Essay: Exploring the Social Responsibility of Businesses

This essay provides a comprehensive overview of the social responsibility of businesses, delving into the core concepts of stakeholder and shareholder theories. It begins by defining social responsibility as an ethical framework that prioritizes maximizing stakeholder value, contrasting it with the traditional capitalist view focused solely on shareholder wealth. The essay then explores the inherent tension between profit-making and social welfare, examining the shareholder theory proposed by Milton Friedman, which emphasizes profit maximization within the bounds of fair competition. Critics of this theory argue that it neglects the impact on society at large and the interests of various stakeholders. The essay then introduces the stakeholder theory, championed by R. Edward Freeman, which posits that businesses should create value for all stakeholders, including employees, suppliers, and the community. The concept of Corporate Social Responsibility (CSR) is presented as a balance between the two theories, encompassing economic, legal, ethical, and philanthropic responsibilities. The essay concludes by emphasizing that social responsibility extends beyond profit maximization and encompasses the well-being of all stakeholders, contributing to long-term growth and sustainability. It also highlights how businesses must balance these responsibilities, adapting to specific situations to ensure the welfare of all parties involved.

Social Responsibility of
Business
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Table of Contents
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
Conclusion.......................................................................................................................................6
References........................................................................................................................................8
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Introduction
Social responsibility is an ethical framework that insists business on maximising
stakeholders' value not just shareholders' value (Carroll, 2015). Capitalism is considered as
natural business theory and traditional capitalists believe that basic nature of business is to
perform and operate with the aim of earning profit and maximising shareholders' wealth only.
But in recent past, it has been observed that businesses are not only socially responsible to its
owners but also to society at large from which it obtains resources. Trade off may often exist
between the two and effective social responsibility is to managing to sustain equilibrium the two.
Main Body
Doing business for the primary motive of earning profits is as natural as one can think of.
It is a one-size-fits-all type of rule. Even non-profit organisations need to raise money for their
operations. When it comes to affairs of a business, two parties are distinctly expressed as
separate. One is shareholder and other is stakeholder. Although shareholders are also a
stakeholder, they relationship with company is different fro other stakeholders and thus, they are
treated as different. Shareholders are the part owners of company and are responsible for it
personally through limited or unlimited liability while other stockholders only have a certain
connection or interest in either some project of company or in company as a whole. Other
stakeholders include employees, suppliers, government, investors, society at large, etc. They
both share common aspect that both are interested in long term growth and sustainable
development of the company. Other stockholders are not bound with survival of the company
because they are only with the company for their personal interest. Therefore, there are often
clashes between the two interests. There are various theories proposed around the basic
objectives of the business and the welfare of the stakeholders. Two most famous normative
theories are shareholder theory and stakeholder theory.
“The Social Responsibility of business is to increase its profits”. These words were
quoted by capitalist economist Milton Friedman. He proposed The Shareholder Theory. He
believed that a company is responsible for the welfare of only one stakeholder i.e. of
shareholders or owners of the business (Jahn and Brühl, 2018). He argued that a corporate is an
artificial person and acts through its executives. Executives are the employees of company who
are employed by owners and thus, are responsible to conduct its activities only in accordance
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with their desires. A company shall operate with the only purpose of increasing its profits;
staying within the rules of the game i.e. to engage in only free and fair competition (Orlitzky,
2015). Shareholders and executives are real persons and it is them, who benefits from the
societal resources. A company pays dividend to its shareholders and if they wish, they can spend
their money back on society. This theory pushes concept of pure economic business. Business
shall directly made a donation if it can be treated as equivalent to investment that would reap
future benefits. Critics of this theory argue that while it enriches corporate elites, it is harmful for
society at large. It proves counterproductive to the extent that executives refrain from taking
research, strategic renewals and investments which are at risk of putting shareholders wealth in
lurch. This theory also ignores the fact that even though corporate is an artificial person, it
operates through and within real persons. Acting in their interest might hurt company profits in
short term but will definitely reap benefits in long terms. For example, when a company donates
its products to the needy people for free, it might hurt immediate financial equation of the
company but it will definitely increase goodwill and societal connect with the company. This
will bring manifolds of benefits in the long run such as new and loyal customers to the
company.
Shareholder theory ignore the fact the shareholders are not the only stakeholders of the
business. There are various other stakeholders as well who are directly and indirectly affect and
are also impacted by the operations of business such as employees, suppliers, society at large,
etc. Since, business impacts them also, it is socially responsible for them as well. This is the
basis of The Stakeholder Theory proposed by R. Edward Freeman. He suggested that
shareholders are only one of many stakeholders in a company. He was of view that there exists
interconnected relationship between a business and its various stakeholders such as customers,
suppliers, employees, communities, etc. Thus, a business shall create value for all stakeholders,
not just shareholders (Freeman, 2015). This theory talks about stakeholder ecosystem of all
related groups which must be considered and satisfied. He believed that it keeps a company
healthy and help it grow sustainably for a long term. For example, if a company ignores the
welfare of its employees for the sake of owner's profit, employees will leave the company. So,
there might be short term profit for the company but in the long term, it would only reap losses.
This theory seeks to optimise relationship with all related stakeholders. This theory helps
company makes effective long term relationships which naturally shows in the performance and
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position of the company. For example - good relationship with employees make them feel
connected with company which increases their productivity and reduces their turnover. Increased
productivity results in better products and and improved customer services. Better customer
services results in increased customer loyalty and new customers. Increasing customer base leads
to growth and development of business which attracts more investments from financiers. Better
finances open better opportunities for business. All the above parties in the example are different
stakeholders. It can be clearly seen how interconnected they are and how giving value to one not
only increases the value to other but also increases value of business.
Both of these theories have long been pitched against each other. Undermining the value
of organisational profits in favour of stakeholder management and exaggerating the need of
profit maximisation for organisational growth has always been in the discussions (Crane, Matten
and Spence, 2019). There was a need to maintain equilibrium between two. This is how arose the
concept of Corporate Social Responsibility. Corporate Social Responsibility (CSR) is a concept
that emphasizes that as much as business is responsible to make money for its shareholders, it is
responsible to play a broader role in community welfare. CSR comprises of four aspects. Let's
understand these aspect from the point of view of a company which manufactures furniture at 10
units and sell them through their 50 stores all over UK. Due to some unfortunate conditions,
sales are dipping from last 2 years and production at previous level is causing it losses. Thus,
company is considering a plan to shut down its two manufacturing units and dispose the assets..
Different aspects as per different theories are below:
First aspect is economic responsibility. Making profit is the primary objective of
business. Profits are necessary for its survival and growth. And since shutting of these units will
help company reduce it loss level and disposal of assets will yield revenue, shareholder theory
will naturally support this plan. On the other hand, stakeholder theory might not demand
dropping the plan but would demand retention of employees. It would rather suggest that
company indulge in finding out reasons for decrease in sales, other cost management practices,
research and development and encourage innovations to develop new ranges with better design
and technologies and then earn profits out of that competitive advantage (Advantage, 2020).
Second aspect is legal responsibility. Company must follow rules and regulations of the
law of the land in which it operates. A business has to adhere with business and labour laws. In
UK, companies are subjected to laws such as National Minimum Wage Act 1998, Working Time
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Regulations 1998, Employment Rights Act 1996, Pensions Act 2008, Equality Act 2010, Trade
Union and Labour Relations (Consolidation) Act 1992, etc. Shareholders Theory suggests lay off
of employees of those two units while stakeholder theory suggest that they shall be retained and
transferred to other units. They shall be given employment assurance and better working
conditions as per law. This will increase its goodwill among employees and society. Companies
with higher goodwill are often placed high in customer preference.
Third aspect is ethical responsibility. They are not legal ethics, rather cultural and
societal ethics (Bhardwaj and et.al., 2018). Society treats owners and business as one and expects
the same amount of moral behaviour from business as they do from owners. When a business is
being disposed, shareholder theory will suggest to sell assets to bidder who is offering highest
consideration to earn maximum revenue possible. On the other hand stakeholder theory would
suggest to check the profile of the bidder as well. As in, what is the business of the bidder and
what will it do after buying business assets. What impact would it have on society and if
management is keen on laying off staff of those two units, will they be hired by new bidder or
not. At first look, these measures might appear as casting negative impact on profit levels but in
overall, it would bring welfare to all people in the society including owners of the company.
Final aspect is philanthropic responsibility. This aspect urges organisations to assume
active role in welfare of the society. Shareholder theory would suggest not to indulge in any
social investment while stakeholder theory would suggest that management includes welfare of
society in their planning. For example, they can partner with government and other companies to
develop roads and other infrastructure like parks, community centres, etc. Such projects not only
improve the community allegiance to the company but also, open new sources of revenue for
them.
These responsibilities are not mutually exclusive and shall go together (Buchanan, Cao,
and Chen, 2018). In case of conflicts such as when economic prospects of the company are hurt
by legal responsibilities, a balance shall be drawn. There is no proper course of action and the
situation shall be dealt accordingly.
Conclusion
Social responsibility is responsibility of business to include social welfare in its agenda
along with their primary aim of earning profit and maximising shareholders' wealth. Other than
shareholders, there are other stakeholders as well which directly and indirectly impact operations
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of business. Activities of stakeholder management might cause expenses and short term losses to
the firm but it is seen that investment on them often results in increased long term profits and
growth opportunities of the firm (Kim, Kim and Qian, 2018). Thus, it can be said that if the
artificial person have legal responsibilities, it is also morally abided as well. In sum up, it can be
concluded that social responsibility of the business is to increase profit for not only its
shareholders but for all stakeholders.
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References
Books and Journals
Advantage, C., 2020. Corporate Social Responsibility. CSR and Socially Responsible Investing
Strategies in Transitioning and Emerging Economies. p.65.
Bhardwaj, P. and et.al., 2018. When and how is corporate social responsibility profitable?.
Journal of Business Research. 84. pp.206-219.
Buchanan, B., Cao, C.X. and Chen, C., 2018. Corporate social responsibility, firm value, and
influential institutional ownership. Journal of Corporate Finance. 52. pp.73-95.
Carroll, A.B., 2015. Corporate social responsibility: The centerpiece of competing and
complementary frameworks. Organizational dynamics.
Crane, A., Matten, D. and Spence, L. eds., 2019. Corporate social responsibility: Readings and
cases in a global context. Routledge.
Freeman, R.E., 2015. Stakeholder theory. Wiley Encyclopedia of Management. pp.1-6.
Jahn, J. and Brühl, R., 2018. How Friedman’s view on individual freedom relates to stakeholder
theory and social contract theory. Journal of Business Ethics. 153(1). pp.41-52.
Kim, K.H., Kim, M. and Qian, C., 2018. Effects of corporate social responsibility on corporate
financial performance: A competitive-action perspective. Journal of Management.
44(3). pp.1097-1118.
Orlitzky, M., 2015. The politics of corporate social responsibility or: why Milton Friedman has
been right all along. Annals in Social Responsibility.
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