Responsibilty In The Banking Sector In Mauritius

Published Date: 02 Nov 2017

Chapter 1: Introduction

2: Overview of banking industry

3: Literature Review

4: Methodology

5: Analysis and findings

6: Conclusion

Presented by: Groodoyal Ourvashee Devi

Bsc Finance Year 3

Email add: [email protected]

CHAPTER 3: LITERATURE REVIEW

3.1 Corporate Social Responsibility

3.1.1 Meaning of CSR

3.1.2 Definition of CSR by Different School of Thoughts

3.2 Social Responsibility Model

3.3 Evolution of CSR

3.4 Corporate Social Responsibility Internationally

3.5 CSR in the Banking sector

3.6Arguments For and Against CSR

3.1 Corporate Social Responsibility (CSR)

3.1.1 Meaning of Corporate Social Responsibility

Corporate social responsibility stands for business contribution to sustainable development and covers company’s active participation in different fields, human rights, human resources, relations with clients, suppliers, and other stakeholders, corporate governance, environment and contribution to community. The concept of social responsibility states that a private corporation has responsibilities to society that extends beyond making profit. It enables all such activities ranging from providing safe products and service to give a portion of company’s profit to welfare organization.

CSR means conducting business in an ethical way and in the interests of the wider community, responding positively to emerging societal priorities and expectations, willingness to act ahead of regulatory confrontation, balancing shareholder interests against the interests of the wider community and being a good citizen in the community.

Corporate social responsibility may also be referred to as corporate citizenship and can involve incurring short-term costs that do not offer an immediate financial benefit to the company, but rather promote positive social and environmental change. With CSR being adopted by many as the means of ensuring values based corporate governance, the quality community now has the opportunity and responsibility to take leadership in encouraging ethical business practices and driving CSR to regain consumer confidence.

3.1.2 Definition of CSR by Different School of Thoughts

Since the 1950’s there has been much debates concerning the exact definition of CSR. In fact since Bowen wrote a book on "Social Responsibilities of the Businessman", there have been various authors, academics and scholars who undertook extensive research in this field. Subsequently, while different approach and theory has been defined, there has been no exact agreement on the definition of corporate social responsibility. (Elisabet Garriga & Domènec Melé, 2004).

The World Business Council for Sustainable Development (WBCSB) defines CSR as: "The continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large".

According to Cannon (1994), there is a specific relationship between the organisation and the community "whether implicit or explicit there is a contract between business and the community that it operates. Business is expected to create wealth, supply markets, generate employment ...and produce sufficient surplus to improve competitiveness, whilst contributing to the maintenance of the community. The interdependence between society and business cannot and should not be understated" (Cannon, T. 1994:32).

As reported by Carroll, (1979; 2008, 500) CSR is "the social responsibility of business encompasses the economic, legal, ethical and discretionary expectations that a society has of organizations at a given point in time." On the other hand European Commission stated that CSR is "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis."

Mallenbaker articulated that "CSR is about how companies manage the business processes to

produce an overall positive impact on society."

Michael Hopkins defined: ’’CSR is about treating all stakeholders responsibly or ethically.’’ In other words:

Corporate Social Responsibility is concerned with treating the stakeholders of a company or institution ethically or in a responsible manner. ‘Ethically or responsible' means treating key stakeholders in a manner deemed acceptable according to international norms.

Social includes economic and environmental responsibility. Stakeholders exist both within a firm and outside.

The wider aim of social responsibility is to create higher and higher standards of living, while preserving the profitability of the corporation or the integrity of the institution, for peoples both within and outside these entities. (Original Source: Michael Hopkins (MHCi): A Planetary Bargain: Corporate Social Responsibility Comes of Age (Macmillan, UK,1998) Updated by author January 2008)

Bowen (1953) provided a preliminary definition of CSR: "it refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society". Alas and Tafel (2008) described that research about corporate social responsibility could be categorized into three categories: structural research (van Marrewijk, 2003; Wilenius, 2005), normative research (Gatewood & Carroll, 1981) and developmental research (Carroll, 1991; Schwartz & Carroll, 2003). CSR can be discerned in these three words, ‘‘Maximizing returns to shareholders’’ (Zenisek, 1979).

Ferrell et al. (2002) have illustrated CSR ‘‘as an organization’s obligation to maximize its positive impact on stakeholders and to minimize its negative impact, whereas business ethics comprises principles and standards that guide behavior in the world of business’’ (as cited in Rolland and Bazzoni, 2009). Thorne et al. (2008) has defined CSR ‘‘as the adoption by a business of a strategic focus for fulfilling the economic, legal, ethical and philanthropic responsibilities expected by its stakeholders’’.

3.2 Social Responsibility Model

In 1991, Carroll (1991) first presented his CSR model as a pyramid which is a four-part social responsibility model clarifying distinction in various responsibilities of businesses as

shown below:

Source :(http://lcbackerblog.blogspot.com/2011/01/harmonizing-transnational-corporate.html)

The various responsibilities are explained below:

Philanthropy Responsibilities

Philanthropy encompasses those corporate actions that are in response to society’s expectation that businesses be good corporate citizens. This involves actively engaging in acts or programs to promote human welfare or goodwill. Examples of philanthropy include business contributions to financial resources or executive time, such as contributions to the arts, education, or the community.

Ethical Responsibilities

Ethical responsibilities consist of those standards, norms, or expectations that reflect a concern for what consumers, employees, shareholders, and the community regard as fair, just, or in keeping with the respect or protection of stakeholders' moral rights. For instance, firms should not impose social costs like unnecessary pollution or unknowingly produce harmful products.

Legal Responsibilities

Society has not only sanctioned businesses to function according to the profit motive but at the same time they are expected to comply with the laws and regulations as the ground rules under which they must operate. A business must comply with various federal, state, and local regulations and need to be a law-abiding corporate citizen and a successful firm defined as one that fulfills its legal obligations.

Economic Responsibilities

A first level of responsibility of all businesses is the long-run efficient and effective combination of resources so as to generate goods and services that society needs and wants to sell them profitably. Economic responsibility is necessary as it allows businesses to operate consistently and to maintain a strong competitive position along with a high level of operating efficiency.

In the light of these four responsibilities, business social responsibility is denoted as a hierarchy of obligations for the firm to fulfill its economic obligations, abide by the laws of the land, behave ethically and finally voluntarily assume the obligation to tackle some of the problems of society at large. Thus the astute modern manager must acknowledge that business entities have social responsibilities and that one of many management tasks is to develop strategies to enable the enterprise to achieve economic objectives within the constraints of legal requirements, while giving due regard to the ethical implications of the firm’s actions and assuming an appropriate share of responsibility for discretionary quality-of-life concerns when the firm is capable of making a useful contribution. Source: (SK Bhatia, Dr Abad Ahmad, Business Ethics and Managerial Values)

3.3 Evolution of CSR

CSR concepts have been applied for years through quality and have proven their practicality and profitability, while emphasizing sustainable performance through valuing people and society. The evolution of CSR as a concept dates back to the 1950’s when the first stirrings of social conscience among management practitioners and theorists were felt. The writings of Keith Davis starting in the 1950’s and continuing into the 1970’s speak of the need for businesses to engage in socially responsible behavior and to ensure that society as a whole does not lose out in the process of profit making behavior by businesses. CSR as a concept was starting to be taken seriously by the time the 1970’s dawned and through the tumultuous decade when big business and their minions were accused of several misdemeanors pertaining to rampant disregard for the environment and society as a whole.

One can trace the anxieties of activists and management theorists during this time as they feared that the rapacious behavior of businesses and corporations ought to be checked if a semblance of social responsibility was to be maintained. Of course, both sides started to stick to their positions and this resulted in the debate over CSR getting shriller during the 1980’sThe concept of CSR has a long and varied history. The 1970s saw the first widely accepted definition of CSR emerge – Archie Carroll’s CSR pyramid- as well as the first CSR code, the Sullivan Principles. The 1980s brought the application of quality management to occupational health and safety and the introduction of CSR codes like Responsible Care.

In the 1990s, CSR was institutionalised with standards like ISO 14001 and SA 8000, guidelines like GRI and corporate governance codes like Cadbury and King. A recent International Journal of Management Reviews paper argues that conceptualizations of and research on CSR have evolved along two avenues (Lee 2008):

In terms of the level of analysis, researchers have moved from a discussion of the macro social effects to an organizational-level analysis of CSR and its impact on organizational processes and performance.

In terms of the theoretical orientation of this field, researchers have shifted from explicitly normative and ethics-oriented arguments to implicitly normative and performance-oriented managerial studies.

In the eighteenth century the great economist and philosopher Adam Smith expressed the classical economic model of business. In essence, this model suggested that the needs and desires of society could best be met by the unfettered interaction of individuals and organizations in the marketplace. By acting in a self-interested manner, individuals would produce and deliver the goods and services that would earn them a profit, but also meet the needs of others. The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for free-market economies in the twenty-first century.

In the century after Adam Smith, the Industrial Revolution contributed to radical change, especially in Europe and the United States. Many of the principles espoused by Smith were borne out as the introduction of new technologies allowed for more efficient production of goods and services. Millions of people obtained jobs that paid more than they had ever made before and the standard of living greatly improved. Large organizations developed and acquired great power, and their founders and owners became some of the richest and most powerful men in the world.

In the In the late nineteenth century many of these individuals believed in and practiced a philosophy that came to be called "Social Darwinism," which, in simple form, is the idea that the principles of natural selection and survival of the fittest are applicable to business and social policy. Indeed, at the same time that many of the great tycoons were giving away millions of dollars of their own money, the companies that made them rich were practicing business methods that, by today's standards at least, were exploitative of workers.

Around the beginning of the twentieth century a backlash against the large corporations began to gain momentum. Big business was criticized as being too powerful and for practicing antisocial and anticompetitive practices. Laws and regulations were enacted to rein in the large corporations and to protect employees, consumers, and society at large. An associated movement sometimes called the "social gospel," advocated greater attention to the working class and the poor. The labor movement also called for greater social responsiveness on the part of business.

3.4 Corporate Social Responsibility Internationally

It is essential to glance of what is happening in other countries to be able to understand well the issue of CSR and thus can allow us to compare with the local context.

United States

A survey carried out by KPMG (1996) indicates that 20% of the very large companies that include environmental costs in their financial statements are mostly US companies involved in chemical, oil and gas industries.

United Kingdom

In 2001, the collapse of Enron in the UK, once a paragon of CSR, showed just how deeply a corporation’s claims of social responsibility can differ from the reality. The UK government went down a similar line with the Operating Financial Review (OFR), in which all stock market listed companies would be required by law to produce a yearly review of their business operations and future developments and risks. This was to include information on environmental matters, employees and social and community issues, though the content of that reporting would be entirely at the company's discretion.

South Africa

In the case of South Africa, recent increases in the quantity and quality of CSR reporting may be explained by a number of socio- political factors. The advent of the first Socially Responsible

Investment (SRI) Index is an emerging market, the Johannesburg Stock Exchange (JSE)

Securities Exchange’s SRI Index, have increased the level of transparency and accountability required from companies operating in South Africa. (Drawn from the Global Initiative

Guidelines for environmental Reporting), (Burritt, R.L (1997) Corporate environmental performance Indicators), (Greene Management International v17 (Spring) p 89-100

India

In India although Corporate Responsibility reporting is not mandatory, a small but sizeable number of both subsidiaries of multinationals and local companies in, for example the steel, automotive and entertainment industries are publishing Corporate Responsibility Reports mostly based on GRI guidelines focusing more on community Initiatives, rather than governance, risk and disclosure.

France

Economic Regulations (New Economic Regulations Law Art. 116) adopted in France in 2001 required listed companies to include detailed social and environmental information in their annual reports. The CSR reporting consists of 40 indicators such as social information, community issue, labour standards, and environmental consequences of operations of the company.

3.5 CSR In The Banking Sector

The banking sector focuses primarily on profits in the financial area, while corporate social

responsibility takes a broad overview of the needs of society in general and how the banking

sector serves those needs. Many difficulties arise from combining corporate social responsibility

and banking. CSR takes the position that a corporation's obligation to shareholders cannot take

precedence over the responsibility to society in general. Raising money for charity is a good

thing, but doing so doesn't negate maintaining good stewardship in other areas. CSR in banking,

in some ways, brought about the economic downturn of 2008. In an effort to ensure everyone

lived the American dream of owning his own home, banks and mortgage lenders engaged in

risky lending practices that sent shock waves throughout the world.

A socially responsible bank needs to address a variety of issues, including environmental sustainability and refraining from conducting business with companies and individuals not socially conscious. A socially responsible bank would place the needs of its customers and the needs of society over the needs of its shareholders. In the short term, such a bank might lose a great deal of support from shareholders, but the positive publicity generated by behaving responsibly might offset some or all of the losses.

Taking deposits, granting loans and providing complementary services are the core business of banks. No matter what kinds of countries, what kinds of culture, and what kinds of banking products and investors, banks need to be responsible for their customers in a social responsible way.

CSR is influenced by how businesses align their values and behavior with the expectations and needs of stakeholders – not just customers and investors, but also employees, suppliers, communities, regulators, special interest groups and society as a whole. CSR is generally understood to be the way a company attains a balance or integration of economic, environmental, and social imperatives while at the same time addressing shareholder and stakeholder expectations, with the understanding that businesses play a key role on job and wealth creation in society. CSR has become a prominent topic in the both business and academic press.

Financial institutions, such as banks, do not produce hazardous chemicals or discharge toxic pollutants into the air, land or water and thus apparently they might be viewed as uninvolved with environmental issues (Cowton and Thompson, 2000). But through their financing practices they are supporting commercial activity that ultimately degrades the natural environment (Smith, 1993). They act as facilitators by supplying the fund to support the production process which ultimately causes environmental degradation (Sarokin and Schulkin, 1991). Thus banks should admit the responsibility of indirect involvement in environmental damages and recognize their environmental responsibility, which is a part of their CSR, to strike a balance between economic and social goals to encourage the efficient use of resources. It is not just philanthropy and obeying the laws, rather an attempt to ensure their own sustainability and profitability (Wanless, 1995).

Involvement in environmental degradation will not only invite public criticism and negative customer reaction, but also might make regulations more stringent which can impair the bank profitability by curbing market for the products of their customers. Also lenders can even be held responsible for their clients’ environmental impacts. Thus banks have strong prudential reasons for trying to avoid lending in ways that expose them to environmental risk and have clear incentive to incorporating environmental criteria into the lending decision making process.

Mcllroy (2008) brought up the need of risk management in banking industries after the sub-prime crisis with a proposal of the following three reforms; requiring banks to retain a proportion of any loan that they originate, insisting transparency of risks in financial products; and holding of capital for less pro-cyclical situation. "Banks are regulated because of the possibility of systematic risks. Systematic risk is not and never will be a purely theoretical possibility."(Mcllroy, 2008)

Besides, the importance of internal audit has to been emphasized, especially in banking industries. Coetzee and Fourie (2010) mentioned that internal audit had been perceived positively. They indicated that internal audit should focus on strategic, operational and business risks in addition to financial and compliance risks as 80% of loss in external shareholders‟ value in Fortune 500 companies could be linked to the first set of risks. Senior management and those of the chairpersons of the audit committees expect an increase in internal auditing involvement in risk-related issues. Coetzee and Fourie (2010) also highlighted that risk assessment had to be performed annually under the requirement of industries.

Barac, Plant and Motubatse (2010) quoted a survey conducted by Institute of Internal Auditors (IIA) on five value-adding attributes for IAFs. They were: organizational alignment, extensive staff expertise, challenging work environment, risk assessment of the audit universe; and an array of audit services. Furthermore, Barac, Plant and Motubatse (2010) shared the idea of Dittenhofer (2001) in the aspect of making a smooth internal audit process. They were: interaction with organization, internal restructuring, creation of new services and methods, and using technology.

All in all, CSR in banking industries comprises the following elements: risk assessment, effective and efficient internal audit process with value added to stakeholders. Hence, in order to maintain competitiveness in the market and responsible to customers, bankers need to understand the economic situation, re-focus marketing strategy with prudent risk management system, identify the concerns of customers, implement fair operation procedures to protect customers and the community as a whole.

Baron (2001) asserts that companies compete for socially responsible customers by explicitly linking their social contribution to product sales. A good example of such strategic CSR was Ben and Jerry’s commitment to donate 7.5% of its pre-tax profit to social causes.

In a similar vein, McWilliams and Siegel (2001) outlined a simple theoretical model in which two firms sell identical goods, except that one company decides to add an additional "social" attribute or feature to its product. This social feature is valued by some consumers or, potentially, by other stakeholders. In this theory of the firm-based model, managers conduct a cost/benefit analysis to determine the level of resources to devote to CSR activities/attributes. Simply put, firms simultaneously assess the demand for CSR and the cost of satisfying this demand and then determine the optimal level of CSR to provide.

A key implication of a theory of the firm/strategic perspective on CSR is that this activity is likely to be matrixed into the company’s business-level differentiation strategies. For example, a "hybrid" version of a Honda Accord generates less pollution than a standard Honda Accord. Most consumers will consider the hybrid car to be superior to the standard model.

Other papers (Baron (2001), Fedderson & Gilligan, (2001)) provide additional insights on the strategic implications of CSR, especially the role of asymmetric information. While some CSR attributes are easily observed, it is sometimes difficult for consumers and other stakeholder to assess a firm’s social performance. The level of asymmetric information regarding internal operations can be mediated by the firm itself or by activists. For instance, companies such as McDonalds, Motorola, and Nike publish annual reports on social responsibility. One can view this activity as a form of advertising, especially for more general types of CSR. While such reports may be useful, some consumers perceive this information as biased, since it is filtered through senior management.

It is also possible that the form of CSR is tailored to the type of experience good the firm sells. Thus, some firms may find it advantageous to engage in a more publicly visible type of CSR. Such "public" CSR might entail generous charitable contributions, avoiding layoffs, or adopting 'green' purchasing policies, actions that are likely to attract public attention and signal social responsibility. For example, some potential customers of a bank (classified here as selling an experience service) may be more concerned about the organization’s charitable donations to specific causes in the local community or its family-friendly employment policies than with attributes of service quality or honesty.

The notion of a consumer demand for CSR is based on the idea that buyers believe that a reliable and honest firm will produce better products. In the minds of some consumers, CSR is viewed as a signal of such honesty and reliability. Thus, CSR is a form of product differentiation--a form of advertising to establish or sustain brand loyalty. The producer of a search good such as food or furniture might choose CSR, e.g., to use pesticide-free ingredients or pledge not to use old-growth wood. In this case, the consumer might prefer the product simply because of a desire to support the environment or some other cause, rather than using.

Idowu and Towler (2004) brought up the importance of "care" of organizations to the people and environment that they operate in. They mentioned that CSR reports are required in addition to traditional financial reports. They claimed organizations should make positive contribution to the society. This is the way to demonstrate that they do care people and environment in their operating environment. Hence, different kinds of CSR reporting systems emerge under this idea. Examples are ISO 14001 – Environmental Management System, SA 8000 system, and reports showing directors‟ contribution to CSR and charities.

3.6 Arguments For and Against CSR

There are strong arguments on both sides of the debate about business’ social responsibilities.

This is better explained by the table below:

Corporate social responsibility Debate

Arguments for CSR

Argument against CSR

Balances corporate power with

responsibility

Lowers economics efficiency and profit

Discourages government regulation

Imposes unequal costs among competitors

Promotes long-term profits for business

Imposes hidden costs passed on to stakeholders

Responds to changing stakeholders’

demands

Requires social skills business may lack

Corrects social problems caused by

business

Places responsibility on business rather than

individuals

Source Business and society, Corporate Strategy, Public Policy, Ethics authors James Weber