A Critique of Friedmans Theory of Corporate Social Responsibility - Coursework Example

Corporate Social Responsibility (Name) (Course) (University) Date of presentation: Lecturer: A Critique of Friedman’s Theory of Corporate Social Responsibility Introduction This paper reviews the level of business obligation discussed by Friedman (1970) in the essay, ‘The Social Responsibility of Business is to Increase Profits’. In the essay, Friedman argues that businesses have minimal or no social obligations apart from complying with the law. This paper attempts to ascertain the validity of Friedman’s view by reviewing a number of literatures and research articles on the subject. This paper articulates that Friedman’s argument does not present an accurate image of the social roles and obligations of a business. In his article, Friedman puts strong emphasis on the values of freedom, duty and respect for the law as the main factors which contribute to profitability of a business. Friedman fails to show that business ethics arises from the nature of the business itself and compel a business to embrace ethical considerations in its interaction with stakeholders. While businesses are motivated by the desire to make profit, profit-making is not the only function of a business. A business performs a number of different social functions as is part of the host community. According to Wood (2002) a business has to take care of the stakeholders who are instrumental in securing its survival such as owners, employees, investors, consumers and the government in particular and the society in general. The concept of social responsibility encourages businesses to earn and maximize profits through judicious management and by simultaneously contributing to the welfare of the society. The Concept of Corporate Social Responsibility Corporate social responsibility refers to organizations being aware of their immediate society’s problems. An organization that embraces social responsibility acts in the best manner that promotes environmental well-being. This way, the organization provides a solution to social problems and helps preserve the wellness and overall health of the world. Corporate social responsibility as defined by Pratley (1995) is the belief that social, environmental and economic objectives can be pursued simultaneously in harmony and in a manner that propagates the interests of corporate institutions. Thus, corporate responsibilities and corporate self-interests (profit maximization) are reconcilable and can move together in unison and its pursuance should be the primary objective of an organization’s management. From this definition, it is clear that it is the responsibility of an organization to be aware of the concerns of its society and be able to respond effectively to the concerns. Thus, contrary to Friedman's argument, the need to conduct business in line with the welfare and wishes of the society should be a core aspect of an organization’s business objectives. Wood (2002) has pointed out in his book that corporate social responsibility is closely related to environmental conservation efforts. It is, in fact, the case that contributing to corporate social responsibility is part of an organization strategic vision and therefore the responsibility should be incorporated into the organization’s internal system. Werhane (2000) has put a lot of emphasis on the need for companies to ascertain that their businesses are proof of their awareness of social concerns. When a company responds to the interests of the society and improves quality of life, both the society and the company benefit. Both increase marginal revenues and benefits without necessarily increasing marginal costs. In contrast to Friedman’s argument, corporate social responsibility can be a sufficient proof that an organization not only focuses on ways to increase its profits but also organizes itself to be socially involved and responsive. Sims (2003) discusses that corporate social responsibility can improve a company’s marketing clout and hence result into higher profits if it is centered on product quality and consumer’s preferences regarding key product issues. In that case, aligned interests become crucial and account for the positive impact of corporate social responsibility. However, such facts may not count if stakeholders are oblivious of a corporation’s accomplishments. Thus, corporate awareness which results from social responsibility is an important factor in strategic business management. This can be adduced by the fact that when consumers are aware of a company’s social corporate responsibility initiatives, the awareness increases the desire to be associated with that company. This makes the company an attractive place to work in and invest. One of the strongest roles of corporate social responsibility is participation in construction of social meaning which defines and evaluates an organization’s social obligations. Specifically, corporate social responsibility helps enhance an organization’s credibility and character in public policy realm and to bolster brand equity and sales revenue. Therefore, corporate social responsibility provides the basis upon which organizations achieve mutually-aligned interests. Handy and Katz (1998) have defined corporate social responsibility as a business’ obligation to maximize its positive impact on society while at the same time minimizing its negative impact. There are three dimensions of social responsibility which businesses are obliged to observe: economic, legal and ethical. The economic dimension is related to how a firm utilizes resources for production of goods and services and how these are distributed to the society. The legal dimension relates to a firm’s obligation to obey the law and standards that have been set by the government. The law establishes basic ground rules for responsible business practices. The ethical dimension of social responsibility concerns behaviours and practices that are expected by members of an organization as well as its community, although these expectations are not necessarily put into law. Ethical responsibilities reflect the concerns of major stakeholders about what is right with respect to protection of moral rights. To a large extent, the ethical dimension of social responsibility entails the expectations that a firm should contribute resources to the society to improve the quality of life (Sims, 2003). For a business to survive in the long run, the economic, legal and ethical dimensions of social responsibility should coexist. To a large extent, the three dimensions are complementary to each other. Thus, Friedman’s argument that the main role of a business is to maximize profit is not a true reflection of the role of firms. Business managers understand, for instance, that ignoring social and environmental issues can be bad for the survival of a business. Companies which pollute their host communities fear poisoning customers. Failure to contribute to the development of the local education system poses the threat of depleting a pool of qualified works. As such, businesses have to contribute to the stakeholders and the societies in which they operate (Pratley, 1995). Importance of Corporate Social Responsibility in Modern Business Practices Trends in the modern business world have greatly disapproved Friedman’s view of the role of business and its position within a society. The profit-maximization objective is merely an aspect of the wider spectrum of corporate social responsibility. The numerous challenges posed by competition and the desire to penetrate new and hostile markets have demonstrated that corporate social responsibility should be basic to organizations as are business objectives (McAleer, 2003). Ideally, corporate social responsibility acts as a stepping stone to realizing profit maximization objectives. The realizations of these objectives depend on how well corporations align their interests with those of the audience, consumers and the general public. For this reason, corporate social responsibility turns out to be not only a communication challenge but also a management and planning challenge. There is a compelling need for companies to establish good public relations as a tool for spearheading corporate social responsibility initiatives and for monitoring changes in social values, perceptions and interests. Changes in the society’s perceptions and interests provides an approach for gauging what makes a corporation look good in the eyes of its immediate society. This forms the standards and expectations through which an organization’s actions and conduct are judged by the society (Garriga & Mele, 2004). Constant monitoring of social issues can help corporations understand their positions in the society and how they can align their interests and resources to effect necessary structural adjustments. This is achieved in modern business organizations by taking into account the importance of communication as a tool for enhancing, developing and evaluating vital corporate reputation which fosters public policies. This has made it easy to realize mutually beneficial interests. Firsov (2005) has disagreed with Friedman’s notion of social responsibility and considers corporate social responsibility to be an approved expenditure of human and material resources though which strategic business plans, including profit maximization is advanced. If a firm’s operations fall short of stakeholder’s expectations, legitimacy gaps may pop up and these may motivate stakeholders and the society to reconsider their perceptions about a business. This consideration applies to not only private-sector corporations but also those in the public sector and government agencies. This is because, in all those organizations, several factors apart from revenue flow or profit define corporate social responsibility standards. It is for this reason that several companies have lately embarked on philanthropic initiatives as a way of contributing to the social needs of the society (Vogel, 2005). Some companies have even partnered with government agencies and nonprofit organizations in solving economic, social and psychological problems facing the society. In such cases, corporate social responsibility has been perceived as corporate social philanthropy and has in turn resulted into effective public relations. Empirical data offer extensive support for the positive relationship between corporate social responsibility and profit. Its returns far surpass the costs of implementing it, subject to the manner in which it is nurtured. The benefits of corporate social responsibility are measured by various indicators such as marketing impact, returns, profit and effect on long-term strategic objective. For instance, Handy and Katz (1998) have argued that despite huge costs incurred in an attempt to improve the quality of customer service experience, returns to shareholders respond positively. Kotler and Lee (2005) however note that the relationship between corporate social responsibility and profit is not linear and can vary between industries and corporations. This happens to be the case since some corporations are rewarded by exhibiting high levels of innovativeness than others. An analysis of socioeconomic factors such as impact of an industry on the society can help explain the impact of corporate social responsibility on performance measures. Garriga and Mele (2004) have asserted in his book that social responsibility is a voluntary effort by a business to satisfy the expectations of various stakeholders. The stakeholders may be investors, owners, consumers, employees, government and the society. In order to satisfy the profit maximization objective, a business must be able to satisfy the interests of these groups and develop long-term relationship with each interest group (Black, 2006). Primarily, there are three main considerations for embracing social responsibility: i. Public image: the various activities and contributions that a business makes to the welfare of the society earn reputation and goodwill for the business. In addition, the business’s growth and revenue depends upon the public image of its activities. Researches (Firsov, 2005) have shown that most people prefer buying the products and services of companies which engage in social welfare programs. A positive public image can help attract competent and honest employees. ii. Government regulation: to avoid stringent government regulations, businesses find it necessary to discharge some duties voluntarily. For instance, if accompany pollutes environment, it will naturally be put under strict government regulation, which may ultimately force it to close down. To avoid government regulations, the business should take initiatives to conserve and maintain a pollution-free environment. iii. Growth and survival. Every business is part of a wider society. Businesses harness and utilize available resources from the society such as water, land, power and human capital and in turn distribute output to the society in form of products and services. It is therefore, a natural responsibility of the business to put efforts to develop the welfare of the society, from which it obtains input and distribute output. Conclusion The analysis of Friedman on corporate social responsibility is quite simplistic in its specification of the motivation of businesses. Friedman’s theory assumes that the ability of firms to maximize profits is dependent on adherence to the rules and regulations governing business conduct. Empirical researches have, however, disputed Friedman’s notion and have shown that a business’s strategic objectives, including profit maximization are realized through interaction and contribution to the welfare of the society. It is from the society that businesses obtain inputs which they use in the production process. In addition, the outputs of the production process are distributed to the society in the form of selling. As such, businesses have an obligation to contribute to the interests and needs of the society and it is only through this consideration that they can realize their profit maximization objectives. References Black, L.D., (2006). Corporate Social Responsibility as Capability, Journal of Corporate Citizenship, 23:25-38. Firsov, E. (2005) Charity as Commercial Undertaking. Unpublished Master Thesis, New Economic School. Friedman M. (1970) The Social Responsibility of Business is to Increase Its Profits. The New York Times Magazine. September 13, 1970. Garriga, E. & Mele, D. (2004). Corporate Social Responsibility Theories: Mapping the Territory. Journal of Business Ethics, 53:51-71. Handy F. and Katz E. (1998) The Wage Differential between Nonprofit Institutions and Coprorations: Getting More by Paying Less? The Journal of Comparative Economics. Vol. 26. p. 246-61. Kotler, P. & Lee, N. 2005. Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause. Wiley & Sons Ltd. McAleer, S. (2003). Friedman’s Stockholder Theory of Corporate Moral Responsibility. Teaching Business Ethics, 7:437-451. Pratley, P. (1995). The essence of business ethics. Prentice Hall Essence of Management Series: London, pp100-108. Sims, R., (2003). Ethics and corporate social responsibility: why giants fall. Westport: Praeger. Vogel, D. (2005). The Market for Virtue. The Potential and Limits of Corporate Social Responsibility. Brookings Institution Press. Werhane, P.H. (2000). Business ethics and the origins of contemporary capitalism: Economics and ethics in the work of Adam Smith and Herbert Spencer, Journal of Business Ethics, 24, 3:185-198. Wood, D.J. (2002). Business Citizenship: From Individuals to Corporations. Ruffin Series in Business Ethics, Society for Business Ethics, p59-94. Read More

From this definition, it is clear that it is the responsibility of an organization to be aware of the concerns of its society and be able to respond effectively to the concerns. Thus, contrary to Friedman's argument, the need to conduct business in line with the welfare and wishes of the society should be a core aspect of an organization’s business objectives. Wood (2002) has pointed out in his book that corporate social responsibility is closely related to environmental conservation efforts.

It is, in fact, the case that contributing to corporate social responsibility is part of an organization strategic vision and therefore the responsibility should be incorporated into the organization’s internal system. Werhane (2000) has put a lot of emphasis on the need for companies to ascertain that their businesses are proof of their awareness of social concerns. When a company responds to the interests of the society and improves quality of life, both the society and the company benefit.

Both increase marginal revenues and benefits without necessarily increasing marginal costs. In contrast to Friedman’s argument, corporate social responsibility can be a sufficient proof that an organization not only focuses on ways to increase its profits but also organizes itself to be socially involved and responsive. Sims (2003) discusses that corporate social responsibility can improve a company’s marketing clout and hence result into higher profits if it is centered on product quality and consumer’s preferences regarding key product issues.

In that case, aligned interests become crucial and account for the positive impact of corporate social responsibility. However, such facts may not count if stakeholders are oblivious of a corporation’s accomplishments. Thus, corporate awareness which results from social responsibility is an important factor in strategic business management. This can be adduced by the fact that when consumers are aware of a company’s social corporate responsibility initiatives, the awareness increases the desire to be associated with that company.

This makes the company an attractive place to work in and invest. One of the strongest roles of corporate social responsibility is participation in construction of social meaning which defines and evaluates an organization’s social obligations. Specifically, corporate social responsibility helps enhance an organization’s credibility and character in public policy realm and to bolster brand equity and sales revenue. Therefore, corporate social responsibility provides the basis upon which organizations achieve mutually-aligned interests.

Handy and Katz (1998) have defined corporate social responsibility as a business’ obligation to maximize its positive impact on society while at the same time minimizing its negative impact. There are three dimensions of social responsibility which businesses are obliged to observe: economic, legal and ethical. The economic dimension is related to how a firm utilizes resources for production of goods and services and how these are distributed to the society. The legal dimension relates to a firm’s obligation to obey the law and standards that have been set by the government.

The law establishes basic ground rules for responsible business practices. The ethical dimension of social responsibility concerns behaviours and practices that are expected by members of an organization as well as its community, although these expectations are not necessarily put into law. Ethical responsibilities reflect the concerns of major stakeholders about what is right with respect to protection of moral rights. To a large extent, the ethical dimension of social responsibility entails the expectations that a firm should contribute resources to the society to improve the quality of life (Sims, 2003).

For a business to survive in the long run, the economic, legal and ethical dimensions of social responsibility should coexist. To a large extent, the three dimensions are complementary to each other.

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