Social responsibility of businesses questioned

Feb 28, 2012

When the Icelandic banking system was privatised in 2003, it inaugurated a period of furious expansion of both loans and risky investments. The bubble burst in 2008. At that time, the nominal assets of the three largest banks was 14 times bigger than Iceland's entire GDP.

The crash shook Icelandic society to its foundations with mass , drastic increases in , loss of savings, increased indebtedness and raised taxes. Deteriorating health care and emigration of highly educated people are other that will affect Iceland for a long time to come.

At the same time, the banks emphasized their social responsibility for . During their brief heyday, they invested in sponsoring a number of sporting and cultural events – everything from opera and concerts to marathons, and even a chess club.

This is a type of positive social commitment that creates goodwill for companies and actually goes hand in hand with their PR strategies, argues David Sigurthorsson, doctoral student in Applied Ethics at Linköping University and himself an Icelander. His analysis has been published in an article in the Journal of Business Ethics.

He demonstrates the confusion reigning around what CSR – corporate – actually means. Most of the good that companies do can be put here. CSR can, however, be roughly divided into positive and negative obligations. The negative ones amount to refraining from harmful behaviour, for example production that destroys the environment, and violations of human rights. In the case of the banks, it would have been managing depositors' money responsibly.

The positive obligations are supporting social activities in society. They are more visible, and can be more easily combined with the company's own PR operations. Negative obligations deal with how the company makes its profit; the positive are how a portion of that is spent.

Companies often prefer the positive commitments over the negative, and they gladly invest in a type of corporate philanthropy, Sigurthorsson argues. This applies to the three Icelandic banks as well, all of which emphasized the importance of social commitments in their ethical programmes. Both Landsbanki and Glitnir Bank wrote that sponsorship is important, and Kaupthing indicated charitable activities, education, culture, and sport as sectors to support.

Small investments here yielded large dividends. Sigurthorsson compares the significantly larger sums the banks spent on their guests – and fishing and sporting trips, as well as gifts, for them. Kaupthing, for example, spent over ISK 580 million (EUR 3.5 million) on its guests between 2004 and 2008, compared with ISK 107 million (EUR 656,000) on external sponsorship.

At the same time the banks sponsored a number of events, they managed socially harmful – and in certain cases criminal – operations with their aggressive loan and investment policies. Sigurthorsson asks himself whether the trust the banks built up actually became an obstacle to stronger regulation and supervision of their operations.

False trust was created, both with the public and politicians; they felt the were being responsible. This reduced the demand for transparency, and the pressure for harder legislation.

The contents of CSR should be better defined and tied to responsible operations – the things associated with negative obligations, he concludes.

This is one of the many lessons we should learn from the Icelandic banking crisis, he adds as a final remark.

Explore further: Moving to the 'burbs is bad for business: Study reveals a surprising truth about location

add to favorites email to friend print save as pdf

Related Stories

Corporate social responsibility: less profit, more value

Feb 07, 2008

Companies that operate in a socially responsible manner 'pay' for this with a loss in financial profit. Yet at the same time, socially responsible business practices can enhance a company's value. Dutch economist Lammertjan ...

Don't privatize banks too soon

Jan 28, 2010

The research, led by Professor Panicos Demetriades of the University of Leicester, suggests that privatising government owned banks without having an effective system of regulation in place can result in a collapse of depositors' ...

Bailed-out banks issued riskier loans

Sep 15, 2011

Banks that received federal bailout money ended up approving riskier loans and shifting capital toward risky investments after getting government help, say University of Michigan researchers.

Banks have difficulty adapting in crisis: study

May 18, 2011

(PhysOrg.com) -- Can the financial sector regulate itself? A study carried out by EPFL’s Swiss Finance Institute, involving 350 American institutions, shows that those that perform poorly in times of ...

Recommended for you

'Patent trolls' jeopardize innovation, study finds

12 hours ago

(Phys.org) —New research co-authored by a Naveen Jindal School of Management accounting professor suggests that companies that don't manufacture goods or products but sue companies that do threaten innovation and economic ...

Sustainability reporting falling short

13 hours ago

Once on the fringe of institutional investors' considerations, reporting on environmental, social and governance related issues is now common practice among major listed companies.

Marcellus drilling boom may have led to too many hotel rooms

Sep 18, 2014

Drilling in Pennsylvania's Marcellus Shale region led to a rapid increase in both the number of hotels and hotel industry jobs, but Penn State researchers report that the faltering occupancy rate may signal that there are ...

Entrepreneurs aren't overconfident gamblers

Sep 17, 2014

Leaving one's job to become an entrepreneur is inarguably risky. But it may not be the fear of risk that makes entrepreneurs more determined to succeed. A new study finds entrepreneurs are also concerned about what they might ...

User comments : 0