A2 Sample Answer: Corporate Social Responsibility

CHAN CHICKEN FARM [9707/31/M/J/15, Q4]
Discuss the importance to CCF of corproate social responsibility when aiming to maximise shareholder value. (16 marks)

Consider the comment that was made in the examiner's report for this question.

"Many candidates started well with a definition or explanation of corporate social responsibility and went on to give examples of this. Occasionally a contrast was made between the stakeholder concept and the shareholder view of business. However, many responses simply quoted passages from the case study without adding to them. These answers tended to just describe the problems that CCF faced from its approach of cutting costs. Many answers wrongly conflated CSR with observing legal or regulatory constraints. Most answers contained a general assumption that CCF should consider CSR without giving supporting reasons making effective links to profit, increasing dividends and the value of shares. Only the better answers gave detailed reasons why CSR should be considered. Very few candidates looked at the concept of shareholder value – an integral part of what the question required. The better responses gave commercial reasons for considering CSR and made links between some of the problems faced by CCF and the consequent potential impact on shareholder value. Good evaluation often contrasted the short term cost of CSR with the long term benefits."

GRADE A ANSWER
Corporate social responsibility is understood as how businesses works to fulfill the triple bottomline.  These profit-making organisations do not only function to create economic wealth to benefit the financial interest of their economic masters (i.e. the shareholders) but also work to promote the community interest in addition to preserve and protect welfare of the natural environment.  However, such responsibility does not cover external stakeholders but should also include the consideration of looking after the welfare of the internal stakeholders namely the employees where these people are part of the community.

We must appreciate that corporate social responsibility has the potential to maximise shareholder value in terms helping the company to earn more profit and thereby can provide more dividend payout.  Furthermore, through CSR, the reputation of the company can be build and this subsequently can help increase the share capital value.

Unfortunately, as we see in case study, it appears that CCF has ignored or abandoned its CSR in pursuit of cost reduction.  For example, the reduction in training would be a probable cause of poor quality control leading to the production of products that are harmful upon consumption.  This is highlighted in line 19-20 where consumers suffer from food poisining. Such incidence will negative affect the reputation of the company.  This can result in customers losing confidence of CCF's brand and refuse to purchase.  As such, CCF will experience lower sales turnover and be incapable to provide shareholder higher dividend.  Moreover, as the reputation is spoiled share capital value will drop.

Furthermore, the act of CCF in putting its chicken in confined spaces may be perceived by others as animal abuse.  This can be problematic when animal activisit highlight such practice which can invite backlash from the community and result in customers boycotting CCF's products.

Another issue to consider is where CCF failed to appreciate how employees are social creature.  By abandoning teamwork, those employees may experience isolation and this may result in them experience some psychological problems and also low motivation.  Such outcome will have a negative impact on the performance output leading to poor quality of products being generated.  Again, as stated in earlier paragraph, this can result in lower sales and poor reputation which will diminish shareholder value.

The act of reducing wage rates may lead to CCF to be perceived as not being socially responsible.  This is because for the sake of reducing cost in hope to get higher profits, it ignore the economic needs of the employees who want to receive adequate earning especially if the economic environment is undergoing inflation.  The basic needs of the employees may not be fulfilled leading to lower motivation which may be the cause of lower productivity (stated in line 15).  Perhaps, the employees, seeing how CCF is not being considerate of their welfare, they may react and retaliate by not providing their dedication to their work.

As we can look at the above analysis, we can safely conclude that corporate social responsibility is indeed very important and has the potential to maximise shareholder value in the long term by promoting employee motivation, building a more positive reputation, and instill confidence in the customers to encourage more sales.  Eventually, the act of doing good to the other stakeholders can help CCF to increase the dividend and share capital which are the economic return of the shareholders.