Islamic Banking gif
ported on the business case for CSR. Some of the recognised benefits for adopting CSR as a management strategy are argued to in- clude:
• improved corporate reputation from the media, government, investors, commu- nity, employees, clients; • better management of long term risks by protecting the business from being involved in irresponsible social and en- vironmental scandals and avoiding gov- ernment regulations; • build up in credibility and trust which assist in hiring and retaining staff and increasing employee satisfaction; • stimulation of learning and innovation as companies identify new market op- portunities and improve their business processes to maintain competitive- ness; • improved market positioning and long term profitability.
Over the last decade, investments towards CSR initiatives have been growing in re- sponse to a combination of forces, such as market forces, government involvements and social regulations. For instance, the growing consumer demand for ‘ethical’ products has led to the rise in the fair trade and ethical trade movements. The growth in investor pressure for the integration of en- vironmental, social, and governance (ESG) criteria in investment selection can also be emphasised here. This has encouraged the setting up of socially responsible investment (SRI) funds which have especially taken off in the USA and the UK.
This growth in consumer demand can per- haps be explained by the rise in demand for ethics at both the institutional and individual levels as a result of increased occurrences of issues like bribery, corruption, money laundering and terrorist financing. Worthing- ton et. al. noted the growing stakeholder de- mands for CSR and social reporting in the light of a series of corporate scandals and environmental preoccupations.
These scandals entail both legal and moral risks–whether through adverse consequenc- es of non-compliance with the law or reputa- tional damage–which corporations seek to mitigate through CSR compliance.
The increased involvement of government in promoting CSR is relevant to the case of the UK where the government has made domestic and global CSR policies one of its priorities. It has appointed a cabinet minis- ter to coordinate CSR policies since 2000. It has also amended a number of regulations requiring the disclosure of ESG factors in in- vestment decisions, for instance:
• Amendment of the 1995 Pension Act and enactment of the SRI Pensions Dis- closure Regulation in July 2000, requir- ing trustees of occupational pension schemes to state their policy regard- ing the extent to which ESG factors are taken into account in their investment strategies. • Enactment of the Charity Trustee Act 2000 in February 2001, requiring char- ity trustees to ensure that investments are “suitable” financially and ethically and are in line with the charities’ aims and purposes. • Enactment of the Companies Act 2006 requiring all large companies to pre- pare a Business Review as part of the director’s annual report and quoted companies to also disclose information on environmental, employee, social and community matters.
As a result of growing government initia- tives, therefore, the institutionalisation of CSR policies in the UK is increasingly taking the form of a voluntary, yet explicit business strategy. The business policy on social re- sponsibility in such a case is taken as part of the wealth creation process and viewed as a means to increase the competitiveness of the business and the value to society. This is the general view adopted by the European approach to CSR.
This compares with the case of the Ameri- can model where CSR policies are not pro- moted at a governmental level but left to be determined by market values. The prevailing belief is that market forces will reward the ethically-conscious and penalise the cor- rupted, hence coercing corporations to act
responsibly. Government regulation is in- stead commonly regarded as ‘interference with private liberty’. In the Americal model, CSR is also driven by a strong culture of indi- vidualism where decision making on ethical issues is perceived to be the responsibility of every individual rather than being the State’s responsibility. The key actor in the develop- ment of CSR policies is therefore viewed to be the corporation, with CSR guidelines being developed in the form of corporate codes of ethics and internal compliance pro- grammes at the individual firm level.
According to Baker, CSR practice in the American model is not taken as an integral part of the core business but viewed as a pe- ripheral and implicit policy of the business. CSR in such a case is mostly viewed as an extra activity–a voluntary philanthropic exer- cise-and not internalised as part of business policy.
CSR AND ITS RELEVANCE TO FINANCIAL INSTITUTIONS Financial institutions are above all consid- ered legally operated businesses with an economic purpose. Regarded as profit max- imisers, they are evidently not taken to be charities. Nonetheless, their involvement with the public instils upon them their own set of ethical and philanthropic responsi- bilities. Therefore, Carroll’s four-part defini- tion of CSR is believed to be applicable to financial institutions. The four-part area of influence of CSR namely–responsible business practices, consumer responsibil- ity, sustainable enterprise, and community involvement–are also deemed relevant to their operations.
2012 April Global Islamic Finance 47
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