The social responsibility of corporations

Table of Contents

Introduction

Discussion

Conclusion

References

Further Readings

Introduction

In a 1970 New York Times article Milton Friedman famously stated “The social responsibility of business is to increase its profits” (Friedman, 1970: 138). The purpose of this paper is to critically evaluate this statement and to discuss the appropriate and legitimate range of corporate social responsibility (CSR).

To this end the study will begin by outlining the rationale for a pure profit-maximising view on CSR. It will then proceed by highlighting some shortcomings of that viewpoint and reason why corporations have to assume ethical responsibilities as well.

With the introduction of Carroll’s (1991: 39) “Pyramid of Corporate Social Responsibility” the study will turn towards a fourth type of possible corporate responsibilities, based on philanthropy. In this context the question will be whether philanthropic actions are only legitimate when aligned with a corporation’s strategic goals, or if not purely altruistic behaviour is also justifiable. Addressing this controversy, the paper will first make the case for strategic CSR before moving on to the assertion of a number of arguments for the legitimacy of altruistic CSR.

Finally, having discussed the various types of corporate social responsibility and having reasoned that corporations have to assume responsibilities beyond the securing of profits, the study will conclude on the accuracy of all introduced types of CSR being embedded in corporations’ responsibilities - including the altruistic ones.

Discussion

If asked for the raison d’être of businesses many managers and scholars will answer, businesses exist to make a profit (Friedman, 1970; Levitt, 1958; Sundaram and Inkpen, 2004). Taking this notion even further Milton Friedman argued in 1970 that pursuit of any other goal than profit maximisation is tantamount to stealing shareholders’ money. Moreover, he put forth that corporate managers lack the competence of appropriately identifying and addressing social issues and problems and that corporations’ support of social issues would provide no greater benefit compared to individual efforts. Hence, this domain should be left to the government and the individual citizen respectively. Friedman further contested that only human beings can assume moral responsibilities for their actions. Since corporations are not human beings themselves, it is the individual employees who have to take responsibility for their actions (Friedman, 1970; Friedman, 1970 cited in Crane and Matten, 2004).

Extending this latter argument Albert Carr contents that the morality of managers’ private life has to be separated from their morality in the business context. From Carr’s point of view business undoubtedly has to obey the law, however, in terms of morality he compares it to a game with a lower standard of ethics than that existing in society. Someone deciding to enter business has to be aware of the “special rules” of the game which comprise making impersonal decisions and excluding personal feelings (Carr, 1968).

Adherent to Carr’s argumentation, there are however two severe flaws, both related to his proposed detachment of one’s business and private life. First of all, the attempt to develop two sets of moralities and values can cause mental-health problems, e.g. by producing multiple personalities. Secondly, and perhaps more convincing, is it virtually impossible to separate business and society as these are closely interrelated. In contrast to Carr’s view, participation in business is not a matter of decision, but in many cases involuntary (Lantos, 2001).

It would be possible to further challenge the rationale of the profit-maximising view by contradicting its inherent notion that businesses exist to make a profit (Davis, 2005; Stone, 1975; Regine and Lewin, 2000; Yates and Davis, 2001). However, as this would go beyond the scope of this paper, the study will take a different approach to the argumentation why corporations need to also assume ethical responsibilities while seeking profits and thus go beyond the sheer obedience of the law.

First of all, while following the goal of superior financial performance, it is important not to become obsessed with short-term profit-maximisation. As Rappaport (2005) points out, maximisation of long-term cash flows is not only the most effective way of managing businesses and creating shareholder value, doing the opposite in fact adheres serious dangers for the corporation and its shareholders. Thus, profit-maximisation has to be undertaken in an ethically responsible manner, as corporate disasters observed at companies like WorldCom or the Enron Corporation have proven (Rappaport, 2005; Zandstra, 2002; Zekany et al., 2004). Although much effort has been spend to improve corporate governance since these disasters have taken place (Gosschalk and Hyde 2005, Ray 2005; Vinten, 2002; Zandstra, 2002), a look at the current business press reveals that corporate executives nowadays still compromise long-term shareholder value for the attainment of short-term benefits. AtCompass, the world’s largest catering company, a group of shareholders recently accused CEO Mike Bailey of having compromised sustainable shareholder value by following an unreasonably aggressive acquisition strategy. Moreover, it surfaced, that the top management team had engaged in unethical behaviour in form of obtaining confidential details of rival bids and boosting their own sales by using this information. The loss of reputation adherent to the detection of this fraudulent behaviour contributed to a probably lasting fall of the company’s shares (Fletcher and Goodman, 2005).

Further rationale for the acceptance of ethical responsibilities by corporations is related to the nature of legislation as well as to strategic considerations. One of the characteristics of the law is that it tends to lag behind the latest ethical thinking of societies due to the convoluted political manoeuvring processes of legislators. A corporation that early embraces ethical responsibilities can therefore develop preparedness for societal changes and thus anticipate threads like for example costly litigation cases (Carroll, 1991; Carroll, 1998; Davis, 2005). The idea of foresight leads the study on to strategic considerations. Morally responsible behaviour of corporations may in this context lead to an ethical reputation which in turn can enhance its ability to attract and retain a highly skilled workforce. In the developing knowledge-based economy this ability will increasingly rank among a corporation’s critical success factors (Senge and Carstedt, 2001; Turban and Greening, 1997).

With the above introduction of strategic considerations towards corporations’ social responsibilities the study is now turning towards its final discussion point. The so far discussed economic, legal and ethical responsibilities all form essential parts of Carroll’s “Pyramid of Corporate Social Responsibility”. However there is an important forth dimension: philanthropic responsibilities. This dimension of corporate responsibilities encompasses corporate actions that benefit society. Unlike ethical responsibilities, though, which are expected from corporations, philanthropic behaviour is not expected, but rather desired by society (Carroll, 1991). Consequently, philanthropic responsibilities lie at the heart of contemporary discussions about CSR, with discourse going on about the question whether corporations should only exercise philanthropic CSR when it is aligned with the strategic goals of the corporation (strategic CSR), or if a purely altruistic type of CSR is also justifiable (altruistic CSR).

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