The Only responsibility of a Business is to Increase its Profits Essay
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Business corporations operate in a pluralistic society. There is a high level of interaction and interdependence between the business, the government and the society.
As business organizations draw their resources from the society and as their actions have a considerable impact on the environment there is a growing feeling that they should be more responsible towards society and the environment.
The dawn of the new millennium has ushered in an era of liberalization, privatization, globalization, digital technology and information super highways.
The advancements in scientific technology has pronounced the death of distance and speeded up communication resulting in instantaneous contact amongst people across the nations. In such a scenario a desirable paradigm on corporate social responsibility must adequately address and accommodate myriad compulsions and convulsions due to discontinuous, non-linear technological upheavals, fast integrating world economy and a fast shrinking world.
Corporate Social Responsibility: The Concept
Corporate social responsibility is the ability of the corporation to relate its operations and policies to the social environment in ways that are mutually beneficial to the company and the society. Business has come a long way from Milton Friedman’s phrase, “the business of business is business.” The concept of social responsibility was conceived in the early part of the twentieth century. A number of scholars have contributed to its evolution. The earliest contribution to the modern discussion on social responsibility was made by Howard Bowen who suggested that business should consider the social implications of their business (Koontz 2004: 36).
World Business Council for Sustainable Development has defined corporate social responsibility comprehensively as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.” In broad summary it is the ethical behavior of a company towards society.
Davis has provided five propositions for social responsibility. The first proposition states that social responsibility arises from social power. The second proposition is that business has to operate as a two-way open system between itself and the society. The third proposition is that social costs as well as benefits of an activity, product or service should be thoroughly calculated. The fourth proposition is that the user should pay for the effects of his consumption on the society through the price of the product. The fifth proposition is that business institutions as citizens have responsibilities for social involvement in areas of their competence where major social needs exist (Davis 2005: 19 pp. 19-24).
Nearly two decades after the above study Freeman and Liedkta have critically reexamined corporate social responsibility and have provided three propositions. The first proposition states that corporations are connected networks of stakeholder interests that include the interests of the customers, suppliers and employees among others making them legitimate partners in the dialogue. The second proposition describes corporations as places in which both individual human beings and human communities engage in caring activities that are aimed at mutual support. The third proposition proposes that corporations are a means through which human beings are able to create and recreate, describe and redescribe their visions of self and community (Freeman & Liedtka 2005: pp.92-98).
Wokutch has presented the Japanese style of corporate social responsibility, especially in terms of occupational safety of employees and health practices of the Japanese firms. The firms cooperate with government safety regulations and take their advice and recommendations seriously and implement them. They do not treat such regulatory agencies as interference in their work (Wokutch 2004: pp.56-74).
Lockwood explained the critical role played by HR function in leading and educating their firms regarding the importance of corporate social responsibility, while at the same time strategically implementing sound HR practices that support the company’s business and corporate social responsibility goals (Lockwood 2004).
Fombrun studied the evolving standards regarding building corporate reputation through corporate social responsibility initiatives. Various standard setting initiatives have been developed in recent years that are designed to induce companies to adopt more systematic, progressive and visible corporate social responsibility policies (Fombrun 2005: pp.7-12).
Levin and Hinkley state that corporate abuse of the public interest does not stem from the flaws in the character of corporate personnel; it stems from the flaw in the rules under which the corporations operate. According to them, even shareholders are increasingly supporting stockholder resolutions that address issues of corporate responsibility, even when those resolutions support action that may not be in their short term financial interest. But these changes are slow, piecemeal and vulnerable to being reversed. The authors propose a code of conduct for managers in which the pursuit of profits do not come at the expense of the environment, human rights, public health and safety, the dignity of employees or the welfare of the communities (Levin & Hinkley 2004).
Hopkins studied corporate social responsibility from the value perspective. He has identified that corporate social responsibility actions have economic value added implications on brand equity, company reputation, access to finance, employee motivation, innovation, intellectual capital and better risk management. The studies clearly indicate the growing importance of corporate social responsibility (Hopkins 2004).
Corporate Social Responsibility: The Debate
The debate of whether business should be socially responsible or it should get on with what it does best: making profits continues. There are a number of management thinkers who feel that business organizations should just concentrate on their business and leave the role of betterment of the society to the government. There are a number of arguments put forth by them in defense of their view. The first argument is that business organizations are already very powerful entities and if they are involved in social responsibilities they will become much more powerful leading to more coercive behavior. The second argument is that managing a commercial business is much different from managing society and that business managers may not have the relevant skills that may be necessary to manage social issues.
The third and a very powerful argument in defense of the view is that businesses are primarily responsible to the shareholders and the customers. The business should not waste the valuable resources of the shareholders in investing in social causes, but should concentrate on generating profits through better performance. So also the investments made in the social causes by the organization may be passed on to the customer in the form of increased prices of the products and services purchased by them. Still another argument against social responsibility focuses on the potential for conflicts of interest between the managers responsible for such decisions.
Similarly there are a great number of management thinkers who feel that business organizations should actively involve themselves in social responsibility. The arguments put forth by them in defense of their stand are many. They contend that business corporations operate in a pluralistic society. There is a high level of interaction and interdependence between the business, the government and the society. There are numerous reasons why profitable and successful corporations have a moral/ethical duty to be socially responsible and pay back to the society through charitable contributions.
The first argument in favor of active participation in corporate social responsibility is that, to become competitive and profitable business organizations need quality resources like human resources, financial resources, infrastructure, and raw materials which come from the society. The organization is morally responsible to pay back to the society from which they acquire all their critical resources. Secondly it is the loyal customers from the community or the society who contribute to the organization revenues and hence its profits by consuming its products and services, so it is the responsibility of the company to make the surroundings of the customer a better place to live in.
The third argument in favor of social responsibility is that, businesses have the requisite financial and managerial resources to address the social problems and help improve the quality of life of the underprivileged in the community who can be potential future customers or employees for the company. For example the General Electric Company through its foundation has invested in programs for providing a quality education especially for individuals from under-represented and disadvantaged backgrounds. The company supports high-impact initiatives that improve the access, equity and quality of public education in GE communities around the world.
Another argument of the proponents of corporate social responsibility is that, since industrial revolution business organizations around the world have been consuming non-renewable resources and dumping sewage, production wastes and trash into air, rivers, streams and open land.
The impact of such corporate action has affected the community and society around them through environment pollution, acid rain, global warming and depletion of the ozone layer, and so the corporate businesses have an ethical responsibility to contribute to the betterment of the environment that has been degraded to some extent by their actions. For example the FMCG giant Proctor and Gamble has been analyzing the effects that ingredients in their products have on the environment. The company remains committed to improving the environmental quality of its products, packaging, and operations around the world (Joyner, 2002).
Approaches to corporate social responsibility
From the above discussions it can be seen that some experts advocate a larger social role for organizations, and others argue that the role is already too large. Business organizations usually adopt different approaches to corporate social responsibility. A few of the approaches are discussed below
Obstructionist Stance: Organizations treading this approach are not involved in any form of social responsibility. They avoid accepting responsibility for their actions or charges of wrongdoing.
Defensive Stance: Business organizations adopting this approach follow all legal norms as specified by the government and other authorities with respect to the social responsibilities but nothing more. For example if a law stipulates a minimum investment in pollution control equipment then the companies following this approach will investment only what is required and may not go in for a slightly higher investment even though it may be much more effective in controlling pollution.
Accommodative Stance: Organizations adopting this approach not only follow all the legal norms but will also go beyond in meeting their social responsibilities on a case to case basis when convinced of their merit. For example the information technology major Infosys Technologies through its company foundation donates corpus fund to good but economically weak schools in India that approach it for help. The fund is utilized for the construction of additional classrooms or re-construction of old classrooms/school building, computers, furniture and equipment for science laboratories
Proactive Stance: This is the highest form of corporate social responsibility an organization can exhibit. Organizations following this approach proactively seek opportunities to contribute to the welfare of the society. A very good example for this stance is one of McDonalds through its Ronald McDonald House Charities (RMHC).
The charity has been extending scholarship programs since 1985, and gave $50,000 toward the first scholarships awarded through the Hispanic American Commitment to Educational Resources (HACER) program. In 2001it incorporated the RMHC/ASIA (Asian Students Increasing Achievement) and RMHC African American Future Achievers Scholarships programs. To date, RMHC has awarded more than $23 million to help underprivileged high school seniors attend college in different parts of the globe. (Griffin 2005: 120-130).
An organization’s approach towards social responsibility evolves through experience and the changing ideas of the public about corporate roles and responsibilities, and can be associated with its learning curve (Zadek 2004: 125-132). As the companies move along the learning curve they go through the following five stages.. In the first stage “it’s not our job to fix that”, the responses of the organization towards allegations of social wrongdoing are focused on denial or rejection of the criticism by legal or communication means.
For example when Nike was criticized for the appalling working conditions present in their suppliers’ factories Nike contended that it had the best of practices and what the suppliers did was beyond their control. In the second stage “We’ll do just as much as we have to”, the response of the organization is based on compliance of the concerned laws to avoid risk of litigation and loss in company reputation. When Nestle was criticized that young mothers in developing countries were using contaminated water for mixing its infant formula risking the infant’s health, the company responded by just communicating the hazards to the new mother.
In the third stage “it’s the business, stupid”, the response of the organization is based on the understanding that social issues are long-term problems and they have to refocus their business approaches for long-term solutions. For example Nike changed its procurement incentives to its suppliers to make them comply with the agreed upon labor standards.
In the fourth stage “It gives a competitive edge”, the response of the organization is based on the realization that, if the company realigns its strategy to address responsible business practices then it will have a competitive advantage. Development of environmentally friendly cars by the automobile companies is a good example for the response of the organizations in this stage. In the fifth stage “We need to make sure everybody does it”, the companies promote collective action to address society’s concerns. For example Diageo in association with other top alcohol companies initiated an educational drive that promoted responsible drinking amongst their customers.
Organizations exhibit their social responsibilities in three major areas. Firstly the responsibilities towards their stake holders, that is their investors, their customers, their employees, their suppliers, their associations, the government etc. secondly their responsibilities towards the general social welfare and their responsibilities towards the natural environment. A very critical area of corporate social responsibility of business relates to the natural environment. The enhancement of knowledge and awareness about the environment within the communities all over the world has resulted in grass-roots environmental action without precedent.
Communities across the world are more conscious than ever before of local environmental problems. Business corporations, the main engines of economic growth, face real pressures to respond to the environmental concerns. Customers are demanding safer and cleaner production facilities and waste-recycling programs. Employees are demanding safer and healthier work conditions. Governments all over the world are legislating thousands of environmental protection measures each year and above all the media is giving a strong voice to these demands. The broad awareness of the seriousness of the environmental problems has prompted corporate action.
From the above discussions it is clear that the thinking that business should not be socially responsible and should get on with what it does best: making profits and leave the role of addressing society’s concerns to the state stands on shaky ground today. Business corporations have to be responsible to the society and the natural environment in order to survive, sustain, grow and prosper in the intensely competitive global and knowledgeable markets. The next logical question that arises is the approach a business corporation has to take in being socially responsible and at the same time use it to improve the profitability of the organization.
Shareholders who own the company definitely have the first call on management. Contributions to charity and other social responsibility initiatives will actually lead to the creation of long-term value and better profits for shareholders. According to Professor Pratima Bansal, of the Richard Ivey School of Business, being socially responsible makes good business sense to companies. Such business corporations will be evaluated very favorably by the different stakeholders. They will be able to acquire, talented and committed employees to work for their organizations, loyal and profitable customers to buy their products and services, sound investors to invest in their present business activities and their future growth initiatives and succeed easily in having government representatives to support their investment proposals through better infrastructure and tax benefits.
All this will lead to the firms gaining competitive advantage over their rivals. Studies have also shown that a favorable evaluation of the company also results in the increase in the value of its share prices and less volatility in the share prices during volatile changes in the economy of the environment. Competitive advantage will help the company to gain better market share and hence leading to improved profits. Increase in share prices will increases the wealth of the shareholders.
Some ethical decisions of companies towards social responsibility have resulted in direct profits to the companies. For example Shell to fulfill its social obligation towards business has focused its strategies to produce more with less energy and materials. It achieves this by adopting cleaner technologies, reducing emissions, recycling, reusing, minimizing waste and even turning waste into saleable products. These activities improve the efficiency of its operations, help reduce costs, avoid current and future costs of emissions and even create new income streams (Burnhut, 2002).
Corporate Social Responsibility – A Strategic Approach
Business organizations should not depend on off-the-shelf or simply nice-sounding solutions to corporate social responsibility. Their responses should depend on the circumstances in which they operate. It involves creating a new vision of what a company is and wants to be and should map long-term options and responses. This process clearly needs to be rooted in the development of sound strategies. Businesses should ensure that environmental issues and emerging social forces are discussed at the highest levels as part of overall strategic planning. Executives must educate and engage their boards of directors and develop broad metrics that usefully describe the relevant social and environmental issues, in much the same way that most companies would analyze their customers and competitors. Corporations should strategically address the issues of safety, health and environment protection.
The strategies should evolve with the evolution of the ideas of the public with respect to the expectations from the business organizations towards their approach to social responsibilities. For example Nike’s underlining business strategy is not static as it moved up the corporate responsibility learning curve. With the changes Nike now argues for more regulated labor standards, which would offset any possible competitive disadvantage that Nike would incur if it had to go it alone. Nike is also involved with various initiatives designed to bridge corporate responsibility and public policy.
As a proactive action in early 2004, Nike convened high profile players from the international labor, development, human rights and environmental movements at its Beverton, Oregon headquarters to evolve suitable labor policies. Nike as a business entity is of course responsible to increase its share holder wealth. But the company has taken steps in evolving strategies and business practices that have helped it become a key participant in civil society processes and at the same time increase its shareholder wealth. In dealing with the challenges of corporate responsibility, Nike has come to view the issue as integral to the realities of globalization and as a major source of learning, relevant to its core business strategy and practices.
In conclusion it can be said that in the era of liberalization, privatization, globalization, digital technology and information super highways, corporations have a moral/ethical duty to be socially responsible and pay back to the society through charitable contributions. Such contributions actually lead to the creation of long-term value and better profits for the shareholders if the companies adopt a strategic approach towards their social responsibility initiatives. Thus companies should treat contribution to charities and other social initiatives not as expense but as an investment to gain long-term profits for the company and a way to maximize shareholder wealth.
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