What are the limitations of CSR?

Introduction

Despite its growth and popularity in the past years, corporate social responsibility has severe limitations and challenges, profoundly affecting its ability to reduce the negative social and environmental impacts corporations generate as they pursue their financial bottom line.[1]One of the most controversial CSR issues today is that it’s making the business case for corporate virtue. Although most of the research has found a significant positive relationship between responsible corporate behavior and its financial performance, conflicting outcomes do exist.

However, it is undeniable that corporate entities’ responsible practices beyond legal requirements are becoming an unprecedented global movement. For instance: growing numbers of social and ethical investment funds by companies, adoption of codes of conduct and certified accountability systems, and voluntary submission of the social and environmental report of firms.[2] But the question remains, whether this trend of adopting CSR practices is supported by real corporate benefits to the companies and social and environmental benefits to the communities?

There is an underlying assumption that CSR is an ambiguous concept in terms of different things to different people and has trade-offs. Meaning, that CSR implementation not only differs among companies, but the same company can show inconsistent behaviours across different countries or among its stakeholder groups. The reason being, MNCs are often exerted more pressure to act responsibly because of their visibility, power and influence over their surrounding communities. This trend results in an unstable situation with big visible corporations behaving more responsibly, and the majority of invisible firms maintain their usual and haphazard business practices. These irresponsible business practices from the majority bring more harm to the environment and society, which the minority companies following CSR practices. This is the most significant limitation of CSR. Now, let’s understand more of them in detail, as discussed below:

Key Issues in CSR

Clash in Business objectives

The primary objective of all organizations while conducting their business is its profitability. So, they aim to create a variety of goods and services for their customers, bringing them profit. However, when the companies have to follow the CSR norms and regulations in their business operations, their decision to create a variety of products and services for the customers becomes more restrictive. The CSR norms require the companies to maintain a balance between the organization’s considerations and the public’s interest. It may lead to a clash between the two’s interests, which brings loss for the organizations.

For example, an ‘X’ company wants to purchase land to set up its business plant, but it is situated in a residential area. Although setting up this plant will increase the production and profits for the company, but at the same, the company has the social responsibility to take care of the interest of the concerned community. This entails the clash in the business objectives.

Additional bureaucracy along with rising costs for observance

The primary and foremost disadvantage of corporate social responsibility is the costs incurred in its observance, which is burdensome on small businesses. Whilst, big corporations can afford the budget allocation for CSR, the small businesses suffer out of the extra cost involved. There arises the need to incur special costs for implementing an alternate business operation mode than the usual, which is quite burdensome on small businesses. Another type of cost involved is the cost incurred from the training of employees, formulation of dedicated programs and rule for the upliftment of the society and ensuring the environment safety. All these measures increase the corporations’ overall expenditure for its observance of CSR practices.

Impact on Reputation of the Corporate

These days, corporate uses practices that appear on the face of it very ethical and responsible but are not. This is the concept of green-washing in the world of corporate. In terms of CSR limitations, these companies adopt practices that appear socially and environmentally responsible, but there is no change in the way they carelessly conduct their business.  It’s a fact that CSR activities, if followed quietly, will reap negligible benefits and will deteriorate the interests of communities and the environment. However, if a corporation conducts its CSR activities in a public place, it is open to more significant customer’s scrutiny. Therefore, if there is a mistake of any hint of irresponsible behavior from the company’s side, it is bound to face the public’s wrath, eventually hurting its reputation.[3]

Further, when an organization functions in an ethical and socially responsible manner, they are bound to express the shortcomings in their operations and products in their CSR report, available to the public. Since they are bound to share such information, they become susceptible to a negative impact on their brand image in the market, meaning in all probability, the companies are subject to more harm than good.

Competitive Disadvantage

CSR practice can prove harmful for corporations in the long run. As companies have to accommodate CSR practices in their operations necessarily, it can increase production costs and other ancillary costs and pressure. It has a cascading effect on the company’s stakeholders and customers who have to bear this corporate mechanism’s brunt. With the increase in production cost, there will increase in the products’ prices, which will make the customers less inclined to purchase products from such a company. Therefore, CSR practices in the company’s operation can lead to a disadvantageous position and extra pressure for the companies who follow it.[4]

Limitations of CSR

There are several challenges and limitations of CSR that researchers have found. Undoubtedly, some criticisms are aligned with the concept of CSR that leads to disadvantages for some companies over others. Many researchers consider CSR not helping disadvantaged firms like small and micro businesses, but it is used to get higher profits. Below are some of the main limitations of CSR that creates doubt on its effectiveness:

Lack of concrete clarity on the CSR concept

CSR is not the coherent, homogenous concept that it is often presented as being. One of the main concerns is that the term CSR has become so broad that people interpret it differently and adapt it for different purposes. This vagueness of the concept restricts its effectiveness both as an analytical tool and as a guide for decision-makers.[5] That’s the reason CSR is interpreted in different ways by different people. For example, CSR practices are a different thing for practitioners to implement in the company and to researchers trying to establish it as a structured discipline; it can also mean different to NGOs and corporate entities. These differences in the CSR mechanism implementation can cause frustration, especially for managers who require a clear and concise concept.

The CSR concept’s malleability points out two extreme views: a narrow conception of CSR, which is more corporatist orientation, and an expansive view. The malleability of the concept makes it difficult for the researchers to operationalize a particular definition to reveal when a corporation is or is not socially, environmentally, ethically responsible, or acting according to society’s conflicting norms.[6]

Limitations of Social Reporting and Social Auditing

In India and many countries worldwide, the importance of social responsibility and reporting is being recognized by many corporations. However, the progress and performance of this social reporting and auditing are hindered due to the below-outlined reasons[7]:

1. Not Mandated disclosure: Indeed, disclosure of social responsibility information is not mandatory for India’s private sector units. On the other hand, in public sector units, the ‘order for social overheads schedule’ doesn’t fulfil the social audit requirements.
2. Lack of Standard Format: there is a lack of well-established concepts, postulates, conventions, and axioms to guide and govern the social accountants in drafting their reporting and audit.
3. No clear cut definition of social reporting: Since in India we don’t have a settled definition and procedure for social reporting, every enterprise tends to follow different methods for measuring, reporting, and evaluating social responsibility behaviour.
4. No cadre of social auditors: There is often the case that the company’s general operations auditors are doing social auditing for the firm. There is no separate cadre of social auditors in many companies, and even if there are some, it’s not clear how the social auditing has to be conducted.
5. Auditing social cost and benefit is an intricate function: It is highly doubtful if accountancy scholars alone can perform the tedious task of identifying and documentation of social effects of business activities and audit the social costs and benefits.
6. Lack of objectivity: The collection of data information, evaluation of accuracy, and objectivity on social reporting are complex.

Firms manipulating society and stakeholders for their own benefit

One of CSR’s significant limitations is that big firms manipulate society and stakeholders (consumers) for their benefit. The traditional belief is that since corporations operate in a society and comprehensive environment, they are mandated to follow the social, environmental, ethical, and legal norms of that society and contribute to the fulfilment and expansion of those norms. Although the viewpoint sounds noble in theory, it is little more than a motherhood statement.

The CSR concept is difficult, if not impossible, to operationalize, and it is noteworthy that firms don’t operate in the desired way continuously. It is supposed that ethical consumer, one of the stakeholders of companies, will drive the social and environmental change. Still, they are honestly concerned about the price, taste, or sell-by date than ethics. There has been no such socially responsible change in the behaviour of ethical consumers.[8] Corporations have direct and indirect political, legislature, and judiciary influence; in-fact political lobbying as a corporate strategy has more than 200-year history.[9] Resultantly, corporations skew societal and environmental standards to their own needs and profit.

Conclusion

Radical corporate social responsibility (RCSR) should be adopted for genuine CSR to overcome CSR’s limitations. It is clear that CSR has significant benefits for the society and environment, but its diluted concept, as discussed above, is overshadowing its significance with its challenges and constraints. Hence, there is a dire need to adopt a more radical approach to conducting CSR practices in a corporate entity. RCSR for that purpose is inclusive, more radical transparency in which the stakeholder and general public have greater transparent confidence in how the firm conducts its objectives and vision. There should be a genuine commitment of companies to CSR, a better and sustainable allocation of resources, and evaluation and correction of companies’ operation on the society and environment.

References:

[1] Ivan Hilliard, The Limitations of Corporate Social Responsibility (CSR): A Philosophy at Odds with Its Surrounding, (2019), pp.1-25. Last assessed Jan 24th 2021, at

[2] Perrini, F. (2007). Academy of Management Perspectives, 21(3), 107-109. Retrieved January 24, 2021, from http://www.jstor.org/stable/27747402.

[3] CSR Reasons, Practices and Impact to Corporate Reputation, (2015) available at,

[4] Hency Thacker, What are the disadvantages of CSR, (2020) last assessed Jan 24th 2021, at https://thecsrjournal.in/what-are-the-disadvantages-of-csr/.

[5] Blowfield, M. & Frynas, J.G. (2005). Setting new agendas: critical perspectives on Corporate Social Responsibility in the developing world. International Affairs 81, 3, 499-513.

[6] Devinney, T. (2009). Is the Socially Responsible Corporation a Myth? The Good, the Bad, and the Ugly of Corporate Social Responsibility. Academy of Management Perspectives, May 2009, Vol. 23, No. 2.

[7] Swatishree R., Corporate Social Responsibility, last assessed Jan 24th 2021, at

[8] Doane, D. (2005). The Myth of CSR: The Problem with Assuming That Companies Can Do Well While Also Doing Good is That Markets Don’t Really Work That Way. Stanford Social innovation Review.

[9] Banerjee, S. B. (2007). Corporate Social Responsibility: The good, the bad and the ugly. Cheltenham, England: Edward Elgar.