CSR as a Product of Interactions between Market, Political and Civil Institutions

Corporate Social Responsibility (CSR) is supposed to be a link that connects the market economy to sustainable development. It is believed that it is in business’ enlightened self-interest to mitigate its negative impacts and to contribute to social development.

Although there is extensive literature dedicated to development of theories explaining CSR, it still remains a poorly defined phenomenon. Obviously, CSR is an inevitable stage of development of a liberal market economy: CSR strategy incorporated into corporate governance can positively influence a share price or, in case of failures in implementation of CSR practices (we all remember BP oil spill in 2010), this influence can be almost fatal; CSR activity can strengthen a brand perception or destroy it forever etc. In other words, the more sensitive, demanding and educated a particular market, society or government is, the higher the chance that CSR programs are developed, implemented and monitored.

Differences in levels of incorporation of CSR practices into overall corporate strategies appear mainly because in some countries, companies tend to be involved in closer relationships with governmental institutions, in some – a market has a stronger impact, and in other states, where there is a strong developed civil society, companies also have to take into consideration interests of this particular group of institutions. However, it is worth noting that the third group, the group of civil institutions, is unlikely to be well developed in those countries, where the first two groups of institutions are developed poorly. Thus, generally speaking, institutional theory is concerned with an organizations’ pursuit of legitimacy within a given environment and attempt to match by structure and shape with these environments.

Let’s take post-Soviet states with still forming market economies, remaining close relationships with governments (including corruption issues) and weak civil institutions as an example. To what extent do local businesses engage in social or ecological activity? And what is the difference between their activities and those of companies from Western Europe, Australia, or the USA? Undeniably, such things as stimuli for CSR and forms of CSR will differentiate, and, what is more important, the speed of CSR development will vary as well, which means globally we will witness multiple speed CSR.

Therefore, focusing on the institutional drivers of CSR is important because companies are interlinked with a wide range of political, economic and social, formal and informal institutions that affect their behaviour. At the same time, it is also necessary to take into consideration that companies not only adapt to institutional contexts, but also frequently play an active role in shaping those contexts, which means that the only feasible way to make business all over the world conscious and responsible is further liberalization and closer collaboration between companies, governments and societies.

Still, one question is what tools to choose in order to minimize these gaps between regions and adjust business attitudes. Should they be new types of taxes, stricter forms of regulations and punishments, strengthened blaming and shaming activities of NGOs and media, or better social education? And another question: is it possible at all?

1 thought on “CSR as a Product of Interactions between Market, Political and Civil Institutions”

  1. I think Michael Jensen said it best:
    “Two hundred years of work in economics and finance implies that in the absence of externalities and monopoly (and when all goods are priced), social welfare is maximized when each firm in an economy maximizes its total market value. Total value is not just the value of the equity but also includes the market values of all other financial claims including debt, preferred stock, and warrants.

    In sharp contrast stakeholder theory, argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm (including not only financial claimants, but also employees, customers, communities, governmental officials, and under some interpretations the environment, terrorists, and blackmailers). Because the advocates of stakeholder theory refuse to specify how to make the necessary tradeoffs among these competing interests they leave managers with a theory that makes it impossible for them to make purposeful decisions. With no way to keep score, stakeholder theory makes managers unaccountable for their actions. It seems clear that such a theory can be attractive to the self interest of managers and directors.”

    That last sentence is further supported by empirical evidence: http://apps.olin.wustl.edu/jfi/pdf/csr.conflict.pdf
    “insiders (managers and large blockholders) who are affiliated with the firm may want to over-invest in CSR for their private benefit since it improves their reputation as being good global citizens. We test this hypothesis by investigating the relation between firms’ CSR ratings and their ownership and capital structure. We employ a unique data set that categorizes the largest 3,000 US corporations to being either socially responsible or socially irresponsible. We find that insiders’ ownership and leverage are negatively related to the social rating of firms, while institutional ownership is uncorrelated with it. These results support our hypothesis that affiliated shareholders induce firms to over-invest in CSR when they don’t bear much of the cost associated with it.”

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