Responsibility of Corporations for the Profitable Use of Shareholder Funds - Case Study Example

ASSIGNMENT Thames Water Case Study a. According to Milton Friedman, corporations are responsible for using their shareholders funds in profitable ways. According to this view, the provision of public services is a matter for elected representatives. Explain what is meant by "Corporate Social Responsibility", and, referring to material in the case study, outline the main arguments for and against it. 40 marks The main purpose for companies to put businesses is for them to generate profits. Profits is defined as the difference when all income from sales of services and goods or merchandise is more than all the total costs of buying the goods and the daily operating expenses in running the business. It is also in this light that the shareholders will generate more income from the cash dividends as well as the stock dividends that the company gives them. The shareholders are composed of the stockholders who have invested their hard earned money in the business. The shareholders of the company will generate income in order to stay in operation for a long time. If the company does not make a profit, in other words it generates a loss, then there a possibility that the company will close shop. Therefore if the company will close shop, then the company will have to declare bankruptcy and close shop. The shareholders will be given their dividend income based on the percentage of the number of shares they own divided by the total outstanding shares. The dividends are computed as the total sales or revenue less total costs and expenses generated during the year. If the Sales is more than the expenses and costs, then the numerical amount is called net income. If the total costs and total expenses are more than the total sales or revenue for the year, then the numerical amount is called net loss. The net income is then divided by the number of outstanding shares to get the dividend income per share. This means to say that if the shareholder has more shares of stock of the Thames Water company then this particular shareholder will receive dividend income than the shareholders who invested in lesser number of shares. Likewise, if the company generates a net loss for the year, then the net loss will be divided by the total number of outstanding shares. This means that if the shareholder has more shares of stocks in Thames company, then this specific shareholder will receive more losses from as compared to the shareholder of Thames company who has invested in lesser numbers of shares. Expenses are amounts that include costs of repairing the leakages in the more the one hundred fifty year old pipes covering the South Eastern part of England which is under the water supply responsibility of Thames Water company. Some of the major monetary worries of Thames water which will increases its expenses and thereby decrease the net income resulting to lesser shareholder dividends per share is that Thames Water may be fined for '66m by the London Government regulatory agency OFWAT because it failed to meet its targets for reducing the volume of water lost through leaks. The company had already spend an estimated '150m extra on tackling the problem. The company is legally bound to replace around 230 miles of ageing water mains in London over the next five years in addition to the 770 miles it has already planned. The Thames Water company has to accomplish its leakage plugging for the next two years as well as to double its expenses to plug leaks for the two years after that because the company must not fail to meet their revised targets, or else, the Government agency OFWAT will take some enforcement action. Thames was able to reduce expenses when it did not meet its leakage plugging target since 1999-2000. This could be intentionally done to keep the company on a positive net income position. To add to the company's woes, the company had it lost 894m litres of water a day which has translated into lesser sales revenue and correspondingly lesser net income and finally lesser shareholder dividend per share. In fact the government agency OFWAT, has been soft on Thames Water company because it recognised the financial difficulties faced by Thames because repairing leaks costs money. Since the company still has around one thousand miles of mains that are more than 150 years old, this will entail a large capital investment on the Thames Water company. Thames Water company could increase its income by decreasing the water leakages and thereby increase the water sales revenue. Another way to increase the net income is to conserve water for the future but this does not clearly relate to lesser net income. Specifically, one reason the Thames Water company is having lesser net income is because Thames Water company reports that it is paying an estimated '500,000 a day in order to eliminate or reduce leaks which is not putting the company on the verge of maybe not staying profitable. If this scenario will be brought out to the shareholders or even prospective new shareholders, then their will surely be an increased difficulty to secure future funding. As mentioned above, if the shareholders will see that the Thames Water company is not generating a net income, then they may tend to take back their hard earned money from the Thames Water company and transfer their investment to another company that will generate more dividend income for the shareholders. Each company is enjoined to produce a periodic corporate responsibility report that will be given to affected parties. It is a very useful tool in determining if the company places importance on the its responsibility to comply with all political, economic, social and technological rules and regulations for the betterment of all affected parties. According to the Research done by David Owen entitled Corporate Social Reporting and Stakeholder Accountability the Missing Link idenitified as No. 32-2005 ICCSR Research Paper Series ISSN 1479-1524 done in the year 2004 which he did for the International Centre for Corporate Social Responsibility, Nottingham University Business School, United Kingdom states "that a prerequisite of participative democracy is information and reliance is placed on greater levels of corporate social and environmental disclosure in pointing the way towards more democratic relationships between organizations and their stakeholders". This means that the stakeholders need to know all relevant information that will contribute to their decision making process such as its social responsibility reports, financial statements operating and financial review reports among others. The companies, like Thames Water company in this case, must produce a corporate responsibility report which should be looked with scrutiny chartered accountants, certified public accountants and the like. The shareholders can influence directly the board of directors' decisions in relation to its social responsibility. In the Research paper done by Anita Fernandez Young and Robert Young entitled Corporate Social Responsibility: the Effects of the Federal Corporate Sentencing Guidelines on a Representative Self-interested Corporation identified as no 10-2003 International Centre for Corporate Social Responsibility Research Paper Series ISSN 1479-5124, Nottingham University Business School, United Kingdom which was done in the year 2004, they stated that "There continues to be increasing public and governmental concern regarding business ethics and corporate social responsibility or CSR. One dimension of the response to such concern is the introduction of law intended positively to induce socially responsible conduct as well as deter irresponsible behaviour. The Federal Corporate Sentencing Guidelines or FCSG are relatively well established instance of such law" the research further stated that in Based on the FCSG chapter 8 of the US Federal Sentencing Guidelines Manual, a corporation that violates the corporate social responsibility guidelines shall be penalized. One penalty is of the company to remunerate the victims of their unlawful deed. The purpose of the FCSG guideline is for the companies to be punished in order to deter and police their lines to prevent and detect violations of the such corporate responsibility guidelines. The FCSG further provides that the identified victims of corporate social responsibility guidelines shall be indemnified by the erring company. The bases for the penalty shall be the total loss to the victims, the amount of gain to the offender deriving from the offence or the standard fine prescribed for the offence level. Additional fines could also be imposed. In the research done by Wendy David Owen entitled Corporate Social Reporting and Stakeholder Accountability the Missing Link idenitified as No. 32-2005 ICCSR Research Paper Series ISSN 1479-1524 done in the year 2004 which he did for the International Centre for Corporate Social Responsibility, Nottingham University Business School, United Kingdom which was researched in the year 2003 stated that "The issue of waste generation is of growing concern in all developed nations. National and regional policies have been evolving to combat the flow of waste being generated by production and consumption. In the 1990s the United Kingdom introduced tighter regulation and taxes on waste generation in production". The research found that when the cost of disposability is increased as a result of regulation or taxation, there is a divergence between traditional measures of productivity and those that incorporate environmental violations into the productivity calculation. Therefore Corporate Social Responsibility is a major concern of the Thames Water company. According the research done by Jeremy Moon entitle Government as a Driver of Corporate Social Responsibility No. 20-2004 International Centre for Corporate Social Responsibility Research Paper Series ISSN 1479-5214, Nottingham University Business School, United Kingdom which was done in the year 2004 stated that, based on its research on the two United Kingdom governments of the Conservative Margaret Thatcher and the Labour Tony Blair, they both were "encouraging Corporate Social Responsibility through ministerial leadership; stimulating new and existing business associations; subsidizing Corporate Social Responsibility activities and organizations; and the deployment of SOFT regulations. The research further stated that the Corporate Social Responsibility Reporting in the United Kingdom has grown more in intensity as compared to the other countries because the United Kingdom government feels that Corporate Social Responsibility is a big potential for amelioration. The research further stated that Corporate Social Responsibilty can mimic the concepts of corporate citizenship, sustaining business and also business ethics. It is not only related to the corporate environment but also to the national environment where the company has established its presence. There is no wonder then that other concepts may collide or conflict with the teachings of Corporate Social Responsibility so that this new teaching is being challenged its outreaching or interfering into other concepts, teachings or theories such as business theories as in the case of the Thames Water company. There is another view of Corporate Social Responsibility, as stated in this same research, as philanthropic behaviour where it looks at HOW BUSINESS IS PERFORMED and not just its involvements outside the firm which encompasses employment, supply chains and also reporting situations. In reality the Corporate Social Responsibility report of any company like Thames Water company will increase the monetary value of the company as compared to another company which does not comply with Corporate Social Responsibility policies. The Corporate Social Responsibility in the United Kingdom has now been institutitonalized as a supplement to the regular income statements, balance sheets and statement of cash flows that are annually give to shareholders of companies like the Thames Water company here. Social responsibility includes The Labour Unions' drive for protection of workers' right accompanied by the United Kingdom's providing of major infrastructure that will care for the by products of urbanization which are SEWERAGE and FRESH WATER. Another major ethical issue aside from the repairing of the one hundred fifty year old pipes to prevent the leakages of water in the location above resulting in lesser water revenue sales and reduced net income is that the Environment Agency in its mandate to regulate pollution has identified the company as a major polluter, having been fined every year since 2000 and receiving penalties totalling '128,000 for pollution incidents and in fact in a most recently, Thames Water company was fined '50,000 in September 2006 for polluting Dagenham Brook in Leyton, East London with raw sewerage. Thames Water said it regretted the damage it has caused to the environment, But Thames Water company reiterated that that the number of pollution incidents that led to prosecution was half the figure for the previous year and Thames Water company also mentioned that it has reduced by 75% the number of serious pollution incidents it has caused over the last three years. This is one major factor that has caused its reputation in this field to be low. Another Major ethical issue is that Thames Water has a poor reputation for customer service. On the 19th July 2006, OFWAT served notice that it was going to place a financial penalty on the company for failing to meet its customer service performance standards, under the OFWAT Guaranteed Standards Scheme. The final penalty will not be announced until Ernst and Young have reported to OFWAT as to whether there has been any mis-reporting to the regulator concerning customer service matters. OFWAT has made it clear that no irregularities had been found at the time of the notice . David Bland, from the Consumer Council for Water, a body set up in 2005 to oversee the interests of water consumers because Thames Water company has been described as extremely disappointing their water customers. Corporate Social Responsibility means that the company must not only try to generate profits but also try to follow the Corporate Social Responsibility guidelines set forth by the United Kingdom government such as not polluting in the period of September 2006 the Dagenham Brook in Leyton, East London with its raw sewerage. Some residents near the Dagenham Brook in Leyton, East London will be using the water from this brook and thereby be inflicted with diseases and other health endangering chemicals and other waste byproducts. The health of a person poisoned or maimed by the raw sewerage from the Thames Water Company can be translated into expenses to be paid by the Thames Water company for the medical health reinstatement of the sufferers. This is money spent that could have been avoided. b. Are there likely to be any contradictions or tensions between the commitments Thames Water has made to its shareholders and those which it has made to its customers and local communities in its Corporate Responsibility Policy' How might these be resolved' 20 marks There are contradictions or tensions between the commitments Thames Water has made to its shareholders and those which it has made to its customers and local communities in its Corporate Responsibility Policy because the Thames Water company shareholders, as mentioned the prior paragraphs, is more concerned with getting as much dividend income as possible. If the net income is reduced because the company has to comply with the United Kingdom policy of not throwing away the waste in the Dagenham Brook in Leyton, East London and other places, then the shareholders may think twice as to whether to continue putting their hard earned money in the Thames Water company or they may entertain the idea of withdrawing their investments in Thames Water company and transfer their money to another company listed in the London Stock Exchange that, based on their balance sheet and income statement will give the shareholders a higher dividend income per share. Another conflict, also as mentioned above is that the company has been instructed by the OFWAT to spend more money to fix the leakages and thereby lessen the result of the computation of total water sales less total costs and total expenses resulting to a lower net income and lower dividend income per share for the shareholders. In a practical situation, the company has to comply with the United Kingdom Institutionalized Corporate Social Responsibility requirement because the health and the environment, although they are directly not an additional expense or cost in the income statement if the sewerage outflow will continue to pollute the Dagenham Brook in Leyton, East London with its raw sewerage and also the company will save on expenses if it will not repair the rusted and leaking water pipes, the image of the company in the eyes of the residents and citizens and even in the eyes will be at a low as a environment violator. On the other hand, if the Thames Water company will comply with the Corporate Social Responsibility requirement such as repairing the leaking and rusted one hundred fifty year old water pipes as well as stopping its polluting of the Dagenham Brook in Leyton, East London with its raw sewerage, then the residents and the citizens as well as people outside the United Kingdom will give a high value mark, erasing its present low mark. But this move may anger the shareholders because the expenses of the company for the leakage and rust rehabilitation and stopping of its polluting of the Dagenham Brook in Leyton, East London with its raw sewerage Will cut up a major portion of its net income and thereby lessen the net income per share that the shareholders are so used to receiving every year. c. The water industry is regulated by the government agency, OFWAT, which, as can be seen in the Case Study, is demanding that more of Thames' profits should be spent in repairing leaks.. Should private companies be subjected to regulation in this way' The Thames Water company as well as all other companies, with exception, should follow the OFWAT and other environmental and Corporate Social Responsibility watch agencies' comments and interpretations of guidelines and policies relating to safeguarding the environment. The Earth is the only place we have. If we pollute the rivers of London, then the victims will not only be the residents or the human citizens of this locality of Leyton, East London but the environmental damage will now affect the culprit companies such as the Thames Water company. The water waste will sure drive away the residents from the down. The citizens will learn that the Thames Water company is an environmental damager and the whole world will learn of that the Thames Water company is polluting the rivers. The honor and value of the company will fall down to a lower low so that the residents, the citizens and even environmental groups will rise up to the occasion as force the Thames Water company to tow itself into shape by following the Corporate Social Responsibility policies. The company should also repair its relationship with its customers because it seems that the cold hearted effect that the Thames Water company is giving its clients will make them suffer in the end because the customers will either rise up to protest their poor poor poor service or even transfer to another locality where the Water company has a more friendlier attitude. Thames Water company should be subjected to regulation in this way as Thames has been subjected by the OFWAT and other environmental agencies. CONCLUSION There are three alternatives. The first alternative is for the Thames Water company to think of the Shareholders' interest and forget the interests of the environmentalists and its water service customers. The second alternative is for the company to take up the cudgels for the customers and the environmental groups by complying with a willing heart all the policies enshrined in the Corporate Social Responsibility which has been imposed by the United Kingdom and other countries of this new business and environmental era. The third alternative is for the Thames Water company to meet both sides in the middle. This means that the Thames Water company will spend money on repairs of leaking pipes if the pipes are in REALLY DIRE need to be repaired. This also means that some of the customers' complaints and suggestions will be complied with with a smile. In conclusion, Based on the above data, it is preferable for the company to make both sides of the coin meet in the middle. The reason for this decision is simply because of all the three alternatives above, the third alternative gives the most benefits to all more parties involved in this case. The shareholders will accept the reduction in the net income as well as the reduction in the dividend income per share because the value of the Thames Water company for being a Corporate Social Responsible entity will automatically replace its low rating to a very high rating. The environmentalists and the customers will be very happy with the change of heart of the Thames Water company and increase the value of the company from the original low rating to a very high rating. REFERENCES: David Owen entitled Corporate Social Reporting and Stakeholder Accountability the Missing Link idenitified as No. 32-2005 ICCSR Research Paper Series ISSN 1479-1524 done in the year 2004 which he did for the International Centre for Corporate Social Responsibility, Nottingham University Business School, United Kingdom Anita Fernandez Young and Robert Young entitled Corporate Social Responsibility: the Effects of the Federal Corporate Sentencing Guidelines on a Representative Self-interested Corporation identified as no 10-2003 International Centre for Corporate Social Responsibility Research Paper Series ISSN 1479-5124, Nottingham University Business School, United Kingdom which was done in the year 2004 David Owen entitled Corporate Social Reporting and Stakeholder Accountability the Missing Link idenitified as No. 32-2005 ICCSR Research Paper Series ISSN 1479-1524 done in the year 2004 which he did for the International Centre for Corporate Social Responsibility, Nottingham University Business School, United Kingdom Read More