The criteria of corporate social responsibility


In today's world, business practices have drawn the concern of governments, industries and society. This essay will evaluate the extent a business's social responsibility, other than to use its resources to maximize profit without deception or fraud based on Friedman's statement. The criteria of corporate social responsibility are broken down into economic, legal, ethical and discretionary responsibilities. By comparing the economic responsibilities with legal, ethical and discretionary responsibilities of a business, it appears that profit maximization is not the main social responsibility of a business but to practice care and caution in decision makings which may affect the stakeholders such as the employees, customers, suppliers and environment. In sum, this essay is to evaluate the argument whether business main and only social responsibility is to increase its profits without deception or fraud.

Theory holds that it is the economic responsibility of a business to maximize profits. Economic responsibility states that business is designed to produce goods and services for consumers as a means to maximize profits for the business owners and shareholders. The components of economic responsibilities include consistently maximize earning per share, commit profitability, maintain strong competitive position and high level of operating efficiency (Carroll, 1991). Since businesses are committed to maximize their profit earnings, questions for how they earn their profits are no longer relevant to the business. In this case, there is no incentive for a business to take any actions on decisions that affect the stakeholders (Bauer & Fenn, 1972). When a manager is employed by the shareholders, his sole duty is to maximize the profit and increase the returns of the shareholders. If they decide to contribute part of the earning back to the society, which may be socially responsible, they could reduce potential profitability. This conflicts with duty of the manager and the economic responsibility theory (Kerr, 1996). Moreover, profitability may appear to have contradictory effect when ethical and environmental issues are parts of the concern of business. When a business is not maximizing its potential profit, their performance will be affected in the market place. Consequently it may be subjected to hostile turnover and the manager will face a risk of stepping down (Smith, 2003). Based on an example, industry in Yugoslavia was impoverished after they were forced to increase their labour wage at the expense of the profits (Kerr, 1996). Hence, this criterion states that business will be fine operating to maximize its profits as long the regular rules and regulations are followed (Samson, 2009).

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Business is also supported by other management theories to maximize profits. The shareholder theory states that the only concerns of shareholders are to maximize their utility, profit and economic benefits (Schepers, 2006). Business is therefore, not expected to practice social responsibilities. For instance, the chairman of Salomon Brothers' had lead the company to success by earning $760 million in 1978. This was a great improvement for the company progression from a private to a public owned company (Sterngold, 1988). The Pareto principle, which states that "resources should be allocated in society such that, after trade no one can be made better off without someone being made worse off" (Hussain, 1999), implies that business is in a disadvantage side when social responsibilities are carried out. Hence, there is not advisable for business to practice social responsibilities that will worse off the business profitability. Timberland, for example, has lost $2 million in sale a year when the company's employees are paid to take part in charity activities. As a result, the company made their first operating loss and forced to lay off employees since they were going public (Samson, 2009). Moreover, this principle concerns with how efficient is a business in using scarce resources to meet unlimited wants from consumers. This means that business may only meet the welfare of society by gaining more profit (Kerr, 1996). Similarly, business is entitled to seek for more profit. Based on "mousetrap" metaphor, business is considered social responsible when they serve public interest by providing goods and services. Therefore, this legal profit seeking business is considered as social responsible (Coelho, McClure, & Spry, n.d.). According to the concept of invisible hand from Adam Smith, business should only focus on their profit margin instead of being good to others (Kerr, 1996). Shareholders and the management capable to make informed judgments provided the business is maximizing the profit. Hence, shareholders and the management can well operate the business.

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In the real world, the apparent intention of business to practice social responsibilities may still be to maximize profit. Eastman Corporation Kodak, for instance, has contributed $1 million in supporting the local orchestra and symphony hall. At the meantime, Kodak also received $1 million tax abatement from the government in return of contributing to the society. Questions have arisen regarding whether the contribution to society is an act of cheating. According to Friedman (1962), the only social responsibility of management is to maximize profit as long they stay within the rules without any deception or fraud. As long the management make decisions and actions that maximize profit of shareholders, then they are considered ethical (Coelho, McClure, & Spry, n.d.). Based on that example, it may be seen that business may not be incentive to practice social responsibilities other than profit maximizing. This practice also conflicts with Friedman's statement which states that deception and fraud are not allowed in doing business (Coelho, McClure, & Spry, n.d.).

On the other hand, ethical responsibility opposes economic responsibilities which only concern on profit maximization. Ethical responsibility is defined as "practices that are expected or prohibited by societal members even though they are not codified by law" (Carroll, 1991). Business should concern about the effect to stakeholders when an action was taken. Although this is not required by laws, it is an ethical practice that business should do so. Also, the stakeholder theory supports the ethical responsibility, which states that business should exercise care and caution when dealing with decisions and actions that may affect the stakeholders (Schepers, 2006). This responsibility requires business consistently perform, recognize and respect customs as well as ethical norms adopted by the society (Carroll, 1991). It also states that profit maximizing is not the main social responsibility of each business but to balance out what they have got from society and contribute back to society. When business returns part of the profits to the society by seeing the importance of environmental, consumers and society issues, it will also achieve sustainability. For instance, Novozymes has implemented the "Purchasing with Decency" which aim to improve the development of human rights and labor standards (Pedersen, 2006). Ethical responsibilities also require business to take every action which is right and fair that does not harm any of the stakeholders. Enron, for example, was collapsed due to criminal actions and provision of misinformation. Although some of these ethical practices are not required by law, the societies are expecting business to make moral and ethical actions (Carroll, 1991).

Businesses should also practice legal responsibility. Legal responsibility defines what business is required to obey the laws and regulations which passed down by the local, state, federal government and international organization. Although many laws have been passed down by the government and international organization, most of the businesses do not practice them practically. For instance, businesses in the late 1800s were struggling whether to pay labour compensation after the laws that govern labours' working condition were implemented (Smucker, 2006). For business that engages in using its resources for business activities needs to stay within the framework of law in order to operate (Carroll, 1991). Businesses should not just concern about their returns on investment as they need to take into account whether they obey the laws on how they earn those profits. This perspective sees business that breaks the laws and rules as failure and has poor performance. This will lead to penalty by the government, for example the American Caster Corporation had been charged for polluting the environment and was forced to pay huge fines and cleanups (Samson, 2009). Many legislations and laws have been passed down to advocate the practices of social responsibilities. These include Environmental Protection Agency, the Equal Employment and Opportunity Commission. The intention of these legislations is for the businesses to use them as the guidelines to operate without harming any of the stakeholders (Carroll, 1991).

The last social responsibility that opposes the statement by Friedman is discretionary responsibility. Discretionary responsibility is defined as "purely voluntary and guided by an organization's desire to make social contribution not mandated by economics, law or ethics" (Samson, 2009). This criterion requires business to perform voluntary and ethical actions to the employees, community and environment without expecting any return from them. Body Shop, for instance, has actively engaged in environmental activities such as having a campaign that goes against "battery hen farming". Their intention of having this campaign is clear that they do not plan to gain any return from the communities as well as the government (Kerr, 1996). One of the great philosophers, Confucius, stated that "the basis of a stable, unified and lasting order is through living according to civilized and cultured principles developed through human wisdom" (Miles, 2006). When this applies into business management, business should stress on "love, goodness, humanity and human heartedness" (Miles, 2006). Moreover, business should avoid any conflict and solve disputes peacefully. Malden Mills, for instance, had intended to pay full salaries to their employees even though the company buildings were destroyed by fire in the 1995 resulted in 36 employees were injured and 3000 had lost their jobs (Alpaslan, 2009). This example shows a sense of humanity and is important to today's businesses. Although, discretionary responsibilities is just a complement to other responsibilities it should not be neglected.

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After weighing both the arguments for and against Friedman's statement, I proposed that business should practice corporate social responsibility other than concern only on improving business profitability. As time goes, the traditional way of doing business is no longer suitable and relevant in today's world. Society, organization and government are expecting businesses to exercise care and caution in decision makings. The difference between the traditional and modern business is the way of seeing their business. The sole duty of traditional business is to maximize their earnings whereas modern business aims to make decisions that contribute to the organization and the society (Alpaslan, 2009). Management of business should concern about the environment, society, human rights and poverty issues other than just simply providing goods and services to the consumers. They should also consider the impacts to the organization, society and environment when an action is made. Furthermore, business should always obey the laws to avoid any deception or fraud. A business that seeks for profit maximizing is not sustainable in the long run where sustainability will only be achieved when business realizes the importance of environmental, social and economics (Henriques, 2007). Timberland, for instance, has been actively taking part in charity activities which resulted in achieving better growth of business in the long run, even though they made some losses in between (Samson, 2009). The implementations and degrees of the social responsibilities are varied depending on the business's ability, size, management and other conditions. After all, the most fundamental responsibility of a business is to have foothold in the market (Carroll, 1991).

As business practices have been a concern of the society, organization and government. This essay has considered to what extent the social responsibility of business is instead of solely focus on maximizing its profit without engage in any deception or fraud. Economic responsibilities and stake holder theory advocate that business is entitled to maximize its profit as long the business is free of deception or fraud. Many concepts and metaphors have supported Friedman' statement which stated that profit maximization is the only responsibility of business. Nevertheless, as we have discussed, business needs to practice social responsibilities in today's world. Business should practice ethical, legal and discretionary responsibilities in doing business. Overall, it appears that business is entitled to practice social responsibilities in meeting global needs.

(2010 Words)