CHAPTER 3

THEORETICAL FRAMEWORK OF
CORPORATE SOCIAL

PERFORMANCE
 CHAPTER 3

THEORETICAL FRAMWORK OF CORPORATE SOCIAL PERFORMANCE

___________________________________________________________________________

3.1 Corporate Social Responsibility: Genesis and Overview

The concept of CSR has evolved considerably since the time when concerns for
society first surfaced in 1950(O’Riordan and Fairbrass 2008; Carroll 1999; Freeman 1984).
Though there are earlier references available of a couple of authors who have raised the
concerns about the responsibilities of business by the likes of Chester Barnard (1938) who in
his work “The Functions of the Executives” points that the leader of the organisation has to
consider how the success of the company depends also on the moral incentives he can bring
to it (Gheli 2013; Joyner and Payne 2002; Caroll 1999). Further list of such sporadic
references to the social responsibilities of business include J. M. Clark’s (1039) Social
Control of Business and Theodore Kreps’ (1940) Measurement of the Social Performance of
Business (Caroll 1999). But the first reference to what we refer to in the contemporary world
as ‘CSR’ were made by Bowen (1953) who is regarded to be the pioneer in the field and is
credited as being the ‘Father of CSR’ by Caroll (1999) and Windsor (2001). In his land mark
book ‘Social Responsibilities of the Businessmen’ (1953) he has defined social responsibility
as those policies, decisions and actions of the businessmen which are desirable in terms of
objectives and values of our society.” He asserted that sphere of responsibilities of business
go beyond the financial performance and that the businessmen are responsible for their
conduct which should adhere to the expectations and values the society upholds.

Frederik (1960) referred to CSR as willingness of the organisation to use the

resources for the broad interests of the society and not for achieving private and firm goals
alone. According to Davis and Blomstrom (1975) the protection and enhancement of public
wealth besides meeting the organisation’s interest is included in the responsibilities of the
decision makers. Carroll (1979) gave a more comprehensive definition of CSR which did not
limit the responsibilities of business to profit earning and obedience to state laws but included
economic, legal, ethical and discretionary expectations of society which it has from the
organisation at a given point in time. While Wood’s (1991) notion of CSR is that business
and society are not independent entities but are associated with each other and to Kotler and
Nancy Lee (2005) it is the engagement of the organisation with the community through its
practices and bestowal of corporate resources to achieve their well being.

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 Contributions of business and civil society representatives to the conceptualisation of
CSR are more practical and managerial in scope (Kakabadse, et. al. 2005). World Business
Council for Sustainable Development (WBCSD) (2003) defined it as, "Corporate Social
Responsibility is the continuing commitment by business to contribute to economic
development while improving the quality of life of the workforce and their families as well as
of the community and society at large." emphasizing the need to address concerns of
stakeholders in pursuance of the ultimate end of the business.

According to the conceptualisation of corporate responsibility given by OECD (2003)

it entails on business to develop a ‘fit’ with the society within which it operates. It requires
business to obey the law applicable to them and respond to the societal expectations and not
just limit its responsibilities to providing adequate return to the investors, providing jobs and
producing goods and services. This notion of CSR by OECD added a legal dimension to the
responsibilities of business.

The European Commission defines CSR as “the responsibility of enterprises for their
impacts on society”. To completely meet their social responsibility, enterprises “should have
in place a process to integrate social, environmental, ethical human rights and consumer
concerns into their business operations and core strategy in close collaboration with their
stakeholders” This definition asserts the need to integrate the stakeholder concerns into the
business operations and the core strategy of the business.

ISO 26000 Working Group on Social Responsibility defines, “Social Responsibility is

the responsibility of an organization for the impact of its decisions and activities on society
and the environment through transparent and ethical behaviour that is consistent with
sustainable development and the welfare of society; takes into account the expectations of
stakeholders; is in compliance with applicable law and consistent with international norms of
behaviour and is integrated throughout the organization.”

The different definitions of CSR discussed above very explicitly indicate that there is
no consensus on what corporate social responsibility entails on business. Although the debate
on the relationship of business and society has been persisting since many decades, univocal
and universally accepted definition of CSR is yet not found (Carroll, 1991; Clarkson, 1995;
Jones, 1995; 1999; McWilliams and Siegel, 2001; Kakabadse, Rouzel and Davis, 2005;
Whitehouse, 2006) The differing notions of the term are based on divergent assumptions of
responsibilities of business which range from minimal legal and economic obligations and
56
accountability to stockholders to extensive responsibilities to the wider social system of
which the organisation is a part (Jamali, 2008).

3.2 Carroll’s Model of Corporate Social Performance

The discussion on the varied approaches to CSR has brought forth different dimension which
form part of the obligations businesses ought to accept towards society. There are different
dimensions to the social responsibilities of business; the most widely cited framework for
understanding these aspects is the one offered by Carroll. (1979).

Figure 3.1: Carroll’s Typology of Corporate Responsibilities (Source: Carroll, 1979: 499)

Economic Responsibilities: A narrow approach to the economic responsibilities limit it to

increasing the shareholders’ wealth as argued by Friedman (1962) while in a broader
perspective it refers to creation of value for the customers, suppliers, employees and the
investors (Bhattacharya, 2013).

Ethical Responsibilities: Ethical responsibilities of business involve those activities and

decisions that are right, just and fair morally and beyond what is mandated by law, for
business ethics begin where law ends (Crane and Matten, 2010). It is more fundamental than
law because it is more appropriate to test the validity of laws through moral principles than
do the other way round (Mulligan, 1990). These responsibilities are often most debated and
more challenging for business to deal with as they are often ill-defined (Carroll, 1991). The

57
philosophy behind these obligations is that business should avoid harm to society even if the
business might not benefit from it (Lantos, 2001). It involves taking business decisions
focussing on the impact it will have on the stakeholders rather than the bottom lines alone
(White, 2011).

Legal Responsibilities: It refers to those obligations which prescribe minimum acceptable

standards of performance. Local, national and International bodies set out rules regarding
what companies can and cannot do with regards to areas such as employment, environment,
human rights, corruption and product safety (Blowfield and Murray, 2011). Organisations are
expected to fulfil the “social contract” between business and society in the pursuit of their
economic goals within the boundaries of law (Carroll, 1991).

Discretionary responsibilities: These responsibilities stem from the philosophy of ‘giving

back’ to society through philanthropic donations (Blowfield and Murray, 2011). Taking these
activities under the connotation of responsibilities would be inaccurate as they depend on the
discretion of business, not required by law, not even expected of business in ethical sense and
are purely voluntary (Carroll, 1979). The significance of these activities is such that it creates
a positive moral capital among a broad range of stakeholders and can generate wealth for
shareholders (Godfrey, 2005).

3.3 Wood’s Model of Corporate Social Performance

Wood (1991) built a theory of CSP based on the three-dimensional Model of CSR
given by Carroll (1979) and Wartick and Cochran (1985) formulation. She gave principles of
CSR based on the four dimensions of CSP given by Carroll and related them to principles of
social legitimacy, public responsibility and managerial discretion. Further she identified the
processes of corporate social responsiveness which was developed by Wartick and Cochran
as policies developed to address social issues (Carroll, 1999). This framework is made up of
principles, processes and policies derived from the concepts of corporate social
responsibilities, corporate social responsiveness and social issues (Carroll, 2008).

According to Wood (1991) business and society are interwoven rather than distinct
entities and therefore society place certain expectations of desirable business conduct and
outcomes. These expectations are classified as institutional, organizational and individual and
expressed in terms of three principles of corporate social responsibility: legitimacy, public
responsibility and managerial discretion. These principles are outlines as under:

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 • Institutional principle: legitimacy
Principles of • Organizational prlnclple: public
Corporate Social responsibllity
• Individual principle: managerial
Responsibility discretion

Processes of • Environmental assessment

corporate social • Stakeholder management
• Issues management
responsiveness

Outcomes • Social impacts

• Social programs
of corporate • Social policies
behavior

Figure 3.2: Wood’s Corporate Social Performance Model (Source: Wood, 1991:694)

Principles of Corporate Social Responsibility

(i) Principle of Legitimacy: This concept relies on the notion that a business institution
is part of the social system and there exists a social contract between society and
business (Deegan, et. al. 2000). Society expects the institution to work within the
bounds and norms of decided by it and so the institution must avoid abusing the
power granted.
(ii) Principle of Responsibility: The level of application of this principle is at
organisational level and it requires the corporation to undertake the responsibility of
the potential impacts of its activities. The principle asserts a corporations relation to
its specific, ethical and political environment and that the business is responsible for
outcomes related to its areas of involvement with society.
(iii) Principle of Managerial Discretion: The principle is based on the notion that
managers are moral actors who exist in an organisational and societal environment
with full of choices. Despite the existence of certain corporate social responsibilities
prescribed in various domains, these moral actors can exercise discretion in fulfilling
responsibilities in a manner they choose for their actions are not prescribed by
corporate procedures.

Processes of Corporate Social Responsiveness: Frederick, (1978) consider responsiveness

as second phase of the conceptual development in which the emphasis is on how the theory of

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CSR is put into practice. It refers to the capacity of the institution to respond to social and
environmental pressure. The notion of responsiveness is seen as a complement to corporate
social responsibility but is not adequate to replace CSR (Wartick and Cochran, 1985; Carroll,
1979). The concept includes three theoretically and pragmatically interlocked processes:
environmental assessment, stakeholder management, and issues management (ten Peirick, et.
al., 2004).

(i) Environmental Assessment: Environmental assessment is how an institution

responds to the environmental conditions and adapts itself to it. For business
environment consist of issues which have different origins, process,
configurations and effects and is never static (Wood, 1991).
(i) Stakeholder Management: Stakeholder management is about how an
organisation manages its relationship with different stakeholders. It encompasses
within its notion the way company’s approach to corporate philanthropy,
community relations, activist pressure, international stakeholder management and
business-government relation (Wood, 1991).
(i) Issues Management: Wartick and Cochran (1985) regard it as the third facet of
CSP model which includes within its meaning issues identification, issues
analysis, and response development. It involves developing and monitoring
internal and external processes for managing company’s responses to social issues
(Brown, 1979).

Outcomes of Corporate Behaviour: The third facet of the CSP model and is directly related
with the corporate social performance. It refers to the results of the firm’s interaction with the
society which manifests in form of impacts of corporate behaviour, the programs companies
use to implement responsibility and the policies employed by companies to handle social
issues and stakeholder interests (Wood, 1991)

3.4 Theories of Corporate Social Responsibility

Corporate social responsibility is a multidimensional construct with diverse meanings,

implications and implementations (Gupta and Saxena, 2006). The concept of CSR has been
approached by researchers across the globe with differing notions which has contributed to
the literature on the relationship of business and society. The literature has grown
significantly and today contains a great proliferation of theories, approaches and
terminologies (Garriga and Mele, 2004).

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3.4.1 Neo-Classical Theory of Corporate Social Responsibility

A conventional view of the role of corporation is that it is a highly individualized

economic entity designed to make profits and legitimatized by the laws governing
incorporated business (Klonoski, 1991). It is an approach which underpins the notion that the
only responsibility of business is to maximize shareholder value. Also referred to as an
instrumental theory is an approach based on the neo classical economic theory which defines
social responsibility of business in a limited sense of making profits for the shareholders
(Branco and Rodrigues, 2007). Friedman (1970) asserted that the only responsibility of
business is to use its resources and engage in those activities which increase its profits
working within the norms laid down by the society. According to him managers are agents of
the shareholders and are required to conduct business in ways which are consistent with their
interest and it would be unethical on part of the managers to spend shareholders money on
socially responsible activities. Thus the social concerns should be left to the care of the
governments (Levitt, 1958).

But this theory of corporate responsibility is not free from limitations and is narrow in
its approach as it excludes important stakeholders—including employees, suppliers,
customers and society from the purview of business responsibility. Adam Smith, the pioneer
of the shareholder oriented responsibility theory has emphasized that though the main
consideration in business decision making should be shareholder value maximization, the
interest of other stakeholder must not be adversely affected. As satisfying the interest of other
stakeholders contributes to maximising shareholder value (Mitchell et al., 1997; Odgen and
Watson, 1999). Hence Donaldson (1982) contends that shareholders interest should not be the
only concern of business.

3.4.2 Stakeholder Theory of Corporate Social Responsibility

The term stakeholder refers to those individuals or groups that have an interest in the
organization and are affected by its actions. These stakeholders include customers,
employees, suppliers, and shareholders which are categorised as primary stakeholders while
secondary stakeholder groups include government, competitors, regulatory agencies, trade
unions, NGOs and political activists (saylor.org). These stakeholders are found to be having a
significant influence on the existence of an organization (Murray & Vogel, 1997). The
Contribution of Edward Freeman (1984) to the stakeholder oriented approach is significant,
who contended that managers have a moral obligation to consider and appropriately balance

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the interests of all stakeholders. An alternative to the shareholder theory, “this approach
makes it explicit that the firm has material and/or moral reasons to consider its relationship
with more than just investors” (Blowfield and Murray 2011, p. 206).

The theory provides a basis which explains that how managing stakeholder concerns
effectively can have a positive influence on the firms profitability (Wood, 1991; Donaldson
and Preston, 1995; Hillman and Keim, 2001; Tyagi, 2012). The theory is based on the
premises that the business should act consistent with the moral and legal rights of the
stakeholders and this basis is regarded as the ethical principal of business responsibility
(Tilakasiri, 2012). And business which do not act consistent with this ethical principal face
large penalties and other disadvantages such as “deterioration of relationship, damage to
reputation, declining productivity, creativity, loyalty, ineffective information flow throughout
the organisation and absenteeism” (Weiss, 2008 in Tilakasiri, 2012 p. 31 and 32). In this
sense the stakeholder approach is contrary to the shareholder oriented approach which is
myopic and a narrow approach as it focussed only the responsibilities business has towards
the stockholders, while stakeholder approach is broader in sense as it is concerned with the
active management of business environment, relationships and promotion of shared interest
in the promotion of business strategies (Fontaine, Haarman and Schmid, 2006). Companies
which fail to include the concerns of their primary stakeholders within their strategy put their
long-term survival at risk (Clarkson, 1995). Hence organisations must work to achieve its
economic motives while simultaneously satisfying effectively legitimate claims of the
stakeholders (Kakabadse, Cecil and Lee-Davis, 2005).

Donaldson and Preston (1995) have classified the stakeholder theories into three
groups: descriptive, instrumental and normative. Descriptive theories are those which
describe and explain specific corporate characteristics and behaviour. Instrumental theories
establish a framework for assessing the association if there exists any between the practice of
stakeholder management and corporate performance goal of profitability primarily. While
normative are concerned with determining the responsibilities of the companies to their
stakeholders. The last two dimensions are extensively explored by researchers (Kakabadse,
Cecil and Lee-Davis, 2005), the instrumental approach to responsibilities look upon
corporations as an instrument for wealth creation alone and the social performance is
regarded as a means to achieve this end (Garriga and Mele, 2004). This approach does not
require excluding the interest of the stakeholders from business consideration but asserts that
satisfaction of stakeholder interests contribute to the shareholder value maximization (Odgen

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and Watson, 1999). Normative approach on the other hand is regarded as the premises on
which the stakeholder theory is based. The emphasis of this approach is on the ethical
requirements which strengthen the business and society relationship (Brickson, 2007). The
underlying belief of this theory is that all stakeholders have intrinsic value and no stakeholder
has priority of interest over other stakeholders (Saint and Tripathi, n.d.).

3.5 Business Case for CSR

Business case implies the inclination to invest in a project or initiative which promises
to yield significant returns to justify the expenditure. In the same manner a business case for
CSR refers to the quest to find merits for socially responsible ventures of the company
(Kuruz, Colbert and Wheeler, n.d.). The search for the business case for CSR is as old as the
concept itself (Freeman, 1984). With the increase in the amount of resources dedicated to the
socially responsible pursuits by companies in recent years, it has intrigued researchers and
business practitioners to ascertain if these pursuits really make economic sense (Tonello,
2011). For Lantos (2001) CSR would not be a legitimate endeavour for any publicly held
company if it is not expected to yield dividends. The empirical research on the issues has
found evidence on the measurable rewards of engaging in socially responsible initiatives for
the firm as well as its stakeholders (Carroll and Shabana, 2010). Motivations to pursue CSR
are different for different companies, while individual drivers could be stronger for some
companies than the others (Brine et. al., 2007; Tyagi, 2012).

(i) Brand Image and Reputation

Reputation is regarded to be very critical for the success of the company for various studies
have shown an association between reputation and financial performance (Roberts, Keeble
and Brown, n.d.). It is emerging as an overall determinant of value for firms (Sen, 2006).
Socially responsible companies enjoy higher brand image and reputation compared to the one
which are not (Jenkins, 2005). CSR investments are extremely important for companies in
maintaining positive stakeholder reputations and contribute to increasing shareholders wealth
(Martin, Petty and Wallace, 2009). Failure to meet stakeholder needs on the other hand
negatively impacts firm reputation (Preston and O’Bannon, 1997). Negative stakeholder
reputation would entail loss of sale, negative publicity and dissatisfied workforce for a firm
(Martin, Petty and Wallace, 2009). Thus it could be inferred that the potential benefits of
CSR are more compared to the cost of CSR activities (Preston and O’Bannon, 1997).

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 (ii) Risk Management

Companies in the new global environment are faced with challenges ranging from human
rights abuses in the supply chains, resource depletion, climate change issues, regulatory
reforms, and societal expectations, requiring an effective means to manage and mitigate
them. “CSR offers corporate risk management at two levels: by providing intelligence about
what those risks are and by offering and effective means to respond to them, the key to which
is managing stakeholder relationships effectively” (Kytle and Ruggie 2005, p. 9). The
demands of stakeholders present potential threats to the viability of the organisation, and
mitigating these threats through threshold level of social or environmental performance
serves corporate economic interests (Kurucz, Colbert and Wheeler, n. d.).

(iii) Cost Reduction and Operational Efficiency

A well-managed CSR creates social and environmental value for the business by reducing
operating costs, enhancing relationships with key stakeholders and customers while
supporting company’s business objective (Rangan, Chase and Karim, 2012). It is in complete
contrast to the neo-classical view that CSR entails unnecessary costs on business while
putting the firm in a position of competitive disadvantage as against its competitors
(Friedman, 1970; Aupperle et al., 1985; McWilliams and Siegel, 1997; Jensen, 2002 as cited
in Cheng et. al. 2011). Operational effectiveness of the company improves when it invests in
eco efficient technologies, work to reduce waste, optimally use raw materials and reduce
carbon emissions (bitc.org.uk). The proactive management of environmental concerns can
lead to reduction in the existing and future regulatory costs though it can increase the
operating costs in the short run (Moon, 2007).

(iv) Employee Engagement

Companies’ socially responsible initiatives have a positive influence on the employee

wellbeing and motivation, besides it also contributes to ease of hiring quality staff, employee
retention, commitment and motivation and result in innovation and productivity in the
organisation (hiring.monster.co.uk website). Prospective employees see value in
organisations which show commitment to CSR and a good CSR reputation might help it hire
excellent candidates (Cotterill, 2007). Employees show more commitment to organisations
with engage in CSR activities and feel more proud of them (Brammer, Millington and
Rayton, 2007). Positive employee engagement by company leads to low attrition and

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absenteeism, increased productivity and higher level of commitment and effort (Moon, 2007;
Tyagi, 2012).

(v) Investor Engagement and Access to Capital:

Investors see significant benefits in financing companies that are proactive on social,
environmental and governance issues that pose material risks and have the potential to
directly affect the long-term financial performance of companies (CERES Report). Cheng et.
al. (2011) contended that firms with better CSR performance are better positioned to obtain
finance from the capital markets and face less capital constraints. Recent studies have found
evidence that superior CSR performance and its voluntary disclosure leads to reduction in
cost of capital and ease in raising finance (Dhaliwal et. al., 2011; El Ghoul et. al. 2011).
Investors have started recognizing that companies that regularly engage stakeholders on
sustainability issues are leaders in risk management and innovation (CERES Report).

(vi) Community Engagement and Licence to Operate

To ensure that company’s operations have support and a social license to operate, companies
must engage meaningfully with the communities. Community Involvement includes those
initiatives that advance the interests of both the company and its communities, such as
donations, employee volunteerism and community partnerships (Burke, 1999). According to
Carroll and Shabana (2010) Positive community relationships help to decrease exposure to
risk and conflict and protect a company’s licence to operate in the society. It is based on the
“social contract approach” of CSR which perceives that a corporation has an obligation to
society over and above the expectations of its shareholders (Ghillyer, 2012).

(vii) Competitive Positioning

Researchers have found positive association between firm’s social performance and the
advantage that companies gain over its competitors by integrating CSR into its strategy and
operations (Turban and Greening, 1997; Ogden and Watson, 1999; Porter and Kramer, 2002).
Turban and Greening (1997) have found an association between social performance of the
companies and potential competitive advantage to the companies as the indicated that firms
with higher CSP have positive reputation and are more attractive to prospective employees.
Companies perceived to be good corporate citizens find support from consumers, gain
competitive advantage in marketing their products and service as such companies are able to
differentiate their brand from others (Rochlin and Christopher, n.d.) Addressing concerns of

65
the society in a manner which best suits company’s resources and circumstances help it gain
competitive benefit by creating shared value (Porter and Kramer, 2006).

(viii) Socially Responsible Investment

Socially responsible investment (SRI) has grown rapidly in the last decade (Scholten and
Sievanen, 2012). SRI involves screening out businesses by the investors that do not meet high
environmental or social standards (Robert, Keeble and Brown, (n.d.). It requires application
of principles of CSR and sustainable development in investment decisions (Steurer, Margula
and Martinuzzi, 2008). Increasing number of investors consider long term non-financial
factors including SRI before making an investment and so it is regarded as an important
driver of CSR (European Multi Stakeholder Forum on Corporate Social Responsibility
Report 2004).

3.6 Approaches to CSR

Based on Carroll’s conceptualisation of CSR, Lantos (2001) gave three approaches to CSR:
Ethical, Altruistic and Strategic.
 Ethical CSR: Includes those morally mandatory obligations which go beyond
economic and legal responsibilities of business. These responsibilities are not
mandated by law but expected by society from business such as respecting people,
avoiding social harm and preventing social injury (Jamali, 2008) even if it might not
benefit business. This approach requires from business to solve problems they create
or avoid harms they can potentially cause (Lantos, 2001).
 Altruistic CSR: It refers to the philanthropic or discretionary responsibilities of the
business and involves contributing to the good of the society even if it entails sacrifice
on part of business. These obligations go beyond ethical ones and require sacrifice of
time and resources to alleviate ills within a community or society. These
responsibilities reflect on the social contract that exists between business and society
whereby firms agree to be good stewards of the society’s resources (Lantos, 2001).
 Strategic CSR: Strategic CSR involves those community related initiatives of the
company which have implications for the long term success of business. It includes
fulfilling those philanthropic responsibilities which benefits the firm through publicity
and goodwill. In strategic CSR, companies contribute to their constituencies not only

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 because it is a right thing to do but also in their best financial interest which is the
ultimate responsibility to the stockholders (Lantos, 2001).

3.7 Corporate Social Responsibility in India

India has the world’s richest tradition of corporate social responsibility

(Janalakshmi.com). CSR has been practiced here since ages though seen traditionally as a
philanthropic activity (pwc.in). India is a country with over 2,000 years of history and the
culture of philanthropy here is just as old (Cantegreil, Chanana and Kattumuri, 2013).
Philanthropy has deeper roots in India compared to many other countries and it stands out as
a country where its culture of philanthropy has played a critical role in its foundation as a
modern independent state (Cantegreil, Chanana and Kattumuri, 2013).

Though CSR is the most prevalent form of philanthropy worldwide (Ramchandran, K.

2009), it has evolved through different phases like community engagement, socially
responsible production and socially responsible employee relations (Janalakshmi.com). CSR
in pre colonial rule period was more in form of charity to the deprived and underprivileged
sections of the society and was dominated by religious considerations. India has a rich culture
of charitable giving influenced by the religious ideologies of communities and took form of
Daan, Zakat and Dashaant which included the act of donating money, goods and services for
a noble cause (Deo, 2013; Cantegreil, Chanana and Kattumuri, 2013).

During the industrialisation period, the wealth of the business dynasties surged to
unprecedented levels, allowing them to contribute to public welfare by setting up their
foundations and trust. The beginning of the independence movement led to the upsurge of
nationalism influenced by the call of “trusteeship” given by Mahatma Gandhi which
witnessed a shift from charity to philanthropy (Sundar, 2000). The Industrialist contributed to
the nation building process by establishing trusts for running schools, colleges, hospital,
setting up training and scientific institutions (indiainfoline.com).

In the post independence era, the role of the Indian state expanded and led to the
emergence of Public Sector Enterprises which were established to promote social good,
reduce inequalities of income and wealth and boost community welfare. The period also
witnessed the enactment of industrial licensing, high taxes and restrictions on the private
sector, but it failed to eradicate poverty, widened the economic disparities between the rich
and the poor and led to corporate malpractices. The policy of dominant public sector too

67
failed to achieve the desired economic goals which lead to a call for greater role of private
sector in attaining socio-economic growth. The year 1965 marks the emergence of corporate
social responsibility debate in India with organisation of workshops and deliberations by the
academicians, politicians and business to inspire a culture of social accountability and
transparency (Cantegreil, Chanana and Kattumuri, 2013; Sood and Arora, 2006)

The economic reforms introduced in 1991 brought a tremendous growth in the wealth
of Indian corporate enabling them to contribute towards social cause bringing a shift in their
approach from traditional philanthropy to strategic CSR (Sood and Arora, 2006).
Furthermore, the thrust to export promotion and increased market access caused by
liberalisation and globalisation required the companies to consider the labour and
environmental concerns of overseas markets in their operations making these companies
more willing to comply with the international norms. In the light of the favourable impacts of
CSR on companies’ reputation and competitiveness, growing number of companies are
embracing the socially responsible business conduct.

Furthermore, the MCA introduced Corporate Social Responsibility Voluntary

Guidelines along with the introduction of National Voluntary Guidelines on Corporate
Governance in the year 2009 to promote CSR amongst the companies working in India. In
the year 2011, the MCA introduced National Voluntary Guidelines on Social, Environmental
and Economic Responsibilities of Business to encourage the companies to conduct business
responsibly. Following which SEBI in the year 2012, mandated the inclusion of Business
Responsibility Report (BRR) as a part of the annual reports for top 100 listed companies on
the BSE and NSE based on market capitalisation to make companies to disclose
Environmental, Social and Governance initiatives undertaken by them. Finally with the
implementation of Companies Act 2013, contribution to CSR from profits was made
mandatory by the MCA for companies of a certain description form year 2014-15.

3.8 Significance of Dimensions of Social Performance of Companies

Based on the BRR format given by SEBI, the social performance of the companies
has been classified in to seven dimensions for the purpose of the current study. The
significance of these dimensions for business

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 (i) Business Ethics, Transparency and Disclosure:

The prominence of ethical business conduct in the contemporary world has grown
significantly. The potential and influence of business on the society is greater than ever
before (Crane and Matten, 2010). Business is regarded as a foundation of prosperity in
society, as companies have the power to create resources that permit social development and
welfare (Naringsliv, 2004) At the same time business malpractices have the potential to cause
significant harm on individual, communities and environment (Crane and Matten, 2010). The
demand for more ethical conduct of business has grown from consumers, employees,
communities, media and the government. And even the companies themselves are
increasingly recognizing that ethical conduct is actually good for business (ibid).
Transparency and disclosure are important elements of a robust corporate governance
framework for it facilitates informed decision making by shareholders (Fung, 2014).
Transparency today has taken a new meaning which requires active disclosure from
companies and has put new responsibilities on the companies (Brown, 1999). Stakeholders
expect better reporting and transparency together with good corporate governance practices
through their management and board processes in order to lower uncertainty in investment
decision making (Fung, 2014).

(ii) Community Relations:

Business is a part of a broader community in which it functions and exists. It has the
responsibility to contribute to the wellbeing of the community by involving in areas which
are crucial for the development of the communities and where the effort of the state is
lacking. Burke (1999) defines corporate community involvement as the relation between the
company and the communities in which it has a presence or impact. Corporate community
involvement includes those programs which promote the interest of business and community
both. Companies contribute to the community by undertaking initiatives to promote
education, health, water and sanitation, give donations and encourage their employees to
volunteer in such initiatives. The knowledge of corporate community involvement can
positively influence stakeholders’ perception of company’s reputation (Rochlin, 2000).
Community contribution and its communication provide a company with competitive
advantage (Stewart Lewis, Director, MORI. as cited in Adkins, 1999). When a company
aligns the concerns of the community to its core business strategy, it attracts and retains top
employees at the same time it also positions itself positively among customers and improves

69
its position in the market and ultimately all this translates into a boost to the company’s
bottom line (Googins, 1999)

Business
Ethics,
Transparency
and
Disclosure
Community
Human Rights
Relations

Dimensions
of social
performance
Customer
Responsible
and Product
Procurement
Performance

Environment Employee
Protection Relations

Figure 3.3: Dimensions of Social Performance

(iii) Customer and Product Related Performance:

According to Druker customer is the foundation of business and essential for the existence of
business. Customer satisfaction is regarded as an important part of corporate strategy
(Fornell, et. al. 2006). For it is widely recognized that customer satisfaction is the key to
achieving goals of the organisations (Davada, 2013). It is believed to have a significant
influence on the profitability and market value (Oh et. al., 2013). Consumer expect from the
companies to act consistent with acceptable commercial, marketing and advertising principles
and make every possible effort to ensure supply of quality and safe goods and services
(Naringsliv, 2004). Consumers have grown increasingly aware in recent years and insist
from companies and their suppliers respect for human rights and refusal to practices of child
labour, forced labour and so on (ibid). Consumers assess companies as well as products in
terms of CSR where positive CSR associations have the potential to boost company and
product valuation while negative CSR associations are more detrimental (Biehal and
Sheinin, 2007) There is growing evidence which supports the view that positive corporate
image has a positive influence on the purchase intentions of consumers (Lafferty et al. 2002)
but at the same time it is also true that consumers are capable to distinguish between window
dressing CSR and credible CSR and hence demand long-term consistency of behaviour from

70
organisations claiming to be socially responsible (Meehan, Meehan and Richards, 2006).
Customer perception of corporate image is significant and has influence on the satisfaction
of consumers as customers CSR expectations lead to stronger evaluations of corporate image
(Chung, Choi and Shin, 2015). Hence firms should consider their involvement in CSR
initiatives concerning community, environment and customer relations (ibid).

(iv) Employee Relations:

Employees are an important stakeholder group of companies which not only is influenced by
the actions of the companies but also has power to influence companies’ performance.
Employees are regarded as the most important stakeholder group towards whom corporations
have to exercise their social responsibility (Humieres and Chauveau, 2001). It is necessary
that the employers address the concerns of the employees as employee satisfaction is directly
associated with productivity and long term success of the organisation. In recent years the
issues of corporate social responsibility and employee engagement have drawn significant
attention and considerable research is conducted to determine the business case for both of
them (Gross, n.d.). Studies have found evidence to support the positive outcomes of
employee engagement for business such as decreased absenteeism and turnover, increased
customer satisfaction and loyalty, increased productivity and revenue growth (ibid). Further a
unique relationship also exists between the CSR of companies and the employee engagement
in the sense that CSR activities of companies like employee volunteering may lead to value
creation for companies by motivating employees and enhancing their efficiency
(Bhattacharya, Korschun & Sen, 2011), it also provides a positive signal to the potential
employees and help attract and motivate employees which may have a positive influence on
the financial performance of the companies (Greening and Turban, 2000). At the same time,
the employees possess power which may play an important role in companies’ choice of
engaging in CSR activities (Dechant and Altman, 1994).

(v) Environment Protection:

The world has become increasingly conscious of the impacts business has on the environment
and so business owners have an ethical and moral obligation to protect the environment
(Thompson, n.d.). Besides the concern for environmental issues to stakeholders has grown in
recent years, as financial performance of the companies is related to some extent to their
environmental performance (Peyiuan, 2005). Investors and financial analysts evaluate the
overall performance and estimate risks based on environmental information, government

71
need information to implement environmental laws and consumers need it to protect their
rights (ibid). The growing significance of environmental management or corporate
environmentalism can be sensed from the emergence of ethical investment funds, willingness
of consumers to pay more for environmentally responsible products (John Elkington,
Environmental consultancy SustanAbility as cited in iisd.org), pressure from governments,
media and activists and most importantly the urge for competitive advantage. Hence it is
necessary that firms devise proper policies to counter the environment related risks and
capitalize on the opportunities of developing sustainable business solutions.

(vi) Responsible Procurement:

Responsible procurement involves management of social, environmental and economic

impacts in the purchasing decisions of companies. It has become necessary that the objective
of sustainable development of the company is set forth throughout its procurement function
(iisd.org). The significance of responsible procurement has grown in recent years as it makes
good business sense as well as the right thing to do (bsr.org). In this era of increased
outsourcing and supplier dependency, it is essential that companies design a right structure of
its supply chain to create a network that is sustainable at the same time effective in satisfying
customer expectations without sacrificing on profits (Girotra, 2014). Sustainable sourcing can
provide companies with an opportunity to manage social, environmental and economic risks
effectively, help reduce cost and raise productivity and also create potential competitive
advantage through improved firm reputation, innovation or differentiation (Carter and
Rogers, 2008).

(vii) Human Rights:

The responsibility of business to protect and respect human rights is realised very
prominently in recent years as companies have the potential to affect human rights directly
through their own actions, inactions, operations and indirectly through their interaction with
governments, local communities and suppliers (GRI Resource Guide, 2009). To act
responsibly towards human rights concerns companies can conduct due diligence to assess
the human rights risks that may be associated with companies’ activities, operations and
interactions (Taylor et.al, 2009). Human rights due diligence implies adopting a human rights
policy, conducting impact assessment of human rights, integration of policy into company’s
operation and culture and monitoring the performance thereof (Ruggie, 2008). The evidence
on the business case for human rights due diligence is growing (Blair, 2014). Studies have

72
shown that customers boycotts of products of companies complicit in human rights abuse
have costs companies huge losses and so prudent companies are acting diligent to human
rights concerns and reaping the benefits in terms of competitive advantage, increased
productivity, reduced costs and increased investments (ibid).

73
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