The Purpose of Corporations - Assignment Example

Topic: The Purpose of Corporations (Evaluate the Following Statement :) Introduction Companies are born out of the idea of serving or meeting the demands of a given purpose in society. All companies have this factor in common since it is only by meeting a certain need in society does a firm or company get capital for its operations and make profit (Miller and Jentz, 2009, p. 78). The most successful of companies the world over serve a need to the highest number of people. Healthcare companies, taxation firms and food companies quickly come to mind when thinking of meeting the needs of society. It is evident that the three types of industries to which the respective firms belong have been part of the human society since the beginning of time. Every human being gets sick one time or the other and thus needs medical care in various forms (Spadaccini, 2007, p. 65). Taxation has always been a part of humanity since the beginning of governance while food is a big part of the human existence (Aras and Crowther, 2010, p. 176). The above paragraph aims to bring out the importance of the relationship between a corporation and society in general. While the aim of any given firm can be safely said to be the creation and maximization of wealth for the different parties involved, neglecting the sole purpose the firm was created for leads to eventual failure on the part of the firm both in business and social responsibility. I therefore agree with the statement that “the purpose of a corporation is to maximize the wealth of its shareholders. It must also, however, be socially accountable, or it will fail the purpose it is created for” (Emanuel and Emanuel, 2009, p. 56). Even though corporations have their independent management teams that decide what steps are to be taken in achieving such and such a given aim, it is safe for the given firm to put society’s needs at the core of it business. Experience has shown that the firms performing better than others in a given industry have good relations with the society around them since, while society and its constituents provide the demand and sales required by firms to spur its growth, the very successful firms give back to society through various activities that can be summarily referred to as Corporate Social Responsibility (CSR) (Goodman and Hirsch, 2010, p. 67). Theory: Neoclassical perspective vs. stakeholder theory on Corporate Social Responsibility (CSR) Corporate Social Responsibility can be defined as the contribution of a business to the sustainable development goals of the society. It is about how a particular business accounts for its impacts on the society, the economy and the environment in which it operates. Corporate Social Responsibility has been recently widening it is scope to include issues such as employee relations, corporate ethics, plant closures, human rights the environment and, as stated above, community relations (Balotti and Finkelstein, 2010, p. 176). There is even a classification of these areas by a European organization that is a membership of large firms across Europe into workplace (employees), community, marketplace (customers, suppliers), the environment, ethics and human rights. Even with all these efforts aimed at instilling the spirit of Corporate Social Responsibility among companies the world over, there is a raging debate as to whether firms need to use shareholders’ money to fund projects of the society that are not profit-generating besides the payment of taxes and the provision of employment opportunities to the members of the society (Schneeman, 2012, p. 55). This debate has divided those with ideologies and propositions on the role of Corporate Social Responsibility into groups with those holding a neo-classical view opposing Corporate Social Responsibility while the stakeholders support it (Holzer, 2010, p. 89). The neo-classical view of Corporate Social Responsibility is that the sole aim of the firm, its management and employees in general is to maximize profits as much as possible for the shareholders. The most known of the proponents of the neo-classical view on Corporate Social Responsibility is Milton Friedman who stated that “few trends would so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than t make as much money for their shareholders as they possibly can.” (1962) (Monks and Minow, 2008, p. 45). Other neo-classical economists of a similar view to Friedman’s argue that Corporate Social Responsibility activities constitute an agency problem since they are basically a form of theft of the resources legally owned by shareholders and that should be used to increase efficiency and not be given out in acts of charity. There is evidence also that there is a possibility of misallocating resources when the same resources that are best utilized in the serving of a particular purpose are used to meet a social goal that ill suits the resources in question (Margolis and Walsh, 2003). Other critics of Corporate Social Responsibility activities question the fundamental humanistic assumptions of the agency theory in which the individual is viewed as being opportunistic and self-serving. These assumptions have been found to be self-fulfilling prophecies (Ferraro et al., 2005; Ghoshal and Moran, 1996; Roberts, 2003). On the other hand, the proponents of Corporate Social Responsibility activities, a group that can be safely summed up as stakeholders are of the opinion that companies need to solve the problems of the society whether or not they are the cause of these problems (Prasad, 2006, p. 78). The group puts forth the idea that since corporations have resources that individual parties in society cannot afford to have, spare and channel to the solving of the very problems facing them, they deserve to be charged with the responsibility of solving these problems (Minars, 2003, p. 109). It is also thought by the same proponents of Corporate Social Responsibility activities that since the resources in terms of profits are derived from the society, the latter deserves a share of the profits. Even without laws in place requiring the spending of company resources on Corporate Social Responsibility activities, these proponents are of the opinion that the shareholder primacy model is flawed due to the fact that focusing primarily on the economic functions of the firm ignores the complexity in place that firms deal with in relation to information asymmetries, inefficiencies and multiple incentive problems. The stakeholder theory of the firm proposed by the members of this group widens a firm’s role and scope of interest to include external actors and internal parties besides the shareholders (Donaldson and Preston, 1995; Freeman, 1984). One of the most notable proponents of Corporate Social Responsibility activities stated that “in addition to making a profit, business should help to solve social problems whether or not business helps to create those problems even if there is probably no short-run or long-run profit potential” (Holmes, 1976). The Impact of Corporate Social Performance (CSP) on Corporate Financial Performance (CFP) From the above-stated theories on the impact of Corporate Social Responsibility activities on the society and the company undertaking the activities, several studies have been carried out to determine the effect of the Corporate Social Responsibility activities carried out on the Corporate Financial Performance (CFP) of the specific firm. Most of these studies were carried out to find a link between Corporate Social Responsibility activities and the returns of firms that either engaged in this activities or not. The debate is still between those who hold a neo-classical view against those with the stakeholders’ view on the same subject. The first effect of Corporate Social Responsibility activities found is that there is a general increase in Corporate Financial Performance in the companies engaging in Corporate Social Responsibility activities. A statement on this subject says that “companies with a defined corporate commitment to ethical principles do better financially than companies that do not” (DePaul University, 1997). It was even showed by an 11-year Harvard University study that firms that balanced stakeholder interests with other factors showed up to four times the growth rate and up to eight times the employment growth rate when rated alongside companies that are focused primarily on their shareholders’ interests. This vouches greatly for Corporate Social Responsibility activities since growth rates are a main focus of most –if not all- firms in all areas. Growth in the employment rates and other areas mean the firm is most likely to realize increased sales and eventually increased profits. The second impact of Corporate Social Responsibility activities on the Corporate Financial Performance of any firm so far sited is that these activities reduce costs in the long run. This is contrary to the widely-held opinion that Corporate Social Responsibility activities are a financial burden to the companies that undertake them. It has been found out that improved environmental management systems do not automatically result in greater operational costs. It is shown that over time, these systems improve operational efficiency of a company by reducing waste production and the usage of water with the eventual result that the energy efficiency is tremendously improved (Clarke, 2004, p. 88). There is evidence from the same systems that they enable easier and more effective selling of recycled materials owing partly to the relationships they forge with parties that have vested interests in the company. This is opposed to the disposal of toxic wastes; an activity that has proven to be very expensive to many engaged in manufacturing activities. Points depicting the negative impacts of Corporate Social Responsibility activities on the Corporate Financial Performance of a given firm bring out a picture in line with the neo-classical view of the effect of the same activities. The first one of these points is that they bring a conflict of interests as far as the choice between Corporate Social Responsibility (CSR) and Public Relations (PR) are concerned. This is a hard choice to make since the two are to be taken care of from the same resources. It thus becomes a matter of opportunity costs as opposed to having them side by side since the latter involves strenuous allocation of company resources. This debate has resulted into the use of activities to pull publicity stunts and force companies to engage in Corporate Social Responsibility activities that are detrimental to their development. Case Study: The Financial Impact of Social Engagement on Companies Both in the Short-Run (one year) and the Medium Run (3 to 5 years) A study was carried out to determine the impact of Corporate Social Responsibility activities on the Return On Assets (ROA) and Return On Equity (ROE) of Hidalgo Inc. in comparison with the stock market’s return. Hidalgo is a small-scale beverages company in Texas. The study was carried out over a five-year period and the activities undertaken by the company’s employees in the name of Corporate Social Responsibility included philanthropy, environmental conservation and contribution to health facilities in several ways. The carrying out of these activities occurred mainly during weekdays since it is during weekdays that the highest number of people can be accessed (Bevans, 2006, p. 67). The philanthropic activities undertaken included giving foodstuffs to children’s homes, giving wheelchairs to homes for the aged and contributing to the local program to rehabilitate street children by giving them education and other forms of formal training. The environmental activities undertaken by Hidalgo Inc. employees included contribution of capital to the building of better drainage systems and waste management. Lastly, the employees engaged in healthcare activities among them the sensitization of the public of the contents of the company’s soft drinks and the effects associated with the consumption of too many soft drinks among other issues. Summary It was found out that, at the end of the year, the Return On Equity and the Return On Assets of Hidalgo Inc. increased tremendously in comparison to the stock market return. Not only that, the returns on equity and on assets outdid those of the previous years where there had been no Corporate Social Activities. For the first time in the history of Hidalgo Inc., its stock beat the stock market in terms of performance. It was not possible to quantify the impact of each CSR activity since they were not directly related to specific results in the increase in sales of Hidalgo soft drinks. Since there was a general improvement in the stock prices of soft drink manufacturing companies, it was even more difficult to attribute the improvement in Hidalgo’s returns on equity and return on assets to a specific corporate social responsibility activity (Blowfield and Murray, 2008, p. 187). Several factors were sited to have led to the improvement in the performance of Hidalgo’s stock. One of the factors is that the activities undertaken served to enhance the brand image and reputation of Hidalgo to a large extent. Before the CSR activities, Hidalgo was a little-known soft drinks company with slowly moving products but, at the end of the period which saw to the CSR activities, its products competed favorably with the products of the other soft drink manufacturing companies (Horrigan, 2010, p. 78). Given that a good reputation is very hard to build, Hidalgo did a great job especially the sensitization of the public on the contents of its soft drinks. This went against the widely-held convention by its competitors who kept the contents of their drinks a secret. Since such courageous stunts are treated with suspicion by competitors, Non Governmental Organizations (NGOs) and stakeholders in general, tests carried out by a human rights organization proved Hidalgo’s statement to be true. This boosted the shareholders’ confidence in the company; an activity that saw to the meteoritic rise in the company’s share price. In a ‘coins will swap round automatically’ analogy, the CSR activities saw to increased sales and customer loyalty. From other studies carried out before the one at hand, it has been shown that consumers do not only prefer good and safe products, they also want to be aware of what they buy, how it was, produced and its contents and if it was produced in a socially and environmentally responsible way. Also noted was the increased ability to attract and retain most of its employees (CQ Researcher, 2009, p. 106). The Cherenson Group once found out that ’78 percent of employees would rather work for an ethical and reputable company than receive a higher salary.’ This statement holds true in the case of Hidalgo (Truitt, 2006, p. 34). The research exhibited several flaws and limitations in terms of the data collected and analyzed thereafter. As stated before, there was a general improvement in the stocks of soft drink companies and even though no data was collected concerning the activities the other soft drink manufacturing engaged in, the improvement in Hidalgo’s performance cannot be safely attributed to its role in corporate social responsibility activities (Shabel, 2007, p. 67). Another shortcoming of the whole data collection and analysis process is that many companies have of late realized that CSR activities serve as marketing stunts and therefore engage in them in pretense since the activities have lower costs on the company compared to real marketing. The company’s aim cannot therefore be easily discerned from the activities (Brown, 2005, p. 100). It is a suggestion that in future research papers on the same subject, care should be taken to include what the other firms in the industry did, did not do or did differently from the firm under study. The companies under study’s take on corporate social responsibility activities should also be known before the study is carried out to find out their aim in undertaking the activities (Henry, 2008, p. 55). References Aras, G. and Crowther, D., 2010. Gower Handbook of Corporate Governance and Social Responsibility. New York: Gower Publishing, Ltd., 2010. Balotti, F and Finkelstein, J., 2010. The Delaware Law of Corporations & Business Organizations Statutory Deskbook 2011. Chicago: Aspen Pub. Bevans, N., 2006. Business Organizations and Corporate Law. Chicago: Cengage Learning. Blowfield, M. and Murray, A., 2008. Corporate Responsibility: A Critical Introduction. 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