Social Responsibility of a Business - Essay Example

Social Responsibility of a Business of the New Zealand Introduction "There is only one social responsibility of business - touse its resources and engage in activities designed to increase its profits without deception or fraud" (Friedman, 1962). This statement by Milton Friedman has been a point of discussion since it was made. A similar statement was made by Archie Carroll. According to Carroll (1973), “Social responsibility of a business has at least four dimensions: an economic dimension, a legal dimension, an ethical dimension and a discretionary dimension.” Under the economic dimension it is emphasised that a business organisation is the agent for creating wealth. Through the proper use its material and manpower resources they make the economy healthy. The more they make profit, the higher is the taxes they pay to the government. The government will then have the money to take measures of social welfare. The legal dimension proposes that the business organisations should follow the rules and regulations proposed by the government and should not evade taxes. During their operation, business organisations should follow the rules related to health and safety of the staff, rules against racial or sex discrimination, emission norms etc. There are several industry specific rules such as rule related to hazardous waste, which must be followed. The ethical dimension refers to the business ethics of fair competition while protecting the interest of the major stakeholders be it the shareholders, consumers and the employees. It requires the business owners to work with the moral conscience while taking business decisions. The discretionary dimension is the philanthropic part of social responsibility wherein the business organisation make donations for the social cause such as poverty alleviation, education of the poor sections of the social, control of a deadly disease like cancer or HIV AIDS. There are donations made by businesses during any national or global calamity. All these become a part of discretionary philanthropic act. Only two of the four dimensions discussed above has been the part of Friedman’s statement i.e. economic and legal dimension. In his essay, Friedman argues that the ethical and the discretionary dimensions can be the responsibility of any individual be it the businessmen or the employees of the organisation and not the business. Arguments in favour of the statement As was insisted in the stakeholder theory by R. Edward Freeman, business organisations have legal obligation towards the primary and secondary stakeholders to run in a profitable and fair manner. The primary stakeholders include shareholders, customers, business partners, employees and the community while the secondary stakeholders include the government and the regulatory bodies, civic institutions and competitors etc. Any business organisation is utilizing the resources of a state. It is in the interest of the state that this organisation makes the best possible use of these resources. It uses the right quantity of raw material to produce the required quantity of product or service as desired by its consumers. All this should happen without the interference of government once the regulations are in place. Business organisations should hire the most suitable manpower for each work at the right remuneration. The correct remuneration will keep the employees motivated enough to deliver their best and the company will thus become more profitable. Profitable businesses will create further jobs and pay increased taxes to the government. Hence the company is helping the government indirectly for the public cause. The employees who get jobs will spend their earning to buy goods and services from the society and also pay taxes on the amount they are earning. There will be more money in the market and the society. There is overall increase in quality of life of the society through the increased earning and the community as a whole is getting benefitted. Friedman has also insisted on the importance of being fair in the course of doing business. The business organisations should not resort to any act that is deceptive to any of the stakeholders be it the owners, the employees, the government or the competitors. If profit is increased by deceiving any of them, then its motive of profit maximisation is not justified. Friedman’s view has got strong support from many business executives and leaders across the world. One of them is the ex-CEO of Commonwealth bank David Murray. He once insisted that the bank has been able to make huge charitable donations only because they have been making huge profits. He also argued that the closure of several branches and retrenchment of employees were actions taken to maximise the profit of the organisation and hence they were socially responsible act. It is because of these actions that the company was making profit and hence able to make the philanthropic donations. Arguments against the statement There are strong arguments against Friedman’s statement. The first one is the environment related issues. Businesses use the resources of the society and the state for earning profits. In this process they pollute water, air and land as well. Taking measures to control pollution and recycling of most valuable resource- water involves cost. The company may not be interested in taking up such measures. For the purpose of elaboration, let’s take the case of a hypothetical company ABC Pharmaceutical Ltd. This organisation uses various resources of the society such as chemicals (raw materials), human capital, land, water, air to produce the medicines required by the society and sells them. This organisation is fully aware of what to produce and in what quantity to maximise profit. However, in this process of production of these medicines, it is polluting land and water. It is releasing various gases in the air which is harmful of the people, plants and the animals as well. The machinery that it is using is old and hence the pollution is higher though it is within the limits provided by the regulatory bodies. If it replaces them by new machinery, there will be a reduction in amount of polluting gas released. The organisation can also install water treatment plant which can help in purification of water to make it suitable for reuse. However, both of these steps would involve cost. Any business organisation in such a scenario would do a cost-benefit analysis. On analysis, it realizes that the investment required in new machinery is high and its profit will be reduced for several subsequent years. It also finds that the cost of recycling water is much higher than using fresh water from the available sources. Any organisation which has only profit motive of running the business would not be interested in taking up environment saving measures. A businessman, thus, needs to go beyond the profit motive and think for the benefit of the society and the world to take up such a step as it has to give away some amount of profit in taking up these environment-friendly measures. Similar to the above is the case of use of renewable sources of energy. The initial investment required to install equipments for the use of non-conventional energy sources like solar energy and wind energy is high. The business organisation will save on electricity bill. However, the saving for a small organisation may not be as high as compared to the cost of the equipment. There is additional man-power cost involved in running and maintaining the equipment. Hence it is not be a profitable step for a small organisation to install the required equipments to use solar or wind power and produce electricity for their business. This might be profitable step for a large business organisation from a long term perspective. However, the company may not have that foresight or financial muscle to take up such a measure. In the world of cut-throat competition, changing customer need and fast changing the business dynamics, any short-sighted businessman might not be interested in making long term capital investment. There are times when business decisions related to future investment have to be taken by overlooking immediate profits. As Stephen P. Waring (1992) restated the words of Peter Drucker: “Profit making should not be the only objective. Overemphasis on profits would lead to shortsightedness, postponement of desirable investments, and continuation of obsolescent projects.” (p-217); Peter Drucker, MBO, and the Corporatist Critique of Scientific Management. Personal View In my view, the statement of Friedman is about an ideal scenario. In an ideal scenario, the businesses are fair in their dealings and practices, they are not manipulating regulations to curb the competitors, they are paying fairly to all employees and not discriminating between them on the basis of sex, region, origin and race. This statement also assumes that the business managers are completely aware of the market needs and hence not exhausting the resources to produce goods which will not be used. The government regulation in each and every state and country are in place so that the business organisations know where the line has been drawn and never cross it. However, businesses operate in real world and not an ideal world. The data produced out of survey done by several leading business magazines prove that women are paid lesser than men across the world even though they are doing a better job. The managers who hire manpower are human beings and hence their personal bias towards or against any race, sex or origin cannot be influenced by the organisation’s regulations beyond an extent. Discrimination is not limited to hiring. It even goes up to remuneration and promotion. In a country like Australia where 44.6 percent of workforce comprises of women, but only 5 percent of them are in line manager’s position. Discrimination on the basis of race and origin is quite prevalent in U.S. even though there are stringent state and federal laws in place. There is dearth of stories where businesses have used the loopholes of regulations to win cut throat competition. Thus expecting the world as an ideal place and businesses to operate in ideal manner is not sufficient and the economic and the legal dimension of the social responsibility are not sufficient enough to justify their social responsibility. There is another angle in this discussion. Any philanthropic step or ethical measure draws a lot of publicity for the business organisation. When pharmaceutical giant Merck took a decision to spend $100 million to produce the drug Mectizan in larger quantity than the requirement and distribute them for free to the less privileged for 25 years, it made big news. With that news, what got increased was its brand recognition. People recognise the company for its philanthropy and are inclined to buy its products. Its profit increases. Its brand value also increases which is an intangible asset. Overall the book value and the profit of the company increase. Hence the philanthropic actions should not be seen in isolation. They are also used as a measure to increase the profitability and business organisations have been using this step successfully. Conclusion In spite of all the criticisms that Friedman has received and the valid counter arguments, his statement forms a good basis on how businesses should operate to fulfil their social responsibility. A business is a mean to fulfil interests of all the different stakeholders which has lead to the different dimensions of social responsibility. We should also remember that the interests of these stakeholders are conflicting. A business will be able to take care of these conflicting interest only when the interest of the business is fulfilled which is maximising profit. However, we should not forget the human part of scenario. Adam Smith, the father of modern economics, has given another great book apart from the well known ‘The Wealth of Nation’. It is called ‘The Theory of Moral Sentiments’. In this book, he has argued that it is against human nature to think about his self-interest only. As a human being, we all need friendship, love, sympathy, empathy and desire for social approval. This is the third level of needs from the Maslow’s hierarchy. Businesses are run by business leaders who need social acceptance and affiliation. They cannot ignore the ethical and the discretionary dimension of its social responsibility. There are times when they overlook the profit motive only and take steps for the welfare of the society. References: Robbins, Stephen P. (1998). Organizational Behaviour (8th ed.) U.S.: Prentice-Hall Inc. Carroll, A.B., and A.K. Buchholtz. ( 2003). Business and Society: Ethics and Stakeholder Management. (5th ed.) Australia: Thomson South-Western. Crane, Andre. , McWilliams, Abagail., and Matten, Dirk. (2008). The Oxford handbook of corporate social responsibility. Oxford: Oxford University Press. Murray, Peter., Poole, David., and Jones, Grant. (2005). Contemporary issues in management and organisational behaviour. Australia: Thomson Course Technology Waring, Stephen P. (1992). Peter Drucker, MBO, and the Corporatist Critique of Scientific Management. Ohio: Ohio University Press. Friedman, Milton. (1970) The Social Responsibility of Business is to Increase its Profits. Retrieved from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html Mercado, Gloria Jumamil. (2007) . Corporate Social Responsibility: Synergy of State,Business, Society and Non-State Actors. Retrieved from http://203.72.2.115/EJournal/3053000205.pdf O’Riordan, Linda., and Fairbrass, Jenny. (2008) Corporate Social Responsibility (CSR): Models and Theories in Stakeholder Dialogue. Retrieved from http://www.crrconference.org/downloads/2006oriordanfairbrass.pdf Read More