Social Responsibility of Business

This article discusses the concept of social responsibility in business and explores various theories such as shareholder theory and stakeholder theory. It also highlights the importance of sustainability strategy and organization's social behavior. The article concludes by emphasizing the need for a balanced approach that considers both profit maximization and the well-being of all stakeholders.

Social Responsibility of
Business
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Table of Contents
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
Various theories of Social Responsibilities.................................................................................3
Sustainability strategy and organisation's social behaviour........................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9
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Introduction
Social responsibility emphasizes dual responsibility of businesses i.e. to make money and
to interact ethically with society. Businesses are conceived to hold economic activities.
Therefore, traditional view of business social responsibility says that businesses exits to make
profits and all the ethical dilemmas are to be approached with a money-centred prospective
(Osagie and et.al.., 2019). Contemporary view believes that businesses derive their resources
from society and are thus, responsible to provide returns back to all stakeholders not just
shareholders. This is considered as main contradiction between shareholder's theory and stake-
holder's theory which pave way for two different forms of capitalistic theory.
Main Body
Various theories of Social Responsibilities
Capitalism is believed to be natural business theory and earning profits for owners
becomes natural responsibility of the businesses. Although earning profits is one-size-fits-all
type of rule for corporates who enter into business to perform commercial activities, it cannot be
termed as incorrect for even non-profit organisations which raise funds to perform their desired
service objectives. Both commercial and non-commercial organisations have certain
stakeholders. Stakeholders are those parties which are interested in the operations of the business
such as owners, employees, customers, suppliers, government, etc. Even though shareholders are
also stakeholders, they are considered different as they share different relationship with company
from other stakeholders. Shareholders are part owners of the organisations and have direct and
personal relationship with the well-being of the business while other stockholders only care
about their vested interests in the company, not overall well-being of the organisation (Windsor,
2019). This often results in the contradictions between shareholders and other stockholders. This
is the basis of two most famous normative theories of basic objectives of the business -
shareholder theory and Stakeholder theory.
Shareholder theory was proposed by capital economist Milton Friedman. He quoted
“The Social Responsibility of business is to increase its profits.” as he believed that a company
has only one aim i.e. profit maximisation and is responsible for welfare of only shareholders. He
argued that even though a company has a separate legal entity from its owners, it is not a real
person. It obtains its funds from owners and operates through its management and employees.
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Employees are hired in the name of owners and therefore, they are responsible to conduct
business activities according to the owners only. It is owners and employees who are real person
and obtains their resources from society and get benefited from them. Company provides returns
to its owners in the form of dividends and the onus to provide returns to the society lies on them.
A company shall make a donation directly on its name only when the donation can be treated as
investment and can reap it future benefits (Bhagat and Hubbard, 2020). Friedman pushes concept
of pure economic business and proposed that company shall operate with the only motive of
shareholders' wealth maximisation but it should stay within the rules of the game i.e. profit
should be earned out of free and fair business competition. This theory is criticised by many as
promoting capital elitism which is supposedly good for big corporates but harmful for society at
large. Critics countered that this theory restricts creativity, innovation, research, and investments
which are proving threat to the shareholders' wealth. It encourages counter-productivity and
hampers the growth opportunities of the business. It is also ignoring the fact that although
company is an artificial person, it operates through, for and within real persons in a society.
Ignoring the sentiments of the society might reap it short term benefits but will he hurtful to its
business prospects in the long term. For example, a company had a chance to sponsor either a
social event for underprivileged kids or an entertainment show. It chose entertainment show for
the sake of getting mega exposure through media coverage of the show. This might or might not
reap it expected business growth but it lost a chance to increase societal connect of the company
which would have definitely earned it goodwill. Such noble goodwill would have bring it many
new and loyal customers which it lost now.
Other than shareholders theory is another theory which believes that shareholders are just
a part of stakeholders and it is stake-holders' wealth maximisation that should be social
responsibility of the businesses. This theory is known as the Stakeholder theory. It was proposed
by R. Edward Freeman. He believed that there are other stakeholders as well in a company which
are directly and indirectly impacted by business operations. Therefore, a business is responsible
for them also. He believed that a company shall aim to create value addition for all its
stakeholders and only when it thinks about making profit for whole of its stakeholders
ecosystem, is can make a sustainable growth in long term (Lankoski, Smith and Van
Wassenhove, 2016). For example, a company manipulates legal compliances and sells inferior
quality products in the market to reap higher profits for its shareholders. This resulted in many of
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its customers falling ill and being hospitalised as well. It had to face governmental inquiry.
Company was also sued and dragged in many litigations. To fight those legal cases and settle
those compensations, it had to incur a lot of cost. Also, it lost its goodwill and customer
confidence. This proves that focusing on profit maximisation of one stakeholder i.e. shareholder
and ignoring the interests of other stakeholders might earn it short term benefits but will
definitely cost a fortune in the long term. On the other hand, suppose a company makes good
efforts to create a good work culture and enhance its employees' skills. It provided them with
good training and good perquisites to stay motivated. This showed a tremendous improvement in
their performance and indirectly on the company's growth as well. That's why, stakeholder
theory suggests on creating a balanced approach and to optimise the benefits of all stakeholders.
It argued that this will definitely show positive effects in the long term performance and position
of the company (Machan, 2017).
Both of these have been seen as a contradictory to each other. But all that needs is to
create a balance among the two for as much as it is required for a business to perform its social
responsibilities, it is necessary for it to earn profits to perform all its commercial and social
obligations. This paves the way for concept of Corporate Social Responsibility (CSR) which
branches out of stakeholder theory of Freeman. This theory suggests that business shall play
broader role in society and its welfare.
Another theory is Triple Bottom Line (TBL) approach which also stresses to focus on
social and environmental concern along with profit objective. Thus, it emphasizes on three
bottom lines – profit, people and planet. Profit or economic sustainability favours long term
financial solidity over short term profit i.e. it believes that it is economic responsibility of large
businesses to create business plans that allows stable and prolonged business growth. People or
social sustainability suggests about business's responsibility to bring balance in people's lives i.e.
it believes that for long term growth and sustainability of business, company shall spread
opportunities and wealth to as many people as possible (Hussain, Rigoni and Orij, 2018). For
example, an industrial chemical company is discharging its toxic waste without treatment or
care, this result in birth defects in local community. Ignoring its social responsibility will hurt
sentiments of both business and community and is bound to create hatred for company. Third
aspect is planet or environmental sustainability which considers the due responsibilities of
businesses towards conservation of natural resources especially non-renewable so that they are
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available to future generations as well. For example, the above mentioned discharging its toxic
waste without treatment which deplete the natural resources present under earth, pollutes the air
and water and destroys biodiversity present there.
One more model is Business Excellence Model which promotes integrated approach to
CSR. It is also based on Stakeholder theory and forwards that for a company to present an
excellent business model in long term, it has to take all its stakeholders together. This model
comprises of two aspects – enablers and results. Enablers are the factors that a company
manipulate and results are the effects of those manipulations. Enablers are all the key
performance indicators of a company and this models suggests to integrate CSR in corporate
vision, mission and values to make it part of enablers as well and also, a company needs to track
its overall result with respect to social and environmental aspects as well (Gómez, Martinez
Costa and Martinez Lorente, 2017). For example, making employee satisfaction and adopting
eco-friendly practises a part of organisational values.
Sustainability strategy and organisation's social behaviour
Sustainability in context to a business can be defined as an approach to create long-term
value by taking into account how an organization operates within social as well as economic
environment. Organizations these days are increasingly adopting measures in order to ensure that
their business is not only profitable, but sustainable as well. With consumers becoming more
conscious about buying products from brands that are environment friendly. There are different
operations within an organization that they are now trying to make sustainable. Most of the
organizations have started using natural and biodegradable resources in order to make the
products environment friendly.
An organization can adopt various sustainable strategies to build a brand that is
successful. This can positively impact the overall profitability of the business as well as
contribute to the overall performance (Rivas, 2017). One of the ways of doing so is to ensure a
proper engagement with the stakeholders of the company. For example, H&M has introduced a
product line that is made using sustainable products. This is the company's initiative to build a
sustainable brand and thus, attract a greater number of customers. The strategy of sustainability
is mainly implemented at the operational level. Besides this, corporate social responsibility is
another strategy that an organization can implement in order to move towards sustainability.
There are many benefits of practising corporate social responsibility. For example, the overall
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image of the company is improved and the employees of the organization are more engaged in
such activities. Social responsibility analysis shows how businesses can add to the betterment of
society by incorporating their operations with social concerns. Performance of social
responsibilities presents a positive image of organisation on society's mind which includes the
targetted customers of business (El-Kassar, Yunis and El-Khalil, 2017). This positive impact
brings a lot of loyal customers which improves sustainability and financial performance of
business for a long period of time. It helps in whole stakeholders engagement.
The company is able to save a lot of money and also, gain an advantage over the
competitors. Besides this, the business is also able to retain its existing employees. It can be said
that practising corporate social responsibility can significantly contribute to the overall success
and growth of a business. The financial performance of the organization is improved and the
customers become loyal. The business gets an opportunity to partner with new businesses and
thus, improve its overall image in the market (De Klerk, De Villiers and Van Staden, 2015).
There are many businesses that are practising corporate social responsibility in order to attract a
greater number of customers and grow their business. Lets understand CSR in respect of a
company which is engaged in restaurant business all over UK. It is famous for its taste, quality
and experimentation in its menu dishes. From last few years, it is facing tough competition from
speciality restaurants. This has made it necessary for its management to perform operational
changes in its strategies. It is considering to change its old staff and bring in new professional
chefs, change its marketing strategies and if necessary, shut down few of its branches. Different
aspects of CSR theories in this case are as below:
Primary aspect of business is it economic responsibility. Company shall focus on
increasing it profit in an ethical manner. It shall change its promotional strategies to attract more
customers or shall reduce its operational costs to improve profit structure. For example, it shall
promote what's hit with regular customers and should not compromise on quality and only cooks
with fresh ingredients. Next is its legal responsibility. Restaurant chain shall comply with all
laws applicable on it such as food hygiene certificate, pest control, insurance, alcohol license,
building permit, etc. as well as Employment Rights Act 1996, Competition Act, 1998, Equality
Act 2010, etc. (Kim, 2019) For example, restaurant shall indulge in fair competition and restrict
from unfair practises such as sabotaging the business of competitors. It should get it's social audit
done from independent audit to ensure that society and environment are not being harmed. Third
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is ethical responsibility. This considers the issue of laying off of old staff who has made it the
brand it is today. Company can rather have them trained accordingly. It would save the jobs of
those chefs and also, the basic taste associated with restaurant that came from those chefs would
remain unchanged. Also, company shall adhere to high standards of food sanitation as customers
love those places which serve untainted food. This ethical practice would bring sustainability to
the business operations in the long run. Final aspect is philanthropic responsibility. This includes
social responsibility of restaurant chain. For example, Company can sponsor food of charity and
donation events which will not only bring it goodwill but will also serve as promotional
campaign (Lopatta, Buchholz and Kaspereit, 2016). It can also tie up with various NGOs that
provide free food to poor, deprived and malnourished and can send its extra food which is left
daily after restaurant closure timings. This way food will not be wasted as well as few extra
mouth will get food which otherwise would have remain hungry.
Conclusion
From the above discussion, it can be concluded that social responsibilities of a business
does not limit to its shareholders, but shall cover its whole stakeholder ecosystem. Even though it
might look like that primary social responsibility of a business is profit maximisation and thus a
business shall focus on earning profits only, management shall not forget that amounts and
efforts invested on others stakeholders will definitely reap them long term benefits. An artificial
entity of business though obtains funds from its shareholders but deploys other resources derived
out of a real society. This makes company morally responsible to pay it back to society. This is
the thought behind the concept of corporate social responsibility which assumes that a corporate
shall fulfil its social responsibility while earning profit out of it.
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References
Books and Journal
Bhagat, S. and Hubbard, R.G., 2020. Should the Modern Corporation Maximize Shareholder
Value?. Available at SSRN 3548293.
De Klerk, M., De Villiers, C. and Van Staden, C., 2015. The influence of corporate social
responsibility disclosure on share prices. Pacific Accounting Review.
El-Kassar, A.N., Yunis, M. and El-Khalil, R., 2017. The mediating effects of employee-
company identification on the relationship between ethics, corporate social
responsibility, and organizational citizenship behavior. Journal of Promotion
Management. 23(3). pp.419-436.
Gómez, J.G., Martinez Costa, M. and Martinez Lorente, A.R., 2017. EFQM Excellence Model
and TQM: an empirical comparison. Total Quality Management & Business Excellence.
28(1-2). pp.88-103.
Hussain, N., Rigoni, U. and Orij, R.P., 2018. Corporate governance and sustainability
performance: Analysis of triple bottom line performance. Journal of Business Ethics.
149(2). pp.411-432.
Kim, S., 2019. The process model of corporate social responsibility (CSR) communication: CSR
communication and its relationship with consumers’ CSR knowledge, trust, and
corporate reputation perception. Journal of Business Ethics. 154(4). pp.1143-1159.
Lankoski, L., Smith, N.C. and Van Wassenhove, L., 2016. Stakeholder judgments of value.
Business Ethics Quarterly. 26(2). pp.227-256.
Lopatta, K., Buchholz, F. and Kaspereit, T., 2016. Asymmetric information and corporate social
responsibility. Business & society. 55(3). pp.458-488.
Machan, T.R., 2017. Stakeholder vs. shareholder debate: Some skeptical reflections.
Contemporary Readings in Law and Social Justice. 9(1). pp.7-13.
Osagie, E.R. and et.al.., 2019. Contextualizing individual competencies for managing the
corporate social responsibility adaptation process: The apparent influence of the
business case logic. Business & Society. 58(2). pp.369-403.
Rivas, R.C., 2017. A Brief Unified Theory of CSR Under Milton Friedman. Available at SSRN
3041054.
Windsor, D., 2019. Economic Nationalism and Corporate Social Responsibility. In International
Firms’ Economic Nationalism and Trade Policies in the Globalization Era (pp. 217-
243). IGI Global.
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