Efficient Functioning of a Capitalist System - Coursework Example

Efficient Functioning of a Capitalist System Introduction With the changing economical and financial conditions that are taking place through out the world, corporate players have changes their view toward social responsibilities. The condition is identical in UK as more and more companies are paying emphasis toward Corporate Social Responsibility (CSR) to attain success. Companies have realised the fact that their past strategy of short term benefit to the shareholders will no more be expectable and this strategy was one of the major cause of world wide financial slowdown. The companies, who have to come out from the prevailing financial trap, should think about long term benefit for the investors as well the society in which the business survives. The country's law should also assist companies to come-up with their CSR policies; hence the company law has to bring required amendments. Like other countries, the concept of CSR is gaining momentum in UK and the company law system is incorporating required changes so that companies can carry out their social responsibility. UK company law system is considered as an over-complicated system which has blend of both modern and radicalism. All the UK listed companies have to comply with the combined code and they have to publish Turnbull report. This reports ensures that the company will manage its non-financial risks and it will pay due respect toward environmental, social and ethical factors along with its main business practice. The UK government always tried to maintain a balance in shareholders interest and this view was clearly reflected in white paper that provides guideline which the companies have to follow. Government of UK has always supported the idea that the duty of the director of a company has to be codified and the new director should gain an introductory idea regarding the duty toward society. After considering all the factors into account, UK government had introduced certain amendments like draft clauses, volume II- Schedule II, 2 (b) which was a step toward modernising company's law. Corporate Social Responsibility (CSR) and Capitalism Different thinkers have different view regarding capitalism and CSR. The term corporate was well defined by Melvin Aron Eisenberg in the following fashion “the business corporation is an instrument through which capital is assembled for the activities of producing and distributing goods and services and making investment. The business corporation should have as its objective the conduct of such activities with a view to enhancing the corporations profit and the gain of the corporation’s owners, that is, the shareholders ” (Monks & Minow, p. 8). This definition makes it clear that to run the business, companies take money from the investors, so the main aim of the corporation is to earn for its shareholders who are the actual owners. The term CSR derived its name from two different words which are “corporate”, “social” and “responsibility”, hence the term CSR is self explanatory. The concept of CSR is not as new for the society as different thinkers gave different view regarding company's responsibility toward the society and toward its investors. Milton Friedman gave the argument that only responsibility of any business is to maximize shareholders’ profit and social responsibility is purely a socialism concept. He also argued that managers are just a representative of the shareholders whose only obligation is to maximise the shareholders’ capital (Friedman, M, 1970, p. 32-33, 122, 126). But with passage of time, companies realised the fact that in reality if they follow CSR, they can succeeded to attain better market position and this will make a positive impact on their financial performance. So more and more companies started accepting CSR as an integrated part of their business process. Now a day companies publish the CSR report along with their annual financial report. The main motto of this report is to provide detail regarding company's investment toward betterment of their stakeholders and the environment. On the basis of this report, the companies are ranked, so before publication the facts and figures related to CSR undergoes audit. To realise the fact that why do the company ask for assurance for their CSR report and how the stakeholders take this whole concept, a global survey was conduced by PricewaterhouseCoopers (PWC). The results of this survey reflected the fact that majority of the companies in UK and Australia rely on assurance for Corporate Responsibility Report (CRR) where as in EU, companies rely more on audit firms for attaining assurance statement for CRR. Undertaking the growing demand for sustainability assurance, many new auditing standards have been incorporated. One such example is ISAE 3000, which specify the special requirement for auditing sustainability of a firm. This standard also sets requirement of the auditing team and the firm which conduct the audit (PWC, p. 2-8). Necessity of corporate social responsibility (CSR) in the capitalist systems It has been found that more and more companies are taking CSR seriously to enhance their market position. Companies have realised that CSR can bring vital change in their performance and overall in their financial performance. Necessity of CSR can be bifurcate into two sections which as under: Moral necessity- as the corporation is directly dependent on society for men, material, money and land; hence the corporation should have certain moral responsibility toward the society. The corporation should actively participant in enhancement of environment, community and the other section of society. Economical necessity- the financial responsibility of the company indicated that the quality of the products and services should be high; the customers who are paying for the goods and services should get the return in best possible way (Crane et al., p. 305-306). CSR is a broad term which covers many factors under one umbrella. The factors which come under CSR are given below: The day to day factors like general environmental sustainability and work place related issues Transparency and social audit related to corporate governance- as the company run the business with shareholders money, so it is company's responsibility that they must inform what they are doing for the society through the CSR report. This report brings transparency among corporation and the stakeholders. Personal and legal obligations related to the ethical factor- CSR is not just an ethical factor, rather is as important as other legal factors. Though CSR a company tries to follow fair trade practices within their working. So it can be said that CSR is “moral righteousness”. Strategic brand management- CSR provides assistance in management of strategic brands. Handling cultural strategic conflict- many a time the cultural differences comes up as one of the major hindrance for the companies, so CSR creates a platform to overcome the cultural differences. Patriotism- by undertaking CSR, the company can undertake its responsibility toward the nation, so CSR is one of the common modes of showing patriotism. Internal relationship management with the suppliers, customers, employees- as the company have responsibility toward its internal stakeholders, so the corporation have certain responsibility toward them. External relationship management with the customers, community and other stakeholders- a business thrive for its customers, so the corporations should take into account its responsibility toward them. The corporation is a part of society or more strictly speaking, it is an integrated part of the community so through CSR, company can perform their duty toward their community and their welfare (p. 6-8) It is important to understand that what CSR is not. CSR is not a legal obligation nor is it a regulatory regulation for the corporations existing in different industries. But there are certain rules and regulations which each and every corporation have to follow and braking of the rules is equivalent to breaking a law. In reality CSR is a business strategy so the corporation should be positive while selecting or avoiding them. The concept of CSR should take into account that it is not a cause related marketing tool. CSR in UK and UK Company Law The story of development of Corporate Governance and Corporate Social Responsibility in UK is same as that of US and other part of the world. As soon the rights and the duties of the shareholders and the directors in UK Company were recognised, the Company Law of UK made the required amendment to take into account the complexity of the matter. The UK government in 2002 published the White Paper- “Modernizing Company Law” (Mullerat & Brennan, p. 42). This paper proposed that directors' duty should be codify and the major listed company should review their financial and other operation related information to enhance transparency. The Companies Act 2004 (UK's 2004 Act) introduced certain more addition in the director's duty and further modification in accountancy (Mullerat & Brennan, p. 42-43). In March 2005 proposed further codification of directors 'duty toward the stakeholders, and the directors duty should be to “enlighten the share holders duty” (Hicks & Goo, p. 315). The Companies act 2006 is longest one and it has 1300 sections which introduced many new amendments in the Company's Law. The Act paid emphasis on the fact that companies should pay proper importance toward their employees and their shareholders' welfare. Companies should also be responsible toward the suppliers, customers and the environment. The GC100's best practice guideline provided a roadmap for CSR practices and new duties of director (ICAEW, Companies Act 2006). Section 172 of the Companies Act refers that the director should practice fair practices for the betterment of the company and for preservation of the stakeholder’s interest () CSR as a marketing strategy In UK a constant growth has been taken place in the number of companies publishing their CSR report. One of the reasons behind such high growth is that many companies consider CSR as a powerful marketing tool. The companies which fail to retain their good name in terms of social responsibility faces huge trouble. Two such large businesses are Exxon Mobil Corp. and Nike Inc. which came to spotlight on the CSR ground. The corporate strategist and head of the professor of marketing at Emory University' Goizueta Business School said that many companies utilised CRS as a strategic philanthropy to assist their own business in long term. He gave that example of Microsoft Corp. and Apple who actively participate in educational programmes not just for welfare of the society, but also to help the organisations. The reason behind is educated population often be more computer savvy and leads to development of large pool of potential employee for the future. In the same way Google participates in social responsibility to make impact on its own used base. Hence it can be concluded that many of the companies participates in CSR activities to ultimately support their own business in the long term (Knowledge@Emory, “The Real Story Behind Corporate Social Responsibility”). CSR has gained momentum in the last century and due to development in the international trade laws. World Trade organization (WTO) has restricted the government to restrict import on ground of environmental factors or labour standards existing in the exporting country. The rules given by WTO restricts labelling of the product and also the description that how the product has been produced outside the nation. But due to formation of certain bilateral treaty between EU and USA, labelling and certification becomes compulsory. Such labelling and certifications are used as marketing strategy under the name of CSR. The myths of CSR It is a fact that CSR refers to ethical behaviour, high customer loyalty, well treatment with the customers and many more. But the developing pressure for the advocate of CSR is constantly creating problem for the developing countries by making comparison of labour condition between then and with developed countries. It has to be accepted that thought developing countries pay less to their labour, but if these jobs are taken away, it will lead to great problem for the third world nations. So the thing which is correct for one nation is not for the other. In the 21 century the shareholders are mutual funds or pension funds investor. If the top executive announces that 50 percent of the company's profit will be donated for welfare of the society, soon the investors will start selling their investment and the value of the company will go down. Such decision may hurt the sentiment of the employees of the company (Heaton, p. 1-2). CSR doesn't take into account the trade off between financial condition of the company and the ethical factors. The other problem related with CSR is incomplete or imperfect information that fail to differentiate between the facts which are good for the company and the factors which are good for the society. The prevailing myth regarding CSR can be summaries as follows: It is possible for retaining short term benefit for the corporation along with maintaining long term benefit for the society. The ethical consumers will bring change for the corporation. The ethical factors will help the corporation to overcome competitive race (Doane, p. 25-27). For example, Ford have strategic link with a breast cancer research centre. If one analyse the fact that how can a motor car manufacturer have link with breast cancer? Rather an auto-mobile manufacturer can relate itself with alternative fuel research or the growing challenges related to gasoline (McElhaney, p. 33). Conclusion Different thinkers have different view regarding corporations’ responsibility toward society. No doubt that corporation utilises their CRS strategy as their marketing tools, but the bottom line is that through companies CSR strategy the society do gets benefited in long term. The main motto of capitalism is to make profit for their shareholders and to grow in lion term, but the CSR related legal factors pressurise the companies to keep welfare of their stakeholders and environmental factors into account. The concept of CSR report bring transparency in the whole process of social welfare because before publishing the facts and figures, the companies have to acquire assurance from some authenticated source like an auditor. So the companies are well aware that any negligence in the CSR can ruin their market image and the consequences can be hazardous for business in long term. The case is same in UK where number of companies has started publishing the CSR report along with the annual financial reports. But till date many loop holes exists in the CSR policies provided by government through different Acts and companies take advantage and try to manipulate the CSR concept for their own benefits. Hence government should conduct in-depth research on this mater and should introduce required amendments in the Company's Law. Such legal framework will for effective functioning of the capitalist system with the aim of maximising profits for investors and side by side undertaking welfare of the stakeholders like customers, suppliers, community and environment. References Crane et al. The Embedded Value of Business and Government Responsibilities. 2008. The Oxford Handbook of The Corporate Social Responsibilities. . Doane, D. The Myth of CSR. 2005. Stanford Social Innovation Review Fall 2005. Leland Stanford Jr. University. September 24, 2009. . Friedman, M. The Social Responsibility of Business is to Increase its Profits. September 13, 1970. New York Times Magazine. Heaton, H. Corporate social responsibility: sensible? April 03, 2005. deseretnews.com. September 24, 2009. . ICAEW Modernising UK Company Law 2009. The Institute Of Chartered Accountants In England And Wells. September 25, 2009. . Kluwer Law International Hicks, A & Goo, S. H., Cases and materials on company law. 6th ed. (2008). Oxford University Press. Knowledge@Emory, The Real Story Behind Corporate Social Responsibility. August 12, 2009. Business Ethics. September 25, 2009. . McElhaney, K. Creating a CSR Strategy. No Date. The Strategic Approach To Corporate Social Responsibility. Executive Forum. September 24, 2009. . Monks, R. A. G. & Minow, N. 2008. 4th ed. Corporate governance. John Wiley and Sons. Mullerat, R & Brennan, D. Corporate social responsibility: the corporate governance of the 21st century. (2005). Kluwer Law International. PLC. GC100 Paper on Companies Act 2006 - Directors' Duties. February 07, 2007. Practical Law Company Limited. September 25, 2009.. PriceWaterHouseCoopers (PWC). The Right Combination: Corporate Responsibility reports: the role of assurance providers and stakeholder panels. . December 2007. University of Miami. Corporate Social Responsibility (CSR). No date. A Guide to Corporate Social Responsibility (CSR). September 24, 2009. . Read More