Business Risks in the Context of Social Responsibility
Rather than a comprehensive analysis this essay serves as a necessary theoretical background compressed into a few pages helping the reader to acquire a general understanding of the topic. Social responsibility meaning Prior to examination of business risks associated with social responsibility it would be useful to define the term itself in order to provide the reader with the initial insight Into the topic. Harvard university study materials (2008) offer the following deflnltlon: “Corporate social responsibility encompasses not only what companies do with their profits, but also how they make them.
It goes beyond philanthropy and compliance and addresses how companies manage their economic, social, and environmental Impacts, as well as their relationships in all key spheres of Influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm. ” Server businessdictionary. com (2013) provides following shortened definition in comparison: “Social responsibility is the obligation of an organisation ‘ s management ‘OF5 responsibility background Academics of Vlerick Business School (2013) claim that globalisation and other factors are confronting businesses with new risks and new challenges.
Corporate scandals, culture differences and the growing interest in environmental issues are putting pressure on organisations to adopt a responsible role in society
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CSR) because it does give them some cachet with the press and customers. However, there are certain risks associated with this philosophy and concept of CSR which have to be taken into account. The emergence of social risks Risk management function undoubtedly has changed since the time when the notion of social responsibility became the important success factor for many companies. T. Bekefi, B. Jenkins and B. Kytle (2006) state that traditional risk management programs focus on operational and compliance risks. However, these days, companies are facing a relatively new type of risks in addition.
Those are so called social risks. Server sriportfolio. com (2013) defines social risks as follows: “Social Risk arises when organisational behaviour or the actions of others in its operating environment create vulnerabilities, which stakeholders might identify and apply pressure on in order for it to change its behaviour”. Social risks have had an eminent impact on business operations in recent years therefore the integration of social risk management function into the overall risk management function seems to be an inevitable step for most companies in order to stay protected against possible threats. According to B.
Kytle and J. G. Ruggie (2005) it was a significant shift in market power – not Just to customers and traditional investors but also, and more importantly, toward stakeholders: communities, employees, regulators, politicians, suppliers, non- governmental organisations and even the media which caused the emergence of social risks. Nowadays, social risk is a rising area of concern for most businesses. Obviously some industries are more sensitive to social pressure than the others. F. Hawthorne (2013) classifies clothing, autos, food, and architecture sectors among those which are most likely to be affected by social risks.
Common social risks M. Shtender-Auerbach (2009) described in his article various social risks concerning businesses. He argues that financial crisis of 2008 brought among other things enormous threat of social risks. He suggests that ability to manage social risks have had a reasonable impact on the quality of a healing process while searching for the remedy of crisis consequences. Most importantly he highlighted ten most common areas where social risks may arise. These are including following: 1. Human Rights 2. Rule of Law 3. Corruption 4. Security 5. Land 6.
Environment 8. Indigenous Rights 9. Working Conditions 10. Supply Chain One of the many companies that recognised the rising need for socially responsible operations during the crisis was the BHP Billiton, company dealing with the discovery, acquisition, development and marketing of natural resources. In response to the newly established trend the firm set certain policy requirements addressing social responsibility risks related to their business. These zero tolerance requirements are the subject of compliance for company itself and for its suppliers as well.
They involve following categories: child labour, forced or compulsory labour, inhumane reatment of employees, living wage, workplace health and safety, freedom of association, World Heritage Sites and IIJCN protected areas, biofuels, corruption, bribery and extortion, compliance with laws and non-discrimination. (BHP Billition CSR policy requirements, 2010) Social risk components In order to understand the notion of social risks properly it would be useful to highlight its particular components which are forming it.
For this purpose I present the following exhibit taken from J. Nelson (2006) which clearly points to four elementary components characterising the foundation of social risk phenomenon. Figure Social Risk Components D. G. Cogan (2003) says that from a company’s perspective, social risk occurs when an empowered stakeholder takes up a social issue area and applies pressure on a corporation (exploiting a vulnerability in the earnings drivers – e. g. reputation, corporate image) so that company will change policies or approaches in the marketplace.
This additional definition helps to recognise above mentioned components by including them both directly and indirectly inside the explanation in their basic sense. Social Risk Management Social risks nowadays pose several threats to various businesses. Failure to treat social risks seriously usually lead to an occurrence of adverse consequences including brand and reputation damage, heightened regulatory pressure, legal action, consumer boycotts or operational stoppages. Such disability critically endangers shareholder value then. B. Kytle, J. G.
Ruggie (2005) remind that social risk management strategies can be extremely complex undertakings that must account for and balance numerous conditions, perspectives and variables across the business enterprise. However, successful adoption of such function undoubtedly brings more benefits than shortcomings in the end. T. Bekefi, B. Jenkins and B. Kytle (2006) provide a comprehensive view on the issue of social risk management implementation. However, their findings may be briefly summarised into the following five points describing the essence of social risk management as they concluded: 1.
An integrated management approach is needed to address social risks. 2. Clearly defined roles and responsibilities, from headquarters to local levels, are essential to timely and integrated responses to social risks. 3. Existing protocols may not be suited to the issue-stakeholder combination that characterise social risk nd can yield unanticipated or undesirable results. 4. Focused appropriately, Corporate culture and leadership are important determinants in whether managers will look beyond traditional risks to anticipate risks from “non-traditional” sources such as local stakeholders.
Conclusion This brief excursion into the issue of business risks related to social responsibility pointed out some general knowledge describing basic theoretical foundation of the topic based on the research of relevant topic-related materials published by renowned authors in the field. Definitions of social responsibility or social risks lightly differ according to different authors however the essence is very similar and all authors conclusively agree that the need to manage business risks arising from social responsibility is vital in today’s business environment.
It is not only the recent “fashion” trend to be socially responsible which is driving the change in business approach but most of all it is the shift towards stakeholder focus which is the primary reason causing the placement of social awareness so high on company agendas. Managers are recognising benefits of such approach. However, the recognition of ossible risks associated with this philosophy proved to be the real challenge for strategy makers. Social risks appeared to be significant area of interest for many businesses in recent years.
Social and environmental issues have become important source of strategic risks. I examined areas which proved to be very likely main originator of social risk emergence. Among those most common belong human rights, environmental changes, public health or working conditions. However, the sensitivity to particular social risks varies according to different countries, industries, religions or even corporate structures. Social risk itself comprises of four interrelated components: an issue, a stakeholder or group of stakeholders, a negative perception about the company, and the means to do the damage.
Simply, social risk occurs when a person or group of people who have an interest or concern in business (stakeholders) express their irritation caused by some unacceptable business operations against social or environmental norms (issue) and using different means (Internet, word of mouth… ) they create a negative perception about the company. The rise of social risks in recent years was enormous therefore the adoption of social isk management seems to be a crucial step for most businesses.