The OECD guidelines are meant to guide companies and other enterprises on the way forward while conducting their businesses. Corporate Social Responsibility (CSR) as it is commonly known is defined by the European Commission (2010) as, “a concept whereby companies integrate social and environmental concerns in their business operations and their interaction with their stakeholders on a voluntary basis." Davis (1973) states that it not merely enough for companies to have economic concerns but they should go beyond that and better the community around them. Although it is clear that these stipulations are voluntary, and no one firm can be forced to enact them, they do prove to be important in doing so to provide the company a good standing with the community apart from similar companies offering the same services. In turn, this may contribute to their competitive advantage.
While companies may want to perform their due diligence in the society, implementing, the CSR guidelines are not without high costs according to Byiers and Bessems (2015). There are no standard tests to confirm the cost-benefits, but they are realized as they go.They also add that perhaps the bigger the cost, the bigger the benefits in the long run. Costs are not standardized across all corporations but are rather customized according to various factors. These include but are not limited to, level of compliance being sought out, the size of the firm and the already present level of due diligence.
Companies with no prior CSR functioning tend to invest more capital than those with “high CSR” according to Ghoul et al. (2011).There are three levels of costs namely “sunk costs, recurrent costs and opportunity costs,” (GIZ, 2012) which are all interrelated. Depending on the type of industry involved like the evasive mining, power-generating, and chemical production industries, sunk costs tend to use up the bulk of the capital. Switching to environmental-friendly equipment is very costly but incurs very minimal recurrent costs because the machines are very sturdy. However, if companies want to implement the CSR guidelines, recurrent costs are very high because they are continuously updated as the need arises.
Because CSR activities can be restrictive in nature, they tend to prevent some companies in the industries mentioned above from undertaking certain activities due to their destructive effects on the environment. Such missed opportunities will also incur costs known as the opportunity costs. (Sprinkle and Maines, 2010).
Recurrent costs cover the majority of the capital invested in CSR activities and according to GIZ include, "labor costs for increased wages and overtime payments, an increase in management time, all forms of insurance, training, benefits for workers, monitoring, and reporting, and equipment update and maintenance." (Sprinkle and Maines, 2010). They also include the costs of maintaining the compliance in all its aspects.
Other costs for companies without CSR compliance are rather evident as demonstrated by their low investor base. “socially conscious investors prefer not to include low CSR firms in their investment portfolios.” (Ghoul et al., 2011). In such cases, companies that are non-compliant end up giving huge returns to their few investors in a bid to keep them on board. Another effect of lack of compliance is the increase in perceived risk for the companies. These companies would expose themselves to the possibilities of future lawsuits if their products were non-compliant resulting in huge payouts and reduced customer bases.
All these costs are weighed against the benefits and sometimes, companies adopt the CSR when it is economically feasible to do so, that is, their profits will not be adversely affected by the implementation. (Reinhardt et al., 2008).
With all these costs, there are significant benefits that follow once the CSR is implemented. According to Sprinkle and Maines (2010), “firms believe that CSR helps recruit, motivate and retain employees.” These reasons go a long way in helping to avoid the costs brought on by turnovers if employees feel that their social responsibilities needs are not being met as part of being a global citizen. Companies such as Timberland have reported this as one of their primary benefits of implementing the CSR.
Another advantage is building a larger customer base. Companies that are very participative in the society by doing vast charity work and community projects are viewed to be better as they appeal to basic humanity. "Involving the customer in this fashion is, naturally, expected to stimulate loyalty and sales." (Steele, 2006).
Reduction of production costs also appears to be a benefit to certain companies like Wal-Mart which once they switched to less packaging materials, reduced transportation costs by $3.5 million. If a single change could bring about such savings, it only indicates how it would be if such initiatives are applied in other production sectors. (Wal-Mart, 2006). For these reasons, a company's brand image and confidence increase in its customers. (Center for Strategy and Evaluation Services, 2011).
Transparency in business is paramount for various reasons such as accountability and instilling trust in people. CSR requires companies to uphold the highest levels of integrity, and it has been shown to be one of its greatest benefits as cited by many firms. (Center for Strategy and Evaluation Services, 2011). Reporting forms an integral part of any business as it serves to uncover a flaw in its plan and devise ways to solve it before greater losses are made. All around, CSR appears to have greater benefits in the long run as opposed to not having it.
Byiers, B., and Bessems, J. (2015). Costs If You Do, Costs If You Don’t. Promoting Responsible Business and Reporting- Challenges for Policy Makers. ECDPM Discussion Paper No. 176. Online www.ecdpm.org/dp176
Centre for Strategy and Evaluation Services (CSES). (2011). Framework Contract for Evaluation and Impact Assessment Activities of Disclosure of Non-Financial Information by Companies. Final Report. UK: CSES. http://ec.europa.eu/finance/accounting/docs/non-financial-reporting/com_2013_207 study_en.pdf
Davis, K. (1973). The Case For and Against Business Assumption of Social Responsibilities. Academy of Management Journal, 16(2), 312-323.
El Ghoul, S., Guedhami, O., Kwok, C. C., &Mishra, D. (July 2010). Does Corporate Social Responsibility Affect the Cost of Capital? Online on Principles for Responsible Investment: http://www.unpri.org/files/Article4_EG.pdf European Commission. (2010). Corporate Social Responsibility (CSR). Retrieved from http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social responsibility/index_en.htm
GIZ. (2012). Costs and Benefits of Corporate Social Responsibility (CSR): A company level analysis of three sectors: Mining industry, chemical industry, and light industry. Sino-German Corporate Social Responsibility Project.
Reinhardt, F. L., Stavins, R. N. and Vietor R. H. K. (2008). Corporate Social Responsibility through an Economic Lens. HKS Faculty Research Working Paper Series. http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP08-023
Sprinkle, G., and Maines, L. A. (2010). The Benefits and Costs of Corporate Social Responsibility. Business Horizons.
Wal-Mart to reduce packaging. (2006, September 22). TheStreet.com. Retrieved online from http://www.thestreet.com/newsanalysis/retail/10310727.html