Global Compact International Yearbook Ausgabe 2013

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Extending the business case debate One reason for the inconclusiveness of the business case debate can be ascribed to the lack of long-term considerations. To illustrate this in more detail, it is important to distinguish between three generic positions within this business case debate. First, there is the “only profits matter” argument: Rooted in neo-classical economic theory, this argument considers firms to be efficiency-driven anyway, and thus no special emphasis on managing ecological or social issues is needed. The managerial advice would be to incorporate sustainability only to the extent as it is covered by business as usual processes. Any further efforts to increase CSP unnecessarily constrain the firms’ actions through increased costs. Following this line of thought, management should only focus on maximizing profits and creating shareholder value. It is obvious that, under these assumptions, there is not much room for more sustainable business practices, especially to the extent that is urgently needed. Second, there is the short-term payoff argument: This argument is rooted in the assumption that, because of information asymmetries, companies may not always follow efficiency-driven goals and make optimal decisions. Based on this assumption, environmental-strategy research suggests green management The CSR-CFP Link – Some Useful National Studies Malaysia: Mustaruddin Saleh, Norhayah Zulkifli and Rusnah Muhamad: An Empirical Examination of the Relationship between Corporate Social Responsibility Disclosure and Financial Performance in an Emerging Market Link: http://www.pbfeam2008.bus.qut.edu.au/papers/documents/MustaruddinSaleh_Final.pdf South Korea: Fu-Ju Yang, Ching-Wen Lin and Yung-Ning Chang: The linkage between corporate social performance and corporate financial performance Link: http://www.academicjournals.org/ajbm/pdf/pdf2010/apr/yang%20et%20al.pdf Indonesia: Hasan Fauzi and Kamil M. Idris: The Relationship of CSR and Financial Performance: New Evidence From Indonesian Companies Link: http://ssrn.com/abstract=1694284 Bangladesh: Kazi Zahirul Islam: Corporate Social Responsibility (CSR) and Issue to Corporate Financial Performance (CFP): An Empirical Evidence on Dhaka Stock Exchange (DSE) Listed Banking Companies in Bangladesh Link: http://www.iiste.org/Journals/index.php/EJBM/article/view/2456 South Africa: Hopolang Leeto Ntoi: Impact of Corporate Social Responsibility on the Financial Performance of Companies listed on the Johannesburg Securities Exchange Link: http://upetd.up.ac.za/thesis/available/etd-06182011-184232/unrestricted/dissertation.pdf Pakistan: Nadeem Iqbal, Naveed Ahmad, Nauman Ahmad Basheer and Muhammad Nadeem: Impact of Corporate Social Responsibility on Financial Performance of Corporations: Evidence from Pakistan Link: http://www.macrothink.org/journal/index.php/ijld/article/download/2717/2286 Sri Lanka: Wijesinghe K. N. and Senaratne S.: Impact of Disclosure of Corporate Social Responsibility on Corporate Financial Performance in Bank, Finance and Insurance Sector in Sri Lanka Link: http://www.kln.ac.lk/uokr/ICBI2011/A&F%20141.pdf 186 Global Compact International Yearbook 2013
Agenda Integrated ISO 26000 Reporting efforts can detect previously overlooked efficiency potentials. Increasing operational efficiencies then, in turn, contributes to the firms’ profitability and competiveness. Hillman and Keim present similar arguments in the stakeholder context: If CSP practices are directly related to primary stakeholder concerns, they may not only serve to improve stakeholder relations, but also improve shareholder value. Following this line of thought, it has been argued that there is no linear relationship between CSP and CFP. The managerial advice would be to make use of cost-benefit analyses to determine when the optimal amount of investments for enhancing CSP is reached. Third, there is the long-term value-creation argument: This school of thought proposes that management should care about environmental degradation, as this is expected by society. According to this line of thought, in the short run it is possible that firms will face a negative effect of CSP practices on CFP, as such activities do not necessarily result in immediate returns. However, in the long-term they benefit from such a strategy, as their stakeholders value more socially acceptable business practices, which in turn contributes to long-term business success. The managerial advice would be to investigate when and how global sustainability trends and challenges are going to change the business environment, and to implement corporate strategies that respond to these changes. Most of the empirical research on the business case considers rather short-term effects, for example, the return developments in the following year or the evaluations in financial markets within a short time frame after an event. However, in practical terms, it may often be difficult to precisely determine the optimal amount of CSP investments, especially when purely looking at the short-term financial benefits. Some investments may immediately be profitable, others not. Thus, limiting CSP–CFP evaluations only to short-term considerations can be seen as an important reason for the inconclusiveness of the business case debate. Moreover, in most of the cases, the fundamental negative consequences of unsustainable business practices are likely to become visible in the long run. This, in turn, implies that efforts to become more sustainable may also require some time to become tangible – or, in business language, to materialize. First empirical evidence suggests that, in fact, a long-term orientation has a positive effect on CFP. Wang and Bansal find exactly that for firms with a high level of longterm orientation – their relationship between corporate social responsibility and CFP is stronger compared to firms with a low level of long-term orientation. Busch, Stinchfield, and Wood find a positive effect of CSP on CFP in the long run, whereas there is no support for this effect in the short run. As such, it may be important to actually answer the “When does it pay?” question by considering the long-term effects and implications of CSP. Managerial implications The way ahead is that the short-term efficiency-driven objectives need to be aligned with a long-term value-creating strategy. In a first step, for example, Unilever has moved its reporting practices in this direction. As from 2011 the firm has been releasing a quarterly trading statement every second quarter instead of publishing full financial results. The purpose behind this change is to enhance communication about corporate performance by moving from a short- to a longer-term focus, which better reflects the way the firm manages its business. This is a good starting point. The next important step is to understand a firm’s ecological embeddedness, as it is a key determinant for the long-term success of an organization. Based on this understanding, new questions need to be asked when entering markets, developing products, and evaluating investment opportunities: How resource-dependent are the production processes? To which extent do we explore low-carbon opportunities? Are there any potentially controversial business practices, notably in the supply chain? Essentially, as part of its long-term-oriented strategy, a company does not use the prevailing uncertainties within the business environment as reasons for inaction. Instead, the principle of responsible leadership can serve as the foundation for a proactive business strategy. As a precondition for firms implementing such a strategy, the organization’s self-image is important. It has to shift its taken-forgranted stance toward an attitude of being a responsible leader that acknowledges the relevance and necessity of taking new, uncommon, and sometimes even inconvenient pathways that reflect the firm’s ecological embeddedness. As Amory Lovins puts it, such leaders who want to get it done need “guts, creativity, and perseverance.” Responsible leaders can fundamentally change corporate strategy and influence “others to understand and agree about what needs to be done and how to do it, and the process of facilitating individual and collective efforts to accomplish shared objectives.” Thus, business leaders can become important drivers of (structural) changes. From this point of view, the primarily instrumental motivation of a long-term value-creating strategy finally merges with the normative form of addressing corporate sustainability. Dr. Timo Busch is Professor at the School of Business, Economics and Social Science, University of Hamburg. Global Compact International Yearbook 2013 187
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