Corporate social responsibility
Corporate social responsibility
Going beyond what the law requires. Businesses must of course comply with the law — pollution limits, health and safety, minimum wages. CSR is what a company does about its effect on society and the environment above that floor, because society increasingly expects it to take responsibility for that effect whether or not a statute says so.
A useful definition: “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”.
About the lecture for this chapter.
The recording below is the shortest in the paper, and it leaves more out than any other. Three things to hold as you listen:
Section 4, CSR and the supply chain, is not in the recording at all. Rana Plaza, Foxconn and Nike are taught in this chapter and are not mentioned in the recording. The syllabus names supply-chain issues as an outcome of its own, so section 4 is examinable and is covered only in these notes.
Section 5.3, integrated reporting and the ISSB, is covered only in these notes — it post-dates the recording entirely.
⚠️ One statement of law in the recording is incomplete. Discussing whether directors may give company money to a hospital, the tutor says “the directors have a legal duty to act in the best interest of their shareholders.” That is the first half of the duty and it is fair as far as it goes, but it stops before the part that matters here: under the Companies Act 2006, s.172 the directors must also have regard to the long term, employees, suppliers and customers, the community and the environment. The argument the recording then builds — what right have directors to spend other people's money, and who chooses the causes — is a good argument and this chapter keeps it. But it starts from section 3.2 below, not from the shorter version.
1 What corporate social responsibility is
1.1 The idea
The function of a business is to yield adequate returns to the owners and providers of capital, by identifying and investing in promising projects. In addition to rewarding the suppliers of capital, those projects provide jobs and produce the goods or services that customers want. Successful businesses therefore create economic prosperity — which is itself a virtue, and worth saying before anything else.
When carrying out their activities businesses must of course comply with the law: the rules that restrict and manage pollution, the rules on health and safety in factories, the minimum wage. Corporate social responsibility refers to going beyond what the law requires. Increasingly, society expects companies to assess and take responsibility for their effect on the environment and on society even where no law or regulation defines it.
CSR involves acting as a good corporate citizen, satisfying the needs of many stakeholders, and reducing the adverse effects caused by the organisation's activities. Some companies perceive CSR as an ethical virtue; others see it simply as good for business. Both motives produce the same actions, and the exam does not require you to prefer one.
1.2 CSR, the law, and the international frameworks
The syllabus asks about the role of national and international laws and regulations, and the two work quite differently.
What it does | How it bites | |
National law and regulation | Sets the floor: minimum wage, working time, health and safety, environmental permits and pollution limits, product safety, anti-bribery and anti-discrimination law. In a growing number of countries it also requires non-financial reporting — on emissions, on diversity, or on modern slavery in the supply chain. | Compulsory, and enforced by courts and regulators. Falling below it is a legal wrong, not a CSR failure. |
International frameworks | Set expectations above the floor. The main ones are the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (section 2), the UN Global Compact, the UN Guiding Principles on Business and Human Rights, and the UN Sustainable Development Goals as the shared agenda they all point at. | Mostly voluntary. They work through adherence, due diligence and disclosure rather than through sanction — a company says what it will do, reports what it did, and is judged by investors, customers and the press. |
The line between the two moves, and it moves in one direction. Much of what was voluntary CSR twenty years ago — reporting emissions, checking suppliers for forced labour — is now law in some jurisdictions and heading that way in others. A company that treats the international frameworks as optional is often only guessing at what its national law will require next.
2 The OECD general policies
The general policies are Chapter II of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. They are recommendations addressed by adhering governments to multinational enterprises, and they were updated in June 2023 — the seventh update and the first since 2011, which is also when the instrument acquired the words on Responsible Business Conduct in its title. The 2023 edition has sixteen policies under section A, and one further recommendation under section B.
Sixteen numbered paragraphs is not a list anybody memorises. Grouped by what they are actually about, they are five ideas:
Theme | What the enterprise should do |
Contribute to sustainable development | Contribute to economic, environmental and social progress with a view to achieving sustainable development (A.1). Encourage local capacity building through close co-operation with the local community (A.3). Encourage human capital formation, in particular by creating employment and facilitating training (A.4). |
Respect people | Respect the internationally recognised human rights of those affected by their activities (A.2). Promote awareness of and compliance with company policies by the workers employed, including through training (A.8). |
Play straight with government and society | Ensure transparency and integrity in lobbying, and refrain from seeking exemptions not contemplated in the statutory framework on human rights, environment, health, safety, labour, taxation or financial incentives (A.5). Abstain from any improper involvement in political activities (A.16). |
Govern and self-regulate properly | Support and uphold good corporate governance principles and practices, including throughout enterprise groups (A.6). Develop and apply effective self-regulatory practices and management systems that build confidence and mutual trust with the societies in which they operate (A.7). |
Carry out due diligence, and do not silence those who raise concerns | Carry out risk-based due diligence to identify, prevent and mitigate actual and potential adverse impacts, and account for how they are addressed (A.11). Avoid causing or contributing to adverse impacts, and address them when they occur, including through remediation (A.12). Seek to prevent or mitigate an adverse impact linked to operations, products or services through a business relationship, even where the enterprise did not contribute to it (A.13). Encourage business partners to apply compatible principles (A.14). Engage meaningfully with relevant stakeholders as part of that due diligence (A.15). And refrain from discriminatory or disciplinary action, or any reprisal, against workers or others who report practices that contravene the law, the Guidelines or the enterprise's own policies (A.9 and A.10). |
Two of those are new in the 2023 edition and are worth noticing, because older material does not contain them: A.10, the protection against reprisals extended beyond the enterprise's own workers to anyone who investigates or raises concerns about its impacts, including people at companies it does business with; and the lobbying transparency requirement folded into A.5. Both point the same way — towards the enterprise being answerable for what happens along its business relationships, which is section 4 of this chapter.
The Guidelines then apply those general policies through chapters on particular subjects:
Disclosure
Human rights
Employment and industrial relations
Environment
Combating bribery and other forms of corruption
Consumer interests
Science, technology and innovation
Competition
Taxation
3 The demands of multiple stakeholders
3.1 Who wants what
The central practical problem of CSR is that an organisation has several groups of stakeholders and they want different things — and a decision that satisfies one may cost another.
Stakeholder | What they want | Where it conflicts |
Shareholders | Returns: profits, dividends and a rising share price, now and in the long run | Money spent above the legal floor reduces this year's profit, and the benefit is often long-term and hard to measure |
Employees | Pay, security, safe and decent conditions, training and advancement | Higher pay and better conditions are a cost; so is not moving production somewhere cheaper |
Customers | Quality, price, safety, and increasingly a product they are not ashamed of | Ethical sourcing usually costs more, and part of the market will not pay for it |
Suppliers | Fair prices, prompt payment, stable orders | Squeezing suppliers improves margin — and is exactly what pushes poor practice down the chain (section 4) |
The local community and wider society | Jobs, no pollution, contribution to local life | Environmental protection and community spending both cost money |
Government | Tax, compliance, employment | Aggressive tax planning is legal and is one of the most-criticised CSR failures |
3.2 What the directors' duty actually says
A great deal of loose writing about CSR begins from the claim that directors have a legal duty to maximise shareholder wealth, and therefore that CSR spending is somewhere between doubtful and unlawful. That claim is wrong, and it is worth being precise about what replaces it.
The duty, in full
A director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole — and, in doing so, have regard (amongst other matters) to: the likely long-term consequences of the decision; the interests of the employees; the need to foster business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members.
Companies Act 2006, s.172 — the English illustration; the duty is taught in full in Chapter 4 §4.2. The formulation is known as enlightened shareholder value.
So the community and the environment are inside the duty, not competing with it. A board that considers the environmental effect of a decision is not departing from its obligations; it is performing them. Jurisdictions differ in how they express this, and some leave it to case law — but no major company-law system tells directors to ignore the effects of what they do.
That does not end the argument. It moves it from may they? to how much, on what, and who decides? — which is where the real questions live, and the syllabus wants you to be able to argue them:
What entitles directors to decide that a company should start spending shareholders' money generously on CSR projects that the directors have chosen?
How do directors decide which projects? Are they simply funding causes that interest them, or their families and friends?
Company money spent on CSR reduces profit and therefore reduces the government's tax revenue. Perhaps government is better placed to legislate and to spend: it is elected by everyone, and it can allocate across many competing needs.
If shareholders want to contribute, they can make personal donations out of their dividends, to whatever causes they choose.
Against all four sits the practical answer: a company that damages its workforce, its suppliers, its community or its reputation is not maximising anything for long. The strongest CSR argument is not charity — it is that the six matters in s.172 are the conditions on which a company keeps succeeding.
4 CSR and the supply chain
4.1 Why the supply chain is where the risk is
As CSR has become more important to investors and other stakeholders, businesses have realised that their supply chains are where they are most exposed. Many companies are multinational, and may off-shore production or import materials and components. The public increasingly cares about the policies and ethics of overseas manufacturers and suppliers, because it believes that the product it buys is tainted by poor practice further down the chain — and it makes no distinction between a company and its contractors.
4.2 What has gone wrong
Case | What happened | What it shows |
Rana Plaza, Bangladesh (2013) | Known structural faults caused a garment factory building to collapse, killing around 1,130 workers. The factory supplied garments to retail chains including Primark, Benetton and Walmart. | A buyer's responsibility does not stop at its own gate. None of the retailers owned the building; all of them were held to account for what was made in it. |
Foxconn | The China-based assembler of iPhones for Apple has been the subject of sustained criticism over working conditions. | The reputational risk attaches to the brand the consumer sees, not to the contractor doing the work. |
Nike (1990s) | Nike maintained that labour conditions in its overseas contractors' factories were not its responsibility and that it could not be held responsible for sub-contractors' actions. Its sub-contractors were attacked over workplace practices including child labour. Nike's reputation was damaged, it suffered a consumer backlash, and profits fell. The chief executive then acted, beginning to monitor local factories and to help them implement workplace and human-rights standards. | The position “not our responsibility” was legally arguable and commercially fatal. Nike is the case that turned supply-chain conditions into a mainstream corporate issue. |
4.3 The four issues, and what a company does about them
Issue | What it covers |
Environmental responsibility | Monitoring the environmental impact of suppliers — pollution, biodiversity, energy use — and developing a purchasing policy aimed at reducing the impact of suppliers' activities, goods and services (‘green buying'). |
Human rights | Slavery, bonded labour, child labour, freedom of association, working conditions and wages, exploitation and non-discrimination. |
Sustainability | Operating now in ways that do not put at risk the well-being of future generations. Wooden furniture is the standard example: the wood is said to come from sustainable sources, with trees replaced and supply managed so as not to cause irreparable damage to ecosystems — the difficulty being that the buyer has to take that on trust unless it is verified. |
Diversity | Supplier diversity means increasing the number of suppliers under diverse ownership or control — for example ethnic-minority-owned or women-owned businesses. It widens the pool of talent a buyer has access to, as well as being an end in itself. |
What a company actually does about all four is the same four things, in order:
A supplier code of conduct — written standards on labour, safety, environment and bribery, incorporated into the purchase contract so that they are enforceable rather than aspirational.
Due diligence — risk-based, as the OECD Guidelines require: identify where the serious risks are (which country, which material, which tier), rather than sending the same questionnaire to everyone.
Audit and verification — visiting and inspecting, not merely asking. Self-certification by a supplier under commercial pressure is worth very little.
Remediation and improvement — fixing what is found and helping the supplier improve, rather than simply terminating and moving the problem somewhere less visible. Nike's eventual response is the model here.
Notice that this is section 2's due-diligence policies applied to a real problem: the 2023 OECD Guidelines expect an enterprise to seek to prevent or mitigate an adverse impact that is linked to its operations, products or services through a business relationship — even where the enterprise did not cause it.
5 Reporting corporate social responsibility
A commitment to CSR implies a commitment to reporting on the business's impact on the environment and on people, as well as on its financial results. Three frameworks matter at this level, and they arrived in that order.
5.1 The triple bottom line (Elkington, 1994)
The triple bottom line is a framework for reports that include CSR impacts. It has three sections:
Section | What it measures | Sometimes called |
Financial | Traditional accounting measures, such as profit | Profit |
Social | The effect of business practices on labour and on the community | People |
Environmental | The effect of business practices on sustainability, and the beneficial or harmful effects on the environment | Planet |
It should encourage businesses to think beyond narrow measures of performance. Stakeholders might support a reduction in profit if it were balanced by improvements in the environmental and social measures. But there are problems with it:
It is not much use as an overall measure of performance — how do you balance or compare results from three different dimensions with no common unit?
How should the social and environmental elements be measured at all?
There is no legal requirement to report in this format and no standardisation, so companies cannot be compared.
The last of those three objections is precisely what the next two frameworks exist to answer.
5.2 The GRI Standards
The Global Reporting Initiative is an international independent organisation that helps businesses, governments and other organisations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights and corruption.
Its output is the GRI Standards, which are organised in three series:
Series | What it contains | Who it applies to |
Universal Standards (GRI 1, GRI 2, GRI 3) | The foundation: how to use the standards, general disclosures about the organisation, and how to determine the material topics it should report on. They incorporate reporting on human rights and environmental due diligence, in line with intergovernmental expectations. | Every reporting organisation |
Sector Standards | Sector-specific expectations, so that reporting by organisations in the same industry is consistent and comparable. | Organisations in the sectors covered |
Topic Standards | The disclosures relevant to a particular topic — emissions, water, waste, occupational health and safety, anti-corruption, and so on. | Whichever topics the organisation has determined to be material |
The revised Universal Standards were published in October 2021 and took effect for reporting from 1 January 2023. That matters because a great deal of older study material describes an earlier structure — GRI standards grouped, like the triple bottom line, into economic, environmental and social categories. That is not how the GRI Standards are organised now. The current structure is Universal, Sector and Topic, and the step that drives the whole report is determining material topics under GRI 3.
5.3 Integrated reporting and the ISSB
The third development is the most recent and it is the one that has ended up inside the mainstream accounting framework. You need to recognise the names and the direction of travel; you do not need the content of any standard.
Integrated reporting starts from an observation about the triple bottom line's weakness: three separate bottom lines produce three separate reports. The Integrated Reporting Framework instead asks a company to explain, in one report, how it creates value over time using six capitals — the resources it draws on, only one of which is money:
Capital | What it is |
Financial | The funds available to the organisation — equity, debt, retained earnings. |
Manufactured | Physical objects the organisation uses: buildings, equipment, infrastructure. |
Intellectual | Knowledge-based intangibles: patents, software, systems, brand and reputation. |
Human | People's competencies, capabilities, experience and motivation. |
Social and relationship | Relationships with communities, customers, suppliers and other stakeholders, and the trust and licence to operate they carry. |
Natural | Environmental resources — air, water, land, minerals, biodiversity — that the business uses or affects. |
The point is that a business consumes and replenishes all six, and a report that measures only the first is not describing what happened. Integrated thinking is the same idea applied inside the business: the six are considered together when decisions are made, not reconciled afterwards in a report.
The custodianship of that framework has moved, and the sequence is worth knowing because the names appear in different vintages of study material:
The International Integrated Reporting Council (IIRC) developed the Integrated Reporting Framework.
The IIRC merged into the Value Reporting Foundation.
The Value Reporting Foundation was consolidated into the IFRS Foundation — the same body that oversees the International Accounting Standards Board.
The IFRS Foundation established the International Sustainability Standards Board (ISSB), announced in November 2021, which now leads this work.
In June 2023 the ISSB issued its first two standards: IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-related Disclosures. Both are effective for annual reporting periods beginning on or after 1 January 2024. The ISSB built on the earlier initiatives it absorbed, including the Task Force on Climate-related Financial Disclosures (TCFD), whose recommendations are carried into IFRS S2, and the SASB Standards.
The direction of travel is the thing to take away: sustainability reporting has moved in roughly twenty-five years from voluntary narrative, through competing voluntary frameworks, to standards issued by the same foundation that issues the accounting standards. It is becoming part of financial reporting rather than an appendix to it — and the UN Sustainable Development Goals are the shared agenda most of these frameworks measure progress against.
6 CSR and the brand
The link between CSR and a company's brand runs in two directions, and the same fact can travel either way.
Direction | How it works | Example |
Damage | A CSR failure anywhere in the organisation or its supply chain attaches to the brand the consumer recognises, not to the contractor responsible. Reputational damage is fast, is amplified by social media, and is expensive to repair. | Nike in the 1990s: sub-contractors' labour practices, a consumer backlash, and falling profits (section 4.2). |
Advantage | A credible CSR position differentiates a product and can command loyalty and sometimes a premium. Many companies now advertise a commitment to becoming carbon neutral, to recycling a high proportion of their materials, or to paying suppliers fairly. | Companies that built the brand on ethical sourcing and refusal to test on animals, so that the CSR position is the product's positioning. |
Some CSR also has a direct financial payoff, which is worth saying plainly because it removes the argument from the realm of virtue: recycling more waste and recovering usable material from it saves money; using less energy costs less; a supplier relationship that survives is cheaper than one that has to be replaced.
Greenwashing is the risk that turns advantage into damage. It is making a CSR claim that the company's actual conduct does not support — an environmental slogan with nothing behind it, a target with no plan, a report that discloses only the flattering measures. Regulators in several countries now police advertising claims of this kind, and the reporting frameworks in section 5 exist partly to make claims checkable. A company that is caught overstating what it does is worse off than one that never claimed anything.
Responsibility for a supplier
Is the following statement true or false?
“If a company buys from an independent supplier, then the company has no responsibility for how the supplier operates.”
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The triple bottom line
What are the three elements of the ‘triple bottom line'?
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The Global Reporting Initiative
What does the Global Reporting Initiative do, and how are the GRI Standards organised?
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What CSR means
Is the following statement true or false?
“CSR simply means being a good corporate citizen by obeying the laws with respect to the environment, consumers, and employees.”
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Directors and CSR
Is the following statement true or false?
“Directors have a legal duty to support CSR.”
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7 Test your knowledge
Two quick checks before you move on: work through the flashcards to fix this chapter’s key terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.
Corporate social responsibility
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