Social Responsibilities of Business

The question of what a company’s social obligations are is an interesting one, and a vexed one. Unfortunately, the question is complicated by the fact that the very term “Corporate Social Responsibility” (“CSR”) has come to be associated with a particular view about the right answer to that question. As I’ve argued here before, the term “CSR” is now (regrettably) typically used to refer to the particular point of view that says that companies have an obligation to contribute socially, beyond the contribution they make by providing a valued product or service, by providing jobs, by providing investment opportunities, and by paying taxes.

That point of view was preemptively (but, to many, unconvincingly) criticized by economist Milton Friedman, in his famous 1970 article The Social Responsibility of Business is to Increase its Profits. Friedman asked whether it made sense to say that a corporation (or rather, a corporation’s management) has responsibilities to engage in such pro-social activities as:

  • keeping their prices low, in order to fight inflation;
  • spending more than required by law to reduce pollution;
  • hiring the hard-core unemployed (rather than simply focusing on hiring the most-qualified candidates).

Oversimplifying somewhat, Friedman argued that a corporation’s managers have neither skill-set, nor the obligation, nor indeed the right, to use shareholders’ money for such objectives. What they ought to do, according to Friedman, is to stick to what they know best — which also happens typically to be the job they were entrusted to do, namely to make profits for shareholders within the boundaries of law & general ethical rules.

Here are 2 modern examples of opportunities for companies to do business in a way that is explicitly aimed at positive social outcomes:

  • Pharmaceutical companies have choices about how to focus their research & development efforts. For example, they can focus their efforts at producing lifestyle drugs (for things like erectile dysfunction or hair loss), or they can aim at producing “me-too” drugs in categories that are already well supplied (e.g., ), Or they can focus on cures for so-called “orphan” diseases. Or they can search for new antibiotics in response to the growing problem of drug-resistant infections. The latter would meet a real social need. I don’t know how promising such lines of research would be, nor how lucrative. In the absence of such information, could we still say that pursing the development of new antibiotics is a social responsibility of drug companies?
  • With U.S. unemployment rates just below the double-digit mark (and Canada’s just slightly lower), governments are looking to industry (and sometimes to particular industries, such as biotech) to boost employment. And some people are liable to point to a social responsibility on the part of corporations to do some hiring. Certainly, people are prone to call it socially irresponsible when profitable companies lay off employees. But then, employment for its own sake is unlikely to be good for a company. If employees aren’t needed, then hiring them (or keeping them) is liable to reduce profits, and indeed liable to reduce the viability of the company as an entity that produces all kinds of benefits for a range of stakeholders.

Whatever you think of such purported social responsibilities, one thing is clear. If they really are responsibilities, they are at very least genuine examples of social responsibilities — responsibilities to promote the interests of something like society as a whole (as opposed to the interests of one particular stakeholder, like customers or employees).

13 comments so far

  1. Wayne Norman on

    Good point. And why would we want to use the language of “responsibility” rather than, say, virtue? Is some given Corp really RESPONSiBLE for those things, in the sense that they let us down when they fail to do them (the way they are responsible for paying their proper taxes)?

    • Véronique Luciani on

      Good point too! (Hello Wayne!)
      My feeling though is that for many, still, CSR isn’t about virtue, as you mentioned (indeed, I don’t believe corporations have the responsibility, skill-set, and so on to do what Friedman mentions), but really about a responsibility not to do harm (by polluting, violating basic human rights…), even if doing so would increase profits (because of asymmetrical information, for instance). So, I don’t think the term “CSR” is necessarily wrong; though surely over-used.
      Would you agree with that use of the term “responsibility”?

      And, I have to agree with Steven Mintz: great blog!

  2. Chris MacDonald on

    Wayne:

    Yes, thanks for adding that!

    That’s the other thread of the critique, which I’ve blogged about before, here:
    Why the “R” in “CSR”?

    Chris

  3. Steven Mintz on

    Great blog. One area of “social responsibility” that is receiving a lot of attention on my campus is sustainability. There are differences of opinion whether this falls under the umbrella of CSR and to what extent such issues should be discussed in a bachelor’s and MBA curriculum. One problem is to clearly define the scope of the area. Sustainability seems to mean different things to different people. From an accounting perspective it could deal with measuring an organization’s carbon footprint and efforts taken to develop and implement green technology initiatives. It seems to me that at a minimum there should be a disclosure in the financial statements to inform the stakeholders of such efforts and, perhaps, a description in Management’s Discussion and Analysis. Going forward, it will be interesting to see the extent of implementation of sustainability in university curricula.

  4. Chris MacDonald on

    Steven:

    Thanks, and good point. I think the language of sustainability is kind of a mess. As with CSR, too many people try to fit *everything* under the umbrella of “sustainability” (based, I guess, on the dodgy empirical hypothesis that unethical practices cannot be “sustained” in the long run). As for sustainability being part of CSR, that depends on a) whether “sustainability” is taken to mean “environmental sustainability” (which is what most people envision, I think) and also b) whether one takes environmental obligations to entirely about the interests of people. Anyone who thinks nature is intrinsically valuable, for instance, cannot plausibly cast sustainability as a Social Responsibility.

    Regards,
    Chris.

  5. jilly on

    I may be missing the point here, but I would like to talk about corporate social irresponsibility for a moment. Friedman’s question about whether company’s should go beyond what is required by law would make sense ONLY if companies were not actively engaged in changing the law to reduce their liabilities. Similarly, companies might, perhaps, not need to consider keeping their prices low to discourage inflation if price fixing and corporate collusion were not so rampant.

    In my view, admittedly not a particularly well-informed one, the need for corporate social responsibility itself might simply go by the boards if companies were actually required to pay for the part of the public commons that they consume and pollute. Were that the case, they would perhaps use or destroy fewer common resources, and would give the kind of return on those resources that would enable governments to revitalize the commons and provide the social services (health, education, income support) that would reduce the number of “hard core unemployed” over time.

    Cheers

  6. Lalitha on

    It is interesting to read the various comments on CSR. True, Chris, you have focused on Milton Friedman’s theory but in MHO I guess we have come a long way since 1980 and the paradigm shift from “shareholder theory” to “Stakeholder’s theory” of Edward Freeman (Strategic Management: A Stakeholder Approach) and later still the shift from philanthropic CSR to Strategic CSR (Michael E. Porter and Mark R. Kramer, The Link Between Competitive Advantage and Corporate Social Responsibility) need to be spoken in the same breath to get a holistic picture.
    Further, you have also mentioned about the pharma sector and their social responsibility panning out to “orphan drugs”. Does not the case of Merck & Co with reference to the adaptation of Ivermectin to Mectazan, for treatment of the disease of River Blindness, a standing example of such gestures by the pharma sector? No. No. Don’t get me wrong. I am not holding the brief for Big Phrma and when we talk about drugs and pharma, it would be necessary to have some perspective about the huge investments made in the invention of a molecule, the number of years spent, the protracted process of getting the FDA approval etc. etc and not the least the patents which gives the pharma business the cutting edge over the other rivals.
    Further, remember how Nike faced censure and social boycott (United Students Against Sweatshops) due to employment of child labor in the supply chain! We can also immediately recall how Levis Strauss drafted its outsourcing policy and decided to pull out of China due to the pervasive violation of human rights or of CISCO in early 2001 when faced with the need to lay-off its employees tied up with local NGOs and allowed its employees to help the NGO improve its technical skills at 50% of the pay with option to revert back to CISCO as and when situations improved.
    In Canada, too, the number of social investors investing in ethical mutual funds is definitely on the increase!
    Well, due to the UN Global Compact, I guess there would be more specific commitment to social responsibilities as corporates increasingly make conscious decisions to enhance their “reputation capital” as well.

  7. Chris MacDonald on

    Lalitha:

    I’m not making an argument for or against CSR generally, here. The blog posting above is really just intended to highlight the notion of *social* responsibilities (the S in “CSR”), so that people less familiar with the debate can see where the focus on the CSR debate really ought to be.

    But I take it that the “big question” — whether companies have a moral obligation to do good in the world, beyond producing good products or services, providing jobs, and providing investment opportunities — remains in dispute.

    Regards,
    Chris.

  8. Susan Mogensen on

    I think the primary social responsibility of business is simply to do no harm in the pursuit of results on behalf of shareholders. By “do no harm” I mean activities which the board of directors would consider illegal, imprudent or unethical. If shareholders wanted a particular ‘CSR’ result in addition to ROI, they could always go there, but I think in most cases we just want to know that while our investments are growing, the company is not enslaving its workers, killing dolphins or engaging in corruption.

  9. [...] things like charitable donations. But today, it is utterly run-of-the-mill for companies to have CSR departments that consider not just things like charitable donations, but how to track and report on [...]

  10. [...] the term “corporate social responsibility” provides a useful analytic lens. I’ve argued here before that the term “CSR” is over-used — we shouldn’t try to stuff every single [...]

  11. Ismail Sengoonzi on

    as we all know that social responsibilities are duties every individual or organisation has to preform so as to maintain a balance between the economy and the ecosystem.Now this means that the point of (sending morethan required by low to reduce pollution) can not be applicable but i agree with you in otheres

  12. Kathryn Facer on

    I find this discussion on social responsibility to be an interesting one as I have worked in businesses that think social responsibility is a very important aspect of their business.

    Milton Friedman quotes in his 1970 article “The Social Responsibility of Business is to increase its Profits”. People in society may agree with Friedman that a Manager has a direct responsibility to their employers and that he will conduct the business in accordance with their desire on how the company should be run. Generally this will include making as much money as possible while making sure they are conforming to the rules of society, obeying the law and in an ethical way. Friedman’s approach would mean that business leaders would use the defensive strategy when it comes to social responsibility, defensive being when a business is doing only what is necessary for them.

    Friedman’s approach is a more classical approach, the invisible hand of capitalism, which could also be the stockholder view, simply put “The business of business is business…” It is also the Hand-of-Government approach where businesses believe it is the Government’s role to bring in legislation that is to regulate society and its citizens. Businesses view this as “Them” and “Us” and that ‘They” (Government) are responsible and that individuals and organisations then have to comply with them.

    I would like to add that I don’t believe it is up to the business leaders to take this social responsibility on but the company as a whole, starting from the board of directors, who are after all voted on by the stockholders. If social responsibility is lead from the top then managers are able to implement this into the day to day running of the business which in turn becomes part of the company norms.

    I agree with your point that social responsibilities are to promote the interests of society as a whole but to do this I feel we need to look at all stakeholders. Narrow stakeholders are those vital to the organisational accomplishment and existence such as customers and suppliers and wider stakeholders who are able to either influence or be influenced by the business such as local communities.

    R. Edward Freeman’s “A stakeholder theory of the Modern Corporation” is in contrast to Friedman’s approach. Freeman’s viewpoint is that stakeholders are a vital success to a business and therefore all stakeholders should be individually treated in their own right. Suppliers, (narrow stakeholder), are vital to the success of the business for raw materials or product to enable them to sell a good product and at a good price. Customers (narrow stakeholder) buy the product of the firm and receive the benefits of the product but are also the lifeblood of the business bringing them their revenue. Local communities (wider stakeholders) gain benefits such as tax, economic and social contributions from these businesses.

    Freeman’s approach is in line with the Hand-of-Management stakeholder approach; because businesses benefit from society, in return business have a responsibility to pay for part of the cost for improving the society. I would like to acknowledge that this approach is at an extra cost to businesses and in the current global financial crisis with economies worldwide still trying to recover, some businesses just cannot afford to put the money into this long term investment even if they felt they should or wanted to do so. Businesses who are investing long term in social responsibility are including Triple Bottom Line reporting to report to the shareholders and stakeholders how they are doing in this part of their businesses. They also may include this area of their business in their financial and long term strategic planning, as well as building this into their vision and mission statements for the business.

    Freeman’s approach to this means that management would take on a proactive strategy which is actively looking at ways for the business to be socially responsible. Top managers must now try to balance claims from all the different stakeholders of the business which ensures that the health of the business remains strong.

    An example of The Hand of Management Stakeholder approach and using the proactive strategy for a New Zealand business is The Warehouse which is one of New Zealand’s largest retailers. The founder of The Warehouse, Stephen Tindall’s approach to social responsibility is that The Warehouse has definitely benefited from society as it was a business that he started with one store in 1982 employing one other staff member and now has 88 stores throughout New Zealand employing approximately 9,000 staff. His view is that it is due to the support of local communities and individuals within these communities that have meant his stores have been so successful in New Zealand. He felt that he had the responsibility to pay for part of the cost of improving society and backs this up with triple bottom line reporting and releasing annual reports for society and environment.

    Stephen Tindall uses the proactive approach and they are always looking at ways to do things better. The Warehouse supports communities through their fundraising and donates large amounts to charities and community groups. They are also very passionate about protecting the environment by recycling, reducing energy use and emissions within their stores, sourcing more sustainable products to sell and maintain ethical trade commitments. The Warehouse is able to adequately serve the interests of all individuals and groups with a stake in the firm (Freeman, 2004) by providing a degree of corporate transparency and accountability.

    Milton Friedman’s argument that managers do not have the skill-set, obligation or right to use shareholders’ money for objectives did not discourage New Zealanders buying into The Warehouse when as a private company it was floated on the New Zealand share market stock exchange in 1994. New Zealanders were able to and wanted to become shareholders in this company which took social responsibility seriously as part of running their business. This shows that businesses can be competitive, healthy and grow as well as being socially responsible.

    REFERENCES
    The Warehouse (nd). Retrieved 16 January 2012 from: http://www.thewarehouse.co.nz/
    Module Three – Ethics and the role of business. (2009). 71203 Business ethics. Lower Hutt, New Zealand: The Open Polytechnic of New Zealand.
    Ethics and Social Responsibility. (2011). 630 Leadership. Timaru, New Zealand: Aoraki Polytechnic.
    Corporate social responsibility. (n.d.). Retrieved January 16, 2012, from Wikipedia, the free encyclopedia: http://en.wikipedia.org
    Freeman, R. (2004). A stakeholder theory of the modern corporation. In T. L. Beauchamp & N. E. Bowie (Eds.), Ethical theory and business (7th ed., pp. 55-64). Upper Saddle River, NJ: Pearson Education.
    Friedman, M. (2005). The social responsibility of business is to increase its profits. In G. D. Chryssides & J. H. Kaler (Eds.), An introduction to business ethics (pp. 249-254). London: Thomson Learning.


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