Stakeholder theory, ethics and the return on customer

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Stakeholder theory, ethics and the return on customer

  1. 1. Corporate Social ResponsibilityStakeholder Theory, Ethics, Trust and the Return on Customer By: Eva Kanovich World Mediterranean MBA Student Date: September 12th, 2007 Submitted to: Mr. Andrew Roberts
  2. 2. Table of ContentsAbstract…………………………………………………………………………………… p.2Introduction ……………………………………………………………………………… p.3Defining Corporate Social Responsibility……………………………………………….p.3, 4Andrew Carnegie………………………………………………………………………….p.4Key Developments………………………………………………………………………..p.5, 6Micro vs. Macro Approaches…………………………………………………………….p.7Anything for Profit –An Economic View of the Firm……………………………………p.7Milton Friedman, Albert Carr and Robert Reich………………………………………..p. 8Stakeholder View; Edward Freeman…………………………………………………….p.9Instrumental Stakeholder Theory…………………………………………………………p.9Evolution of the Consumer: People, Planet, Profit……………………………………..p.9, 10Acknowledging Stakeholder Power: Cooperation and Collaboration………………..p. 11, 12FORTUNE Accountability: Beyond the Bottom Line…………………………………...p.13, 14, 15Corporate Social Responsibility,Business Profitability and Increased Customer Satisfaction…………………………..p.15, 16Increased Customer Interest and CSR…………………………………………………..p.17, 18Return on Customer and Total Shareholder Return……………………………………p.18, 19, 20Conclusion…………………………………………………………………………………..p.21Bibliography…………………………………………………………………………………p.22, 23 1
  3. 3. AbstractThere are countless writings on Corporate Social Responsibility (“CSR”), but littlecorrelative examination of the Return on Customer, CSR and overall value maximization.This paper offers a qualitative look at the key developments of CSR, the evolution ofneeds of the modern day consumer and the tenable value consumers bring in generatingfuture cash flow for a company. Pivoting on the writings of both micro and macro schoolsof thought, I set out to show the limitations of shareholder theory and contend thatbusinesses, much like consumers, espouse similar value systems; mirrored respectivelyin Maslow’s hierarchy of needs. Highlighting a consumer centric approach to business, Ishow that companies can be both ethical and profitable if they incorporate keystakeholder interests and CSR into their ongoing business strategies. 2
  4. 4. IntroductionMuch like the businesses they operate, business managers live under continuous pressure andscrutiny to excel or to achieve; to be profitable or to be virtuous. But is there a way that they canbe both? Companies and individuals alike are being held increasingly accountable for theiractions as demand grows for higher standards of Corporate Social Responsibility. Stakeholders:including shareholders, analysts, regulators, activist, labour unions, employees, communityorganizations and the news media are asking companies to be accountable not only for their ownperformance but for the performance of their entire supply chain and for an ever changing set ofCorporate Social Responsibility issues. These societal demands and consumer pressures haveultimately led to an economic paradigm shift; wherein corporate social responsibility needs todrive corporations beyond the bottom line. Companies must now go over and above the onceprescribed altruistic do-gooderist- philanthropic contributions they made; rather align both ethicaland business strategies so as to quell all stakeholder expectations. ‘The invisible hand,’ as oncedescribed by Adam Smith, has failed to ensure business morality and has contributed to theshaping of modern day CSR implementations.This paper will address the humanitarian side of capitalism whilst entertaining a myriad ofCorporate Social Responsibility theories. It will explore the long standing competing shareholdervs. stakeholder debate and the link between profit, consumer and Corporate SocialResponsibility. The objectives will be threefold: Firstly, to show that modern consumers exactCorporate Social Responsibility strategies from the companies they endorse. Secondly, to showthat Corporate Social Responsibility is competitively advantageous. Lastly, to demonstrate howCorporate Social Responsibility is a means of redefining profit maximization and increasing areturn on customer.Defining Corporate Social ResponsibilityThere have been breathless writings on CSR yet no single definition to date. Generally, CSR isregarded as the economic, legal, ethical and philanthropic expectations placed on corporations bysociety.1 In this regard companies are required to meet their economic and legal requirementsand at the same time are expected to operate in ethical ways and avoid social injuries even if thecorporation may not benefit in the short term. The concept in and of itself has becomesynonymous with organizations, especially but not limited to commercial business, having theduty to take care of all their stakeholders’ interests and is often used to describe businesses’integration of social and environmental issues into decisions, goals, and operations. A widelyquoted definition by the World Business Council for Sustainable Development states that“Corporate Social Responsibility is the continuing commitment by business to behave ethicallyand contribute to economic development while improving the quality of life of the workforce andtheir families as well as of the local community and society at large.”2 This holistic and symbioticapproach to business holds organizations as being fully integrated partners in their communities,rather than seeing them more narrowly as being primarily in business to make profits and servethe needs of their shareholders. This duty of care is seen to go beyond the statutory obligation tocomply with legislation.As corporations operate in many communities and across various social segments, and theyfrequently have to respond to the different needs of these groups, let us further theaforementioned definitions as follows: corporate social actions whose purpose is to satisfy socialneeds. Here the fundamental idea is harnessed on the notion that a business should haveobligations to work for social betterment and should act as the consistent function of thecompany’s operations.1 Mattten, Crane, Chapple. ‘Behind the Mask: Revealing the True Face of Corporate Citizenship2 www.wbcsd.org 3
  5. 5. The vantage point of the consumer is equally important in identifying the most crucial tenets ofCorporate Social Responsibility. In a 2007 Fleishman-Hillard survey, consumers responded to the“what is Social Responsibility” question with more than a dozen unprompted response categories,including the most frequently offered responses: “Corporations need to be committed to the publicand communities and overall to society” (23%) - No.1, “Corporations need to be committed toemployees” (17%) - No.2. 3 Such feedback suggests consumers’ proclivity to identify corporatefunction as being just with various stakeholders.Andrew CarnegieThe idea of Corporate Social Responsibility finds its roots in the writings of Andrew Carnegie,founder of U.S. Steel, who articulated two principles he believed were necessary for capitalism tofunction. First, the charity principle which requires more fortunate members of society to assist itsless fortunate members, including the unemployed, the disabled, the sick, and the elderly. Hemaintains that these "have nots" could be assisted either directly or indirectly, through suchinstitutions as churches, settlement houses, and other community groups.4 Second, he putsforward the stewardship principle, which requires businesses and wealthy individuals to seethemselves as the stewards, or caretakers, of their property.5 This idea assumes that wealthmaximization benefits all stakeholders. Carnegie views the rich as holding their money "in trust"for the rest of society as a whole. In turn, they could use it for any purpose society deemedlegitimate. However, he maintains that it is also a function of business to multiply societys wealthby increasing its own through prudent investments of the resources that it was caretaking.63 Rethinking Corporate Social Responsibility: A Fleish-Hillard Study4 Freeman, E.,Liedtka, J. ‘Corporate social responsibility: a critical approach - corporate social responsibility’5 Ibid 46 Freeman, E.,Liedtka, J. ‘Corporate social responsibility: a critical approach - corporate social responsibility’ 4
  6. 6. Key DevelopmentsWhen compared to developments in previous centuries, the two most striking features oftwentieth century economic growth are its staggering size and acceleration. It has witnessed theawakening and expansion of globalization, the transformation of the capitalist system, theascension of capital markets and the deepening competition in business. Now, in an era ofpermeable boundaries, cross flow of information and greater mobility of human capital,corporations have been confronted with the evolving eco-friendly, ethically conscious, sociallyminded post-modern consumer. Such commitment and awareness has provoked an irreversibletrend in business: to progressively, innovatively and steadfastly integrate CSR into corporatevision and strategic planning.But how did we get to this point? Although the past is never a perfect template for the present wemust look at CSR having its seminal roots in three correlative movements: 1) Communityrelations and contributions response to local pressures/needs and CEO/Senior Management-1960’s and 1970’s, 2) Corporate Citizenship model based on ethical issues including the newcorporate or strategic philanthropy-1980’s-1990’s, and 3) Strategic Alliances closely aligned withcorporate objectives-1999 and beyond.7Traditionally businesses operated exclusively on the classical economic model of maximizingprofits. As long as the firm could sell its good(s) or service(s) at prices high enough to make aprofit and survive, then its social obligation was fulfilled.8 However, shortly after large companiesfirst emerged in the 1870s, debate quickly arose as to the appropriateness of their conduct.9 Thisdebate would later arise with many multinationals in the 1990’s as their unethical behaviour wouldbe publicly rebuked.Upon the heels of the Great Depression, the 1930’s signaled a transition from a primarily laissez-faire economy with industrial power and might in control to a more mixed economy with a moreactivist role by organized labor and the government.10 Eventually, the governments creation ofvarious socially oriented programs to ease the countrys economic woes resulted in more sociallyminded Americans.11 Thus, more socially minded persons demanded more socially mindedbusinesses. Under the auspices of change, and in a flurry of enlightened self-interest,businessman and politicians alike wanted to rebuild the post World War II economy. Protracteddebates over the appropriate role of business in society continued and business leaders seemedto (more than ever) come to espouse a belief of the equitable distribution of wealth. Little by little,the pillars of corporate philanthropy were being established with the creation of public interestwatchdogs and regulatory agencies such as the American Civil Liberties Union. The FederalTrade Commission stimulated new interest in business ethics, the standards by which to judgecorporate and individual behavior within the moral framework of business and society.127 Jafar, Alamgir. ‘Global Scenario and Context’8 Ibid 79 Jafar, Alamgir. ‘Global Scenario and Context’10 Ibid 911 Jafar, Alamgir. ‘Global Scenario and Context’12 Ibid 11 5
  7. 7. The 1950’s ushered in an era of Social Responsibility. It was Howard Bowens SocialResponsibilities of the Businessman (1953) that expanded social responsibility into the corporaterealm. According to Bowen, the social responsibilities of a businessman consisted of obligationsto pursue those policies, make those decisions or to follow those lines of action which would bedesirable in terms of objectives and values to society.13 Soon afterwards, all three levels ofgovernment started enacting increasingly detailed legislation conducive to socially responsiblebehavior by businesses. Further, the four key regulatory agencies – the Equal EmploymentOpportunity Commission, the Occupational Safety and Health Administration, the EnvironmentalProtection Agency and the Consumer Product Safety Commission – were established from 1969to 1972.14 These developments created an entirely new framework for managers: hit all of asudden with four enormous regulatory agencies making many demands for information andcorrective action.15A combination of factors propelled the subject of socially responsible business to the frontlinesduring the 1980s.The ‘ME’ decade of popular culture was symbolic in many ways. It bore thelargest population growth the world had ever seen, witnessed the introduction of compact discs,the first Macintosh, the first available hand held phones and presented a time wherein socialissues were becoming more visible and registering on the corporate radar. After the decline andthen eventual collapse of socialist economies, the world saw the rise of the technologicalrevolution and the globalization of economics – the creation of a worldwide market thatchampioned capitalism and democracy as twinned values. More transparency was demanded ofcompanies and coupled with the consumer rights movement heightened scrutiny of corporatepractices. In 1937, Adam Smith wrote that “consumption is the able end and purpose of allproduction, whereby the basic measure of an economys worth should be the health, safety andeconomic well-being of its consumers.”16 Here, consumer sovereignty governs supply anddemand. Moving from a work-based to consumer-based society, the Reagan-Bush era, in whichgovernment restrictions on businesses were loosened, caused some business leaders to contrastwhat appeared to be an alarming array of crumbling institutions – including weakened federal andlocal government agencies once charged with protecting those institutions – with the wealth theyand their shareholders had amassed over roughly the same period, and to recognize an inherentimbalance.17The 1990’s present a time of environmentalism and entrepreneurship. With the Royal Dutch/Shellcrisis thrust upon the world in 1995, the general public had put morality to centre stage. It calledattention to the dubious corporate policies and practices that lay behind consumer goods offeredfor sale in the Western World.18 Transnational corporations were now seen as having to be moralactors with moral and ethical obligations. In lieu of the crisis, consumers increasingly begandemanding that corporations pursue socially responsible goals rather than ones purely motivatedby bottom line profit maximization. Companies could no longer employ the antiquated charitablegiving method to offset the damage they were doing both to communities and the environment.Being both reactionary and visionary to this moral consumer activism, corporations such asStarbucks responded through ethically branded strategies; for example, ensuring that farmerswould receive an equitable price for their coffee and receive help in strengthening their farms inthe future.Within an evolutionary landscape, CSR needs to be looked at as more than a cost constraint orcharitable deed. Strategic CSR needs to directly align key stakeholder interests, businessstrategy and financial long term profitability. In modern light, when identifying both the social and13 Ibid 1214 Jafar, Alamgir. ‘Global Scenario and Context’15 Ibid 1416 Smith, Adam. The Wealth of Nations, 1937, p 62517 Jafar, Alamgir. ‘Global Scenario and Context’18 Holzer. Boris, ‘Framing the Corporation: Royal Dutch/Shell and Human Rights Woes in Nigeria,’ Journal of ConsumerPolicy 6
  8. 8. business aspects of CSR it is highly important to distinguish strategic CSR from charitabledonations and good works. Corporations have often spent money on community projects,scholarship endowments, and the establishment of various foundations such as Habitat forHumanity and Ronald McDonald House. In addition, they have also often encouraged employeesto volunteer in community work thereby creating goodwill in the community which in turn directlyenhances the reputation of the company and strengthens its brand.Listening and incorporating consumer demands has now become a type of brand insurance forcorporations. According to a survey conducted by Cone Communications and the Roper Group,76% of consumers would switch brands to further worthy causes (holding price and qualityconstant with other goods). Results of another extensive study conducted by the same groupsreveal that 40% of (25,000) respondents would consider punishing a business deemed not to besocially responsible; 20% of respondents avoided products of offending businesses or expressedtheir dissatisfaction to others, and one in five consumers were likely to use their purchasingpower "to reward a company perceived as socially responsible.”19Micro vs. Macro ApproachesThere are two basic approaches to the concept of Corporate Social Responsibility. One school ofthought focuses on micro level analysis which deals specifically with how individual companiescould be made more responsible towards society.20 Robert Ackerman, a micro-level theoristespouses that responsiveness should be the goal of corporate social endeavour. ArchieB.Carroll’s well known four-part CSR pyramid model plays on the latter and suggests that thetotal Corporate Social Responsibility of business entails the fulfillment of the firm’s legal,economic, ethical, and discretionary responsibilities.21 It must produce the goods and/or servicesthat society wants and in a lawful manner and must sell them at a profit.22 Nevertheless, businesshere should also be a good corporate citizen, whereby it should contribute financial and humanresource to the community and improve overall quality of life. Conversely, researchers belongingto the macro level school of thought favour government, not individual companies, as the entitythat establishes and achieves a countrys social goals.Anything for Profit –An Economic View of the FirmWithin the economic view shareholder value consists of maximizing share value and wieldingshort term profit .Those against CSR have anchored their arguments in the economic view of thefirm which suggest that the primary task of the corporation is to fulfil its economic purpose. Forthis approach social problems and social services are relegated to the role of the governmentsince businesses are set up as economic institutions, not welfare agencies. The economic viewsupports the same values as the Pareto Optimality theory which maintains that free-market forcesensure that maximum social benefits will be achieved at minimum social costs.23 The allegedproblem within CSR in a capitalistic scenario is primarily a Pareto Optimization problem wherebythere exist too many conflicting objectives, namely, minimizing costs, maximizing profits andsatisfying all stakeholders.19 Cone press release 200520 Pater. Alberic, ‘Corporate Social Responsibility Theories: Mapping the Territory’ Journal of Business Ethics, Volume 53,Numbers 1-2 / August, 200421 ‘Caroll. A.’ Thee Pyramid of Corporate Social Responsibility: Toward the Moral Management of OrganizationalStakeholders.’ Business Horizons, July-August 199122 Freeman, E.,Liedtka, J. ‘Corporate social responsibility: a critical approach - corporate social responsibility’23 Lantos, G. ‘The boundaries of strategic corporate social responsibility,” 2001 Volume: 18 Issue: 7 Page: 595 – 632,MCB UP Ltd 7
  9. 9. Milton Friedman, Albert Carr and Robert ReichAccording to Milton Friedman, a company’s mandate is to make money. A fervent proponent ofthe economic view, Friedman fundamentally bases his arguments on two principal contentions:one economic and the other, legal. From the economic perspective, he asserts that if managersspend corporate funds on projects not intended to maximize profits, the efficiency of the marketmechanism will be undermined and resources will be misallocated within the economy.24 On thelegal side, Friedman contends that because managers are legal agents of stockholders, their soleduty is to maximize their financial return. Hence, if they spend corporate funds for socialpurposes, they are essentially stealing from the stockholders.25 What Friedman fails to address isa scenario wherein there could be a profitable return on social projects and said return on suchaction could actually maximize shareholder return not only in the short but in the long term.Rather, Friedman champions the idea that society determines and meets its needs and wantsthrough the marketplace He determines the needs of society to be singular rather than pluralistic;neglecting to take into account spiritual and self actualization needs. Through his agencyperspective, Friedman maintains that ‘the business of business is business,’26 and thatcorporations’ main players should be those that invest their wealth: the shareholders. Investmenthere does not take into account the investments made by other parties, namely, consumers.Friedman’s perspective is rooted in the idea that the corporation’s priority should be to satisfy theshareholder and to make profits. For him, the relationship between the corporations and groupssuch as employees, suppliers and customers is maintained as primarily economic.In ‘Is Business Bluffing Ethical?’ Albert Carr posits that “we can learn a good deal about thenature of business by comparing it with poker. While both have a large element of chance, in thelong run the winner is the man who plays with steady skill. In both games ultimate victory requiresintimate knowledge of the rules, insight into the psychology of the other players, a bold front, aconsiderable amount of self-discipline, and the ability to respond swiftly and effectively toopportunities provided by chance. Focused solely on profits and legality he continues, “Pokersown brand of ethics is different from the ethical ideals of civilized human relationships. The gamecalls for distrust of the other fellow. It ignores the claim of friendship. Cunning deception andconcealment of ones strength and intentions, not kindness and openheartedness, are vital inpoker. No one thinks any the worse of poker on that account. And no one should think any theworse of the game of business because its standards of right and wrong differ from the prevailingtraditions of morality in our society.”27Much like his follower, Friedman undersells the humanitarian dimension of capitalism. Althoughnever overtly dismissing philanthropy, he pointedly questions its merits in terms of engenderingprofitability. Rather, he suggests that a business’ social responsibility should be to increase itsprofits in a free enterprise system where there is no coercion and deception. He denies theimportance of networks linked to the corporations such as communities, media and the naturalenvironment which now, in the 21st century are inextricably linked to the crucial long term viability,profitability and sustainability of a firm.Notable liberal economist Robert Reich agrees with Friedman, contending that “if a certain actionimproves the corporations bottom line, theres no point in labeling it socially responsible. Its justgood business.” What Reich neglects here is to realize that CSR is not about generous deeds,volunteerism or virtue, but about social impact and competitive advantage. In his controversialnew book, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life,Reich goes as far as suggesting that “if consumers were willing to sacrifice good deals for thesake of some social goal they believed in – for example, paying more for a garment with a label24 Friedman, M. ‘The Social Responsibility of Business is to increase its profits’ New York Times Magazine, pp. 87-9125 Ibid 2326 Friedman, M (1970) ‘The Social Responsibility of Business is to increase its profits’ New York Times Magazine27 Carr, A. ‘Is Business Bluffing Ethical?’ Harvard Business Review 46, January-February, 1968, pp. 143-53 8
  10. 10. guaranteeing its not made by children in a poor country or for a book thats made with recycledpaper – then youre right: Supercapitalism, as Ive called it, would serve the interests of us both asconsumers and as citizens. But the overwhelming evidence shows that consumers are not willingto make such sacrifices. If items are priced the same, consumers will choose the one that bettermatches their personal ethics, but they wont pay more for one that does.’28 The Natural andEthical Report of 2005 challenges this assertion and presents findings that suggest that (forexample) 67% of Dutch and 60% French consumers are wiling to pay a premium for ethicalproducts.Stakeholder ViewEdward FreemanBusiness should not be separate from ethics and society. From an investor’s perspective, thepurpose of business should be to maximize profits, but what is the purpose for otherstakeholders? An enlightened corporation should try to create value for all of its constituencies.The stakeholder theory challenges the conventional market capitalist views of the firm. Rather itviews the corporation as an entity through which a variety of participants who may beinterdependently related accomplish multiple and at times divergent goals. Stakeholder theorydescribes the firm as a nexus of co-operative and competitive interests possessing intrinsicvalue.29 Stakeholder theory, often thought not to take account of the interests of shareholders, infact does so by seeking to ensure the long-term sustainability of the company. It is imperative tonote that businesses rely on the contribution of a much wider set of constituents, not justshareholders, for its success and they have a duty to take into account the interests of thesestakeholders as well as the shareholders.Rather than looking solely at wealth maximization through classic business models, stakeholderview, offers an enlightened self–interest approach; taking into account other issues that couldimpact the sustainability and long term profits of the firm-namely consumers. “It’s tempting toconsider value simply as a matter of maximizing the short term financial performance of theorganization,” 30 says Michael Jensen. Contending with that value maximization approach isstakeholder theory which says that managers should make decisions so as to take into accountall of the interests of all stakeholders in the firm. He further writes that “a firm cannot maximizevalue if it ignores the interests of its stakeholders. But a melding of new interpretations of bothvalue maximization and stakeholder theory is necessary so as to make possible the long runmaximization of the value of the firm.”31 CSR should be viewed as more than an add-on solution.Rather, it should be strategically integrated as a direct response to stakeholder demands forethical business and be fully integrated into core business practices.Instrumental Stakeholder TheoryHow do we get beyond the theoretical problem of reconciling corporate social responsibility andshareholder value? Instrumental stakeholder theory suggests a positive relationship betweencorporate social profitability and corporate financial profitability. According to this theory, thesatisfaction of key stakeholder groups is instrumental for organizational financial performance. Byaddressing and balancing the claims of multiple stakeholders’ managers can increase theefficiency of their organization’s adaptation to external demands. The assumption here is thatinstrumental strategic ethics generally equates or engenders wealth maximization. Additionally,according to Freeman, high corporate performance results not only from the separate satisfaction28 Wooseley, M. Forbes Q&A ‘Supercapitalism: Transforming Business, Democracy and Everyday Life’ Sept 6, 200729 Freeman, E (1984) Strategic management: A Stakeholder Approach30 Jensen, Michael.HBS working paper "Value Maximization, Stakeholder Theory, and the Corporate Objective Function,"31 Ibid 30 9
  11. 11. of bilateral relationships 32 but also from the simultaneous coordination and prioritization ofmultilateral stakeholder interests. These strategic and tactical steps may be necessary to reducethe likelihood of the organizations becoming stuck in a high-density network which can reducecorporate financial profitability in a number of ways.33 For example, in a high-density network,firms may become stuck in the role of compromiser or subordinate, depending on the degree ofthe firm’s network centrality.34 Either of these roles may lead to further consumption of valuablefirm resources such as time, labour, and capital.Evolution of the Consumer: People, Planet, ProfitOver the course of this century, the affordability and availability of consumer goods have greatlyincreased and given rise to new behaviors and new consumer attitudes. But are price, quality andend benefit the only purchase determinants or are there other drivers? In their book, Brand Spirit,How Cause Related Marketing Builds Brands, Hamish Pringle and Marjorie Thompson contendthat consumers are going beyond the practical issues of functional product performance orrational product benefit and further than the emotional and psychological aspect of brandpersonality and image.35 Consumers are moving towards the top of the Maslow Hierarchy ofNeeds and seeking self-actualization. Instead of just looking for product benefit, they are nowasking for and are compelled by demonstrations of good and ethical behaviour. They arequesting to identify, relate and be challenged by the brands they endorse. They want to share thesame values and work towards self-perfection.36 We can look towards NIKE who pioneered thefocus on self-actualization with their famous "Just Do It" tag line. Home Depot followed suit with"You can do it. We can help." 37 Starbucks also engaged it’s consumer with its mantra ‘RewardingEveryday Moments.’ These companies have transcended the product only relationship withcustomers. The aforementioned brand names have unequivocally demonstrated a belief in theircustomers abilities to reach higher, accomplish more and become the best person they can be.32 Orlitzky, Frank L. Schmidt, Sara L. Rynes. ‘Corporate social and financial performance: A meta-analysis OrganizationStudies’33 Rowley, T.J. 1997. ‘Moving beyond dyadic ties: A network theory of stakeholder influences’. Academy of ManagementReview34 Freeman, E (1984) Strategic management: A Stakeholder Approach35 Pringle, Hamish & Thomspon, Marjorie, Brand Spirit, How Cause Related Marketing Builds Brands, 200136 Ibid 3537 Hamish, Pringle, Thomspon. Brand Spirit, How Cause Related Marketing Builds Brands, 2001 10
  12. 12. So if consumers are moving towards the top of Maslow’s hierarchy, are corporations doing thesame? Frank Tuzzolino and Barry R. Armandi, provide a motivational theory of organizationalsocial response based on Maslows hierarchy of needs in their work A Need-HierarchyFramework for Assessing Corporate Social Responsibility.38 They suggest that a parallel existsbetween individual and organizational needs. This organizational-need hierarchy consists of: (a)physiological needs which are fulfilled by corporate profits; (b) safety needs which focus oncriteria such as dividend policy, payout ratio, integration, conglomeration, and competitiveposition; (c) affiliative needs which are manifested by the willingness to participate in tradeassociation, lobby groups, industry publications; and (d) internal and external self-actualizationneeds. The former pertains to employee relations and addresses such areas as job enrichment,compensation policy, and pension plans. External self-actualizations refers to community andgovernment relations as demonstrated by corporate philanthropy, affirmative action, pollutionabatement, and product reliability.39Acknowledging Stakeholder Power: Cooperation and CollaborationShould corporations be concerned with their social performance as much as their economicresults? And if so, why? According to an ASQ poll, 96% of business leaders think their companysCSR behavior will greatly impact the nation’s economic future, but more than 40% still do nothave any policy in place to guide their companys actions. These ASQ findings hyphenated withthe McKinsey Quarterly Global Survey of Business Executives, which polled more than 4,000executives from 116 countries in December 2005,40 shed new light on the importance of socialstrategic interest. While the January 2006 edition of the McKinsey Quarterly published the resultsof the global survey, the latest edition of the publication includes an in-depth analysis of thesurvey findings, entitled "When social issues become strategic".The McKinsey analysis maps out the social contract businesses must honor, extending it wellbeyond the traditional understanding of abiding by formal laws to encompass less formalstakeholder expectations and, increasingly, "frontier" expectations that are still developing.41The authors cite obesity as an example, where responsibility has shifted from individuals whochoose what to eat to companies that make or sell unhealthy foods, just as the debate aroundtobacco shifted from individual smokers to companies marketing of addictive products.Companies such as McDonald’s are now adding healthier menu options so as to combat thesocietal and ethical pressure bestowed on fast food companies. Should McDonalds want tomaintain its number one perennial ‘global brand’ standing, it will have to rigorously provide aconscientious product offering. 42“Business leaders must become involved in socio-political debate not only because theircompanies have so much to add but also because they have a strategic interest in doing so,"stated McKinsey analysts Sheila Bonini, Lenny Mendonca, and Jeremy Oppenheim.Subsequently they assert that “Social and political forces, after all, can alter an industrysstrategic landscape fundamentally; they can torpedo the reputations of businesses that havebeen caught unaware and are seen as being culpable; and they can create valuable marketopportunities by highlighting unmet social needs and new consumer preferences." 4338 Tuzzolino, Frank & Armandi, Barry R., A Need-Hierarchy Framework for Assessing Corporate Social Responsibility’39 Ibid 3840 th Baue. B, ‘Social Funds, April 4 2006, Analysis Advocates Strategic Approach to Corporate Social Responsibility’41 Ibid 4042 th Baue. B, ‘Social Funds, April 4 2006, Analysis Advocates Strategic Approach to Corporate Social Responsibility’43 Ibid 42 11
  13. 13. The McKinsey analysis takes a practical approach of acknowledging the reality of stakeholderpower instead of fighting it. Rather than denying it, Mckinsey analysts recommend acknowledgingit and working with it. They believe that it is beneficial to all parties to endeavour towards creatingshared value. The analysts assert”…we believe that the case for adopting a wholeheartedlystrategic approach to the socio-political agenda is threefold.” They continue to say, “First, theseforces can alter an industrys landscape in fundamental ways. Second, the immediate financialand longer-term reputational impact of social issues that backfire can be enormous,” citing theMonsanto genetically modified organism debacle and the Exxon Valdez oil spill. They finallyremark that “new product or market strategies can emerge from changing social and politicalforces." Think Toyota Prius.44 Toyata’s success speaks for itself; hybrid sales in 2006 doubling tocapture 3% of all the companys sales in Canada-which is nearly 6,000 vehicles.45 Furthermore,Toyota towers as a key example of a company which responded early to public concern aboutauto emissions. In turn they created the hybrid-engine Prius that significantly reduced pollutantsand gave Toyota and enviable lead over its rivals in hybrid technology.The McKinsey analysis also recommends something that may seem antithetical to competitivecapitalism: namely, collaboration and cooperation. It notes that Coca-Cola and PepsiCo haveexperienced success through a common approach of implementing policy prohibiting themarketing of their core carbonated soft drinks to children under 12.46 The analysts state that "as arule, companies should consider responding on their own if they think they can capture the first-mover advantage (as British Petroleum did in acknowledging the dangers of global warming), ifthey are a target, or if a collective approach is too difficult or costly. Collaboration can beattractive if the stakeholders regard all companies as equally culpable, if regulation is imposed onan entire industry, or if isolated, individual action would clearly destroy value." 4744 th Baue. B, ‘Social Funds, April 4 2006, Analysis Advocates Strategic Approach to Corporate Social Responsibility’45 CSR automotive, February 22, 2007, Report on Business46 th Baue. B, ‘Social Funds, April 4 2006, Analysis Advocates Strategic Approach to Corporate Social Responsibility’47 Ibid 46 12
  14. 14. FORTUNE Accountability: Beyond the Bottom LineRanking of the worlds largest companies by how well they conform to sociallyresponsible business practices 2006 2005 Accountability Global 500 Rank Rank Company score* Industry Rank Computers and 1 3 Vodafone 72 66 electronics 2 1 BP 71 Petroleum refining 4 3 2 Royal Dutch Shell 69 Petroleum refining 3 4 8 Électricité de France 61 Energy and utilities 68 5 15 Suez 58 Energy and utilities 96 Trading and 10 5 Carrefour 50 25 merchandise 11 9 Peugeot 50 Automotive 60 Computers and 14 28 General Electric 48 11 Electronics 17 18 Total 46 Petroleum refining 12 International Business Computers and 18 24 46 29 Machines electronics 19 56 Volkswagen 46 Automotive 17From the July 23, 2007 issue(Accountability ratings for 2007 will be published in November2007)Fortune Global 500 Revenues Profits Rank 2007 Company ($ millions) ($ millions) 1 Wal-Mart Stores 351,139.0 11,284.0 3 Royal Dutch Shell 318,845.0 25,442.0 4 BP 274,316.0 22,000.0 10 Total 168,356.7 14,764.7 11 General Electric 168,307.0 20,829.0 13
  15. 15. Business survival and profitability depends on changing socio-economic norms and the newmoral marketplace. Within this framework, different CSR activities are aimed at differentaudiences, but about one in every ten dollars of assets under management in the U.S-anestimated $2.3 trillion out of $24 trillion48 is being invested in companies that rate highly on somemeasure of social responsibility. This is a $2.3 trillion wager that socially responsible companieswill outperform companies that dont engage a wide array of stakeholders, from shareholders andcustomers to employees and activists, in an ongoing conversation about what can be donebetter.49Taken from the 2007 issue of Fortune: Accountability :Beyond the Bottom Line, the worldslargest companies were ranked according to how well they conform to socially responsiblebusiness practices. The survey conducted by AccountAbility (a London think tank on corporateaccountability) and CSR network (a British for-profit consultancy), measured 6 criteria, rangingfrom stakeholder engagement to performance management, at the top 50 companies onFortunes Global 500 list. Fourteen other large companies were included so that there were atleast ten in each of five industry sectors. 50Many of the highest-ranking companies were not conventionally considered do-gooders orphilanthropic corporations, but ultimately showed progressive CSR tactics to reinvent theirbusiness strategies. Oil giants BP and Shell assumed the No. 2 and No. 3 ranks respectively,however, the rankings did not measure performance outcomes such as CO2 emissions. It isimportant to note that four of the top ten on the list were utilities.51 The rankings’ barometerfocused on management practices: Does a company have procedures for listening to critics? Areits executives and board members accountable? Has it hired an external verifier? This is wherethe triple bottom line comes into play-where CSR measures align both corporate and publicexpectation and ultimately correlate both socially responsible practice and year end profitabilitymargins.52Much to the chagrin of those that espouse shareholder theory, the key motivation here is forbusinesses to look beyond economic performance for indicators of success. Corporate SocialResponsibility proponents define a company as socially responsible if it maximizes its “triplebottom line.” It encourages companies to maximize their economic, social and environmentalimpacts-something which shareholder fundamentalists would maintain deviates from the essentialrole of business.CEO’s are coming to the realization that CSR counts. This year the top-ranked company wasBritains Vodafone, the worlds largest mobile-phone operator, edging out last years leader, BP."What weve tried to do is embed CSR," 53 said Charlotte Grezo, the companys director forcorporate responsibility.54 There were four newcomers in the top ten this year - French watercompanies Suez (No. 5) and Veolia (No. 8), Italian utility Enel (No. 6), and British banking andinsurance company HBOS (No. 9). Both newcomers and those that fared well in the 2005rankings were those that progressively embraced strategic management systems and/or engagedwith a broader array of stakeholders.55The 2006 ratings penalized companies that failed to address non-financial issues at the core oftheir business. Conversely, Volkswagen climbed the rankings from No. 56 to No. 19 afterreleasing its first comprehensive CSR report. This clearly demonstrates that Corporate SocialResponsibility may be used as a means of differentiation in otherwise competitive environments.48 Demos, Telis, Beyond the Bottom Line. www.money.cnn.com, October 23,200649 Fortune Accountability Beyond the Bottom Line. www.money.cnn.com, July 23, 200750 Demos, Telis, Beyond the Bottom Line. www.money.cnn.com, October 23,200651 Ibid 5052 Demos, Telis, Beyond the Bottom Line. www.money.cnn.com, October 23,200653 Ibid 5254 Ibid 5355 Demos, Telis, Beyond the Bottom Line. www.money.cnn.com, October 23,2006 14
  16. 16. At No. 52, Home Depot also made strong gains; doubling its score, in part due to the company’spublication of a Web report on the non-financial impacts of its business, such as how the wood itsells affects forests in North America and the Amazon.56General Electric (GE) is a prime example of a company that has effectively managed keystakeholder relationships and boasted significant financial gains as evidenced in the company’sNo. 11 ranking in Fortune 500 (2007), No. 14 in Socially Responsible Ranking and No. 4 amongMost Valuable Global Brands of 2006.57 GE’s success can be attributed to the socially andenvironmentally conscious business stratagems the company has embarked on. Most notably, its‘Ecomagination’ technology has offered a new approach to solving customers’ toughestenvironmental challenges. Put into practice, GE’s belief that financial and environmentalperformance can work together to drive company growth.Criticized by CSR campaigners in the past for unethical business practices, McDonald’s nowseems to tower as example of a corporation that has integrated social demand into its businessobjectives and been rewarded with a healthy return on shareholder equity. ”The most importantthing is to listen to our customers,” stated spokesperson Walt Riker. 58 The turnaround plan,which from 2003, focused on customers demand in-turn lead to the company’s stock soaring toan all time high above $55 since it announced its largest-ever dividend increase. McDonald’spromised to return $15 billion to $17 billion to shareholders through dividends and share buybackby the end of 2009.Corporate Social Responsibility, Business Profitability and Increased CustomerSatisfactionCorporate Social Responsibility is contingent on various factors, namely: cost of social responserelative to the firms resources, firms culture, values of management, and rewards a firm expectsto receive from the social segment it serves. Business and investment communities have longdebated whether there is a real connection between socially responsible business practices andpositive financial rewards. There is a growing body of data, both quantitative and qualitative, thatdemonstrate the bottom line benefits of socially responsible corporate performance. In the lastdecade an increasing number of studies have been conducted to examine this link. These studiesgenerally fall into two camps: those analyses that argue companies should pursue CSR initiativesbecause they are the moral thing to do and those that argue companies should pursue CSRinitiatives because they will enhance profits. The former, upheld by stakeholder theorists, arefounded on the premise that without proper pressure companies will not act in a sociallyresponsible manner. The claim here is that managers overemphasize the pursuit of profits whileoverlooking the benefits of Corporate Social Responsibility.Onside with those that maintain that CSR will enhance profitability is Janet Blake, Head of GlobalCSR at British Telecom (BT). Recently interviewed in Green Business News, Blake explains “thatthere is a strong financial return on CSR (BT estimates that about £2.2bn revenue per year is tiedto CSR), not to mention an improvement in customer satisfaction - BT estimates that for every10% rise in customer awareness of CSR, there is a related 1% increase in customersatisfaction.59 Deductively, there in turn must be a correlation between customer satisfaction,return on customer and profitability.A study by the Centre for Social Markets found that “there was a CSR premium (i.e. an additionbenefit because of Corporate Social Responsibility earned by firms or appreciated by consumersand other stakeholders) that could be earned by firms on such items as product quality, employee56 Demos, Telis, Beyond the Bottom Line. www.money.cnn.com, October 23,200657 Business Week 2006 ‘Innovation Metrics The top 100 Brands’58 st Carpenter, David. ‘How McDonald’s Got Cooking’, Associated Press September 21 , 200759 www.green.itweek.co.uk/2006 15
  17. 17. productivity, consumer satisfaction.”60 Therein the additional CSR costs could well be cancelledout by consumers accepting to pay for this additional premium or through prices being positivelyaffected by the additional efficiency that CSR was likely to bring about. The Centre maintainedthat “evidence for this positive CSR premium is growing. How big this premium is likely to be is amatter for further research although visionary CSR companies can have a premium of at least 5%over non visionary companies”61Furthermore, over 100 empirical studies published between 1972 and 2000 have examined therelationship between companies’ socially responsible conduct and financial performance. In thesestudies, the majority of results (68%) point to a positive relationship between corporate socialperformance and financial performance. The London Business School confirms these findingsand has identified 80 studies on CSR, of which 42 demonstrated a positive impact, 19 found nolink, and 15 produced mixed results and only 4 showed a negative impact.62To give some examples of the studies: • Companies with a public commitment to ethics performed better on 3 out 4 financial measures than those without. These companies also had 18% higher profits on average. (Source: Institute of Business Ethics, 2003) • A study of “stakeholder superstars” (including Coca Cola, Procter and Gamble, Johnson & Johnson) showed that companies who consistently tried to take into account its stakeholders opinions outperformed the S&P 500 by more than twice the average over the past 15 years. Total shareholder return was 43% over the past 15 years, while the total shareholder return from the S&P 500 was 19% • This result was confirmed by Harvard University, who that found stakeholder-balanced companies’ showed four times the growth rate and eight times the employment growth when compared to companies that are shareholder-only focused (Harvard University, 2000). • Other research show that corporations with a public commitment to relying on their ethics code outperformed firms that did not by two to three times (Business and Society Review, 1999)63Overall wealth maximization is achieved through strategic stakeholder relationships. Manyexperts even argue that a company’s commitment to social responsibility improves its financialperformance by attracting more investment. For examples, 9 of the 15 largest social funds are inthe top quartile of investment categories based on a three-year performance.64 In addition, astudy by the University of Southwestern Louisiana titled, "The Effect of Published Reports ofUnethical Conduct on Stock Prices,” showed that publicity about unethical corporate behaviorlowered stock prices for a minimum of six months.65 The latter findings highlight the relationshipbetween stock, share market performance and corporate reputation rankings. Said resultsconfirmed that based on total equity return, firms of higher reputation outperform lowly rankedfirms. .60 th Laffer, A. ‘Does CSR enhance business profitability?’ November 19 , 200461 Ibid 5862 www.crseurope.org63 Ibid 6064 www.csreurope.org65 Journal of Business Ethics Volume 15, Number 12 / December, 1996 16
  18. 18. Increased Customer Interest and CSRIn 1960, Theodore Levitt, wrote "Marketing Myopia," one of the most widely-quoted and reprintedHarvard Business Review articles. The article warned of the dangers from firms shortsightedlyfocusing on their products and, in doing so, overlooking the needs of their customers.66 Levittinsisted that the organization must learn to think of itself not as producing goods or services, butas buying customers; as doing the things that will make people want to do business with it.Although a functional fundamentalist that viewed CSR as immaterial, Levitt’s article seems to callinto play customer needs which now, forty years later, are entrenched in ethically mindedpurchasing. While businesses must first satisfy customer’s key buying criteria-such as price,quality, availability, safety and convenience, studies have shown a growing desire to buy or notbuy because of other values-based criteria such as ‘sweatshop-free‘ and ‘child-labour free’clothing, lower environmental impact and absence of genetically modified materials oringredients. (i.e. Body Shop).I draw attention to a body of evidence that suggests that the ethical conduct of companies exertsa growing influence on the purchasing decisions of customers. On December 5, 2006 GolinHarrisrevealed results of its fourth national survey, ‘Corporate Citizenship Gets Down to Business:Doing Well by Doing Good 2006.’ The survey found that Americans were sending a clearmessage to Corporate America: ‘Do more, be authentic and the business rewards will follow.’67An overwhelming two-thirds of Americans interviewed said: • “Doing well by doing good” is a savvy business strategy. Good corporate citizenship should be approached as an investment, asset and competitive advantage for business that contributes to the companys success.” (67%) • “Business should invest significantly more money, time, attention and resources in corporate citizenship than it does today.” (68%) • “Corporate citizenship should be considered an essential, high priority compared to other priorities companies face and manage in running a profitable, competitive and successful business.”68 (68%)A loyal customer is the equivalent of repeat business and the possibility of increased profitmargins. The strength of the business-consumer relationship is only as good as the level ofsatisfaction it generates. In a recent study by Cone Inc. and AMP Insights, (2007) more than onein five consumers reported having either rewarded or punished companies based on theirperceived social performance.69 The following, outlines the repercussions of both responsestowards companies. While support of social issues improved trust in a company, Cone’s researchalso showed that Americans stood ready to act against companies that behaved illegally orunethically. Although the effects of such actions may have not hurt the company in the short term,the consequences for business could be devastating in the long-term.70Those surveyedresponded that they would react in a variety of ways if they were to find out about a company’snegative practices:71 • Consider switching to another company’s products or services (90%) • Speak out against that company among my family and friends (81%) • Consider selling my investment in that company’s stock (80%) • Refuse to invest in that company’s stock (80%) • Refuse to work at that company (75%)66 Levitt,T. ‘Marketing Myopia.’Harvard Business Review, 200667 , GolinHarris News Release December 5, 200668 Ibid 4669 Cone press Release 200470 Ibid 6971 Cone Press Release 2004 17
  19. 19. • Boycott that company’s products or services (73%) • Be less loyal to my job at that company (67%)72So, responsible business can make for loyal customers, improved morale and higher productivityamong employees. In turn, companies should have an interest in strengthening their socialresponsibility with associations and consumers. Companies need to be cognizant that any actionsthat violate societal expectations could very well damage, even destroy, brand image amongnetworked stakeholders. Precariously balancing the interests of various groups is paramount tosafeguarding a company’s image.A recent study by the Reputation Institute found that companies which demonstrated: innovation,vision, social responsibility and appealed to emotions while simultaneously posting strongfinancial results, had the best corporate reputations. For its eighth annual rankings, ReputationInstitute surveyed more than 60,000 people online in 29 countries – participants could only voteon companies based in the country where they live – and used the result to determine acompanys reputation. Consumers were polled on seven factors that contribute to a firmsreputation: products and services, innovation, workplace, governance, citizenship, leadership andperformance.73 The results ultimately proved that good deeds, lead to good reputations. CharlesFombrun, Executive Director of the Reputation Institute said that “companies that gave to socialcauses did well in the survey.” 74 According to Fombrun, Ikea and Lego were “two companiesthat (had) taken responsibility for the development of their region and country and (were) seen asnational icons. They have earned their trust, respect and admiration from behaving in ways thatare relevant to their key stakeholders and that’s why they’re rated tops by the public.”75Integrating CSR in business strategy has not only had a social impact, but, as reported in 2007,led Lego to report a 3% rise in pretax profit.7672 Ibid 7173 www.forbes.com/leadership/2007/05/22/reputation-institute-rankings74 Ibid 7375 http://reputationinstitute.com (Press Release May 2007)76 Reuters August 29th, 2007 18
  20. 20. Return on Customer and Total Shareholder ReturnUltimately, both short term and long term company profit are generated from the one businessasset that matters most: customers. So it’s imperative that companies’ align their businessobjectives with the increasing social consciousness demands that consumers place on them.Peppers and Rogers, who defined and launched the global CRM movement, have devisedReturn on Customer (ROC) formula for measuring the rate at which overall enterprise value iscreated by customers. This formula is consumer centric-defining the customer as the primaryprofit and value driver of the business.According to Don Peppers and Martha Rogers, a customer can create value for a business in twovery important ways: by increasing the company’s current-period cash flows and by increasing itsfuture cash flows. 77 For instance, as stated previously in the section on reputation, if a customerhas a bad experience with a company and becomes less inclined to do business with it in thefuture, the firm loses value at that very instant with the customer’s change of mind. This companywould lose real value-in the same way as share price would lose current value when future profitsare threatened.In their work, Return on Customer: Creating Maximum Value From your Scarcest Resource,Rogers and Peppers explode the notion that “maximizing the value created from a givencustomer over time, most likely occurs when the company’s value to that customer is maximizedand the customers who get the most value are those who have come to trust the firm. So tomaximize Return on Customer (ROC) a firm must earn trust.”78 The two authors maintain thatmost customer relationship management ROI-oriented business cases focus too much on thenear term, counting only direct "hard" benefits and ignoring the more important "soft" benefits thatrelate to customer satisfaction, retention and lifetime value optimization. Their ROC modelfocuses on the softer benefits especially maximizing customer lifetime value.79 Peppers andRogers believe that "Customers are the only reason you build factories, hire employees, schedulemeetings, lay fiber-optic lines, or engage in any business activity. Without customers, you donthave a business."80 Therefore attracting and retaining customers should both be regarded ascritical processes.To model a very simple example of unintended value destruction Rogers and Peppers consider acompany that has a million customers, each with a 1% likelihood of responding to a direct mailsales offer.81 Let us assume that each solicitation costs $1 to send out and each positive77 Peppers, Don & Rogers, Martha, Return on Customer: Creating Maximum Value From your Scarcest Resource78 Ibid 7779 Peppers &Rogers, Martha, Return on Customer: Creating Maximum Value From your Scarcest Resource80 Ibid 7981 Peppers, Don &,Rogers, Martha(2005), Return on Customer: Creating Maximum Value From your Scarcest Resource, 19
  21. 21. response generates $125 in cash flow.82 Thus, with the first campaign the company spends $1million on solicitations and generates $1.25 million in cash flow for a $250,000 profit.83 The firmcan effect up to six solicitations a year and each campaign pulls a 1% response from thecustomer base. As Table 1 illustrates below, these customers represent $6 million for the firm.The firm’s Return on Customer remains constant in subsequent years because it continues togenerate a steady 1% productivity rate on its customers year to year.84This begs the question, what if after six unsuccessful solicitations each year; the customers wereto become less likely to take the company’s offer during the next year?85 The company builds intothe model a .05% annual decline in response rate, accounted for by increased speculation aboutthe brand and its corporate affiliation. If the decline were actually .05% annually then the firmwould be destroying about a quarter of its customer equity-more customer equity than it wasreaping profit.86 The result: a negative ROC in the first year as shown in Table 2 which thenaccelerated downwards as the company continues to decrease the value of its customer base.82 Ibid 8183 Peppers & Rogers.Return on Customer: Creating Maximum Value From your Scarcest Resource84 Ibid 8385 Peppers & Rogers, Return on Customer: Creating Maximum Value From your Scarcest Resource86 Ibid 85 20
  22. 22. An examination of Table 2 reveals a direct relationship between the decreasing rates ofprofitability and the declining customer response rates. While the company may assume it iscreating value, in actuality customer equity is declining each year by an amount exceeding theyear’s profit; with an end result of total value created each year being negative. As a result, thecompany’s return on customer is negative and while it might think it has a profit to report, it isactually eating its own customer base. Year 4 is the very last year that the company will generateany current-period profit as it will have completely destroyed the productivity of its customer base.To compliment the Rogers and Peppers theory, research conducted by Bain Consulting Groupand Harvard Business School in August of 2005, showed that the longer a customer is a with acompany, the greater the annual profit generated from that customer. These increased profitscame from a combination of increased purchases, cost savings, referrals and a price premium.87This research implies that companies should not be near-sighted and simply look at market shareor short term profitability as would people such as Friedman. Rather they should base theirmarketing programs on the following basic tenets: Firstly, to quickly assess which new customershave the greatest potential to become high-value, long-term customers. Secondly, to rewardexisting high-value, loyal customers with preferential treatment in order to retain a higherpercentage of said customers.88ConclusionIn the end, what benefit does return on customer bring to overall shareholder return? When wetalk about Total Shareholder return, we define it as an investment term that refers to the overallreturn a shareholder earns from owning a company’s stock over some period of time. It is theeconomic value of a business broken down into customer specific units.89 This definition is basedon what a shareholder’s actual cash flow would be if he were to buy the stocks at the beginning ofthe period and sell it at the end. All value is created by any company’s business operation mustcome from its customers at some point. 90 Therefore, if the discounted cash flow value of anoperating business is created entirely by customers, the result is that its discounted cash flow iscomposed of a whole of individual lifetime values. All the firm’s current and future customerlifetime values added together (its customer equity) will equal its total discounted cash flow.Beyond the bottom line, businesses need to balance economic, legal, and social responsibilitiesin order to achieve long term success. Firms that are seen as acting illegitimately are likely to87 Cutler, Andy.(2005) ‘The need for Customer Centric Marketing’88 Ibid 8789 Peppers & Rogers,Return on Customer: Creating Maximum Value From your Scarcest Resource90 Ibid 89 21
  23. 23. face difficult relations with employees, governments, communities, and consumers – which allhave direct impacts on the top and bottom lines. When examining whether or not business couldprosper from strategic Corporate Social Responsibility it is pivotal to see it’s overall businessbenefits – lowering and limiting litigation, sizably reducing taxes, protecting and enhancing brandimage, improving customer satisfaction and retention, reducing employee turnover, reducingoperating cost, increasing both reputation and sales and increasing customer loyalty. Byintegrating a stakeholder perspective which accounts for various consumer needs (i.e. ones ofself actualization), management is best placed to optimize shareholder returns over the longerterm and create overall value maximization-both for the consumer and the corporation. 22
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