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CommentaryUnmasking corporate social responsibility: The hidden motives behind CSR reporting

Unmasking corporate social responsibility: The hidden motives behind CSR reporting

Corporate social responsibility (CSR) refers to the wide range of actions companies take to address stakeholder interests. While corporations may pursue profit maximization as a top goal, they must also consider stakeholder desires to remain viable long-term. In addition to profits, companies should focus on community needs, employee welfare and environmental stewardship through their CSR programs and strategies.

Compelling research links CSR engagement to improved legitimacy and financial performance. Firms integrating CSR into core operations tend to do well financially. However, CSR initiatives and reporting are not always aimed at ensuring sustainability or boosting returns. Some companies may “greenwash,” using CSR communication to portray a rosier picture than reality warrants. Managers also occasionally pursue CSR for self-interested reasons unrelated to stakeholders.

Experts often reference “Potemkin villages” when analyzing motives behind questionable CSR. The term originates from an 18th century story where a prince, Potemkin, hastily constructed fake settlements to impress his ruler visiting land he was developing. The tale revolves around Prince Potemkin, who, tasked with settling people in a specific area, sought to impress Empress Catherine II by constructing fake settlements to hide the town’s dilapidated conditions.Today it refers to elaborate facades masking an undesirable truth.

Two areas where managers may leverage CSR for private gain rather than public good are earnings management and greenwashing. On earnings management, scholars Lars Moratis and Max van Egmond argue managers signal robust CSR to distract from poor financial statements, hoping stakeholders focus on CSR over earnings quality.

Earnings information becomes distorted when managers, leveraging their superior knowledge and control over a company’s operations and financial reporting system, manipulate earnings to meet predetermined goals. Managers who distort earnings information to pursue private benefits may be motivated to engage more in CSR activities as a means to divert attention and manipulate shareholders’ information needs.

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Another area where CSR reporting can propagate false narratives is greenwashing, which pertains to the environmental aspect of CSR reporting.The practice of “greenwashing” – promoting environmental friendliness through inflated or unsubstantiated claims was coined in the 1980s after a hotel guest noticed towels were only replaced to save water, not the planet.Jay Westerveld encountered a card urging guests to reuse towels to help conserve water, but suspected that the hotel’s primary motive was cost-saving rather than environmental preservation.

Greenwashing sees companies aggressively but deceptively communicate “green” qualities to court undeserved legitimacy.

Ultimately, CSR reporting should be honest communication of real engagements and impacts, not cover for operational issues. Misusing such reports to conceal operational shortcomings can lead to detrimental consequences, such as the “boomerang effect” witnessed by some major corporations. Facades aimed at diverting from on-the-ground realities risk unintended consequences upon discovery. Authentic sustainability outweighs momentary swaying of attention.

Moreover, such malpractices can mislead investors who rely on CSR reports to make investment decisions. While short-term gains may arise, misleading investors or stakeholders usually backfires over the long-run through lost credibility.

Companies must refrain from creating a facade that lacks substance and cannot be substantiated by real actions. To secure true legitimacy within their environments, companies must walk their talk through substance matching stakeholder perception of CSR commitments and communications. The credibility and verifiability of CSR messages regarding environmental engagement and products are crucial.

Effective CSR disclosure occurs when the substance of the message aligns with stakeholders’ perceptions. Firms can only secure legitimacy by adhering to the values and norms of the environment in which they operate. Therefore, companies should prioritize transparency and ensure that their CSR efforts are genuine, credible, and aligned with stakeholders’ expectations.

ByAsegid Getachew (PhD)

(Asegid Getachew (PhD) is an Assistant Professor of Corporate Finance at Hawassa University.)

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