this format, amounts donated to society or paid to employees or the government are considered as profit distribution and don’t affect the management performance.

In finance, there are clashes between CSR and the fundamentals of finance. Investments, risk management, and other finance concepts are viewed on the company level regardless of the whole effects on society. Recent experience of subprime lending and the use of risk-transferring financial innovations such as derivatives contributed in the financial crisis. These financial instruments innovations may protect the company from specific risks, but eventually, these risks are borne by other parties of the society and usually the disadvantaged parties. The global financial crisis raises questions about bankers sense of social and economic responsibility, particularly in the light of their damaging effect on trust and reputation. There is considerable debate whether bankers’ practices in these areas reflect shareholder, stakeholder or the personal motivations of bankers.

In marketing, one of the major dominant concepts in this science is satisfying customer needs for profit. However, customer needs and company profit may contradict with society or consumers interest in the longer-term.

For example, high- pressure selling and creating false wants are practices used to make profit in the short run without any consideration to their social impacts. . Reckless lending by some financial institutions to provide short term profit may result in shifting customer behavior towards consumption and living in an unaffordable lifestyle. Usually, marketers ignore the social implications of their activities, not just customer satisfaction, but also long run societal well-being.

The question here is: are the marketing managers’ experts in defining and acting in the public interest and can they evaluate their decisions according to economic and social criteria rather than economic criteria?

Conclusion

CSR as a concept, where companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders, is a very ethical and fair concept. Firms should no longer act as separate entities regardless of the interest of the society.

However, CSR challenges the capitalist society principles. Traditionally, accounting practice, finance theory, and marketing have focused on the interests of shareholders in preference to all other groups or society. It is assumed that the core purpose of the firms is to maximize the interests of the recipients of profit, often to the cost of other stakeholders. Are we going to witness a radical change in the capitalist system, thereby shifting the interest from the firm level to the society level? Or will the CSR be used as a marketing tool to improve the firm’s image without creating any social change?