The Business of Business - Literature review Example

?‘The Business of Business is Business’. This quote by the great economist Milton Friedman from his 1970 Times magazine article has sparked off a long running significant debate when it comes to the ideology and the reasons for existence of a business entity. Milton argued in this article that the sole purpose and core obligation of a business is to act in the shareholders best interest- i.e. to create shareholder value or in more blatant terms, to generate profit for them (Friedman, 1970). However, Wearden (2010) adds that there are many who argue against this, the proponents of Corporate Social Responsibility or Sustainable Business, those who advocate the integration of social and environment concerns in their business operations. Mainly there are three different schools of thought or approaches on ‘Corporate Social Responsibility. They can be classified as: Neoliberal approach Neo-Keynesian Radical Political Economy In the Neoliberal approach, Corporate Social Responsibility is defined as the basic and fundamental set of policies, codes or guidelines which drives the basic running of a business (Lockwood, 2012). It is mainly based on the viewpoint articulated by Friedman that the main social responsibility of a business is to effectively use its resources and employ those activities which increase the profits of the business as long as it engages in free and open competition without any deceptive and fraudulent activities (The Guardian, 2009). In an article, a neoliberal journalist, Ahaner (2012) rightly pointed out that the main flaw of Corporate Social Responsibility is that the businesses justify their existence by acting on higher moral grounds. According to Riley (2011), the main idea of pursuit of profit not being associated with public good simply does not match up. Adam Smith had rightly said that “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest”. Although most of the neoliberal advocates agree that Corporate Social Responsibility hinders the achievement of the primary purpose of the business, they agree that it will be profitable for the companies in the long run if they adopt Corporate Social Responsibility in their policies (Jedrzei, 2007, pp. 669-681). Furthermore, Yuan (2011, pp. 75-92) adds that even if Corporate Social Responsibility hinders the businesses profit making, it is imperative to note that it can be used as an important insurance strategy to lower the risks of adverse media campaigns, consumer backlash to corporate behavior and government intervention. On the other hand, Cai (2011) defends that the advocates of Neo-Keynesian have a wider approach by recognizing the active role of the business stakeholders. However, there is no general definition of Corporate Social Responsibility and it is mainly construed as having no formal and external set of regulations by both the stakeholders and the state. The Neo-Keynesian theory is different from that of the neoliberal perspective is many ways. The main difference is that the Neo-Keynesian recognizes that market failures or lack of corporate awareness can have negative impacts on the corporate behavior (Thomsen, 2010, pp.139-142). Advocates of neo-Keynesian are mostly concerned with the corporation environmental policies, regulations and policies related to workplace and mainly the environmental and economic consequences of a business activity. Marquez and Fombrun (2005, pg. 304) explain that advocates also entertain the thought of a positive role of the state in enforcing regulations and policies of Corporate Social Responsibility. The third school of thought, The Radical political economy has a skeptical stance on Corporate Social Responsibility by following a different view point on the existence and the abuse of corporate power in terms of both global and local economies. They argue that global business giants possess enormous power which they use for their own self interest, at the expense of the human society and the environment (Porter and Kramer, 2006). They argue that many businesses deliberately design their internal and self regulatory Corporate Social Responsibility policies to redirect external policies and regulations and they also camouflage those activities which are destructive to the society and the environment. Corporate Social Responsibility and Social Risks Businesses and companies operating in today’s globally challenged environment have to deal the many dangers that the environment poses to them. This social risk is one of the main challenges which a business may face and can relate to the overall risk management strategies employed by the business (Friedman, 1970). In many ways, Corporate Social Responsibility can be a valuable and effective method to provide strategic information to counter and manage the social risks involved. What is risk management? First of all, we need to know what exactly does risk management means and how is it strategically linked and related to Corporate Social Responsibility. Risk management strategies are formulated to protect businesses from the various threats and attacks coming from the stakeholders, consumers and users, government and most importantly, the environment. Many economists advocate that if a business incorporates a Corporate Social Responsibility approach in its strategic plans, it can have a positive competitive advantage in the market. For a business, a social risk arises when a company’s own actions or the actions of outside factors creates vulnerability for the business and influences the business’s operations in a negative manner. The stakeholders may identify these vulnerabilities and loopholes and may put pressure on the business to change its course of action. As it has become a competitive trend for the stakeholders to voice their concerns, these social concerns can be best managed once embedded in the corporate strategy of the business. A business has to balance these complex strategies which comprises of many variables and perspectives. Whenever a social risk takes place, it challenges the management of the business to set up a clear direction for the effected function. These challenges can be addressed by incorporating Corporate Social Responsibility across the business and its functions. The Advantages and Disadvantages of Corporate Social Responsibility According to The Neoliberal School of Thought: For the advocates of neoliberal school of thought who strictly adhere to the Friedman’s perspective that a business should only concentrate on its shareholders, not the stakeholders and only operate to maximize its profit, they argue whether or not Corporate Social Responsibility is a legitimate activity for a business entity to even engage into? David Henderson created controversy in his book Misguided Virtue: False Notions of Corporate Social Responsibility, where he argued that adoption of Corporate Social Responsibility is far from being harmless for a business entity (Marrewijk, 2008, pp. 95-105). Not only it threatens economic prosperity in both the rich and poor countries, it also ‘undermines the market economy’ and decreases free competition and the economic freedom. He says that there are many external forces that compel and pressurize a business entity to be more socially responsible. Initially it was only the Non-Government organizations (NGO) who worked up this pressure on the businesses to not only seek profit, but later on the stance was taken up by other critics and academics, and mainly the global giants themselves as well. The author harshly condemned those advocates who pressurize the businesses to engage in corporate citizenship and collaborate with the stakeholders to reach their social economic and environment goals. Neoliberals Arguments to Adopt Corporate Social Responsibility However, Monsted (2010) adds that there are many advocates of this neoliberal approach who believe that it will be strategically feasible for many businesses to incorporate Corporate Social Responsibility into their operations. For instance, Latos 1 although still heralding the Friedman’s thoughts that there is no altruistic Corporate Social Responsibility, he also advocates that incorporating strategic Corporate Social Responsibility is viable for both the businesses and the society in total (Porter and Kramer, 2006). . However, Corporate Social Responsibility activities should only be incorporated when it is definite that they will increase the business’s value. Two other neoliberal writers also argue that there are two ways in which a business can gain benefits by incorporating Corporate Social Responsibility. One, these activities gains trust of the business’s main stakeholders, its investors, users or consumers and its employees – for being a responsible corporate conduct. However, Kytle (2010) explains that more importantly, it’s the threat from the state for enforcing more strict regulations that compels the business to adopt Corporate Social Responsibility. This is a very direct approach towards Friedman’s viewpoint as it focuses on the factors which may threaten the business’s bottom line in case of any adverse reactions from the stakeholders due to any negative business activity (Porter and Kramer, 2006). Similarly, Wearden (2010), states that ‘companies are wise to adopt a Corporate Social Responsibility policy as part of their risk management strategy’. According to Kytle (2010) those businesses who not incorporate Corporate Social Responsibility into their business activities may face a ‘bottom line backlash’ and are advised to do so. He says that according to an Australian consumer survey, the repute of a business can be negatively affected by the bottom line business when in conflict and consumers becomes hostile towards a business if they see that the business is achieving profits at the cost and expense of any other stakeholders. However, if a business has a reputation for being profitable while being socially responsible, than the consumers are likely to have a positive view of the business. Reasons for a Business to Adopt Corporate Social Responsibility into a Neoliberal Approach: According to a report by Kytle (2010) there are three reasons a business may incorporate Corporate Social Responsibility into its polices. Firstly, Corporate Social Responsibility is used as a business strategy to promote innovation into the business operations so that it can benefit the business. It is also incorporated to avoid the risks that the business may face towards the shareholder’s main interest- profitability. This is more dominant approach and is widely find in many businesses worldwide. Secondly, Corporate Social Responsibility is forcefully incorporated on the basis of ethical and moral values as the society sees it. Lastly, Corporate Social Responsibility can be implemented into a firm to have social sustainability. If the company has not incorporated Corporate Social Responsibility into its business operations, it can have many adverse repercussions. It may be too late for a business to handle the adverse reactions of any social or environmental issue. Thus, as Sheila (2010) explains, the main perspective underlining the neoliberal school of thought emphasizes on the strategic benefits which a business can achieve if it implements Corporate Social Responsibility into its business strategy. These strategic benefits are mainly in the shape of risk management strategies. These strategies are formulated keeping in mind the protection which a company may need from threats and pressures arising from the customers, stakeholders and the government. Makower (2006) explains that if a business adopts a Corporate Social Responsibility approach in its strategic planning, then it can have many advantages in the market. A business can implement Corporate Social Responsibility strategies to offset the different risks it faces. Some of these can be in the form of: Human Resources: A very important challenge a business faces when it comes to spreading its operations across the globe is the cultural and religious differences its varied workforce may have. To succeed in the implementation of cross cultural strategies, a business has to recognize these differences by incorporating Corporate Social Responsibility which can increase employee satisfaction. Corporate Social Responsibility can equally play an important role in terms of recruitment and retention of employees. The effectiveness of Corporate Social Responsibility depends on it being taken as an important factor throughout the organization. Delivering the promise is the key in developing the trust of the stakeholders in the organization. For this delivery, Human Resources play an important role in proper planning and implementation of Corporate Social Responsibility. In order for changes to be accepted, the Corporate Social Responsibility needs to be implanted in the culture of the business. Risk Management: Environmental accidents are the prime examples of a risk which can ruin a company’s reputation. Corporate Social Responsibility can reduce the impact of an environmental disaster on a company if proper risk management strategies are employed in a business. Implementation of Corporate Social Responsibility can reduce the effects of these risks. Brand Differentiation: Many companies are running successfully because they have differentiated themselves from their competitors on the basis of their brand and image. As per Sheila (2010), a leading example of Corporate Social Responsibility in a business is that of The Body Shop as their unique selling point are their products being environment and animal friendly. License to Operate: according to Makower (2006), many businesses avoid government interference in its operations, which a government can do so by levying taxes and other rules and regulations. Deliberate and voluntary moves by a business can help it in persuading the government to impose more regulations. A business may take any social or health issue and work towards its solution to avoid any governmental intervention. Diverting Attention: Those companies which have been in the news for their environment related accidents often implement Corporate Social Responsibility programs which draw attentions from their core business activities. The Main Question: Does Corporate Social Responsibility Support The Bottom Line? A long standing issue which has been debated amongst both the neoliberals and neo-Keynesians is the effect of Corporate Social Responsibility on a business’s bottom line. Does Corporate Social Responsibility increase the profitability of a business or is it a cost to the corporate bottom line. Many economists and writers have different view points on this dispute. According to Makower (2006), the researchers have not come up with the proper way to examine the costing associated with the implementation of Corporate Social Responsibility activities. On the other hand, many neoliberals and neo-Keynesians economists and writers see Corporate Social Responsibility as a factor adding corporate value to a business. Many economist asks what factors can cause a business to increase its value when it implements the Corporate Social Responsibility into its strategies. They say it can only happen under imperfect completion and when one business has an added advantage over its rivals. According to Sheila (2010) , there are growing cases of Corporate Social Responsibility being productive in return. She claims that many research studies have indicated that companies are getting financial gains from implementing Corporate Social Responsibility. In a study conducted by Wearden (2010), which is an independent sustainability rating agency, sustainability has been co-related with financial performance. The study has revealed that the companies who were socially responsible and had a better sustainability record, their shares performed well in comparison to those companies who were less socially responsible. In another study by Broomhill (2007) it was revealed that Corporate Social Responsibility pays off better financial gains. The Dow Jones Sustainability Index performed 36% better than the main Dow Jones Index during the previous 3 years (Wearden, 2010). Does Corporate Social Responsibility Increase Profits? According to Riley (2011), Friedman advocated that the profitability is the end target of a business. In today’s world, this view has been challenged primarily due to lack of incorporation of the Corporate Social Responsibility in his viewpoint. It is a general principle that Corporate Social Responsibility increases profitability and that’s why many businesses are implementing strategies to Corporate Social Responsibility. However, does it actually increase a business’ profit? It is generally believed that Corporate Social Responsibility can have a positive impact on the image of the business which can result in greater respect of the company by the stakeholders which ultimately enhance the profitability. According to Broomhill (2007) some researches indicate that Corporate Social Responsibility does increase profit. In 2010, a study was conducted on this subject by Kytle (2010), "Economic Implications of Corporate Social Responsibility and Responsible Investments,” Her study revealed that Corporate Social Activities generally does not have a negative effect on profitability, however the positive effect is also very small. According to Wearden (2010), in another study  ‘The Economics and Politics of Corporate Social Performance" . The researchers found out that for many consumer industries, an improvement in the social performance is due to improvements in the financial section of the firm. In conclusion, it is possible that Corporate Social Responsibility can positively affect the profitability of the firm. However, it is not easy to relate CSR with the profitability of the firm. But many researchers according to Kylte (2010) argue that it hasn’t been established that the profitability is dependent upon social responsiveness. The British Petroleum rig is an ideal example of this. Though BP has been socially responsible with CSR as its corporate strategy, with their large wind turbines situated on the gas station deceiving their stakeholders that they care about them. The 2010 BP oil spill, off the Gulf of Mexico attracted severe criticism from all the stakeholders. Governments and environmentalists, as the firm was not quick enough to give a response to be socially responsive as it took 3 months to find a solution for the leakage of crude oil in the ocean (Riley, 2011). The BP's Initial Exploration Plan for the oil rig said that "it is unlikely that an accidental spill would occur" and "no adverse activities are anticipated to fisheries or fish habitat. The cost and expenses for oil spill and its disaster has been estimated for more than $ 40 million, and many believing that the actual cost could be as high as $ 60 million. The sales of many BP gas stations declined between 10 and 40% as a consequence of the incident. As per Broomhill (2007), if a business continuously overlooks the environmental and other social issues, it can have a negative impact on the business and its repute. Their customers will be skeptical of the business’s performance when they see the environmental effect of their operations. With globalization at its peak, businesses settle in at one place, do their business activities, and move on to other place after leaving behind the damages it may have caused. Davis (2005) adds that the debate continues. What is exactly the main purpose of a business to maximize profit? Some argue that to reach this goal, being socially responsible can assist the business in achieving higher profits due to the resultant increased consumers trust. However, many still also argue and believe in the neoliberal or Friedman’s view point that a company should simply focus on its main goal of profit maximization and engage in those activities which enhances the shareholders best interest. 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Concepts and Definitions of CSR and Corporate Sustainability: Between Agency and Communion. JOURNAL OF BUSINESS ETHICS. Vol. 44, no. 2-3, 95-105 Yuan, W. (2011). Integrating CSR Initiatives in Business: An Organizing Framework. Journal of Business Ethics, 2011, Vol. 101, No.1, pp. 75-92 Thomsen, L. (2010). Special Issue on “New Perspectives on Business, Development, and Society Research”. Journal of Business Ethics. Vol. , Pages 139-142 Cai, Y. (2011). Doing Well While Doing Bad? CSR in Controversial Industry Sectors. Journal of Business Ethics. Read More