The Social Responsibility Influencing Business Decision

Ethics and social responsibility are much talked about areas in business today. Questions regarding what these two mean have fetched a lot of theories from different authors. Further, the question of ethical social responsibility is a question that dawn upon all organizations. Are our philanthropic activities with NGOs an ethical social responsibility of the corporate? Or, is setting up a factory in a backward area that provides employment to the locals but pollutes the river running through the area be considered a socially responsible, ethical action?

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The question that naturally arises is what is the ethical social responsibility of corporations and how do we categorically define it and how do they influence decisions taken by the business. In this essay, we discuss what we mean by ethics and social responsibility of business in light of two contrasting ideas presented by Milton Friedman and Peter Drucker. This article stresses that the economic concept of social responsibility as put forth by Friedman may not always be considered ethical, as was shown by Drucker.

Ethics refers to a system of moral principles, a sense of right and wrong, and goodness and badness of actions and their motives and consequences. Business ethics refers to the application of ethics to business. To be more specific, business ethics is the study of good and evil, right and wrong, and just and unjust actions of businessmen.

Business ethics does not differ from generally accepted norms of good and bad. If dishonesty is considered to be unethical and immoral in society, then any businessman who is dishonest with employees, customers, shareholders, or competitors is acting unethically and immorally. If protecting others is considered to be ethical, then a company that recalls a defective and harmful product from the market is acting ethically. To be considered ethical businessmen must draw their ideas about what is desirable from the same sources as anybody else. Businessmen should not try to evolve their principles to justify what is right and wrong.

Employees and employers may be tempted to apply special or weaker ethical rules to business situations. But society does not condone or permit such an exception. People who are in business are bound by the same ethical principles that apply to others. This belief has been supported by Peter Drucker in his article “What is “business ethics”?” Where he specifically mentions that ethics in business can be derived from the fundamental concepts of Confucian philosophers: “if there ever is a viable “ethics of organization”, it will almost certainly have to adopt the key concepts, which have made Confucian ethics.” (Drucker, 1981)

A corporation is bound by certain ethical principles and rules of conduct that reflect its responsibility, authority, and dignity. Hence, it is correct to expect that corporations are responsible enough to create quality products and ethically marketing them, in compliance with laws and regulations and with financials represented in an honest, transparent way to shareholders. But the idea that they should apply their assets for social purposes, rather than for the profit of its owners, the shareholders, is irresponsible.

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To a great extent, the later pointer is supported by Milton Friedman (1970) who argues that corporate executives are employed by shareholders who are the ultimate owners of the organization and if the executives spend the money of the shareholders on philanthropic purposes and not in profit-maximizing, then the social responsibility they are doing is mere “window-dressing”.

“The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes.” (Friedman, 1970)

According to Friedman, the efficient use of resources for profit maximization is the primary social responsibility of business. But he also says that the responsibility does not lie with the corporation as it is not human but it lies with the corporate executives who are responsible for spending and utilizing the money for social ends. But he advocates that this kind of philanthropy is just the icing on the cake and it does not make a business more responsible.

What he says is that the executives have to be more responsible towards the interests of the shareholders who are spending the money. Since philanthropy does not help or benefit the shareholders in any way, they are considered unnecessary. But to maximize profit even through unethical means is supported in his ideas as long as it maximizes the share value of the corporation. The corporation’s goal is to act on behalf of its owners.

The company’s owners – its shareholders – can certainly donate their assets to charities that promote causes they believe in. They can buy hybrid cars to cut back on fossil fuel consumption or support organizations that train the hard-core unemployed. But it would be irresponsible for the management and directors of a company, whose stock these investors purchased, to deploy corporate assets for social causes.

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Management is charged with making informed decisions to invest corporate assets for uses that will efficiently achieve corporate goals which include growth, profitability, product innovation, and anything else that drives the shareholders’ return on investment indicated through the company stock prices. Anything, for example, a green headquarter, that does not produce a quantifiable outcome is considered redundant according to Friedman’s theory. But the question that logically arises is if it is possible to measure social responsibility or ethical conduct in quantitative terms?

Friedman talks of certain practical reasons why corporations should conceal themselves in the politically correct rhetoric of social responsibility. So when British Petroleum uses the marketing campaign which talks about looking for alternative energy sources, it makes the consuming public feel good about purchasing BP products. But if BP had redeployed billions of dollars into environmental investments that yielded no profits and its stock plummeted, then Friedman’s theory would brand it as socially irresponsible. But Drucker’s theory on ethics will brand BP as undertaking the socially responsible task to safeguard the environment which will bring about the greater good.

Now the question arises what do we think “social responsibility” is? By social responsibility we consider that corporation should conduct the following:

  • Transparency in their financial reporting.
  • Producing quality products without any misrepresent of the product through overstated advertisements.
  • The product’s flaws and their endangering side effects should be clearly stated forthrightly.
  • Predatory practices in offshore manufacturing such as child labor should not be employed.
  • Avoiding environmental pollution and adhering to laws and regulations regarding environmental safekeeping.
  • Adopting fair and open employment practices.

In other words, corporate social responsibilities today do not only stick to the stakeholder theory but also other social aspects such as employees, society, environment, etc. (Sims, p.72)

Friedman in his article concluded that businessmen have one social responsibility and that is to reap profit from the organization’s resources in a law-abiding manner. Thus, this implies that for-profit organizations may not engage in “eleemosynary” activities without the express consent of their stockholders or if at all they do, managers should be in a position to weigh such charity against their supposed responsibility to maximize shareholder wealth.

Friedman insisted that “It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.” (Friedman, 1970) In other words, Friedman argued that for all philanthropic expenditures, doesn’t matter how nominal it is, the test and measure are if the spending serves to maximize profits of the organization.

The idea that Friedman proposes is that business executives to maximize shareholder profit can undertake any means of action, provided they are within the boundaries of law and ethical customs of the society where he operates. But those “laws and customs” may not have anything to do with the principles of individualism or even individual rights.

Here Drucker differs in the view from Friedman. The former emphasizes that ethical conduct differs in different societies: “Yet, even though both the Japanese and the German systems seem to serve their respective societies well and indeed honorably, and even even though it is considered perfectly “ethical” for American civil servants of equal rank and caliber to move into well-paid executive jobs in business and foundations and into even more lucrative law practices, the American company in Japan that abides by a practice the Japanese consider the very essence of “social responsibility,” is pilloried in the present discussion of “business ethics” as a horrible example of “unethical practices.” (Friedman, 1981)

Here we see the point of departure in the ideas expressed by Friedman who emphasized that shareholders should reap the ultimate benefit of a business and the businessmen are responsible for attaining such profit through any means. This is the sole “social responsibility” of the executives. According to Drucker’s arguments Friedman may be considered as a “casuist” who gives “rules, which decide what is ethical for ordinary people, do not apply equally, if at all, to those with social responsibility.

Ethics for them is instead a cost-benefit calculation involving the demands of individual conscience and the demands of position-and that means that the “rulers” are exempt from the demands of ethics if only their behavior can be argued to confer benefits on other people. And this is precisely how ‘business ethics” is going.” (Drucker 1981) Considering Lockheed’s example, we see that Friedman’s ideas would have supported Lockheed’s action of giving money to the Japanese company to keep the project alive, but Drucker does not consider this action as ethical or socially responsible. He considers it to be the tyranny of a ruler.

Now considering the General Electrics fraud case Drucker believes “The Casuist would agree that cartels are both illegal and considered immoral in the U.S.-although not necessarily anyplace else in the world. But he would also argue that the General Electric executive who violated U.S. law had an ethical duty to do so under the “higher law” of social responsibility to safeguard both employment in the Milwaukee area and the defense-production base of the United States.” (Drucker 1981) But Friedman would have considered this action of GE to be socially responsible as it looked at the interest of its shareholders even when it was ethically wrong.

Further lobbying is unethical and according to Drucker a socially irresponsible act but in the idea of social responsibility that Friedman holds, he opposes lobbying only pragmatically, on a case-by-case basis. He failed to draw any major distinction between lobbying to have forced an initiation on behalf of one’s company (seeking a subsidy, say) and lobbying to be defended against force (for example, seeking protection against a U.S. subsidy of a domestic competitor or a foreign subsidy of a foreign competitor).

Friedman did say that a corporation should obey the rules embodied in “ethical custom,” as did Drucker but it would be an even weaker reed in a fully capitalist society, for the latter has rightly shown that “business ethics” departs considerably from the traditional western philosophies of ethics.

Hence we may say that Friedman believes that “social responsibility” looks upon a free-market system not as the social expression of individual rights, but as how society organizes the use of its resources so that they are employed most profitably. Within this system, shareholders are, yes, justified in pursuing the maximization of their wealth. But they are so justified only because their pursuit of profit happens to be a means employed by society for the general, collective good. But the question that arises that Drucker has pointed at is that the economic view of “social responsibility if business” – how ethical it is?

Further, according to Drucker money spent by businesses on eleemosynary purposes are not ethical and does not come under the category of social responsibility which is proponed by casuists: “so almost any behavior of the executive in organizations today-whether in a business, a hospital, a university, or a government agency-could be shown to be his ethical duty under the casuistic cost-benefit analysis between individual ethics and the demands of social responsibility.” (Drucker 1981)

Drucker’s opposition to Friedman’s ideas of social responsibility comes as, “But if “business ethics” becomes a tool to defend as “ethical” acts on the part of executives that would be condemned if committed by anyone else, the present proponents of “business ethics,” like their Casuist predecessors 400 years ago, will have no one to blame but themselves.” (Drucker 1981) Drucker further postulates that business ethics as practiced by businesses today subordinates political concerns to actual ethics. We see that in the case of Enron. Hence the ideas of ethics as practiced by corporations are to suit their purpose.

Social responsibility as we believe it to be is an amalgamation of the economic responsibilities of the organization, i.e. the efficient use of resources to make a profit (Friedman 1970), employee welfare, consumer welfare, as well as community welfare. So in today’s concept of social responsibility is not solely shareholder wealth maximization as was argued by Friedman but a much broader concept.

Ethics plays a crucial role in determining if the organization which undertakes socially responsible work is ethical or not. For instance, if a company tries to seize land from farmers to set up a factory, it is unethical to conduct, but if the company promises to provide jobs to all those farmers as well as compensate them for their land then the company is acting in an ethical as well as a socially responsible manner, according to Drucker.

But Friedman would say that the extra money spent on training the unskilled farmers who had been hired is a wastage of shareholder’s wealth and hence the company is not socially responsible. But we believe that the social responsibility of an organization is not limited to only shareholders but also the society at large. To be more apt, today organizations and corporate executives have to be aware of their different stakeholders rather than stockholders. In business today it is the social duty of the corporate to safeguard the interest of its various stakeholders and their ethical conduct is judged by their behavior towards various stakeholders.

Reference:

Friedman, M. (1970) “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, pp. 32-33.

Drucker, P. F. (1981) “What is business ethics?” The Public Interest.

Sims, R. R. (2003) Ethics and Corporate Social Responsibility: Why Giants Fall, Greenwood Publishing House.

Kotler, P. (2005) Corporate Social Responsibility, Doing the Most Good For Your Company and Your Own Cause, Wiley.

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