Facing tighter financial constraints than their large counterparts, SMEs often find it difficult to undertake CSR initiatives. Makoya Kageyama argues, though, that smaller companies may be in a better position to reap tangible benefits from socially responsible practices and shows there has been a deepening understanding of CSR’s significance among SMEs.

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Small and medium-sized enterprises account for 99% of all business entities in the advanced industrial world. The importance of SMEs to the real economy is immense, particularly in outlying areas, where they often play a critical role in the life of the community. Finding ways to inject vitality into small businesses is clearly a high priority for industrial economies seeking to overcome the sluggish growth of recent years. At the same time, government policy can only accomplish so much in terms of promoting small business reform in today’s highly complex society. Each company needs to adopt strategies appropriate to its sector and tailored to its own circumstances. Corporate social responsibility has a significant role to play in such private-sector-driven reform.

CSR is in fact an essential element of business strategy for today’s SMEs. In some ways SMEs are in a better position than large corporations to reap tangible benefits from socially responsible business practices. That said, SMEs also face unique challenges rooted in local conditions and the fundamental constraints surrounding small businesses.

Of course, “SME” is a broad category, encompassing relatively large organizations with the resources to adopt big-business approaches to CSR—appointing full-time personnel to dedicated CSR units, publishing CSR reports detailing their many initiatives, and so forth. My focus in the following is on smaller Japanese businesses and their evolving approach to CSR.

Expansion and Maturation

An informal survey of Japanese SMEs yields signs of CSR expansion and maturation in recent years based on a growing understanding of the role of CSR in business strategy. Let us begin with a brief overview of these trends.

Expansion

Recent years have witnessed two watershed developments that testify to the spread of CSR among Japanese SMEs and a deepening understanding of its significance for their management strategy. One is the 2013 establishment of a CSR certification system for companies in the Japanese printing industry. The other is the industrial waste management federation’s establishment of a biennial CSR awards program, launched in 2012.

The CSR certification program for printing companies, administered by the All Japan Federation of Industry Printing Associations, confers certification represented by one to three stars. The first step is to earn one-star certification, for which companies must submit documentation showing that they meet specific standards of corporate responsibility geared to the printing business. These standards are grouped under eight categories of (1) compliance, (2) the environment, (3) information security, (4) quality control, (5) employment and workplace safety, (6) business finances and performance, (7) contribution to society and community involvement, and (8) disclosure and communication. Companies must earn a minimum score in each category for certification.

Certification proceeds one step at a time. To earn two- or three-star certification, a business must establish its own CSR management system based on more rigorous standards. The certificate is renewed every two years, at which time the company may choose to apply for the next-higher rating.

The biennial waste-management CSR awards program, meanwhile, began as an extension of a climate-change initiative launched in 2009 by the youth division of the National Federation of Industrial Waste Management Associations. In 2012, the program conferred awards in eight categories: (1) localized CSR activities, (2) compliance, (3) contribution to the environment, (4) contribution to society, (5) contribution to the local community, (6) collaboration with stakeholders, (7) piriri (“piquant,” that is, small-scale but meaningful) initiatives, and (8) human resources. In 2014 an additional category was created for undertakings that create synergies at the prefectural level.

Maturation

Like large corporations, SMEs are gradually developing more thoughtful, creative, and effective approaches to CSR. Examples of such maturation are refinement of CSR from the standpoint of management strategy; social-impact strategies that leverage the business benefits of corporate philanthropy; regional partnerships with other companies, NGOs, and educational institutions; and the hosting of events outlining their CSR initiatives.

Facing tighter financial constraints than their large counterparts, small businesses often find it difficult to undertake CSR initiatives unless they offer demonstrable benefits from a business standpoint. For many, bottom-line considerations have precluded long-range risk-management, such as business continuity planning (BCP). Yet some small businesses are finding ways to marshal such policies to support business performance. Ugo Mekki, a metal finishing company in Yokohama, has discovered that BCP can point the way to more flexible and efficient use of the production line, even during ordinary circumstances. And Daimu Co., an Osaka printer, has found BCP to be a valuable tool in securing and retaining clients.

Social-impact strategies that make an economic virtue of socially conscious behavior are also making inroads at SMEs. For example, Oita-based Kai Denpa Service (KDS), an information service provider, and Bunny Foods of Kamakura have found that diversity policies that integrate disabled employees into the core workforce benefit the company through improved employee relations. In an era that demands efficient and effective management, there is an urgent need for diversity policies that have a positive impact on human relations within the workplace. These two SMEs merit attention as success stories in this area.

The third area of progress is cross-sector collaboration. Many analysts have stressed the importance of an interdisciplinary approach to today’s increasingly complex social issues. By the same token, initiatives targeting social issues can benefit immeasurably from partnerships that bring together the diverse strengths of the private, nonprofit, and government sectors, which is the thinking behind open innovation. Of course, SMEs specializing in specific component technologies have long formed networks for the purpose of business collaboration. But now we are starting to see partnerships geared to social action and embracing the nonprofit and public sectors as well.

The number of comparatively large SMEs that emulate big corporations by publishing CSR, environmental, or sustainability reports is on the rise. Here, however, I would like to call attention to a practice that is spreading especially among smaller companies: CSR events at which stakeholders, including community residents and representatives from local universities, gather to hear a report on the company's CSR activities. Pioneers of this practice include three Yokohama firms: Ishii Zoen (a landscaping service), Ohkawa Printing Co., and Kyoshin Printing Co.

Factors behind CSR Expansion and Maturation

Strategic Concerns in a Shifting Social Environment

Behind the growth and maturation of CSR efforts by Japan’s smaller businesses are seismic shifts in the social and business environment, which have fueled a widespread sense of crisis among small-business owners.

The first of these is the collapse of traditional Japanese business practices, in which major corporations formed closed networks and operated like families or regional communities in their emphasis on long-term relationships with suppliers and subcontractors. Under this system, countless small-scale operations enjoyed the security of guaranteed patronage by a major corporation or one of its affiliates. Over the past two decades, however, corporate restructuring has largely dismantled that system and removed the security it offered. At the same time, small businesses have had to cope with an increasingly skeptical public as a result of incidents like the false labeling scandal involving Hokkaido meat processor Meat Hope Co., which attracted intense media scrutiny.

The second development is the rise of socially responsible supply-chain management. In recent years, big corporations have come under pressure to ensure that their entire supply chain complies with standards for social responsibility; some have gone so far as to hire ISO (International Organization for Standardization) auditors to perform CSR audits of their suppliers. Such measures were necessitated by the string of corporate scandals that broke out in the wake of the regulatory reforms of the late 1990s and early 2000s. With public anger mounting, corporate groups like Benesse found themselves under fire for the practices of their subcontractors. In 2010, the publication of ISO 26000, a social responsibility guidance standard, provided added impetus for the trend toward responsible supply-chain management.

The third factor is a harsh business climate created by global competition and tight labor supply. In Japan, smaller firms typically offer lower starting salaries for university graduates. They are also regarded as being stingier with benefits and having poorer working conditions than the big corporations. As a result, many small and local companies are facing a labor shortage. The problem is particularly acute in the industrial waste management sector, which suffers from perennial image problems. Printers have also been hard hit: In a locally dispersed industry, the combined impact of regional depopulation and economic decline (accelerated by Koizumi-era structural reforms) and increased competition from emerging economies like China has been devastating. Between 2002 and 2013, the number of printing businesses fell by 27%, as did the total value of shipments.

CSR Certification Programs

However, a sense of crisis is not the only driving force behind the growth of small-business CSR. We can also point to the positive motivation and guidance provided by local CSR certification programs.

The main exemplar of this trend is the system established in Yokohama to assess and certify CSR programs targeting the local community. Launched in 2007 as part of the city’s regional revitalization plan, it is a joint project designed and administered by the municipal government’s Economic Affairs Bureau, IDEC Yokohama (a quasi-public small-business support center), the Yokohama Chamber of Commerce and Industry, Yokohama Standard (a nonprofit think tank established by alumni of the Junior Chamber of Japan), and the CSR Center of Yokohama City University. The cities of Utsunomiya and Saitama have followed Yokohama’s lead and established similar systems.

Programs like this promote the spread and maturation of CSR in a number of ways. First, they familiarize local companies with the meaning of CSR and provide standards for implementation. Yokohama’s program also provides on-site inspections by trained CSR auditors, who advise businesses on how they can implement improvements. In addition, the objective validation conferred by certification offers a powerful means for winning the approval of stakeholders.

Local CSR programs also offer a smart regional revitalization strategy at a time when structural reforms have dealt a blow to local economies, and regional inequality is on the rise. When local businesses pursue effective CSR policies, management improves overall, and business picks up, leading to job creation and economic growth. In addition, when those businesses undertake social initiatives targeted to the local community, the resulting improvements in living and working conditions can provide a further boost to regional vitality.

Features and Importance of CSR in the SME Sector

Features of Small-Business CSR

As pointed out earlier, small and medium-sized businesses have few financial resources to spare for CSR. For this reason, their CSR efforts tend to focus first and foremost on goals likely to impact the business’s bottom line, as by boosting sales, customer ratings, or employee motivation.

In addition, to avoid incurring additional costs, SMEs are biased toward initiatives that enhance their core business operations or leverage their own business know-how and products. Examples of the former are product quality initiatives and measures that promise to reduce the cost of environmental compliance. Examples of the latter are incentives for pro bono work by employees and programs linking sales to charitable donations.

Of course, it is not hard to understand why companies would undertake such efforts if they are good for business. Indeed, it is not at all uncommon for managers with no particular awareness of CSR to advance such policies. We often see such CSR notions built into the management philosophy of small but successful old firms—establishments whose owners realized at some point that their survival depended on their ability to build and maintain a local reputation as a quality-conscious, conscientious operation.

Importance of CSR for SMEs

This underscores the importance of CSR from the standpoint of business performance and competitiveness. In fact, CSR often confers more substantial business advantages and benefits on smaller businesses than on big corporations. Thanks to the limited scale and scope of its operations, a small business generally finds it easier to zero in on its key stakeholders and identify their needs. By designing and implementing initiatives to meet those needs, they can substantially improve their standing among those stakeholders. Moreover, in many cases small size confers the advantage of maneuverability and flexibility in adapting quickly to changes in the environment.

Social and community initiatives can also be good for business if they make a positive impression on stakeholders. To maximize those benefits, companies are well advised not only to plan their projects thoughtfully but also to engage stakeholders in the process. For a business in an outlying area whose workforce and clientele consist primarily of local residents, locally targeted social initiatives make good sense, since they are more likely to resonate with stakeholders. It is also relatively easy for management to gather meaningful feedback on such programs.

Meeting the Challenges of Small-Business CSR

Challenges Facing SMEs

At the same time, there is no denying that small and medium-sized businesses face special challenges in meeting stakeholder expectations vis-à-vis corporate responsibility. With their limited resources, they may find it difficult to tap the expertise and knowledge needed to identify suitable targets and approaches, let alone hire staff and allocate operating funds to support ongoing programs. In fact, a significant number of small business owners are still ignorant of CSR, and many more remain mired in the antiquated Japanese view of CSR as a form of charity—something with little or no payoff in terms of business growth or success. Small wonder many SMEs fail to pursue effective CSR strategies.

Small businesses also face challenges when it comes to communication with stakeholders, which is a key component of CSR. They may lack the financial resources to bring their efforts and achievements to the attention of the broader community through advertisements. Moreover, badly handled communication efforts can backfire if they come across as boastful or self-serving.

Finally, while small size may make it easier for a company to identify and respond to the needs of key stakeholders, it can also make a company vulnerable, as rejection by even one major customer could inflict considerable damage to its business sustainability.

Prescription: Collaboration and Engagement

For small businesses with limited resources, cooperation and stakeholder engagement have emerged as key strategies for tackling CSR effectively. Collaboration in the form of community- and industry-based partnerships with other businesses, as well as with the nonprofit, government, and academic sectors, can allow SMEs to pool their resources while facilitating a more effective response to the increasingly diverse and interdisciplinary challenges of today’s society. The aforementioned initiatives in the printing and waste-management industries are examples of this approach, as are the trends toward open innovation in research and development.

When it comes to social contributions, collaboration with NPOs can provide not only needed expertise and resources but also less tangible PR benefits. If a partner NPO publicizes a project in which a company is involved, stakeholders are more apt to accept that information as objective—or at any rate, geared to the stakeholders’ interests rather than management’s. As a result, such publicity can bring substantial benefits for a company in terms of positive stakeholder response. And when stakeholders are engaged in the planning or implementation of projects, they can spread the word themselves.

Collaboration and stakeholder engagement in CSR projects can also expand the volume and scope of business (including diversification into CSR consulting work), resulting in a healthier risk distribution.

That said, companies must be careful not to approach cross-sector collaboration as a means of acquiring resources cheaply. The goal should be to pool the resources of different sectors to create synergies that can enhance the efficacy of social programs and help revitalize the local economy.

Keys to Ongoing Progress

I would like to conclude this discussion with two additional comments on what SMEs need to consider in the age of CSR.

First, employees are the key to a successful CSR program. Companies need to train employees to take the initiative in contemplating and pursuing CSR as it relates to their own duties and activities. Important ways to nurture such a climate are (1) enhanced communication between top management and rank-and-file employees to promote CSR awareness, and (2) efforts to improve employee satisfaction. Certainly where the first is concerned, small companies are at an obvious advantage.

Second, every business needs to evaluate the success or progress of its own CSR initiatives. It is particularly important to adopt methods for assessing and visualizing the outcomes of CSR policies in such hard-to-quantify areas as risk management and contribution to society. Objective evaluation is critical to winning over stakeholders, as well as to continuous improvement.

The principles of CSR appeared prominently in the revised 2015 editions of ISO 9001 (quality management system) and ISO 14001 (environmental management system), both of which emphasize stakeholder needs, leadership, and engagement. CSR, we can safely say, is an idea whose time has come. As the CSR tide continues to sweep through industry, even very small companies will come under social and economic pressure to demonstrate their commitment, and those that respond appropriately can look forward to substantial rewards.