Let's begin by thinking from the standpoint of an investor.
If you were looking to invest in a company, what is your top priority? For most people, it is to make a decent return on your money.
However, are there other things that you might consider when you are looking to invest in a company? Would you care what the company produces? Would you care how the company produces?
Now, any company has specific duties or responsibilities to its investors. Obviously, their biggest fiduciary duty is to get them the highest return possible, but they are supposed to do so with care, loyalty, and full disclosure.
Generally, the focus has been on generating strong investment returns, because that is what most investors care about, and they can see that in a quarterly earnings performance.
However, this could also imply that companies have some social responsibilities, which will be the focus of this tutorial.
Most investors are looking for companies with successful management teams. They look to leaders of the company to drive profits and make wise decisions.
However, some investors today are also concerned with investing in socially responsible firms.
EXAMPLEFor instance, some funds contain an index of only companies who follow high environmental, social, and governance standards.
CSR is corporate social responsibility. Typically, it is stated in reference to a corporate social responsibility report, where an entity is providing detail specific to its social or philanthropic, environmental, and financial activities.
Corporate social responsibility encompasses the idea that firms may sometimes voluntarily take measures to do "good things" instead of simply making all decisions based on financial gain.
Being socially responsible can take several different forms:
Philanthropy is corporate giving or financial contribution in support of charitable causes.
Sometimes companies actually give back to the community directly and other times they set up foundations or endowments.
EXAMPLESome examples of corporate philanthropy include:
Now, how could this be controversial? Well, although most firms donate at least some money to charity, there is disagreement over this kind of corporate philanthropy.
Some people feel very strongly that companies are actually obligated to help their communities where they do business. These people even suggest that by "giving back," companies can increase their profitability by improving their image and making people want to do business with them.
However, other people who criticize corporate philanthropy feel that it goes against doing the right thing for shareholders, or their fiduciary duty, as it can increase cost and cut into profits.
They also claim that it only serves the interests of management instead of the shareholders, as the shareholders are not choosing the companies receiving the donations.
Corporate governance is how a company or entity oversees its operational and financial processes. It has oversight of operating strategy, risk management, and capital allocation, among other items.
It is usually managed through a board of directors on behalf of stakeholders.
Corporate governance involves how decisions in the company are made, referring to the processes, rules, and procedures for company operations.
It is a way that companies can monitor their actions, policies, and decisions so that the interests of all stakeholders involved are being protected.
Traditionally, governance did not refer to anything surrounding corporate social responsibility. Instead, it referred to areas of the company like finance and audit.
However, many companies are now incorporating other things into corporate governance, like sustainability.
CSR reporting already involves companies disclosing their pollutants, energy and water usage.
However, now the CSR reporting goes beyond that, as companies are creating actual sustainability committees. This highlights the growing importance of including sustainable practices when a company is considering their overall decisions and overall operations.
Finally, let's look at environmental management, which is the management of natural resources and activities that may impact the environment. It is a method of ensuring the least harm to the environment or environmental stewardship.
It is definitely important to measure the environmental costs of production at the production site itself. However, for a firm to be concerned about sustainability, they need to go beyond that and consider the entire production process.
Much of this process occurs before and after what takes place on site, which refers to the supply chain, or singular inputs within a production or operation--in other words, all of those little steps along the way.
While it can certainly help to just look at the production site, to be effective firms must incorporate sustainable practices along their entire supply chain.
Some frameworks have been developed to look at and evaluate sustainability in this holistic manner, including:
Let's circle back to investors for a minute. Socially responsible investing, or SRI, is growing in popularity. It combines the goals of financial return and social good for companies.
SRI encourages practices that promote environmental protection, consumer protection, human rights, diversity.
It focuses on assessing costs and benefits to society holistically, which is the main idea for those people who are interested in socially responsible investing.
CSR looks at corporate practices from financial, economic, sustainability, and environmental perspectives; it is much more holistic.
Many investors, though, are still primarily concerned with profitability, so many companies are wary of incorporating these ideas too much if it means increasing costs.
At least in the United States, corporate social responsibility is happening, but most often it is removed from discussions happening in the company involving marketing, brand management, or corporate communications.
Therefore, keep in mind that while CSR is certainly increasing in popularity, it has a long way to go in many people's opinion, especially in the United States.
Source: Adapted from Sophia instructor Kate Eskra.