The Concept of Corporate Social Responsibility - Coursework Example

 STRATEGIC CORPORATE SOCIAL RESPONSIBILITY Introduction This paper shall discuss the concept of corporate social responsibility, its origins, evolution, as well as the debates spawned by the concept. Social responsibility of business pertains to its relationship with its constituents - namely, the customers, employees, suppliers, communities, governments, and stockholder - stakeholders which influence and are impacted by the decisions the firm makes. From the debates regarding the wisdom of corporate social responsibility have arisen different categories of attitude that firms take in relation to their stakeholders. One of these is called strategic corporate social responsibility, an interesting perspective that is often equated with enlightened self-interest. The Stakeholder Concept Considerable amount of literature have been produced on the subject of the stakeholder concept. In addition to the identification of who these stakeholders are, attempts have been made to categorise them. Clarkson (1995) has divided them into primary stakeholders and secondary stakeholders. The former are those who are essential to the survival of the firm: the owners/shareholders, customers, employees, communities, the government, and (contingently) suppliers and creditors. Secondary stakeholders are those that are not essential to the firm's survival but are affected by its operations; these include interest groups such as environmentalists, the media, intellectual critics, trade associations, and even competitors. An expansive view would include future generations and natural entities such as the earth's atmosphere, oceans, terrain, other living creatures as part of the stakeholders. In this stakeholder model, the welfare of each is an end in itself, not just a means to enrich or benefit investors. This is in contrast with the traditional concept which puts the interests of the investors/ shareholders as paramount. The Concept of Corporate Social Responsibility. There are several definitions of corporate social responsibility, but in general, according to Buchholz (1992), the concept means that a private corporation has responsibilities to society that go beyond the production and sale of goods and services at a profit – that the corporation has a broader constituency than the stockholders alone. Post et al (1996) states that a corporation should be held accountable for any of its actions that affect people, their communities, and their environment. Further, the corporation relates to society through more than just the marketplace and serves a wider range of human values than the traditional economic values that are dominant in the marketplace. The concept means that corporations are more than just economic institutions and have a responsibility to help society solve some of its most pressing social problems, many of which corporations helped to cause, by devoting some of their resources to the solution of these problems. While some entrepreneurs in the nineteenth century are considered to have practiced some forms of social responsibility, the modern concept of corporate social responsibility emerged in the 1960s when society was beginning to change its perception of the role of business, a departure from the old social contract based on Adam Smith's theory of the invisible hand whereby it was believed that the needs of society were best met when businesses looked after their own interests through profit seeking -- a social contract based on the view that the pursuit of wealth in a free enterprise system was the source of all economic and social progress. The purpose of businesses was to produce and sell goods and services at a profit, making their maximum contribution to society in this manner as their interpretation of being socially responsible. The new contract to which society wanted businesses to agree was based on the view that in pursuing economic gains, businesses produced some detrimental side effects that resulted in social costs to some segments of society or the society as a whole. Social progress did not always or automatically result from the operations of businesses, but in some cases they produced negative externalities – such as environmental pollution and degradation, exposure of workers and consumers and nearby residents to toxic substances, unsafe workplaces, discrimination against certain classes of community members, and others. Society wanted to impress upon businesses that it was their duty to minimise or reduce these harmful effects, that in addition to pursuing profits, it was their obligation to be conscious of the economic and social impacts of their activities and consequently to act in a responsible fashion. The concept of social responsibility is based on ethical concepts and principles. It was believed that businesses had a duty not only to obtain good returns for their owners but also to deal with social problems and to contribute to human welfare and the quality of life in the communities where they served. Arguments for Corporate Social Responsibility Because there has been a change in society’s perception and expectation about the role of businesses, it is incumbent upon the latter to adjust to such change. Businesses owe their existence and continued existence to the society and the government that gave them the right and license to operate in the interest of the holders of capital. Because the business sector would be powerless to change the tide of perceptions and attitudes, it has no choice but to accommodate themselves to this transformation in the social environment. Businesses have to work congruently with the new expectations of society. Another argument in favor of corporate social responsibility is that while short-term financial outlays used to alleviate social problems may affect short term profitability, it is in the interest of business to take the long-term view. By creating an environment that serves the interest and welfare of society, it would thus produce environmental conditions favorable for business survival and continued profitability over the long run. The consequences of neglect to deal with social problems would be the deterioration of the environment and difficulty in gaining access to resources that businesses need. In short, the corporation can only have greater opportunities to grow where it operates in a society that is healthy, thriving, and prosperous. In his defense of corporate social responsibility, philosopher Almeder (1988) stated quite emphatically that by addressing social concerns directly, businesses would be able to avoid government regulation. Social issues and expectations go through a certain sequential process wherein if a business fails or refuses to respond to social expectations, they will be taken up by the political system and find their way into the legislative agenda, which can progress into law or government regulation thus forcing compliance and the exaction of penalties for violators. In this scenario, the constraints imposed on corporations are likely to be more severe and restrictive than if they had promptly and directly addressed the relevant social issues. The best strategy for businesses would therefore be to preempt the process and to anticipate social protests or government action by responding early enough to meet social expectations and thus obviate possible government intervention and regulation. A better public image would also be engendered if a company is responsive to social issues. This would mean that it can attract more customers, generate more sales and revenues, have better employees, obtain better valuation of the company’s shares in the stock market, and easier access to the capital markets when they decide to raise funds for expansion. Thus a company with a good social image gains a competitive advantage over rivals who are not socially responsible. An argument anchored on the strengths possessed by corporate entities is the presence of resources and pool of talent and technology that a business possesses and which can be utilised for the purpose of helping solve social problems. A culture of innovation and efficiency obtains in many corporate organisations. If these resources and capabilities can be tapped directly to help address real social problems, society can benefit tremendously and more efficiently than the government can. Further, if businesses can look into areas of poverty and deprivation and address the issue of marginalisation or social exclusion in some geographical areas or urban segments and locate their businesses there, they would be able to address both private objectives of profit making and social problem solving at the same time. For example businesses can locate in areas where there is much unemployment or in deteriorating or blighted neighborhoods,or where they may utilise waste materials as opportunities to create products than can be processed and sold for profit. There is no doubt that businesses create or leave negative impacts through their operations. Therefore, it is their moral duty to solve those problems that they have created, such air and water pollution, unsafe workplaces and working conditions that affect the health and safety of workers, discrimination against certain individuals through their hiring and promotion practices, and so on. These problems cannot be left to the communities or the government alone to solve. Arguments against Corporate Social Responsibility A fundamental objection to the concept of Corporate Social Responsibility is the lack of precise definition that is acceptable to all. There is a great deal of confusion and fuzziness about what it means and what it consists in. The market mechanism does not help in determining corporate social responsibility because it has no relevance to the provision of public goods and services, nor does it help the corporate manager in determining what social problems to address because there is no money to be made from solving pollution problems, for example, or applying affirmative action. Hence there is nothing to regulate or guide the decision making process for managers, who must then act on their own There is no accountability for decision taken to address and solve social problems because the market mechanism is not applicable, and the private decision makers are not publicly accountable, not being elected officials. According to the Nobel Prise-winning economist Milton Friedman (1988), the manager is responsible to the owners of the business, namely, the stockholders, and their decisions and action should be guided by the principle that their principal mission is to maximise stockholder returns. Friedman had two arguments to support his position. Firstly, stockholders are owners of the corporation and thus profits belong to them. Managers are just agents of the stockholders and have the moral obligation to manage the firm in the interest of stockholders. By acting on their own to donate the firm's income to charitable causes, or otherwise help address social problems, they would be using the stockholders' money for illegitimate purposes. Doing so would likely cause them to increase prices in the market and thus lose their competitiveness. According to Friedman, the manager is just a salaried employee of the owners and is legally bound to earn the highest return for the stockholders while staying “within the rules of the game.” Managers also do not have the expertise to solve social problems and cannot be as effective as other institutions which have more experience in dealing with social issues and problems. Secondly, Friedman believed that stockholders are entitled to their profits as a result of a contract among corporate stakeholders. Each of these has a contractual relationship with the firm: the executives and employee obtain salaries and wages for their services; the local community gets paid through taxes; suppliers obtain payments for the goods they provide. Funds remaining after all these payments represent profit for the stockholders, as compensation or premium for the risk they take. Another objection is the concept is a fundamentally moral one. According to this view, corporations are not moral agents that can act for moral reasons. The implication of managerial involvement in social problem solving is that the free enterprise system would be compromised or undermined. It would also mean that the consumers, minorities, environmentalists would have to be represented in the boards of the corporations and the decision making would become political, no longer economic in nature. Strategic Corporate Social Responsibility Ohmae (1982) defines strategy as the way in which a corporation endeavors to differentiate itself positively from its competitors, using its relative corporate strengths and weaknesses to better satisfy customer needs. In formulating a business strategy the three players considered, constituting the strategic triangle, are the company, the customers, and the competition. The above definition is perhaps the simplest and most appropriate one to attribute to a situation where a company uses its resources in order to fulfill its central mission of serving the economic interest of the firm by undertaking activities related to corporate social responsibility, not as an end in itself, but as a means to improve its competitive position. The company in this context attempts to use social responsibility as an instrument to facilitate the achievement of its maingoal of increased profitability, whether in the short term or in the long term. Goodpaster (1991) says that in this strategic view, stakeholders outside the stakeholder group are “viewed instrumentally, as factors potentially affecting the overarching goal of optimising stockholder interests.” He further adds: They are taken into account in the decision making process, but as external environmental forces, as potential sources of either good will or retaliation. “We” are the economic principals and management: “they” are significant players whose attitudes and future actions might affect our short-term or long-term success. We must respect them in the way one “respects” the weather – as a set of forces to be reckoned with (Goodpaster 1991, cited in Beauchamp and Bowie 1993). Managers who adopt the strategic view consider their relationship with stockholders as fiduciary, as agents in relation to principals. In their role as agents for the owners (stockholders) these managers consider other stakeholder concerns as subordinate to stockholder concerns. In this regard, all stakeholders except the special group (the owners) are considered only on the basis of their potential influence on the management's principal mission, that of maximising profits for the stockholders. In the last part of Friedman's essay criticising the adoption of corporate social responsibility as advocated by some, he is quoted as saying: “. . . there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud (italics supplied).” This last qualification appears to closely align his position with the strategic view. Baron (2003) states that some firms use the rhetoric of corporate social responsibility strategically to maximise their profits. This can be done either defensively or aggressively. From the defensive perspective, this takes the form of damage control as a consequence of actions by stakeholders such as labor's attempt to block plant closure or the intervention of consumer and other interest groups in proceedings to regulate offending firms. Firms may also aggressively seek support from local communities, suppliers, and consumers through activities that would project concern for the welfare of the stakeholders. An example would be charitable contributions to local organisations or efforts to improve the morale and satisfaction levels of employees. While these may look like they are stemming from “altruistic” motives, they are actually calculated to benefit the firm indirectly, in order to improve its bottom line ultimately. Ethical behavior in general not only increases long-term earnings but also enables businesses to plan ahead and anticipate social needs and cultural changes that require the firm or its products to evolve (Jennings 1997). One of the benefits ethical behavior and a firm's participation in community concerns is goodwill; and the absence of such goodwill can destroy the firm sooner or later. Jennings points out many evidences of this fact in the experiences of business in the United States. Conclusion Stakeholder theory is still considered as a very much alive and evolving issue. While Milton Friedman advocates the free enterprise principle as serving the larger society best through maximizing business profits, enlightened self-interest dictates that the shareholders’ interest is best served by serving the larger society. The concept of corporate social responsibility posits the view that it is by serving the larger society directly that the larger society is best served. It is perhaps the middle view, enlightened self-interest, that corporate leaders are more inclined to accept as representing what they do when dealing with social issues. It is also compatible with the posture adopted by strategic corporate social responsibility, and is supported by the Business Roundtable, a group composed of CEOs of top American companies and founded in 1972 to “examine public issues that affect the economy and develop positions which seek to reflect sound economic and social principles.” In contrast to the Friedman's view, the Business Roundtable considers management, not the stockholders, as the principals. Stockholders, some of which are quick to dispose of their investments, are simply providers of risk capital. In fact, employees may be considered as having more stake in the success of the firm, as their survival depends on their jobs. BIBLIOGRAPHY Baron, DP 2003, Business and its environment, 4th edn, Prentice-Hall, Upper Saddle River, New Jersey. 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