MONTHLY FEATURE

November 2000

The Measurement of Corporate Social Responsibility (CSR)

By

Michael Hopkins
Director, MHC International Ltd.

THE MEASUREMENT OF CORPORATE SOCIAL RESPONSIBILITY (CSR)

Briefly, CSR is measured following a systems model of a business into three levels:

• Principles of social responsibility

• Processes of social responsiveness

• Outcomes as they relate to the firm's societal relationships

Level I: Principles of Social Responsibility

The level of application of these principles is institutional and is based on a firm's basic obligations as a business organization. Its value is that it defines the institutional relationship between business and society, and specifies what is expected of any business. This level of the CSR model itself is all about the relationship between business and society at large and it has three major elements:

• Legitimacy concerns business as a social institution, and frames the analytical view of the interrelationship of business and society

• Public Responsibility concerns the individual firm and its processes and outcomes within the framework of its own principles in terms of what it actually does

• Managerial Discretion whereby managers and other organisational members are moral actors. Within every domain of corporate social responsibility, they are obliged to exercise such discretion as is available to them, toward socially responsible outcomes

Level II: Processes of Social Responsibility

Corporate social responsiveness is a business's capacity to respond to social pressures. This suggests the ability of a business organisation to survive through adaptation to its business environment. To do so, it must know as much as possible about this business environment, be capable of analyzing its data, and must react to the results of this analysis. But the environment of business is not static; it is a complex and ever changing set of circumstances. This environment can be unchanged for decades, if not centuries, and then it falls apart and is reformed like a kaleidoscope with increasing rapidity. The ability to successfully scan, interpret, and react to the business environment requires equally complex mechanisms.

Three elements are identified as basic elements of this level of the CSR model:

• Business Environment Scanning indicates the informational gathering arm of the business and the transmission of the gathered information throughout the organization.

• Stakeholder Management. A stakeholder is defined as any group or individual who can affect or is affected by the achievement of the firm's objectives for example: Owners; Suppliers; Employees; Customers; Competitors; Domestic and Foreign Governments; Nonprofit organizations; Environmental and Consumer Protection Groups; and Others. Stakeholder Management refers to mapping the relationships of stakeholder to the firm (and among each other) whilst finding, listening and meeting their seeking to balance and meet legitimate concerns as a prerequisite of any measurement process.

• Issues Management Having identified the motivating principles of a firm and having determined the identities, relationships, and power of stakeholders, the researcher now turns to the main issues which concern stakeholders.

Level III: Outcomes

The main focus of measurement is the third level of the CSR model. To determine if "CSR makes a difference", all of the stakeholders relevant to an issue or complex of issues must be included in any assessment of performance. There are, again, three main categories:

• Internal Stakeholder Effects are those that affect stakeholders within the firm. An examination of these might show how a corporate code of ethics affects the day to day decision making of the firm with reference to social responsibility. Similarly, it can be concerned human resource policies such as the positive or negative effects of corporate hiring and employee benefits practices.

• External Stakeholder Effects concern the impact of corporate actions on persons or groups outside the firm. This might involve such things as the negative effects of a product recall, the positive effects of community related corporate philanthropy, or assuming the natural environment as a stakeholder, the effects of toxic waste disposal.

• External Institutional Effects refer to the effects upon the larger institution of business rather than on any particular stakeholder group. Several environmental disasters made the public aware of the effect of business decisions on the general public for example. This new awareness brought about pressure for environmental regulation which then affected the entire institution of business rather than one specific firm.

How does MHCi approach bring business benefits?

1. MHCi provides a picture of what is happening, quantitatively, within the company. This can be used as an input into a social report, social audit or a benchmarking study comparing the companies’ performance to other companies in its sector of activity. In all of these intermediate uses, MHCi’s CSR measurements will improve the focus and performance of the business.

2. MHCi will provide a disciplined approach to enable a company to react to protect it’s reputation and therefore it’s brand as the demands made by society change and multiply

3. MHCi will help to open up new avenues of thinking which will lead to new products, better marketing or wiser investment. We cannot say that, if we are employed by a motor car company, we will tell the company how to produce better cars. However we can say that every organisation that we have worked with has found, through MHCi, new ideas that impact on marketing, production, finance, research or design and which have enhanced the clients wealth and reputation.)

Applying MHCi’s CSR Model: An Example

An example of the way in which the model might be applied is given for Ben and Jerry's Homemade Ice Cream. Ben and Jerry's founder, Ben Cohen explained one aspect of the ethical principles of the firm.

"Businesses tend to exploit communities and their workers, and that wasn't the way I thought the game should be played. I thought it should be the opposite--that business had a responsibility to give back to the community, that is because the business is allowed to be there in the first place, the business ought to support the community. What we're finding is that when you support the community, the community supports you back."

This is a clear statement of principles which belongs in the first level of the CSRmodel. As stated, the principle fulfills both the institutional element (it acts to legitimise the institution of business) and the discretionary element (it directs the firm in a socially responsible path) and goes well beyond any legal requirements, the element of public responsibility.

At the level of processes of social responsiveness, corporate social responsiveness is a business’s capacity to respond to social pressures. Ben and Jerry's social issues scanning is accomplished through a number of mechanisms ranging from direct community involvement through newsletters to special events sponsored by the company. The effectiveness of the scanning and issues management mechanisms can be seen in their funding of organisations as diverse as the Native American Community Board in South Dakota to the Central Massachusetts Safe Energy Project. We can see clear linkages from Ben Cohen’s principles as stated to concrete corporate action.

Among the hundreds of issues which were raised at Ben and Jerry’s, one specific outcome was carried out through its purchasing policies. The firm called on the Greystone Bakery in Yonkers, New York to bake its brownies, a firm that uses its profits to house the homeless and train them as bakers. This outcome is very specific and wholly measurable in a number of ways. One could simply measure the number of homeless people employed by the bakery and the number of trained bakers graduated by the programme. One might also look at how many are still employed at the bakery or in another company as bakers.

There is a clear causal linkage back through corporate mechanisms to ethical principles and the analytical framework can be seen to function. Further research could be done at Ben and Jerry's to cross-relate different elements and their indicators to determine how, for example, profitability is affected by the 7.5% share of pre-tax earnings given by Ben and Jerry's to philanthropic purposes. Conversely, one might take a proposed indicator such as "outcomes of community involvement" and examine its statistical relationships to other indicators in other elements.

The stakeholders in this process are first external to the company and are the homeless who take part in the training programme. A second group of stakeholders can be identified as the community from which the homeless are taken. Clearly, the bakery itself profits as a supplier to Ben and Jerry's and it, in turn, provides benefits to the stakeholders which are possible because of their business with Ben and Jerry's. As one aspect of a very successful social programme, this also benefits shareholders as the success of the firm grows. This is a classic case of new avenues of thinking leading to better profits, reputation, employment as well as a real improvement in the quality of life in the society in which Ben and Jerry’s are operating.

What Indicators do MHCi use?

These are presented in a table too detailed to include here. However, If you would like to examine this in detail you can look at an example in a MHCi table of indicators in table.doc. If you would like to apply a subset of these indicators to your company or institution go to CRITICS (rate your company) on the Web by MHCinternational ltd

Contributed by Michael Hopkins with earlier work by Alton Straughan and comments from Tom Rambaut and Julian Roche all of MHCi.

Every month or so we have a new item of interest to the corporate responsibility world. See previous titles .

[Copyright © Michael Hopkins and with thanks to earlier work by Alton Straughan and comments from Tom Rambaut and Julian Roche all of MHCi]

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