Corporate Social Responsibility (CSR) is a form of corporate self-regulation. According to Johnson (2008), CSR can be defined as the ways in which a firm goes beyond its minimum obligation to stakeholders per law and regulations. This voluntary social responsibilities of an organization may range from adoption of a more costly and environmentally sustainable production process, improvement of wage and non wage benefits to workers, taking on philanthropic projects for the welfare of the community, or combination of all these. This is contrary to the Laissez-faire view of capitalism representing firms that only meets the minimum obligation required by law and not more with sole objective to maximize profit (Johnson et al, 2008).
Laissez-faire firm;
Maximization of profit occurs by maximizing the profit to cost ratio. The profit maximization theory states that
the firm maximizes its profit by reducing its fixed and variable costs to the minimum. For a firm to achieve the highest total profit it has to conduct its business operations by locating and selecting its factors of production based upon comparative advantage where the product can be produced the cheapest. The theory takes into account the characteristics of factor inputs like land and labor costs, transportation costs, government regulations, political environment and all other
the firm maximizes its profit by reducing its fixed and variable costs to the minimum. For a firm to achieve the highest total profit it has to conduct its business operations by locating and selecting its factors of production based upon comparative advantage where the product can be produced the cheapest. The theory takes into account the characteristics of factor inputs like land and labor costs, transportation costs, government regulations, political environment and all other
transactional costs. The firm will choose least expensive factors to operate in order to maximize the profits and at the same time staying within the limits of the law. This is based on the Laissez-faire view of the organization and advocated by Milton Friedman (1970) in his famous New York Times article.
The Laissez-faire firm is not taking into account consequences of externalities like destroying environment and exploitation of natural resources in an under-developed country due to inadequate local regulations or paying low wages and working condition which can be considered unfair and even a human right violation from a developed world perspective but perfectly compliant with the local regulations. This firm is limiting itself to compliance with existing regulations and in essence is not being socially responsible per the CSR theory.
Now, when a firm voluntarily adopts CSR policies like deciding to pay more than the market determined wages or engaging in costly but socially responsible production processes, then it is essentially increasing its production cost and encroaching its profit potential. CSR activities entail significant extra costs for the firm. The only way a firm can continue engaging in voluntary CSR activities and still maintain its profit margin is by raising prices or lowering costs in its value chain, or combination of both. But this is not profit maximization as the firm is either taking in the extra cost themselves or merely passing it to customers. Thus the CSR theory and profit maximization theory are at odds with each other, so the firm ends up pursuing one at the expense of other, but not both. So why is that almost all of the large firms today have CSR policies as part of their strategy, are they voluntarily sacrificing profits for the welfare of society or are they influenced by the future financial gains from CSR activities?
CSR as business strategy;
The traditional profit maximization theory does not make a distinction between maximizing profit on the short term or the long term. This theory is based on a transactional model taking short term view and ignoring long term consequences. The negative consequences of being a laissez-fairefirm like bad reputation will affect the market share and the long-term profitability of the firm. So firms include certain CSR activities into their business strategy as they are trying to maximize profitability over the long term with a short term decrease in profits followed by a more than compensatory increase
in long-term profits. It is safe to assume that these firms believe CSR activities will maximize their profit and not necessarily sacrifice profit over the long term, else why would CSR be part of the firm Public Relations Instrument. There are variety of CSR activities a firm might decide to engage in to maximize their profits.
CSR and Product differentiation;
A firm which is not in a perfectly competitive market structure will voluntarily engages in socially responsible activity, to differentiate its product and boost profits. These firms can set their price to maximize profit and pass on the additional costs of being socially good to the consumers. Firm who indulge in more socially responsible production, for example, organic or fair trade production, pass on the additional cost to consumers and still maintain their profit and at the same time increase market share by differentiation. If consumers are willing to pay a premium for more socially responsible production and increase their market share, then those firms are pursuing profit maximization. A recent study conducted by Siegel and Vitaliano who examined firms that strategically engage in CSR activities highlights that certain types of CSR activities contributed to profit maximization (Murillo & Martinek, 2009).
CSR and Stakeholder Relations;
Alternatively some firms will attempt to maximize their benefits by taking on CSR activities that minimizes the externality effects on its stakeholders. These firms view CSR actions as any other business activities like marketing, advertising or R&D. The objective behind this is that although the costs might increase in the short term, this will be outweighed by the advantages the firm enjoys in the future increases due to greater benefits it provides to its stakeholder. This could be in the form enhancing the firm’s reputation, the ability to generate customer loyalty, to attract and motivate their employees or to satisfy NGOs/advocacy groups. The firms typically identifies social activities that their stakeholders value and integrates those activities into its profit-maximizing strategy. It is difficult to predict if these CSR activities actually contributed to maximizing profit as the range of CSR activities adopted can vary from firms to firms and from industry to industry. A study conducted by Margolis, Elfenbein, and Walsh suggested that these CSR activities were not increasing profits but at the same time, they were not encroaching their profits either as CSR costs pays for itself (Reinhardt et al 2008).
Conclusion;
Clearly CSR activities entails an added cost burden which firms absorb and hence theoretically the firms are not maximizing profits. That said, these days CSR policies have become an integral part of all corporations with a motive that CSR actions will maximize their profits in the long term. Recent studies have shown that some CSR actions have contributed to increased profits but it is inconclusive that CSR policies in general will actually maximize profit over the long term, but at the same time it is difficult to determine if the firms are in fact sacrificing profit either.